2023-14457
[Federal Register Volume 88, Number 144 (Friday, July 28, 2023)]
[Proposed Rules]
[Pages 48968-49055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-14457]
[[Page 48967]]
Vol. 88
Friday,
No. 144
July 28, 2023
Part II
Commodity Futures Trading Commission
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17 CFR Parts 39 and 190
Derivatives Clearing Organizations Recovery and Orderly Wind-Down
Plans; Information for Resolution Planning; Proposed Rule
Federal Register / Vol. 88 , No. 144 / Friday, July 28, 2023 /
Proposed Rules
[[Page 48968]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 39 and 190
RIN 3038-AF16
Derivatives Clearing Organizations Recovery and Orderly Wind-Down
Plans; Information for Resolution Planning
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Proposed Rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing amendments to certain regulations applicable to
systemically important derivatives clearing organizations (SIDCOs) and
derivatives clearing organizations (DCOs) that elect to be subject to
the provisions in the Commission's regulations (Subpart C DCOs). These
proposed amendments would, among other things, address certain risk
management obligations, modify definitions, and codify existing staff
guidance. The Commission is also proposing to amend certain regulations
to require DCOs that are not designated as systemically important, and
which have not elected to be covered by our regulations, to submit
orderly Wind-Down plans. In addition, the Commission is proposing to
make conforming amendments to certain provisions, revise the Subpart C
Election Form and Form DCO, and remove stale provisions.
DATES: Comments must be received by September 26, 2023.
ADDRESSES: You may submit comments, identified by ``Derivatives
Clearing Organizations Recovery and Orderly Wind-Down Plans;
Information for Resolution Planning'' and RIN 3038-AF16, by any of the
following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged. All comments must be
submitted in English, or if not, accompanied by an English translation.
Comments will be posted as received to https://comments.cftc.gov. You
should submit only information that you wish to make available
publicly. If you wish the Commission to consider information that you
believe is exempt from disclosure under the Freedom of Information Act
(FOIA), a petition for confidential treatment of the exempt information
may be submitted according to the procedures established in Sec. 145.9
of the Commission's regulations.\1\ The Commission reserves the right,
but shall have no obligation, to review, pre-screen, filter, redact,
refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication,
such as obscene language. All submissions that have been redacted or
removed that contain comments on the merits of the rulemaking will be
retained in the public comment file and will be considered as required
under the Administrative Procedure Act and other applicable laws, and
may be accessible under the FOIA.
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\1\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I (2020), and are accessible on the
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
FOR FURTHER INFORMATION CONTACT: Robert Wasserman, Chief Counsel and
Senior Advisor, 202-418-5092, [email protected]; Megan Wallace,
Senior Special Counsel, 202-418-5150, [email protected]; Eric
Schmelzer, Special Counsel, [email protected], 202-418-5967; Division
of Clearing and Risk, Commodity Futures Trading Commission, Three
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Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. The CEA and DCO Core Principles
B. Regulatory Framework for DCOs
C. Recovery and Orderly Wind-Down for SIDCOs and Subpart C
DCOs--Regulation 39.39
D. 2014 International Standards and Guidance on Recovery and
Resolution of Financial Market Infrastructures
E. CFTC Letter No. 16-61
F. Additional International Standards and Guidance
G. Requirement To Submit Recovery and Orderly Wind-Down Plans to
the Commission--Sec. 39.19(c)(4)(xxiv)
II. Amendments to Regulation 39.39--Recovery and Orderly Wind-Down
for SIDCOs and Subpart C DCOs; Information for Resolution Planning
A. Definitions--Sec. 39.39(a), Sec. 39.2
B. Recovery Plan and Orderly Wind-Down Plan--Sec. 39.39(b)
C. Recovery Plan and Orderly Wind-Down Plan: Required Elements--
Sec. 39.39(c)
D. Information for Resolution Planning--Sec. 39.39(f)
E. Renaming Regulation 39.39
III. Orderly Wind-Down Plan for DCOs That Are Not SIDCOs or Subpart
C DCOs
A. Requirement to Maintain and Submit an Orderly Wind-Down
Plan--Sec. 39.13(k)(1)(i)
B. Notice of the Initiation of Pending Orderly Wind-Down--Sec.
39.13(k)(1)(ii)
C. Orderly Wind-Down Plan: Required Elements--Sec. 39.13(k)(2)-
(6)
D. Conforming Changes to Bankruptcy Provisions--Part 190
IV. Establishment of Time to File Orderly Wind-Down Plan--Sec.
39.19(c)(4)(xxiv)
V. Amendment to Regulation 39.34(d)
VI. Amendments to Appendix B to Part 39--Subpart C Election Form
VII. Amendments to Appendix A to Part 39--Form DCO
VIII. Related Matters
A. Regulatory Flexibility Act
B. Antitrust Considerations
C. Paperwork Reduction Act
D. Cost-Benefit Considerations
I. Background
A. The CEA, Dodd-Frank Act, and DCO Core Principles
Section 3(b) of the Commodity Exchange Act (CEA) sets forth the
purposes of that Act; among these is to ensure the financial integrity
of all transactions subject to this act and the avoidance of systemic
risk. Section 5b(c)(2) of the CEA, as amended in 2010 by Title VII of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act),\2\ sets forth eighteen core principles with which a DCO
must comply in order to be registered with the Commission and maintain
its registration (DCO Core Principles).\3\ Together, the DCO Core
Principles serve to reduce risk, increase transparency and promote
market integrity within the financial system.\4\
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\2\ Title VII, Wall Street Transparency and Accountability Act
of 2010, Public Law 111-203, 124 Stat. 1376, 1641 (2010).
\3\ Section 5b(c)(2) of the CEA, 7 U.S.C. 7a-1(c)(2).
\4\ Derivatives Clearing Organization Gen. Provisions and Core
Principles, 76 FR 69334, 69334 (Nov. 8, 2011); Customer Clearing
Documentation, Timing of Acceptance for Clearing, & Clearing Member
Risk Mgmt., 77 FR 21278, 21279 (Apr. 9, 2012) (further amending
Sec. 39.12).
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Title VII of the Dodd-Frank Act grants the Commission explicit
authority to promulgate rules, pursuant to section 8a(5) of the CEA,
regarding the DCO Core Principles that govern the activities of all
DCOs in clearing and settling swaps and futures.\5\ Section 8a(5), in
turn, authorizes the Commission to
[[Page 48969]]
make and promulgate such rules and regulations as, in the judgment of
the Commission, are reasonably necessary to effectuate any of the
provisions or to accomplish any of the purposes of the CEA.
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\5\ Section 725(c) of Title VII of the Dodd-Frank Act, 124 Stat.
at 1687 (2010), 7 U.S.C. 7a-1(c)(2)(A)(i).
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For SIDCOs in particular, Title VIII of the Dodd-Frank Act grants
the Commission explicit authority to prescribe risk management
standards, taking into consideration relevant international standards
and existing prudential requirements governing operations related to
payment, clearing and settlement activities and the conduct of
designated activities by such financial institutions.\6\ Under Title
VIII, the objectives and principles for those risk management standards
are to (1) promote risk management; (2) promote safety and soundness;
(3) reduce systemic risks; and (4) support the stability of the broader
financial system.\7\ Combined, Titles VII and VIII of the Dodd-Frank
Act address one of Dodd-Frank's fundamental goals: to reduce systemic
risk through properly regulated central clearing.\8\
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\6\ Title VIII, Payment, Clearing, and Settlement Supervision
Act of 2010, Section 805, 124 Stat. 1802, 1809, 12 U.S.C.
5464(a)(2)(A), (B).
\7\ Enhanced Risk Management Standards for Systemically
Important Derivatives Clearing Organizations, 78 FR 49663, 49665
(Aug. 15, 2013).
\8\ See Customer Clearing Documentation, Timing of Acceptance
for Clearing, and Clearing Member Risk Management, 77 FR 21278,
21278 (Apr. 9, 2012).
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DCOs are subject to a number of risks that could threaten their
viability and financial strength, including risks from the default of
one or more clearing members (including credit and liquidity risk) as
well as non-default risk (including general business risk, operational
risk, custody risk, investment risk, and legal risk). The realization
of these risks has the potential to result in the DCO's financial
failure.\9\
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\9\ CPMI-IOSCO, Recovery of financial market infrastructures
(July 5, 2017) (hereinafter CPMI-IOSCO Recovery Guidance) at ]
2.1.1.
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In light of the central role DCOs perform in the markets that they
serve, the disorderly failure of a DCO would likely cause significant
disruption in such markets. In particular, SIDCOs play an essential
role in the financial system, and thus the disorderly failure of such a
DCO could lead to severe systemic disruptions if it caused the markets
it serves to cease to operate effectively. Ensuring that DCOs can
continue to provide critical operations and services as expected, even
in times of extreme stress, is therefore central to financial
stability. Maintaining provision of the critical operations and
services that clearing members and others depend upon should allow DCOs
to serve as a source of strength and continuity for the financial
markets they serve.\10\
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\10\ Id. at ] 2.1.2.
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Core Principle D requires each DCO to ensure that it possesses the
ability to manage the risks associated with discharging its
responsibilities through the use of appropriate tools and
procedures.\11\ Recovery planning is inherently integrated into that
risk management, and concerns those aspects of risk management and
contingency planning which address the extreme circumstances that could
threaten the DCO's viability and financial strength. To manage these
risks as required by Core Principle D, a DCO needs to identify in
advance, to the extent possible, such extreme circumstances and
maintain an effective plan to enable it to continue to provide its
critical operations and services if these circumstances were to occur.
The recovery plan needs to address circumstances that may give rise to
any default loss, including uncovered credit losses, liquidity
shortfalls or capital inadequacy, as well as any structural weaknesses
that these circumstances reveal. Similarly, the recovery plan needs to
address DCOs' potential non-default losses. The recovery plan also
needs to address the need to replenish any depleted pre-funded
financial resources and liquidity arrangements so that the DCO can
remain viable as a going concern and continue to provide its critical
operations and services. The existence of the recovery plan further
enhances the resilience of the DCO, and will provide market
participants with confidence that the DCO will be able to function
effectively even in extreme circumstances.\12\
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\11\ 7 U.S.C. 7a-1(c)(2)(D)(i).
\12\ CPMI-IOSCO Recovery Guidance, at ] 2.2.1.
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Given the systemic importance of SIDCOs, each SIDCO must have a
comprehensive and effective recovery plan designed to permit the SIDCO
to continue to provide its critical operations and services. Subpart C
DCOs, being held to similar standards as SIDCOs, also need to have such
recovery plans. However, where a recovery plan proves, in a particular
circumstance, to be ineffective, it is important that the DCO have a
plan to wind down in an orderly manner. A plan for an orderly wind-down
is not a substitute for having a comprehensive and effective recovery
plan.\13\
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\13\ Id. at ] 2.2.2.
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The purpose of a recovery plan is to provide, with the benefit of
thorough planning during business-as-usual operations, such information
and procedures that will allow a DCO to effect recovery such that it
can continue to provide its critical operations and services when its
viability as a going concern is threatened. A recovery plan enables the
DCO, its clearing members, their clients, and other relevant
stakeholders, to prepare for such extreme circumstances, increases the
probability that the most effective tools to deal with a specific
stress will be used and reduces the risk that the effectiveness of
recovery actions will be hindered by uncertainty about which tools will
be used. The recovery plan will also assist the Federal Deposit
Insurance Corporation (FDIC) as resolution authority under Dodd-Frank
Title II \14\ in preparing and executing their resolution plans for a
DCO.\15\
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\14\ 12 U.S.C. 5381 et. seq. (``Orderly Liquidation
Authority''). While orderly wind-down as discussed here proceeds
under the authority of the DCO, FDIC would act as receiver in
conducting an orderly liquidation under Title II.
\15\ CPMI-IOSCO Recovery Guidance at ] 2.3.1.
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While the implementation of the recovery plan is the responsibility
of the DCO itself, which accordingly also has to have the power to make
decisions and take action in accordance with its rules, under Title II
resolution, that responsibility and power will pass to the FDIC as
receiver instead. Many recovery tools will also be relevant to a DCO
under Title II resolution, not least because FDIC would ``step into the
shoes'' of the DCO \16\ and accordingly would be able to enforce
implementation of contractual loss or liquidity shortfall allocation
rules, to the extent that any such rules exist, and have not been
exhausted before entry into resolution.\17\
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\16\ 12 U.S.C. 5390(a)(1)(A)(i) (upon appointment as receiver
for a covered financial company, FDIC succeeds to all rights,
titles, powers, and privileges of the covered financial company and
its assets, and of any stockholder, member, officer, or director of
such company).
\17\ CPMI-IOSCO Recovery Guidance at ] 2.2.3.
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To accomplish these ends, this Notice of Proposed Rulemaking (NPRM)
is proposing, among other things: (1) for SIDCOs and Subpart C DCOs,
that they should incorporate certain subjects and analyses in their
viable plans for recovery and orderly wind-down; and (2) for all other
DCOs, that they should maintain viable plans for orderly wind-down that
incorporate substantially similar subjects and analyses as the proposed
requirements for SIDCOs and Subpart C DCOs.
B. Regulatory Framework for DCOs
Part 39 of the Commission's regulations implements the DCO Core
Principles, including Core Principles D
[[Page 48970]]
and R, which require that the DCO possesses the ability to manage the
risks associated with discharging the responsibilities of the DCO
through the use of appropriate tools and procedures,\18\ and a well-
founded, transparent, and enforceable legal framework for each aspect
of the DCO.\19\ Subpart B of part 39 establishes standards for
compliance with the DCO Core Principles for all DCOs.\20\ Subpart C of
part 39 establishes additional standards for compliance with the DCO
Core Principles for SIDCOs,\21\ i.e., DCOs designated systemically
important by the Financial Stability Oversight Council (FSOC) for which
the Commission acts as the Supervisory Agency.\22\ The Subpart C
regulations also apply to DCOs that elect to be subject to the
requirements in Subpart C.\23\
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\18\ Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D)
(``Core Principle D--Risk Management'').
\19\ Section 5b(c)(2)(R) of the CEA, 7 U.S.C. 7a-1(c)(2)(R)
(``Core Principle R--Legal Risk'').
\20\ 17 CFR 39.9-39.27.
\21\ 17 CFR 39.30-39.42. Subpart C flows from Title VIII of the
Dodd-Frank Act, which Congress enacted to mitigate systemic risk in
the financial system and to promote financial stability. Section
802(b) 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 12 CFR
1320.2 (Definitions--Systemically important and systemic
importance). A ``financial market utility'' (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; see also 12 CFR 1320.2 (Definitions--Financial
market utility).
Section 804 of the Dodd-Frank Act requires the FSOC to designate
those FMUs that FSOC determines are, or are likely to become,
systemically important. Three CFTC-registered DCOs, Chicago
Mercantile Exchange, Inc. (CME), ICE Clear Credit LLC (ICC), and
Options Clearing Corporation (OCC), were designated as systemically
important by the FSOC in 2012. Press Release, Financial Stability
Oversight Council Makes First Designations in Effort to Protect
Against Future Financial Crises (Jul. 18, 2012), available at
https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. The bases for the designations are available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations. The Commission is
the Supervisory Agency for CME and ICC; the U.S. Securities and
Exchange Commission is the Supervisory Agency for OCC. See 12 CFR
1320.2 (Definition of Supervisory Agency).
\22\ 17 CFR 39.2.
\23\ In the Commission's experience, DCOs based in the United
States that have banks as clearing members have elected to be
subject to Subpart C in order to achieve status as a qualified
central counterparty (QCCP), while U.S.-based DCOs that do not have
banks as clearing members have not made that election.
In July 2012, the Basel Committee on Banking Supervision, the
international body that sets standards for the regulation of banks,
published the ``Capital Requirements for Bank Exposures to Central
Counterparties'' (Basel CCP Capital Requirements), which describes
standards for capital charges arising from bank exposures to central
counterparties (CCPs) related to over-the-counter derivatives,
exchange-traded derivatives, and securities financing transactions.
(DCOs are referred to as CCPs in international standards and
guidance.) The Basel CCP Capital Requirements create financial
incentives for banks, including their subsidiaries and affiliates,
to clear financial derivatives with CCPs that are prudentially
supervised in a jurisdiction where the relevant regulator has
adopted rules or regulations that are consistent with the standards
set forth in the Principles for Financial Market Infrastructures
(PFMI), published in April 2012 by the Bank for International
Settlements' (BIS) Committee on Payment and Settlement Systems
(renamed the Committee on Payments and Market Infrastructures
(CPMI)) and the Technical Committee of the International
Organization of Securities Commissions (IOSCO) (collectively
referred to as CPMI-IOSCO). The PFMI is available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
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 PFMI. See Basel Committee
on Banking Supervision, Credit Risk Framework at section 50.3,
available at https://www.bis.org/basel_framework/chapter/CRE/50.htm?inforce=20191215&published=20191215. The failure of a CCP to
achieve QCCP status could result in significant costs to its bank
clearing members (or banks that are customers of its clearing
members).
The U.S. banking regulators, including the Board of Governors of
the Federal Reserve (Federal Reserve), FDIC, and the Office of the
Comptroller of the Currency, have adopted capital standards that are
consistent with the Basel Committee's standards. For example, under
the FDIC's regulations, the capital requirement for a clearing
member's prefunded default fund contribution to a qualifying CCP can
be as low as 0.16% of that default fund contribution. 12 CFR
324.133(d)(4). By contrast, the capital requirement for a clearing
member's prefunded default fund contribution to a non-qualifying CCP
is 100% of that default fund contribution. 12 CFR 324.10(a)(1)(iii),
(b)(3) (requiring capital of 8% of risk-weighted asset amount), 12
CFR 324.133(d)(2) (setting risk-weighted asset amount for default
fund contributions to non-qualifying CCP at 1,250% of the
contribution (1,250% * 8% = 100%)). See also 12 CFR 324.133(c)(3)
(applying a risk weight of 2% to transactions with a QCCP).
The Federal Reserve and Office of the Comptroller of the
Currency have similar regulations.
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Section 805 of the Dodd-Frank Act directs the Commission to
consider relevant international standards and existing prudential
requirements when prescribing risk management standards for SIDCOs.\24\
In 2013 the Commission determined that, for purposes of meeting the
Commission's statutory obligation pursuant to Section 805(a)(2)(A) of
the Dodd-Frank Act, the international standards most relevant to the
risk management of SIDCOs are the PFMI.\25\
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\24\ Section 805(a)(2) of the Dodd-Frank Act, 12 U.S.C.
5464(a)(2)(A).
\25\ 78 FR 49663 at 49666. The PFMI consist of twenty-four
principles addressing the risk management and efficiency of a
financial market infrastructure's (FMI's) operations. Subpart C
reflects 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).
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C. Recovery and Orderly Wind-Down for SIDCOs and Subpart C DCOs--Sec.
39.39
The Commission established regulations for the recovery and wind-
down of a SIDCO and Subpart C DCO in 2013 with the promulgation of
Sec. 39.39.\26\ Regulation 39.39 \27\ was codified to protect the
members of a SIDCO or Subpart C DCO, as well as their customers, and
the financial system more broadly, from the consequences of a
disorderly failure of a DCO consistent with Principles 3 and 15 of the
PFMI.\28\ Regulation 39.39 also promotes the concepts in Core
Principles B (Financial Resources), D (Risk Management), G (Default
Rules and Procedures), I (System Safeguards), L (Public Information), O
(Governance Fitness Standards), and R (Legal Risk) of Section 5b(c)(2)
of the CEA.\29\
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\26\ Derivatives Clearing Organizations and International
Standards, 78 FR 72476, 72494 (Dec. 2, 2013).
\27\ 17 CFR 39.39. References in the remainder of this section
are to the existing regulations.
\28\ See 78 FR 72476 at 72494-95. Principle 3 of the PFMI
requires an FMI to have a sound risk management framework ``for
comprehensively managing legal, credit, liquidity, operational, and
other risks.'' PFMI Principle 3, at 32. Principle 15 of the PFMI
requires an FMI 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 it can continue
operations and services as a going concern if those losses
materialize. Further, liquid net assets should at all times be
sufficient to ensure a recovery or orderly wind-down of critical
operations and services.'' PFMI Principle 15, at 88.
\29\ See generally 78 FR 72476.
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Regulation 39.39(a) defines the terms ``general business risk,''
``wind-down,'' ``recovery,'' ``operational risk,'' and ``unencumbered
liquid financial assets.'' \30\
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\30\ 17 CFR 39.39(a)(1)-(5).
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Regulation 39.39(b) requires SIDCOs and Subpart C DCOs to 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
[[Page 48971]]
that threatens the DCO's viability as a going concern.\31\
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\31\ 17 CFR 39.39(b)(1) and (2).
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Regulation 39.39(c)(1) requires a SIDCO or Subpart C DCO to
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 and orderly wind-down.\32\ Regulation 39.39(c)(1) further
requires the plans to include procedures for informing the Commission
when the recovery plan is initiated or wind-down is pending.\33\
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\32\ 17 CFR 39.39(c)(1). The identification of scenarios and
analysis by the DCO allows the DCO to more effectively and
efficiently meet its obligations promptly, and may provide a DCO
with a better understanding of its clearing members' obligations,
the extent to which the DCO would have to perform its obligations to
its clearing members in times of stress, and the ability to better
plan for doing so. The scenarios and analysis in the wind-down plan
are necessary in the event that recovery is not possible and
resolution is not available.
\33\ Id.
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Regulation 39.39(c)(2) requires a SIDCO or Subpart C DCO to have
procedures for providing the Commission and the FDIC with information
needed for resolution planning.\34\
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\34\ 17 CFR 39.39(c)(2).
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Regulation 39.39(d) requires that the recovery and wind-down plans
of SIDCOs and Subpart C DCOs be supported by resources sufficient to
implement those recovery or wind-down plans. This paragraph is not
being amended.\35\
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\35\ 17 CFR 39.39(d).
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Regulation 39.39(e) requires SIDCOs and Subpart C DCOs to maintain
viable plans, approved by the SIDCO's or Subpart C DCO's board of
directors and updated regularly, for raising additional financial
resources in a scenario in which it is unable to comply with any
financial resource requirements set forth in part 39.\36\ This
paragraph is not being amended.
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\36\ 17 CFR 39.39(e).
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Regulation 39.39(f) allows the Commission, upon request, to grant a
SIDCO and Subpart C DCO up to one year to comply with any provision of
Sec. 39.39 or of Sec. 39.35 (default rules and procedures for
uncovered credit losses or liquidity shortfalls).\37\
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\37\ 17 CFR 39.39(f).
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For DCOs that neither have been designated systemically important
nor elected to become Subpart C DCOs, no regulation currently requires
that they maintain viable recovery plans or orderly wind-down plans.
This NPRM is proposing that all DCOs be required to maintain viable
orderly wind-down plans.
D. 2014 International Standards and Guidance on Recovery and Resolution
of Financial Market Infrastructures
In 2014, CPMI-IOSCO published guidance for financial market
infrastructures (FMIs) on the recovery planning process and the content
of the recovery plans.\38\ The 2014 CPMI-IOSCO Recovery Guidance
interpreted the principles and key considerations under the PFMI
relevant to recovery and orderly wind-down plans and planning, in
particular PFMI Principles 3 and 15. The guidance also provided a menu
of recovery tools separated into five categories: tools to allocate
uncovered losses caused by participant default; tools to address
uncovered liquidity shortfalls; tools to replenish financial resources;
tools for a CCP to re-establish a matched book; and tools to allocate
losses not related to participant default.\39\
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\38\ CPMI-IOSCO, Recovery of financial market infrastructures
(Oct. 15, 2014) (hereinafter 2014 CPMI-IOSCO Recovery Guidance).
FMIs as a category include DCOs, CCPs, central securities
depositories, payment systems, and trade repositories. SIDCOs are
thus systemically important FMIs.
\39\ Id. at 12-16.
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The Financial Stability Board (FSB) had, in 2011, published a set
of Key Attributes of Effective Resolution Regimes for Financial
Institutions,\40\ and enhanced those standards with, as relevant here,
an Annex on Resolution of Financial Market Infrastructures, in
2014.\41\ The Key Attributes FMI Annex calls for ongoing recovery and
resolution planning for systemically important FMIs (a category that
includes SIDCOs).\42\ The Key Attributes FMI Annex also calls for such
FMIs ``to maintain information systems and controls that can promptly
produce and make available, both in normal times and during resolution,
relevant data and information needed by the authorities for the
purposes of timely resolution planning and resolution.'' \43\
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\40\ FSB, Key Attributes of Effective Resolution Regimes for
Financial Institutions (Oct. 2011).
\41\ FSB, Key Attributes of Effective Resolution Regimes for
Financial Institutions, Appendix II--Annex I: Resolution of
Financial Market Infrastructures (FMIs) and FMI Participants (Oct.
15, 2014) (hereinafter Key Attributes FMI Annex). The Key Attributes
FMI Annex is ``to be read alongside [the] PFMI which require
systemically important FMIs to have a comprehensive and effective
recovery plan.'' Id. at 57.
\42\ Id. ] 11.1, at 68 (stating ``FMIs that are systemically
important should be subject to a requirement for ongoing recovery
and resolution planning'').
\43\ Id. ] 12.1, at 70 (listing 7 areas of information that
should be made available to authorities, including: FMI rules,
default fund, and loss allocation rules; stakeholders; data and
information for effective and timely risk control during resolution;
the status of obligations of participants; links and
interoperability arrangements with other FMIs; participant
collateral; and netting arrangements).
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E. CFTC Letter No. 16-61
In July 2016, the staff of the Division of Clearing and Risk (DCR)
issued an advisory letter, described therein as ``guidance,'' regarding
the content of a SIDCO's and Subpart C DCO's recovery and orderly wind-
down plans, consistent with Subpart C, in particular Sec. 39.39, and
the accompanying rule submissions designed to effectuate those
plans.\44\ CFTC Letter No. 16-61 highlighted subjects that staff
believed these DCOs should analyze in developing a recovery plan and
wind-down plan, including: the range of scenarios that may prevent the
DCO from being able to meet its obligations and to provide its critical
operations and services; recovery tools; wind-down scenarios and
options; interconnections and interdependencies; agreements to be
maintained during recovery and wind-down; financial resources;
governance; notifications; assumptions; updates; and testing.\45\ The
advisory letter also recommended questions that a DCO should consider,
and the analysis of those questions that a DCO should undertake and
provide to the Commission, in instances where a DCO concludes that a
rule should be changed.\46\
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\44\ CFTC Letter No. 16-61, Recovery Plans and Wind-down Plans
Maintained by Derivatives Clearing Organizations and Tools for the
Recovery and Orderly Wind-down of Derivatives Clearing
Organizations, (July 16, 2016) (hereinafter CFTC Letter No. 16-61),
available at: https://www.cftc.gov/csl/16-61/download. DCR staff was
responding to requests from DCOs for guidance and clarification on
the types of information and analysis that should be included in the
requisite plans. The advisory letter explains staff's expectations
following its preliminary reviews of submitted recovery plans, wind-
down plans, and proposed rule changes, and issues addressed at a
DCR-sponsored public roundtable. The transcript of the roundtable is
available at https://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff031915.
\45\ CFTC Letter No. 16-61, at 4. The guidance was not intended
to be an exhaustive checklist of information and analysis, and did
not address resolution planning. Id. at 3 n.11.
\46\ Id. at 15-19.
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F. Additional International Guidance on Standards
In July 2017, CPMI-IOSCO issued further guidance on the PFMI
related to the development of recovery plans for CCPs.\47\ The (2017)
CPMI-IOSCO
[[Page 48972]]
Recovery Guidance updated the 2014 CPMI-IOSCO Recovery Guidance to
provide clarification on the implementation of recovery plans,
replenishment of financial resources, non-default related losses, and
transparency with respect to recovery tools and their application.
Similarly, the FSB issued further guidance on CCP resolution and
resolution planning.\48\ The 2017 FSB Resolution Guidance sets out
recommended powers for resolution authorities to maintain the
continuity of critical CCP functions, details on the use of loss
allocation tools, and provides steps that resolution authorities should
take to implement crisis management groups and develop resolution
plans. In August 2022, CPMI-IOSCO published a discussion paper on CCP
practices to address non-default losses in which the paper noted
positively, among other things, the practice of testing and reviewing a
CCP's recovery plan at least annually.\49\
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\47\ Supra fn. 9. The guidance as revised in 2017 is referred to
herein as the CPMI-IOSCO Recovery Guidance. CPMI-IOSCO also issued
guidance on the resilience of CCPs. CPMI-IOSCO, Resilience of
central counterparties: further guidance on the PFMI (July 5, 2017)
(providing guidance on governance, stress testing for both credit
and liquidity exposures, coverage, margin, and a CCP's contribution
of its financial resources to losses).
\48\ FSB, Guidance on Central Counterparty Resolution and
Resolution Planning (July 5, 2017) (hereinafter 2017 FSB Resolution
Guidance).
\49\ CPMI-IOSCO, A discussion paper on central counterparty
practices to address non-default loses (Aug. 4, 2022) (NDL
Discussion Paper).
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G. Requirement To Submit Recovery and Wind-Down Plans to the
Commission--Sec. 39.19(c)(4)(xxiv)
In 2020, the Commission amended its reporting requirements under
Sec. 39.19 to require a DCO that is required to maintain recovery and
wind-down plans pursuant to Sec. 39.39(b) to submit its plans to the
Commission no later than the date on which it is required to have the
plans.\50\ The rule also permits a DCO that is not required to maintain
recovery and wind-down plans, but which nonetheless maintains such
plans, to submit the plans to the Commission.\51\ Additionally, if a
DCO revises its plans, the DCO must submit the revised plans to the
Commission along with a description of the changes and the reason for
the changes.\52\
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\50\ Derivatives Clearing Organizations General Provisions and
Core Principles, 85 FR 4800, 4822 (Jan. 27, 2020); 17 CFR
39.19(c)(4)(xxiv).
\51\ Id.
\52\ Id.
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II. Amendments to Regulation 39.39--Recovery and Orderly Wind-Down for
SIDCOs and Subpart C DCOs; Information for Resolution Planning
In 2013, the Commission promulgated broad rules for a SIDCO's and
Subpart C DCO's recovery and wind-down plans, including a rule that
each SIDCO and Subpart C DCO must have procedures for providing the
Commission and the FDIC with information needed for purposes of
resolution planning.\53\ At that time, practice with respect to
recovery and wind-down planning was in a nascent state of development,
and the relevant global standard-setting bodies, CPMI-IOSCO and the
FSB, had not completed work establishing guidance for implementing
international standards addressing recovery and resolution for
FMIs.\54\
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\53\ 78 FR 72476, 72494 (codifying Sec. 39.39(c)(2)).
\54\ See, e.g., CPMI-IOSCO, Consultative report, Recovery of
financial market infrastructures, at ] 1.2.1 (Aug. 2013)
(distinguishing recovery planning from resolution planning and
noting that ``[a]spects of the consultation report concerning FMI
resolution have been included in a new draft annex and will be
included in an assessment methodology for the [FSB's] Key
Attributes''). CPMI-IOSCO, Consultative report, Recovery and
resolution of financial market infrastructures, at ] 1.4 (July 2012)
(outlining the features for effective recovery and resolution
regimes for FMIs in accordance with the FSB's ``Key Attributes for
Effective Resolution Regimes for Financial Institutions'').
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The Commission is proposing to further align the rules under Sec.
39.39 with the international standards and guidance promulgated since
2013,\55\ and to codify certain of the related guidance in CFTC Letter
No. 16-61. The proposed amendments to Sec. 39.39 include specifying
the required elements of a SIDCO's or Subpart C DCO's recovery and
orderly wind-down plans, amending the requirement to have procedures to
provide information needed for purposes of resolution planning, and
specifying the types of information that should be provided to the
Commission for resolution planning. Additionally, the Commission
proposes to change the title of the regulation, amend and add
definitions, and to delete certain provisions.
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\55\ The Commission actively participated in the development of
those standards and guidance in its role as a member of the relevant
working groups (the CPMI-IOSCO Policy Standing Group and Steering
Group and the Financial Stability Board Financial Market
Infrastructure Cross-Border Crisis Management Group and Resolution
Steering Group), and of the Board of IOSCO, one of the parent
committees of CPMI-IOSCO.
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These proposed revisions and amendments to Sec. 39.39 are
consistent with the Commission's obligation under Sec. 805(a) of the
Dodd-Frank Act to consider international standards in prescribing risk
management standards pursuant to its authority under that provision
with respect to SIDCOs.\56\ Moreover, the Commission views the relevant
international standards under the PFMI, as well as the related
guidance, including the CPMI-IOSCO Recovery Guidance, as helpful in
informing its approach with respect to other DCOs in the context of
recovery and orderly wind-down. These proposed revisions and amendments
are reasonably necessary to effectuate Core Principle D \57\ (Risk
Management) and to accomplish the purposes of the CEA, in particular,
to ensure the financial integrity of all transactions subject to [the
CEA] and the avoidance of systemic risk.\58\ The proposed changes also
respond to comments received from SIDCOs and Subpart C DCOs over time.
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\56\ See Section 805(a) of the Dodd-Frank Act, 12 U.S.C.
5464(a).
\57\ Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(i).
\58\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
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As set forth in section III, the Commission is additionally
proposing to require that all other DCOs maintain and submit to the
Commission an orderly wind-down plan that incorporates substantially
similar information and procedures. With respect to DCOs broadly, these
proposed revisions and amendments should lead to more effective DCO
compliance and risk management, provide greater clarity and
transparency for registered DCOs and DCO applicants, and increase
overall confidence and efficiency in the swaps and futures markets.\59\
Among the risks associated with discharging the risk management
responsibilities of a DCO \60\ is the risk that, due to either default
losses or non-default losses, the DCO will be unable to meet its
obligations or provide its critical functions and will need to wind
down. In such an event, an effective orderly wind-down plan should
facilitate timely decision-making and the continuation of critical
operations and services so that the orderly wind-down may occur in an
orderly and expeditious manner.
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\59\ See 76 FR at 69334-35 (a legally enforceable regulatory
framework ``provides assurance to market participants and the public
that DCOs are meeting minimum risk standards'' which ``can serve to
increase market confidence,'' free up resources that market
participants might otherwise hold,'' and ``reduce search costs that
market participants would otherwise incur).
\60\ See Core Principle D(i), Section 5b(c)(2)(D)(i) of the CEA,
7 U.S.C. 7a-1(c)(2)(D)(i).
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A DCO needs to prepare for circumstances--especially those that are
sudden, unexpected, and on too large a scale for the DCO to timely
recover--for which a DCO may not have the resources to continue as a
going concern. A viable orderly wind-down plan promotes the goal of
ensuring, at a minimum, that the DCO has sufficient resources,
capabilities and legal authority to implement the tools and procedures
for orderly wind-down activities. To the extent that the Commission's
bankruptcy regulations look to a DCO's orderly wind-down
[[Page 48973]]
plan,\61\ an effective orderly wind-down plan will allow for the
efficient management of events.
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\61\ See, e.g., 17 CFR 190.15(c) (In administering a proceeding
under this subpart, the trustee shall, in consultation with the
Commission, take actions in accordance with any recovery and wind-
down plans maintained by the debtor and filed with the Commission
pursuant to Sec. 39.39 of this chapter, to the extent reasonable
and practicable, and consistent with the protection of customers.)
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To advance the DCO Core Principles' aims of, among other things,
strengthening the risk management practices of DCOs, enhancing legal
certainty for DCOs, clearing members and market participants, and
safeguarding the public, the Commission is proposing to require that
all DCOs maintain and submit orderly wind-down plans with the subjects
and analyses included herein. Additionally, the Commission is proposing
revised subjects and analyses for the recovery plans that SIDCOs and
Subpart C DCOs must maintain.
A. Definitions--Sec. 39.39(a), Sec. 39.2
Currently, the definitions relevant to recovery and orderly wind-
down planning are contained in Sec. 39.39(a). The Commission is
proposing to move two of those definitions, ``wind-down'' and
``recovery,'' to Sec. 39.2, as orderly wind-down will apply to all
DCOs, and recovery is thematically linked to orderly wind-down. Because
these definitions would apply to all DCOs, the Commission is proposing
technical corrections to eliminate the references to SIDCOs and Subpart
C DCOs in both.
The Commission is changing the term ``wind-down'' to ``orderly
wind-down'' \62\ and is defining it as a DCO's actions to effect the
permanent cessation, sale, or transfer, of one or more of its critical
operations or services, in a manner that would not increase the risk of
significant liquidity, credit, or operational problems spreading among
financial institutions or markets and thereby threaten the stability of
the U.S. financial system.\63\ The Commission intends the amended
definition to focus the attention of DCOs on issues of financial
stability in planning for and executing an orderly wind-down.\64\ Given
the financial crisis that preceded and informed Dodd-Frank's passage,
and the purpose of the CEA to ensure the avoidance of systemic risk,
the Commission believes an important goal of an orderly wind-down
should be to avoid an increased risk of significant liquidity, credit,
or operational problems spreading among financial institutions or
markets.
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\62\ The definition also provides for the use of the term
``wind-down'' as a shorter form of ``orderly wind-down.''
\63\ This definition of ``orderly wind-down'' would align more
closely with the corresponding definition in the Federal Reserve's
Regulation HH (Designated Financial Market Utilities), 12 CFR
234.2(g), but would additionally address operational problems
spreading among financial institutions or markets, consistent with
the U.S. Securities and Exchange Commission's recent rule proposal.
Covered Clearing Agency Resilience and Recovery and Wind-Down Plans,
88 FR 34708, 34717 (May 30, 2023).
\64\ DCOs must already consider issues of financial stability in
their governance arrangements. 17 CFR 39.24(a)(1)(iv) (requiring
that a DCO's governance arrangements explicitly support the
stability of the broader financial system and other relevant public
interest considerations).
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The Commission is also proposing to amend the definition of
``recovery'' by replacing the reference to ``capital inadequacy'' with
``inadequacy of financial resources'' in order to tie the definition of
``recovery'' more closely to the framework of Part 39,\65\ and to move
that definition, as revised, to Sec. 39.2, in alphabetical order.
Neither the recovery plan nor the orderly wind-down plan may assume
government intervention or support.
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\65\ See, e.g., Sec. 39.11 (enumerating the requirements for
financial resources a DCO must maintain to discharge its
responsibilities); Sec. 39.39(d) (enumerating the requirements for
financial resources a SIDCO and Subpart C DCO must maintain to
support its recovery plan and wind-down plan).
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The Commission is proposing to delete the definitions of ``general
business risk'' and ``operational risk,'' and instead to import those
definitions, as modified, as part of the definition of the term ``non-
default losses.'' The Commission is also proposing to add a definition
of the term ``default losses.'' Recovery plans and orderly wind-down
plans are required to address both default losses and non-default
losses.
The Commission is proposing to define default losses to include
both uncovered credit losses or liquidity shortfalls created by the
default of a clearing member in respect of its obligations with respect
to cleared transactions. In this context, uncovered credit losses arise
from the DCO's holding an insufficient value of resources to meet its
obligations. For example, the DCO is obligated to pay, today, variation
margin of $10 billion in U.S. dollar cash, but only has $8 billion of
resources available. Similarly, in this context, a liquidity shortfalls
arise from the DCO holding resources that are not in the correct form
to meet its obligations. For example, the DCO is obligated to pay,
today, variation margin of $10 billion in U.S. dollar cash, but only
has $8 billion of U.S. dollar cash available, even though it may
additionally have more than $2 billion (worth, at present market value)
of securities that it is unable to convert promptly into U.S. dollar
cash.\66\ The definition also focuses on the clearing member's
obligations with respect to cleared transactions. Thus, if the clearing
member defaults on its obligations for facilities rental, or in its
obligations in its role as a service provider to the DCO, those would
not be ``default losses'' for this purpose.
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\66\ Another example of a liquidity shortfall is a currency
mismatch. For example, assume that the U.S. dollar to Euro exchange
rate is $1.10/[euro]1.00. The DCO has a variation margin obligation,
today, of [euro]1 billion, and only has resources available for the
purpose of making payment of $1.1 billion. That would also be a
liquidity shortfall.
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The Commission is proposing to define non-default losses to mean
losses from any cause, other than default losses, that may threaten the
DCO's viability as a going concern. This portion of the definition is
derived from former Sec. 39.39(b)(2), which required SIDCOs and
Subpart C DCOs to ``maintain viable plans for'' (1) Recovery or orderly
wind-down necessitated by'' the risks that are currently proposed to be
included in ``default losses'' (i.e., uncovered credit losses or
liquidity shortfalls as well as (2) Recovery or orderly wind-down
necessitated by general business risk, operational risk, or any other
risk that threatens the DCO's viability as a going concern (emphasis
added).
The former definition specifically included, as potential sources
of loss, ``general business risk'' and ``operational risk.'' The
definitions in Sec. 39.39 will now apply to all DCOs, and thus are
being moved to Sec. 39.2. In order to ensure that DCOs consider, as
part of their planning process, the full set of potential non-default
losses, the definition of non-default losses is proposed to explicitly
include, though not be limited to, losses arising from risks often
referred to as (1) general business risk, (2) custody risk, (3)
investment risk, (4) legal risk, and (5) operational risk.\67\ To avoid
unnecessary questions of taxonomy, however, these terms are not
proposed to be separately defined, rather, the substance of these
definitions are being included as instances of non-default losses.
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\67\ See NDL Discussion Paper section 2.1 (``Generally, CCPs
consider a range of NDL scenarios that may arise from risks relevant
to their business activities, including general business risk,
operational risk, investment risk, custody risk and legal risk.'').
See also Guidance on Financial Resources to Support CCP Resolution
and on the Treatment of CCP Equity in Resolution (FSB 2020) at
section 1.2 (``Hypothetical non-default loss scenarios'').
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Under the first group, losses arising from general business risk,
the Commission proposes to import the previous definition of ``general
business
[[Page 48974]]
risk'' in Sec. 39.39(a)(1), deleting references to SIDCOs or subpart C
DCOs as surplusage. This results in (1) any potential impairment of a
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.
Under the second group, losses arising from custody risk, the
Commission proposes to adopt substantially the discussion of custody
risk in the CPMI-IOSCO Recovery Guidance.\68\ This results in (2)
losses incurred by the derivatives clearing organization on assets held
in custody or on deposit in the event of a custodian's (or sub-
custodian's or depository's) insolvency, negligence, fraud, poor
administration or inadequate record-keeping.
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\68\ See CPMI-IOSCO Recovery Guidance ] 3.2.5 (``[A]n FMI can be
exposed to custody risk and could suffer losses on assets held in
custody in the event of a custodian's (or subcustodian's)
insolvency, negligence, fraud, poor administration or inadequate
record-keeping.'')
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Under the third group, losses arising from investment risk, the
Commission proposes to adapt the discussion of investment risk in the
CPMI-IOSCO Recovery Guidance.\69\ This adaptation results in (3) losses
incurred by the derivatives clearing organization from diminution of
the value of investments of its own or its participants' resources,
including cash or other collateral.
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\69\ See id. (``Investment risk is the financial risk faced by
an FMI when it invests its own or its participants' resources, such
as cash or other collateral.'')
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Under the fourth group, losses arising from legal risk, the
international guidance is less helpful. The CPMI-IOSCO Recovery
Guidance does not define ``legal risk;'' the FSB guidance simply notes
that ``legal, regulatory or contractual penalties could lead to
significant losses or uncertainty for the CCP and can take a long time
to materialise fully.'' Losses from legal risk can arise from causes
other than ``penalties'': For example, in the realm of contract or
tort, a DCO may be responsible for compensating a plaintiff for the
DCO's breach of contract, or for the plaintiff's damages caused by,
e.g., the DCO's negligence. In the realm of regulatory litigation,
there may be remedies other than penalties, including, e.g.,
restitution or disgorgement. Accordingly, the Commission is proposing
to broadly include (4) losses from adverse judgments, or other losses,
arising from legal, regulatory, or contractual obligations, including
damages or penalties, and the possibility that contracts that the
derivatives clearing organization relies upon are wholly or partly
unenforceable.
Finally, under the fifth group, losses arising from operational
risk, the Commission is proposing to draw from the prior definition of
operational risk, adding a few additional important categories.
Specifically, the Commission is proposing to add references to (1) the
actions of malicious actors and (2) the possibility of disruption from
internal events. Cyber risk is increasing, and organizations'
operations are exposed to risk from malicious (threat) actors, who
might include employees and third-party providers, criminals,
terrorists, and nation-states. Thus, the Commission proposes to
recognize explicitly the peril from what has been described as
malicious action by third parties intent on creating systemic harm or
disruption, with concomitant financial losses.\70\ Including a
reference to ``malicious actions (whether by internal or external
threat actors)'' should help protect market participants and the public
by potentially improving the DCO's ability to identify vulnerabilities
from malicious actors, safeguard its systems from such actors, and
address possible losses that might occur if, despite the DCO's system
safeguards, malicious actors detect and act upon any cyber
vulnerabilities.
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\70\ CPMI, Cyber resilience in financial market infrastructures,
at 7 (Nov. 2014); see also CPMI-IOSCO, Guidance on cyber resilience
for financial market infrastructures (June 2016). See generally
Executive Order No. 14028, Improving the Nation's Cybersecurity, 86
FR 26633 (May 12, 2021), available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/12/executive-order-on-improving-the-nations-cybersecurity/.
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The Commission is also proposing to add a reference to the
possibility of disruption from internal events (the current definition
of operational risk refers only to ``disruptions from external
events''). Examples of these internal events include fire as well as
flooding (due to, e.g., malfunctions of sprinkler systems). This
expansion to the definition should also help protect market
participants and the public, by potentially improving the DCO's ability
to identify vulnerabilities to its systems and operations from internal
events, mitigate those vulnerabilities, and address possible losses
that might occur if, despite the DCO's efforts, such vulnerabilities
disrupt its systems or operations.
Accordingly, the Commission is proposing to refer specifically to
non-default losses (5) as occasioned by deficiencies in information
systems or internal processes, human errors, management failures,
malicious actions (whether by internal or external threat actors),
disruptions to services provided by third parties, or disruptions from
internal or external events that result in the reduction,
deterioration, or breakdown of services provided by the derivatives
clearing organization.
B. Recovery Plan and Orderly Wind-Down Plan--Sec. 39.39(b)
Regulation 39.39(b) currently requires each SIDCO and Subpart C DCO
to 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
DCO's viability as a going concern.\71\ Regulation 39.19(c)(4)(xxiv)
currently requires a SIDCO or Subpart C DCO that is required to
maintain recovery and wind-down plans pursuant to Sec. 39.39(b) to
submit those plans to the Commission no later than the date on which
the DCO is required to have the plans.\72\ The Commission is proposing
amendments to these provisions as set forth below.
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\71\ 17 CFR 39.39(b)(1) and (2).
\72\ 17 CFR 39.19(c)(4)(xxiv).
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The Commission is maintaining existing Sec. 39.39(d) and (e).\73\
Accordingly, the recovery and orderly wind-down plans of SIDCOs and
Subpart C DCOs must continue to include evidence and analysis to
support the conclusion that they have sufficient financial resources--
as set forth in Sec. 39.39(d)(2)--to implement their recovery and
wind-down plans. Should this proposed rulemaking be adopted, that
analysis would be informed by the analyses SIDCOs and Subpart C DCOs
would be required to engage in under proposed Sec. 39.39(c).
Consistent with Sec. 39.39(e), moreover, SIDCOs and Subpart C DCOs
must continue to maintain viable plans for
[[Page 48975]]
raising additional financial resources where they are unable to comply
with any financial resources requirements provided in Part 39.
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\73\ Regulation 39.39(d)(2) provides, in part that each SIDCO
and Subpart C DCO shall maintain sufficient unencumbered liquid
financial assets, funded by the equity of its owners, to implement
its recovery or wind-down plans. The SIDCO or Subpart C DCO shall
analyze its particular circumstances and risks and maintain any
additional resources that may be necessary to implement the plans.
The plan shall include evidence and analysis to support the
conclusion that the amount considered necessary is, in fact,
sufficient to implement the plans.
Regulation 39.39(e) provides, in part that all SIDCOs and
Subpart C DCOs shall maintain viable plans for raising additional
financial resources, including, where appropriate, capital, in a
scenario in which the SIDCO or Subpart C DCO is unable, or virtually
unable, to comply with any financial resources requirements set
forth in this part.
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1. Submission of Plans for Recovery and Orderly Wind-Down--Sec.
39.39(b)(1)
The Commission is proposing to amend Sec. 39.39(b)(1) and (2) by
combining the paragraphs into one paragraph, Sec. 39.39(b)(1), and
cross-referencing the reporting requirement in Sec. 39.19(c)(4)(xxiv).
Proposed Sec. 39.39(b)(1) would require each SIDCO and Subpart C DCO
to maintain and, consistent with Sec. 39.19(c)(4)(xxiv), submit to the
Commission, viable plans for recovery and orderly wind-down, and
supporting information, due to, in each case, default losses and non-
default losses.\74\ The Commission is not proposing to require that the
recovery plan and orderly wind-down plan be submitted as separate
documents. However, the analysis for the recovery portion and wind-down
portion must be set forth clearly.
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\74\ In Section IV below, discussing the reporting requirement
in Sec. 39.19(c)(4)(xxiv), the Commission explains the reason for
adding the term ``and supporting information.''
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The Commission requests comment on these proposed revisions.
2. Notice of Initiation of the Recovery Plan and of Pending Orderly
Wind-Down--Sec. 39.39(b)(2), Sec. 39.13(k)(1), and Sec.
39.19(c)(4)(xxv)
Current Sec. 39.39(c)(1) includes, in part, the requirement that
recovery plans and wind-down plans include procedures for informing the
Commission, as soon as practicable, when the recovery plan is initiated
or wind-down is pending.\75\ The Commission proposes to move this
requirement to Sec. 39.39(b)(2) and to amend the requirement to state
explicitly that in addition to having procedures in place for informing
the Commission that the recovery plan is initiated or that orderly
wind-down is pending, the SIDCO or Subpart C DCO must notify the
Commission, as soon as practicable, when the recovery plan is initiated
or orderly wind-down is pending. This is not a substantive change since
the requirement to have procedures in place to provide notice
necessarily implies that such notice to the Commission will occur;
however, the Commission believes that explicitly stating this
requirement will ensure that the SIDCO or Subpart C DCO understands
this requirement.
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\75\ 17 CFR 39.39(c)(1).
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Additionally, the Commission proposes to require that these DCOs'
notice that the recovery plan is initiated or orderly wind-down is
pending also be provided to clearing members.\76\ Timely notification
of events to clearing members is essential to enable them to prepare
for a transition by the DCO into recovery or orderly wind-down. The
Commission proposes that each SIDCO and Subpart C DCO that files a
recovery plan and orderly wind-down plan under this section must notify
clearing members (in addition to the Commission) that recovery is
initiated or that orderly wind-down is pending as soon as practicable.
As discussed below in Section III, the Commission proposes that DCOs
that are neither SIDCOs nor Subpart C DCOs notify the Commission and
clearing members as soon as practicable when recovery \77\ is initiated
or orderly wind-down is pending.
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\76\ CFTC Letter No. 16-61, at 14 (referencing Sec. 39.21,
``Public information,'' which requires a DCO to make information
concerning the rules and the operating and default procedures
governing the clearing and settlement systems of the DCO available
to market participants).
\77\ While, under the proposal, a DCO that is neither a SIDCO
nor a subpart C DCO is not required to have a recovery plan, if such
a DCO does initiate recovery, it will be required to notify the
Commission and clearing members.
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The Commission proposes to add new Sec. 39.19(c)(4)(xxv) to
require that each DCO notify the Commission and clearing members as
soon as practicable when the DCO has initiated its recovery plan or
orderly wind-down is pending.
The Commission requests comment on these proposed changes.
3. Establishment of Time To File Recovery Plan and Orderly Wind-Down
Plan--Sec. 39.39(b)(3)
The Commission is proposing to establish the timing of the filing
of recovery plans and orderly wind-down plans. In 2013, the Commission
acknowledged commenters' concerns that additional time may be required
to comply with Sec. 39.39 because relevant global standards were still
in the consultative phase. The Commission promulgated Sec. 39.39(f) to
allow a SIDCO or Subpart C DCO to apply for up to one year to comply
with Sec. 39.39. Regulation 39.39(f) therefore created various dates
for SIDCOs and Subpart C DCOs to file the plans required by Sec.
39.39(b).
Commenters again requested a specific date to submit recovery plans
and wind-down plans in response to the May 2019 notice of proposed
rulemaking codifying Sec. 39.19(c)(4)(xxiv).\78\ In the January 2020
final rule, the Commission noted the date by which a SIDCO or new
Subpart C DCO is required to maintain a recovery plan and wind-down
plan depends upon when the DCO is designated as systemically important
or elects Subpart C status, whether it requests relief under Sec.
39.39(f), and whether the Commission grants such relief.\79\ The
Commission determined that Sec. 39.39(f) prevented the establishment
of a date certain for submitting plans to the Commission.\80\ This
proposal will, if adopted and finalized by the Commission, codify the
elements of a recovery plan and wind-down plan required under paragraph
(b) of Sec. 39.39, and remove the uncertainty concerning the filing
deadline. The need to request an extension of time for up to one year
to comply with the requirements of Sec. 39.39 (and Sec. 39.35) will
be obviated by the fixed deadline for newly designated SIDCOs to
develop and maintain a recovery plan and a wind-down plan.\81\ The
Commission is proposing to require a DCO to submit a recovery plan and
orderly wind-down plan and supporting information (to the extent it has
not already done so) as required by proposed Sec. 39.39(b) within six
months of the date the DCO is designated as a SIDCO, or as part of its
election to become subject to the provisions of Subpart C set forth in
Sec. 39.31, and annually thereafter.\82\
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\78\ See, e.g., Comment letter filed by the Futures Industry
Association and the International Swaps and Derivatives Association
(ISDA), at 21 (Sept. 13, 2019), available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2985&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=2.
\79\ 85 FR at 4822.
\80\ Id.
\81\ Regulation 39.35 covers the default rules and procedures
for uncovered credit losses or liquidity shortfalls (recovery) for
SIDCOs and Subpart C DCOs.
\82\ As discussed in section III below, it is being proposed
that all DCOs will be required to maintain orderly wind-down plans
on and after the effective date of this rule with respect to that
requirement. As discussed further below, it is proposed that the
effective date of that orderly wind-down plan requirement will be
six months after this rule may be finalized. To address the
possibility that a DCO may be designated a SIDCO or may elect
Subpart C status during that intervening period, such a DCO will be
required to maintain and file an orderly wind-down plan to the
extent it has not already done so.
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The Commission has preliminarily determined to require that a newly
designated SIDCO should file a complete recovery plan and (to the
extent it has not already done so) orderly wind-down plan consistent
with part 39 within six months of the date of designation for the
following reasons. First, in order to be designated as a SIDCO, the DCO
must be a DCO registered with the CFTC. All DCOs must comply with, and
demonstrate compliance as requested by the Commission, applicable
provisions of the CEA and the Commission's regulations, including
Subparts A and B
[[Page 48976]]
of part 39, in order be registered. Second, the Commission expects that
most of the larger DCOs for which future designation may be forthcoming
have elected to be subject to Subpart C, and therefore, have recovery
plans in place. Among those DCOs that are not currently subject to
Subpart C, most are foreign-based DCOs that are subject to standards in
their home jurisdictions that are consistent with the PFMI, and thus
such foreign-based DCOs are required to have both recovery and orderly
wind-down plans.\83\ Third, upon notification that the FSOC is
considering whether to designate a DCO systemically important, the DCO
will be aware of the enhanced regulatory requirements for SIDCOs
included in subpart C of part 39 of the Commission's regulations.\84\
Finally, staff issued CFTC Letter No. 16-61 and its non-binding
guidance in 2016. DCOs registered with the Commission and the clearing
industry in general are likely familiar with the staff letter and have
probably been following developments related to this proposal; hence,
the Commission has preliminarily determined not to require a longer
delay.
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\83\ See text accompanying fn. 207, infra.
\84\ 12 CFR 1320.11(a), 1320.12(a); Authority to Designate
Financial Market Utilities as Systemically Important, 76 FR 44763
(Jul. 27, 2011).
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The Commission is clarifying that a DCO that elects to be subject
to Subpart C of the Commission's regulations must file a recovery plan
and (in the event it has not already done so) an orderly wind-down
plan, and supporting information, as part of its election to be subject
to the provisions of Subpart C.\85\ The Commission continues to expect
that a DCO will not elect status as a Subpart C DCO before it is in
full compliance with the regulations in Subpart C.
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\85\ The Commission is proposing to amend Exhibit F-1 to the
Subpart C election form to require the submission of the recovery
and orderly wind-down plans, and supporting information, as well as
a demonstration of how those plans comply with the requirements of
Subpart C.
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The Commission is proposing Sec. 39.39(b)(3) to require a SIDCO to
file a recovery plan, and supporting information, within six months of
its designation as systemically important by the FSOC. The Commission
is also proposing to require that a DCO that elects to be subject to
the provisions of Subpart C must file a recovery plan and (to the
extent it has not already done so) an orderly wind-down plan, and
supporting information for these plans, as part of the DCO's election
to be subject to the provisions of Subpart C. The Commission is
proposing that such plans be updated thereafter on an annual basis.
The Commission requests comment on this aspect of the proposal.
C. Recovery Plan and Orderly Wind-Down Plan: Required Elements--Sec.
39.39(c)
Regulation 39.39(c)(1) currently requires that a SIDCO and Subpart
C DCO develop a recovery plan and orderly wind-down plan that includes
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. At the time the Commission was
promulgating current Sec. 39.39(c)(1), commenters had requested
specificity regarding the required elements of a recovery plan.\86\ The
Commission declined to provide that specificity because the
international guidance relevant to such plans was not final when Sec.
39.39 was adopted in 2013. After the international guidance was
finalized, staff issued CFTC Letter No. 16-61, which provides informal
guidance from DCR concerning those elements. Supervisory experience
shows that the recovery plans and orderly wind-down plans of SIDCOs and
Subpart C DCOs are generally consistent with the staff guidance in
Letter No. 16-61; thus, most, if not all, of the requirements described
below are already incorporated into the plans submitted by the DCOs
currently subject to Sec. 39.39. The Commission has preliminarily
determined to codify the staff guidance into the Commission's part 39
regulations. The Commission has preliminarily determined to specify the
required elements that a SIDCO or Subpart C DCO must include in its
recovery plan and orderly wind-down plan at this time.
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\86\ See, e.g., Comment letter of ISDA at 2-3 (Sept. 16, 2013),
filed in response to the Notice of Proposed Rulemaking, Derivatives
Clearing Organizations and International Standards, 78 FR 50260
(Aug. 16, 2013), available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391.
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The Commission proposes to replace Sec. 39.39(c) in its entirety.
Proposed Sec. 39.39(c) would reflect, to the extent the Commission
considers appropriate, the guidance on international standards related
to recovery plans and orderly wind-down plans adopted by the global
standard-setting bodies since 2013,\87\ and certain of the DCR staff
guidance set forth in CFTC Letter No. 16-61.\88\
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\87\ E.g., CPMI-IOSCO Recovery Guidance.
\88\ See 17 CFR 39.39(c)(1).
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As a general matter, the Commission believes that a DCO's recovery
plan and orderly wind-down plan required by Sec. 39.39(b) should
include summaries that provide an overview of the plans, and
descriptions of how the plans will be implemented, in order to enhance
both the understanding of the persons who need to use the plans and the
Commission's ability to evaluate the plans as part of its supervisory
program. Proposed Sec. 39.39(c) would also require that the
description of each plan include the identification and description of
the DCO's critical operations and services, interconnections and
interdependencies, resilient staffing arrangements, obstacles to
success, stress scenario analyses, potential triggers for recovery and
orderly wind-down, available recovery and orderly wind-down tools,
analysis of the effect of any tools identified, lists of agreements to
be maintained during recovery and orderly wind-down, descriptions of
governance arrangements, and testing. These proposed plan requirements
are necessary for the plan to be viable, i.e., capable of working
successfully, are consistent with the international guidance discussed
above, and should be considered the minimum that a SIDCO or Subpart C
DCO must include in its recovery plan and orderly wind-down plan. The
Commission proposes to add these requirements as new proposed Sec.
39.39(c). For clarity and completeness, specific requirements will be
set forth in paragraphs (c)(1) through (c)(8), as discussed below.
The Commission requests comment on this approach, and on each of
the proposed specific requirements.
1. Critical Operations and Services, Interconnections and
Interdependencies, and Resilient Staffing--Sec. 39.39(c)(1)
The Commission is proposing to add new Sec. 39.39(c)(1) requiring
recovery plans and orderly wind-down plans to identify and describe the
SIDCO's and Subpart C DCO's critical operations and services, including
internal and external service providers; ancillary services providers;
financial and operational interconnections and interdependencies;
aggregate cost estimates for the continuation of services; plans for
resilient staffing arrangements for continuity of operations into
recovery or orderly wind-down; plans to address the risks that the
failure of each critical operation and service poses to the DCO, and a
description of how such failures would be addressed; and a description
of how the SIDCO and Subpart C DCO will
[[Page 48977]]
ensure that the services continue through recovery and orderly wind-
down.
In developing a viable plan, both the CPMI-IOSCO Recovery Guidance
and CFTC Letter No. 16-61 stress the importance of identifying the
critical operations and services that the DCO provides, and the
financial and operational interconnections and interdependencies among
the DCO and its relevant affiliates, internal and external service
providers, and other relevant stakeholders.\89\ The Commission agrees
that each recovery plan and orderly wind-down plan should identify and
describe the critical operations and services that the DCO provides to
clearing members and other financial market participants. As CPMI-IOSCO
stated in its guidance, ``[t]he purpose of identifying critical
services is to focus the recovery plan on the FMI's ability to continue
to provide these services on an ongoing basis, even when it comes under
extreme stress.'' \90\ The Commission agrees that for purposes of
recovery planning in Sec. 39.39, when determining whether a service is
``critical,'' the DCO must consider ``the importance of the service to
the [DCO]'s participants and other FMIs, and to the smooth functioning
of the markets the [DCO] serves and, in particular, the maintenance of
financial stability.'' \91\
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\89\ CPMI-IOSCO Recovery Guidance, at section 2.4; CFTC Letter
No. 16-61, at 10-11.
\90\ CPMI-IOSCO Recovery Guidance, at section 2.4.2.
\91\ Id.
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The Commission anticipates that the DCO's ability to provide
critical services may also be affected by issues relating to certain
services that are ancillary to the critical service, and thus issues
relating to these ancillary services should be included in the recovery
and orderly wind-down plan. The Commission agrees with the analysis in
the CPMI-IOSCO Recovery Guidance that, ``even if a specific service is
judged not to be critical, a systemically important FMI needs to take
account of the possibility that losses or liquidity shortfalls relating
to the provision of that noncritical service could threaten its
viability and thus necessitate implementation of its recovery plan so
that it can continue to provide those services that are judged to be
critical. An FMI needs to have a recovery plan that covers all the
scenarios that could threaten its viability.'' \92\
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\92\ Id. at section 2.4.4. n.13.
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The Commission believes that a DCO's recovery plan and orderly
wind-down plan should identify and analyze a DCO's financial and
operational interconnections and interdependencies. Such an analysis is
important to foster, and to provide transparency into, the ability of
the DCO to implement each of its recovery plan and orderly wind-down
plan. For instance, the recovery plan should account for the
possibility that an affiliated entity in the financial sector may fail,
resulting in a cascade of failures and resultant defaults on all
obligations to the DCO, including with respect to services that the DCO
depends upon to complete its operations. A DCO's recovery plan and
orderly wind-down plan should also identify the DCO's critical internal
and external service providers, the risks that the failure of each
provider poses to the DCO, how such failures would be addressed, and
how the DCO would ensure that the services would continue into recovery
and orderly wind-down.\93\ Similarly, the DCO should consider the
impact of any disruption in services or operations it provides to
clearing members and financial market participants. In this regard,
CFTC Letter No. 16-61 recommended that a DCO's recovery plan include
the identification and analysis of ``the financial and operational
interconnections and interdependencies among the DCO and its relevant
affiliates, internal and external service providers and other relevant
stakeholders.'' \94\
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\93\ Id.
\94\ CFTC Letter No. 16-61, at 10.
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In considering and analyzing the magnitude of the costs that it
needs to plan for associated with recovery or orderly wind-down, the
DCO should consider the likely increase in certain of its expenses
compared to its business-as-usual operating budget, including, for
example, legal fees, accounting fees, financial advisor fees, the costs
associated with employee retention programs, and other incentives in
order to maintain critical staff. Other costs, such as marketing or
those associated with the development of new products, may decrease.
For purposes of orderly wind-down planning in particular, the DCO shall
proceed under the conservative assumption that any resources consumed
during recovery will not be available to fund critical operations and
services in wind-down.
The DCO's analysis of its critical operations and services should
also describe the impact of the multiple roles and relationships that a
single financial entity may have with respect to the DCO including
affiliated entities and external entities.\95\ For instance, a single
external entity (including a set of affiliated entities) may act as a
clearing member, a settlement bank, custodian or depository bank,
liquidity provider or counterparty. If such a single external entity
defaults in one of its roles e.g., as a clearing member, it will likely
default in all of them.\96\ An entity affiliated with the DCO may be
relied upon for a variety of services, such as those related to
information technology, human resources, or facilities. In order to
support the viability of its recovery or orderly wind-down plan, the
DCO should address the contingency that its affiliate may not be able
to perform those services.
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\95\ Id.
\96\ A financial conglomerate/bank holding company structure may
operate through a set of legal entities (e.g., a broker-dealer/
futures commission merchant separate from a bank separate from an
information technology service provider), each of which has
different relationships with the DCO. Based on past experience with
insolvencies of financial firms (e.g., Refco, Lehman, MF Global),
once one of these affiliates fails, the others are likely to follow
it into bankruptcy or receivership proceedings quickly.
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Consistent with the CPMI-IOSCO Recovery Guidance, the Commission
believes that a DCO's recovery plan should consider how its design and
implementation may affect another FMI, and coordinate the relevant
aspects of their plans.\97\ Given the interconnected nature of the
financial services ecosystem, supporting financial stability requires
the recovery plan and orderly wind-down plan of each DCO to identify
and address contingencies and consequences.
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\97\ CPMI-IOSCO Recovery Guidance, at section 2.4.14.
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Recovery and orderly wind-down planning must also identify
potential risks that may arise in recovery and orderly wind-down if
financial weakness or failure in one of the DCO's business lines or
affiliated legal entities spreads to others. The recovery and orderly
wind-down plans must describe how the DCO has planned for resilient
staffing arrangements for continuity of operations since it is not
feasible to maintain a critical service without the concomitant
personnel. As part of planning for recovery, each SIDCO and Subpart C
DCO should also explain how the DCO will retain, and address the
potential loss of, the services of personnel filling mission-critical
roles during extreme stress. The DCO may additionally be vulnerable to
key person risk; accordingly, plans for resilient staffing arrangements
should identify, to the extent applicable, key person risk within the
DCO or (as relevant) affiliated legal entities that the DCO relies upon
to provide its critical
[[Page 48978]]
operations and services, and how the DCO has planned for this risk.
The Commission requests comment on this aspect of the proposal.
2. Recovery Scenarios and Analysis--Sec. 39.39(c)(2)
The Commission is proposing to add new Sec. 39.39(c)(2) to specify
scenarios that must be addressed in the SIDCO's or Subpart C DCO's
recovery plan, to the extent, in each case, that such scenario is
possible. The Commission believes that the current requirement that a
SIDCO or Subpart C DCO shall identify scenarios that may potentially
prevent it from being able to meet its obligations is too broad and
allows for planning gaps.
To support a systematic planning process that will foster these
DCOs' ability to recover effectively from situations of unprecedented
stress, the Commission is proposing to adopt portions of CFTC Letter
No. 16-61 describing the analysis that should take place for each
scenario considered in the recovery plan; namely: (1) a description of
the scenario; (2) the events that are likely to trigger the scenario;
(3) the DCO's process for monitoring events triggering the scenario;
(4) the market conditions, operational and financial difficulties and
other relevant circumstances that are likely to result from the
scenario; (5) the potential financial and operational impact of the
scenario on the DCO and on its clearing members, internal and external
service providers and relevant affiliated companies, both in an orderly
market and in a disorderly market; and (6) the specific steps the DCO
would anticipate taking when the scenario occurs or appears likely to
occur including, without limitation, any governance or other procedures
in order to implement the relevant recovery tools and to ensure that
such implementation occurs in sufficient time for the recovery tools to
achieve their intended effect.\98\ The Commission believes that this
six-part analysis is integral to viability of a SIDCO's and Subpart C
DCO's recovery plan and orderly wind-down plan. The Commission expects
that each of these DCOs will undertake such analysis for each scenario
described in its recovery plan and its orderly wind-down plan. The
Commission is proposing in Sec. 39.39(c)(2) that each recovery plan
and orderly wind-down plan contain the described analysis.
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\98\ CFTC Letter No. 16-61, at 6-7.
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In order to promote the comprehensiveness of these DCOs' recovery
plans, the Commission is also proposing to require that each recovery
plan describe certain ``commonly applicable scenarios,'' most of which
are described in CFTC Letter No. 16-61, to the extent such scenarios
are possible in light of the DCO's activities.\99\ Those scenarios
include: (1) settlement bank failure; (2) custodian or depository bank
failure; (3) scenarios resulting from investment risk; (4) poor
business results; (5) the financial effects from cybersecurity events;
(6) fraud (internal, external, and/or actions of criminals or of public
enemies); (7) legal liabilities, including liabilities related to the
DCO`s obligations with respect to cleared transactions and those not
specific to its business as a DCO (e.g., tort liability); (8) losses
resulting from interconnections and interdependencies among the DCO and
its parent, affiliates, and/or internal or external service providers
(e.g., the financial effects of the inability of a service provider to
provide key systems or services); \100\ and (9) any other risks
relevant to the DCO's activities. In addition to these scenarios, the
Commission is proposing to require SIDCOs and Subpart C DCOs to include
in their recovery plan the following additional scenarios: (1) credit
losses or liquidity shortfalls created by single and multiple clearing
member defaults in excess of prefunded resources required by law; (2)
liquidity shortfall created by a combination of clearing member default
and a failure of a liquidity provider to perform; (3) depository bank
failure; and (4) losses resulting from interconnections and
interdependencies with other CCPs (whether or not those CCPs are
registered with the Commission as DCOs). For any of those scenarios
enumerated above that the DCO determines are not possible in light of
its activities, the DCO should provide its reasoning for not
considering it. Finally, the Commission is proposing that a DCO must
include at least two scenarios involving multiple failures (e.g., a
member default occurring simultaneously, or nearly so, with a failure
of a service provider) that, in the judgment of the DCO, are
particularly relevant to the DCO's business.\101\ The Commission
believes that a DCO should describe how it is prepared for these
additional exigencies in order to demonstrate to the market and its
clearing members that it is prepared to meet the demands of possible
market stresses.
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\99\ Id. at 5-6. These scenarios are described as ``commonly
applicable'' because, in the Commission's judgment, all DCOs will
plausibly be vulnerable to most of these scenarios occurring, that
is, most scenarios will be possible and, if such a scenario occurs,
it may damage the DCO's financial position sufficiently to require
recovery or orderly wind-down.
The reference to scenarios that are ``possible'' should not be
confused with a reference to scenarios that are ``likely.'' Thus, if
a DCO deposits all relevant funds as cash with a federally regulated
and insured depository institution, and in no circumstances invests
them, then a scenario of losses resulting from investment risk would
not be possible. On the other hand, while regulation of depository
institutions and FDIC insurance makes a loss due to failure of such
a depository bank extraordinarily unlikely, it is not impossible,
and thus is a scenario that should be addressed in the recovery and
orderly wind-down plans. See, e.g., NDL Discussion Paper at section
2.1 (``[L]ow risk is not zero risk, and consequently, CCPs should
have a plan to address [non-default losses (NDL)] from these
scenarios should they materialize. Some CCPs, however, do not
include certain types of NDL scenario[s] in their planning because
these CCPs seem to assume that regulated financial institutions or
central securities depositories pose zero custody [or depository]
risk, or that legal risk cannot cause an NDL (because Principle 1 of
the PFMI requires a legal basis with `a high degree of certainty').
These approaches appear to be inconsistent with the standards set
forth in the PFMI.'')
\100\ For loss scenarios resulting from interconnections and
interdependencies among the DCO and its parent or affiliates, the
DCO should consider, to the extent applicable, how its
organizational structure may impact the specific steps it would
anticipate taking.
\101\ The term ``in the judgment of the DCO, are particularly
relevant'' is being used rather than ``are most relevant'' to avoid
the implication that it would be necessary to conduct an analysis
ranking with precision the relevance of different combinations.
Rather, staff of the DCO should exercise their professional
judgement in selecting at least two particularly relevant
combination scenarios. It is highly unlikely that no such
combinations (or only one) would be possible.
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The Commission requests comment on this aspect of the proposal.
3. Recovery and Orderly Wind-Down Triggers--Sec. 39.39(c)(3)
Thorough planning also requires that a SIDCO or Subpart C DCO be
prepared to determine when recovery or orderly wind-down is necessary,
that is, when the recovery plan or orderly wind-down plan should be
``triggered.'' Some triggers might be automatic (e.g., because the DCO
is insolvent) while others may not be obvious, and many will
necessarily involve the exercise of judgment and discretion (e.g., the
DCO is suffering ongoing business losses that appear likely to lead to
insolvency, or an adverse legal judgment that involves large financial
liability appears likely).
The CPMI-IOSCO Recovery Guidance and CFTC Letter No. 16-61 each
advise that a SIDCO's and Subpart C DCO's recovery plan and wind-down
plan should define the criteria, both quantitative and qualitative,
that they would use to determine, or to guide its discretion in
determining, when to implement the recovery plan and the wind-down
plan, i.e., the trigger(s).\102\ The Commission believes that defining
those criteria (including conducting the
[[Page 48979]]
analysis necessary to do so) would materially aid these DCOs both in
developing effective plans, and in preparing to address events that
lead to such triggers. While the CPMI-IOSCO Recovery Guidance
references only recovery plans, the Commission believes that a similar
analysis should apply to planning for consideration of orderly wind-
down. The Commission also believes that the identification of possible
triggers would project confidence to the public that these DCOs will
continue to function in extreme circumstances (such as recovery), and
convey that these DCOs have a plan to consider wind-down in an orderly
manner if recovery is ineffective.
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\102\ See CPMI-IOSCO Recovery Guidance, at sections 2.4.6-2.4.8;
CFTC Letter No. 16-61, at 7.
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The CPMI-IOSCO Recovery Guidance states that there may be some
triggers that ``should lead to a pre-determined information-sharing and
escalation process within the FMI's senior management and its board of
directors and to careful consideration of what action should be
taken.'' \103\ The Commission agrees that planning for such an
information-sharing and escalation process as part of the DCO's
governance is an important part of ensuring that the DCO is prepared to
deal with contingencies. Accordingly, the Commission is proposing new
Sec. 39.39(c)(3)(i) to require that a SIDCO's or Subpart C DCO's
recovery plan discuss the criteria that may trigger both implementation
and consideration of implementation of the recovery plan, and the
process that these DCOs have in place for monitoring for events that
are likely to trigger the recovery plan. With respect to the orderly
wind-down plan, the DCO must discuss the criteria that may trigger
consideration of implementation of the plan, realizing the importance
of discretion in determining whether to implement orderly wind-down (in
contrast to recovery, a terminal process), and the process that the DCO
has in place for monitoring for events that may trigger consideration
of implementation of the orderly wind-down plan.
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\103\ CPMI-IOSCO Recovery Guidance, at section 2.4.8.
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For similar reasons, the Commission is proposing Sec.
39.39(c)(3)(ii) to require the recovery plan and orderly wind-down plan
each to include a description of the information-sharing and escalation
process within the SIDCO's and Subpart C DCO's senior management and
the board of directors. These DCOs must have a defined process that
will include the factors the DCO considers most important in guiding
the board of directors' exercise of judgment and discretion with
respect to recovery and orderly wind-down plans in light of the
relevant triggers and that process.
The Commission requests comment on this aspect of the proposal.
4. Recovery Tools--Sec. 39.39(c)(4)
By the end of 2013, CPMI-IOSCO had not completed their consultative
work establishing guidance for use in implementing the PFMI. Their
final guidance was published in October 2014 and amended in July 2017.
The CPMI-IOSCO Recovery Guidance does not advise authorities to
prescribe specific recovery tools; rather the guidance ``provides an
overview of some of the tools that an FMI may include in its recovery
plan, including a discussion of scenarios that may trigger the use of
recovery tools and characteristics of appropriate recovery tools in the
context of such scenarios.'' \104\ CFTC Letter No. 16-61 adopts a
similar approach in that it does not prescribe the tools that a DCO
should use during recovery. Rather, the letter sets forth a detailed
analysis that staff expects a DCO should undertake in its recovery plan
to meet its obligations or provide its critical operations and services
as a going concern.\105\
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\104\ Id. at 1; see also id. at section 4.1 (summarizing
specific recovery tools).
\105\ CFTC Letter No. 16-61, at 7-8.
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The Commission declines to prescribe specific tools that SIDCOs and
Subpart C DCOs must include in their recovery plans. Each DCO is
different, and a variety of tools may be available to a particular DCO
in each specific scenario. Rather, these DCOs should have discretion to
decide on which tools to include, so long as the set of tools chosen
meets standards designed to protect indirect participants (e.g.,
clients, end users), direct participants (i.e., clearing members), the
DCO itself, and other relevant stakeholders (including, in the case of
SIDCOs, the financial system more broadly): (1) the set of tools should
comprehensively address how the DCO would continue to provide critical
operations and services in all relevant scenarios; (2) each tool should
be reliable, timely, and have a strong legal basis; (3) the tools
should be transparent and designed to allow those who would bear losses
and liquidity shortfalls to measure, manage and control their exposure
to losses and liquidity shortfalls; (4) the tools should create
appropriate incentives for the DCO's owners, direct and indirect
participants, and other relevant stakeholders; and (5) the tools should
be designed to minimize the negative impact on direct and indirect
participants and the financial system more broadly.\106\
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\106\ See CPMI-IOSCO Recovery Guidance, at section 3.3.1.
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The Commission expects that each SIDCO and Subpart C DCO will
consider in its planning process tools that meet the full scope of
financial deficits that the DCO may need to remediate: (1) tools to
allocate uncovered losses by a clearing member default: e.g., the DCO's
own capital (sometimes referred to as ``skin-in-the-game''), cash calls
(sometimes referred to as assessments), and gains-based haircutting
(sometimes referred to as variation margin gains haircutting); (2)
tools to address uncovered liquidity shortfalls: e.g., liquidity from
third-party institutions and non-defaulting \107\ clearing members; (3)
tools to replenish financial resources: e.g., cash calls and
recapitalization; \108\ (4) tools to establish a matched book: e.g.,
auctions and tear-ups; and (5) tools to allocate losses not covered by
a clearing member default: e.g., capital, recapitalization, and
insurance.
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\107\ In the context of default losses, the defaulting
participants cannot be relied upon to provide any resources. In the
context of non-default losses, all participants are, at least in the
first instance, non-defaulting participants.
\108\ Cf. id. at section 2.4.9. While the CPMI-IOSCO Recovery
Guidance refers to capital, section 39.11(b) recognizes that
financial resources include, but are not limited to, capital.
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To provide these DCOs with some flexibility, the Commission is
proposing to require that each DCO's recovery plan include a complete
description and analysis of the tools it proposes to use to cover
shortfalls from the stress scenarios identified by the DCO that are not
covered by pre-funded financial resources, or where the DCO does not
have sufficient liquid resources or liquidity arrangements to meet its
obligations in the correct form and in a timely manner. Additionally,
the Commission expects each DCO will be prepared to implement tools to
deal with other losses or liquidity shortfalls, including those from
non-default risks that may materialize more slowly, and tools to
increase the DCO's financial resources where necessary in order to
implement its plans. Finally, to support the planning process, the
description of recovery tools in the recovery plan should include, at a
minimum, any discretion the DCO has in the use of the tool, whether the
tool is mandatory or voluntary, and the governance processes and
arrangements for determining which tools to use, and to what extent.
Accordingly, the Commission is proposing Sec. 39.39(c)(4) to
require a SIDCO or Subpart C DCO to have a
[[Page 48980]]
recovery plan that includes the following: (i) a description of the
tools that the DCO would expect to use in each scenario required by
proposed paragraph (b) of this section that comprehensively addresses
how the DCO would continue to provide critical operations and services;
(ii) the order in which each such tool would be expected to be used;
(iii) the time frame within which each such tool would be expected to
be used; (iv) a description of the governance and approval processes
and arrangements within the DCO for the use of each tool available,
including the exercise of any available discretion; (v) the processes
to obtain any approvals external to the DCO (including any regulatory
approvals) that would be necessary to use each of the tools available,
and the steps that might be taken if such approval is not obtained;
\109\ (vi) the steps necessary to implement each such tool; (vii) a
description of the roles and responsibilities of all parties, including
non-defaulting clearing members, in the use of each such tool; (viii)
whether the tool is mandatory or voluntary; (ix) an assessment of the
likelihood that the tools, individually and taken together, would
result in recovery; and (x) an assessment of the associated risks from
the use of each such tool to non-defaulting clearing members and those
clearing members' customers with respect to transactions cleared on the
DCO, linked financial market infrastructures, and the financial system
more broadly. For those scenarios involving non-default losses, all
clearing members are non-defaulting.
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\109\ Thus, while (iv) focuses on internal governance and
approval processes such as among DCO officers and committees, (v)
focuses on external approval processes, if any, such as approvals by
a regulator with the legal authority or practical power to require
approval of the use of a tool.
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The Commission requests comment on this aspect of the proposal.
With respect to the types of recovery tools in particular, the
Commission welcomes comment on whether DCOs use, or would anticipate
using, any tools not identified above in order to meet the full scope
of financial deficits a DCO in recovery may need to remediate.
5. Orderly Wind-Down Scenarios and Tools--Sec. 39.39(c)(5)
As discussed further below, planning for orderly wind-down overlaps
significantly, though not totally, with planning for recovery. There
may be circumstances where the SIDCO or Subpart C DCO attempts to
recover but fails, upon which it should have a plan, as well as
sufficient capital, to transition to and execute an orderly wind-down.
SIDCOs and Subpart C DCOs must therefore plan for both recovery and
orderly wind-down.
Proposed Sec. 39.39(c)(5) would require a SIDCO's or a Subpart C
DCO's orderly wind-down plan to identify scenarios that could prevent
it from being able to meet its obligations, and to identify tools which
may be used in the orderly wind-down of the DCO. CFTC Letter No. 16-61
states that a DCO's analysis of its wind-down options ``should contain
many of the elements of a DCO's analysis of its recovery tools.'' \110\
The letter calls for the wind-down plan to identify and analyze in
detail, with respect to each scenario, nine required elements as well
as ``the manner in which liquidity requirements would be managed during
service closure'' and how essential support services would be
maintained during the wind-down period.\111\ The letter also calls for
the wind-down plan to address obstacles to each option, and the
viability of the options in light of the obstacles.
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\110\ CFTC Letter No. 16-61, at 9.
\111\ Id. at 10.
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The Commission recognizes that, to plan effectively for orderly
wind-down, considering the scenarios and recovery tools described in
the DCO's recovery plan must precede the DCO's analysis of the events
that would trigger consideration of implementation of the orderly wind-
down plan, and the use of the DCO's orderly wind-down options.\112\ A
DCO's orderly wind-down plan should therefore include a description of
the point or points in the recovery plan, for each scenario, where
recovery efforts would likely be deemed to have failed and
consideration of implementing the orderly wind-down plan would be
triggered. The orderly wind-down plan should then describe at what
point the DCO will no longer be able to meet its obligations or provide
its critical services as a going concern. Once these scenarios are
identified, the plan should describe the tools available to the DCO to
effectuate an orderly wind-down. The DCO should, therefore, explain in
its wind-down plan how it would plan to accomplish an orderly wind-
down, taking into account the time it anticipates it would take to
implement the plan. The orderly wind-down plan should include a
complete analysis of the wind-down tools the DCO would anticipate
using, both individually and together. In order to support a thorough
planning process that is consistent with the international standards,
the Commission has preliminarily determined that for each wind-down
tool, the DCO should describe any discretion it has in the use or
sequencing of the wind-down tool for each scenario, any obstacles to
the use of a particular tool, the governance and approval processes for
the tools available, and how the DCO is planning for the viability of
the tools in light of any identified obstacles.
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\112\ See id. at 9.
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To support a systematic planning process that will foster the DCO's
ability to wind-down in an orderly manner in situations of
unprecedented stress, where recovery is infeasible, proposed Sec.
39.39(c)(5) incorporates certain of the staff guidance included in CFTC
Letter No. 16-61, as well as international standards and guidance
issued since the 2013 rulemaking. Proposed Sec. 39.39(c)(5) would
require each SIDCO and Subpart C DCO to identify scenarios that may
prevent it from meeting its obligations or providing its critical
services as a going concern, describe the tools that it would expect to
use in an orderly wind-down that comprehensively address how the DCO
would continue to provide critical operations and services, describe
the order in which each such tool would be expected to be used,\113\
establish the time frame within which each such tool would be expected
to be used, describe the governance and approval processes and
arrangements within the DCO for the use of each of the tools available,
including the exercise of any available discretion, describe the
processes to obtain any approvals external to the DCO (including any
regulatory approvals) that would be necessary to use each of the tools
available, and the steps that might be taken if such approval is not
obtained, set forth the steps necessary to implement each such tool,
describe the roles and responsibilities of all parties, including non-
defaulting clearing members, in the use of each such tool, provide an
assessment of the likelihood that the tools, individually and taken
together, would result in orderly wind-down, and provide an assessment
of the associated risks to non-defaulting clearing members and those
clearing members' customers with respect to transactions cleared on the
DCO, linked financial market infrastructures, and the financial system
more broadly.
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\113\ It may be the case that certain tools may be used
concurrently.
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The Commission requests comment on this aspect of the proposal. The
Commission specifically requests comment on whether the scope of
clearing member customers that are focused upon (i.e., ``those clearing
members' customers with respect to transactions cleared on the'' DCO)
is
[[Page 48981]]
appropriately broad, and appropriately framed.
6. Agreements To Be Maintained During Recovery and Orderly Wind-Down--
Sec. 39.39(c)(6)
A DCO has a variety of contractual arrangements that must be
maintained during business as usual, in times of stress, and recovery
and orderly wind-down, such as those with clearing members, affiliates,
linked central counterparties, counterparties, external service
providers, and other third parties.\114\ These contractual arrangements
include the DCO's rules and procedures, agreements to provide
operational, administrative and staffing services, intercompany loan
agreements, mutual offset agreements or cross-margining agreements, and
credit agreements.\115\ Also, a DCO's recovery plan and orderly wind-
down plan should identify and analyze the implications of the various
contractual arrangements that the DCO maintains and describe the
actions that the DCO has taken to ensure that its operations can
continue during recovery and orderly wind-down despite the termination
or alteration of relevant contracts.\116\
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\114\ Id. at 11.
\115\ Id.
\116\ Id. Note that CFTC Letter No. 16-61 calls for the same,
i.e., determine whether any contractual arrangements include
covenants, material adverse change clauses or other provisions that
would permit a counterparty to alter or terminate the agreement as a
result of the implementation of the DCO's recovery plan or wind-down
plan.
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Contracts may contain covenants, material adverse change clauses,
or other provisions that could subject such contracts to alteration or
termination as a result of the implementation of the recovery plan or
orderly wind-down plan, and thus render the continuation of the DCO's
critical operations and services difficult or impracticable. Therefore,
the Commission believes that each DCO's recovery plan and orderly wind-
down plan should be supported by the DCO's review and analysis of the
DCO's contracts associated with the provision of those critical
operations or services to determine if those contracts contain such
provisions. Where such contractual provisions are present and
enforceable against the DCO, it will need to have alternative methods
to continue those critical operations and services. The DCO's recovery
plan and orderly wind-down plan should describe the actions that the
DCO has taken to ensure that its operations can continue during
recovery and orderly wind-down despite these contractual provisions.
The orderly wind-down plan should also consider whether the contractual
relationships the DCO relies upon to perform its critical operations
and services would transfer to a new entity in the event of the
creation of a new entity or the sale or transfer of the business to
another entity in an orderly wind-down. Furthermore, the Commission
believes that a requirement that a DCO have plans in place to ensure
that its critical operations and services will continue into recovery
and orderly wind-down is consistent with the PFMI and is crucial to
providing ``a high degree of confidence'' that the DCO will continue
its operations and ``serve as a source of financial stability even in
extreme market conditions.'' \117\
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\117\ PFMI at 36 (section on credit and liquidity risk
management).
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The DCO's recovery plan and orderly wind-down plan must also
identify and describe any licenses, and contracts in which the DCO is
the licensee, upon which the DCO may rely to provide its critical
operations and services. Such licenses should be included in the DCO's
analysis of its contractual arrangements that must continue into
recovery and wind-down.
The Commission is proposing Sec. 39.39(c)(6) to provide that a
SIDCO or Subpart C DCO must determine which of its contracts,
arrangements, agreements, and licenses associated with the provision of
its critical operations and services as a DCO are subject to alteration
or termination as a result of implementation of the recovery plan or
orderly wind-down plan. The recovery plan and orderly wind-down plan
must describe the actions that the DCO has taken to ensure that its
critical operations and services will continue during recovery and
wind-down despite such alteration or termination.
The Commission requests comments on this aspect of the proposal.
7. Governance--Sec. 39.39(c)(7)
While current Sec. 39.39 does not explicitly address the need for
a DCO to have an effective governance structure to implement its
recovery or orderly wind-down plans, the Commission has preliminarily
determined to require an effective governance structure in order to
enable the DCO to implement such plans effectively. The CPMI-IOSCO
Recovery Guidance supports the Commission's determination, and
recommends that the DCO's board of directors or equivalent governing
body formally endorse the recovery plan.\118\ In addition, the guidance
calls for ``an effective governance structure and sufficient resources
to support the recovery planning process and implementation of its
recovery plan, including any decision-making processes.'' \119\
According to the CPMI-IOSCO Recovery Guidance, an ``effective
governance structure'' includes ``clearly defining the responsibilities
of board members, senior executives and business units, and identifying
a senior executive responsible for ensuring that the FMI observes
recovery planning requirements and that recovery planning is integrated
into the FMI's overall governance process.'' \120\ The guidance also
states that the FMI's board should consider the interests of all
stakeholders who are likely to be affected by the recovery plan when
developing and implementing it, and the FMI ``should have clear
processes for identifying and appropriately managing the diversity of
stakeholder views and any conflicts of interest between stakeholders
and the FMI.'' \121\
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\118\ CPMI-IOSCO Recovery Guidance, at section 2.3.3.
\119\ Id.
\120\ Id.
\121\ Id. at section 2.3.4.
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CFTC Letter No. 16-61 provided guidance to align the regulation
promulgated in 2013 with the 2014 CPMI-IOSCO Recovery Guidance. CFTC
Letter No. 16-61 advised that a DCO's recovery plan and wind-down plan
should set forth all relevant governance arrangements and recommends
that a DCO's recovery plan and wind-down plan: (1) Identify the persons
responsible for the development, review, approval, and ongoing
monitoring and updating of the DCO's recovery plan and wind-down plan;
(2) describe the involvement of the DCO's clearing members in the
development, review, and updating of the recovery plan and wind-down
plan, and in assessing the effects of the recovery plan on clearing
members; (3) describe how the costs and benefits of various recovery
tools are taken into account during the decision-making process; (4)
describe the recovery plan and wind-down plan approval and amendment
process; (5) describe the specific roles and responsibilities of the
DCO's Board of Directors, relevant committees, and other employees and
clearing members in activating the recovery plan and wind-down plan and
in implementing various aspects thereof including, without limitation,
the use of recovery tools and wind-down options; and (6) the discretion
of such persons and entities in activating the recovery plan and wind-
down plan, the parameters for exercise of such discretion, where such
discretion may be exercised, and the
[[Page 48982]]
governance processes for the exercise of such discretion.\122\
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\122\ CFTC Letter No. 16-61, at 13.
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The Commission believes that, in order to develop thorough plans,
and to be prepared to implement those plans effectively, a SIDCO or
Subpart C DCO must implement and maintain transparent governance
arrangements related to recovery and wind-down that are consistent with
the above standards and that recognize ``one size does not fit all.''
DCOs are required to have governance rules and arrangements in place
both for business-as-usual operations and in times of extreme stress in
order to meet DCO Core Principle O.\123\ DCO Core Principle O requires
a DCO to establish governance arrangements that are transparent to
fulfill public interest requirements and to permit the consideration of
the views of owners and participants.\124\
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\123\ Section 5b(c)(2)(O)(i) of the CEA, 7 U.S.C. 7a-1(c)(2)(O).
\124\ Id.
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In furtherance of Core Principle O, and to support the
effectiveness of these plans and ensure their formal review, the
Commission is proposing new Sec. 39.39(c)(7) to require each SIDCO's
and Subpart C DCO's recovery plan and orderly wind-down plan to be
annually reviewed and formally approved by the board of directors, and
to describe an effective governance structure that clearly defines the
responsibilities of the board of directors, board members, senior
executives, and business units. Each plan must also describe the
processes that the DCO will use to guide its discretionary decision-
making relevant to each plan, including those processes for identifying
and managing the diversity of stakeholder views and any conflict of
interest between stakeholders and the DCO.
The Commission requests comment on this aspect of the proposal.
8. Testing--Sec. 39.39(c)(8)
In CFTC Letter No.16-61, staff recommended that SIDCOs and Subpart
C DCOs include in their recovery and wind-down plans procedures for
regularly testing the viability of such plans and that testing, where
applicable, be conducted with the participation of clearing
members.\125\ Additionally, the recovery plan and wind-down plan should
identify the types of testing that will be performed, the frequency
with which the plans will be tested, to whom the findings will be
reported, and the procedures for updating the recovery plan and wind-
down plan in light of the testings' findings.\126\ Likewise, the CPMI-
IOSCO Recovery Guidance provides that FMIs should, for the purpose of
``ensur[ing] that the recovery plan can be implemented effectively,''
test and review the recovery plan at least annually as well as
following changes materially affecting the recovery plan.\127\ As an
example, it states that testing may be conducted through periodic
simulation and scenario exercises.\128\ The CPMI-IOSCO Recovery
Guidance also states that an ``FMI should update its recovery plan as
needed following the completion of each test and review.'' \129\
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\125\ CFTC Letter No. 16-61, at 15.
\126\ Id.
\127\ CPMI-IOSCO Recovery Guidance, at ] 2.3.8.
\128\ Id.
\129\ Id.
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In 2022, CPMI-IOSCO issued a discussion paper building on PFMI
Principles 3 (Framework for the Comprehensive Management of Risks) and
15 (General Business Risk), the purpose of which was ``to facilitate
the sharing of existing practices to advance industry efforts and
foster dialogue on [CCPs'] management of potential losses arising from
non-default events . . . in particular in the context of recovery or
orderly wind-down.'' \130\ Summarizing the responses of CCPs, the
discussion paper observes, ``In general, responding CCPs perform annual
reviews of their recovery plans'' and ``[a]lmost all responding CCPs
conduct crisis management drills.'' \131\ The responding CCPs also
informed CPMI-IOSCO that they ``use crisis management drills to improve
their decision-making capabilities and their capacity to address
potential [non-default losses] by improving their understanding of
scenarios and tools, and testing assumptions about the effectiveness of
specific tools.'' \132\ The discussion paper quotes one CCP's response
in particular explaining that crisis management exercises helped
improve its operational readiness and identify the need for higher
insurance coverage.\133\
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\130\ NDL Discussion Paper, at 2 (Executive Summary).
\131\ Id. at section 4.
\132\ Id.
\133\ Id.
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In addition, the discussion paper highlights that CCPs engage in
discussion-based exercises involving the internal governance structure
and external partners and stakeholders, which ``appears to facilitate a
better understanding of roles and responsibilities before a crisis
occurs'' and ``serve[s] to reduce the likelihood of purely ad hoc
decision-making on the allocation of [non-default losses] in a crisis,
while still giving decision-makers the flexibility to respond to the
unique circumstances of any particular crisis.'' \134\ The responding
CCPs reported that testing typically involves a wide range of internal
stakeholders and, in some cases, external stakeholders as well.\135\
This greater involvement in testing ``enhances the quality of such
exercises by strengthening the tie between the exercise and reality of
how stakeholders will react.'' \136\
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\134\ Id.
\135\ Id.
\136\ Id.
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According to the discussion paper, testing ``may permit CCPs to
enhance the tools and resources for identifying, measuring, monitoring
and managing [non-default loss] risks'' and has ``the potential to
increase participants' understanding of the types of scenario[s] that
could generate [non-default losses], the range of magnitudes of such
losses and their roles and responsibilities in addressing [nondefault
losses],'' \137\ which could result in an ``increase [in] the
operational effectiveness'' of the CCPs' plans.\138\
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\137\ Id.
\138\ Id.
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The Commission believes that the testing and reviewing practices
described in the foregoing paragraphs will materially contribute to the
effectiveness of recovery and orderly wind-down plans. Although the
CPMI-IOSCO discussion paper focused on existing practices with respect
to non-default losses, the reasoning will also apply to default losses.
Periodic testing has the potential to demonstrate whether a SIDCO's or
Subpart C DCO's tools and resources will sufficiently cover financial
losses resulting both from participant defaults and non-default losses
and whether these DCOs' rules, procedures, and governance facilitate a
viable recovery or orderly wind-down. Further, testing the DCO's
infrastructure is an effective means of revealing deficiencies or
weaknesses which could hamper recovery or wind-down efforts, and
providing an opportunity to remediate them in advance.
Thus, the Commission is proposing new Sec. 39.39(c)(8) to require
that the recovery plan and orderly wind-down plan of each SIDCO and
Subpart C DCO include procedures for testing the viability of the
plans, including testing of the DCO's ability to implement the tools
that each plan relies upon. The recovery plan and the orderly wind-down
plan must include the types of testing that will be performed, to whom
the findings of such tests are reported, and the procedures for
updating the recovery plan and orderly wind-down plan in light of the
findings resulting
[[Page 48983]]
from such tests. The testing must be conducted with the participation
of clearing members, where the plan depends on their participation, and
the DCO must consider including external stakeholders that the plan
relies upon, such as service providers, to the extent practicable and
appropriate.
Testing must occur following any material change to the recovery
plan or orderly wind-down plan, but in any event not less than once
annually. The plans shall be updated in light of the findings of such
tests.
The Commission requests comment on this aspect of the proposal. The
Commission specifically requests comment as to whether the rule should
require that the SIDCO or Subpart C DCO include (rather than simply
consider including) external stakeholders that the plan relies upon in
the testing. The Commission also specifically requests comment on the
proposed requirement that tests be conducted not less than annually:
would a different minimum frequency be more appropriate?
D. Information for Resolution Planning--Sec. 39.39(f)
As discussed above,\139\ when the Commission adopted regulations
for recovery and wind-down plans in 2013, CPMI-IOSCO and the FSB were
in the initial phase of drafting guidance for resolution planning
consistent with PFMI Principle 3, Key Consideration 4, which states
that ``an FMI should also provide relevant authorities with the
information needed for purposes of resolution planning.'' \140\
Consistent with that standard, current Sec. 39.39(c)(2) requires a
SIDCO or Subpart C DCO to have procedures for providing the Commission
and the FDIC with information needed for purposes of resolution
planning.\141\
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\139\ See text accompanying fn. 54, supra.
\140\ PFMI Principle 3, Key Consideration 4, at 32. The
Commission notes that resolution is distinct from orderly wind-down
in that the latter rests within the control of the DCO.
\141\ 17 CFR 39.39(c)(2).
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The Commission proposes to update its regulations to align Sec.
39.39(c)(2), as new Sec. 39.39(f), with the additional standards and
guidance applicable to resolution planning for systemically important
FMIs adopted since 2013.\142\ As stated in the 2017 FSB Resolution
Guidance, ``[a]uthorities should ensure that CCPs have in place
adequate processes and information management systems to provide the
authorities with the necessary data and information required for
undertaking'' an assessment of the financial resources and tools that
the resolution authority can reasonably expect to be available under
the resolution regime).\143\ In the United States, upon the completion
of the statutory appointment process set forth in Title II of the Dodd-
Frank Act, the FDIC would be appointed the receiver of a failing SIDCO
(or other covered financial company) \144\ The supervision of a DCO
rests with the Commission under the CEA, and, in particular, the
supervision of a SIDCO rests with the Commission as the supervisory
agency under Title VIII of the Dodd-Frank Act.\145\ The statutory
bifurcation of responsibilities between the FDIC and the Commission
creates important challenges. Under Title II of the Dodd-Frank Act, it
is the role of the FDIC to act as receiver for a failed covered
financial company if the requirements of Title II have been met. The
FDIC's ability to carry out its responsibilities as receiver would
benefit from advance preparation to ensure that, in the unlikely event
that resolution becomes necessary, there will be an effective and
efficient transition of the SIDCO to the FDIC receivership, thereby
fostering the success of a Title II resolution.\146\
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\142\ See, e.g., 2017 FSB Resolution Guidance, at section 6.4
(noting that ``[a]uthorities should ensure that CCPs have in place
adequate processes and information management systems to provide the
authorities with the necessary data and information required for
undertaking'' an assessment of the financial resources and tools
that the resolution authority can reasonably expect to be available
under the resolution regime).
\143\ 2017 FSB Resolution Guidance, at section 6.4.
\144\ Section 202(a) of the Dodd-Frank Act; 12 U.S.C. 5382(a).
\145\ Sections 803(8)(A)(ii) and 807(a) of the Dodd-Frank Act,
12 U.S.C. 5462(8)(A)(ii) and 5466(a); see also Section 2(12)(C) of
the Dodd-Frank Act, 12 U.S.C. 5301(12)(C).
\146\ This involves coordinated planning and information sharing
to enable a smooth transition into resolution. As the supervisory
agency for SIDCOs, the Commission provides information for
resolution planning to the FDIC under the auspices of a Memorandum
of Understanding (MOU). The current MOU is the ``Memorandum of
Understanding Between The Federal Deposit Insurance Corporation And
The Commodity Futures Trading Commission Concerning The Sharing Of
Information In Connection With Resolution Planning For Derivatives
Clearing Organizations,'' dated June 26, 2015.
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Pursuant to section 8a(5) of the CEA,\147\ the Commission has
authority to make and promulgate such rules and regulations as, in the
judgment of the Commission, are reasonably necessary to effectuate any
of the provisions or to accomplish any of the purposes of the CEA. One
of those purposes is the avoidance of systemic risk.\148\ As further
described in the following paragraphs, it would appear that a reporting
requirement that would enable the Commission to aid the FDIC in its
preparations for the resolution under Title II of a DCO--where placing
the DCO into resolution requires a finding by the Secretary of the
Treasury, in consultation with the President, that, inter alia, the
failure of the DCO and its resolution under otherwise applicable
Federal or State law would have serious adverse effects on financial
stability in the United States \149\--is reasonably necessary to foster
the avoidance of systemic risk.
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\147\ 7 U.S.C. 12a(5).
\148\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
\149\ Section 203(b)(2) of the Dodd-Frank Act, 12 U.S.C.
5383(b)(2).
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Moreover, under Title VIII of the Dodd-Frank Act, the Commission
may, in consultation with the FSOC and the Board of Governors of the
Federal Reserve, prescribe regulations containing risk management
standards, taking into consideration relevant international standards
and existing prudential requirements, for SIDCOs governing: (i) the
operations related to payment, clearing, and settlement activities of
SIDCOs; and (ii) the conduct of designated activities by SIDCOs.\150\
Under Section 805(b) of the Dodd-Frank Act, the objectives and
principles for such risk management standards shall be to: (1) promote
robust risk management; (2) promote safety and soundness; (3) reduce
systemic risks, and (4) support the stability of the broader financial
system.\151\ Additionally, Section 805(c) of the Dodd-Frank Act states
that the standards prescribed may address areas such as: (1) risk
management policies and procedures; (2) margin and collateral
requirements; (3) participant or counterparty default policies and
procedures; (4) the ability to complete timely clearing and settlement
of financial transactions; (5) capital and financial resources
requirements for the SIDCO; and (6) other areas that are necessary to
achieve the objectives and principles in Section 805(b).\152\
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\150\ Section 805(a)(2)(A) of the Dodd-Frank Act, 12 U.S.C.
5464(a)(2)(A).
\151\ 12 U.S.C. 5464(b).
\152\ 12 U.S.C. 5464(c).
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Similar to the context of recovery and orderly wind-down planning,
thorough preparation ex ante is crucial for successfully managing, on
an inherently abbreviated timeline, matters relating to resolution, in
aid of mitigating serious adverse effects on financial stability in the
United States. This thorough preparation for resolution is also crucial
for establishing market confidence, and the confidence of foreign
counterparts to the United States agencies. While the Commission
remains persuaded that the likelihood of a SIDCO requiring
[[Page 48984]]
resolution under Title II of the Dodd-Frank Act is ``extraordinarily
unlikely,'' \153\ thorough planning for such an exigency is
essential.\154\
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\153\ See Bankruptcy Regulations, 86 FR 19324, 19386 (Apr. 13,
2021).
\154\ Key Attributes ] 11.1, FSB CCP Resolution Planning
Guidance at section 7.
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While less likely, it remains possible that similar information may
also be required from Subpart C DCOs in times of extreme market stress,
if it appears at the time that the failure of such a DCO might meet the
requirements set forth in section 203(b) of the Dodd-Frank Act.\155\
Thus, while the Commission anticipates that the intensity of resolution
planning for Subpart C DCOs will be significantly less than that for
SIDCOs, in order to promote the goal of assuring that Subpart C DCOs
will, if necessary, remain capable of effectively being resolved under
Title II, including during times of extreme stress, Sec. 39.39(f)
would apply equally to SIDCOs and Subpart C DCOs.\156\
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\155\ 12 U.S.C. 5383(b). While the determination under Title II
is made at the time when the entity (here a DCO) is under stress
(see 12 U.S.C. 5383(b)(1) (determination that the financial company
is in default or in danger of default, emphasis added), the
determination under Title VIII is made during business as usual,
after a detailed process including notice to the proposed
systemically important financial market utility, and the standards
for the determination are different than those for the designation.
See generally Section 804 of the Dodd-Frank Act, 12 U.S.C. 5463; 12
CFR Part 1320 (Designation of Financial Market Utilities). Thus, an
entity not designated in advance under Title VIII may nonetheless in
particular circumstances be determined to meet the standards for
resolution under Title II, similarly, an entity designated in
advance under Title VIII may not, even in the event of its failure,
be determined to meet the standards under Title II.
Nonetheless, it would appear that the failure of a DCO that has
been determined during business as usual to have met the criteria
for designation pursuant to 12 U.S.C. 5463 is more likely to have
such adverse effects on financial stability than the failure of a
DCO that has not been determined to have met those criteria.
\156\ The Commission does not at this time believe that it is
likely that the failure of a U.S.-based DCO that is neither a SIDCO
nor a Subpart C DCO would meet the requirements set forth in Section
203(b) of the Dodd-Frank Act, 12 U.S.C. 5383(b), given the generally
smaller size of such DCOs and the fact that such DCOs do not have
banks as clearing members (see supra fn. 23). For foreign-based
DCOs, the relevant resolution authority would be the resolution
authority in the home jurisdiction. Accordingly, the Commission is
not proposing to extend this requirement to DCOs that are neither
SIDCOs nor Subpart C DCOs.
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The Commission's DCR staff has been working with FDIC staff on
resolution planning for the two SIDCOs. This joint work has revealed
that the Commission does not receive certain information from the
SIDCOs that the FDIC may need to plan for resolution. The Commission
therefore has determined to update its reporting requirements for
SIDCOs and Subpart C DCOs to reflect additional information that may be
used for resolution planning consistent with the international
standards set forth in the PFMI and related guidance.\157\
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\157\ See Sections 805(a)(1)(A)-(B) of the Dodd-Frank Act, 12
U.S.C. 5464(a)(1)(A)-(B).
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Most of the global standards and guidance relating to planning for
resolution (including for CCPs) apply to resolution authorities, in
cooperation with supervisory authorities (where the resolution
authority is separate from the supervisory authority).\158\ Because of
the nature of principle-based regulation for DCOs, there may be
information in the possession of a DCO that is required for resolution
planning but may not ordinarily be reported to the Commission and may
not be available publicly. Moreover, while the recovery and orderly
wind-down plans described above should be comprehensive in themselves,
there may be additional information that the Commission may require to
plan for the resolution of a SIDCO or Subpart C DCO. The Commission
therefore proposes to specify the types of information a SIDCO or
Subpart C DCO may be required to provide for resolution planning in
light of international standards and guidance established since 2013.
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\158\ E.g., FSB CCP Resolution Planning Guidance at section 7.
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1. Planning for Resolution Under Title II of the Dodd-Frank Act--Sec.
39.39(f)
Current Sec. 39.39(c)(2) requires SIDCOs and Subpart C DCOs to
have procedures in place to provide the Commission and the FDIC with
information for purposes of resolution planning. This rule is
consistent with the Key Attributes FMI Annex: ``In order to facilitate
the implementation of resolution measures, FMIs should be required to
maintain information systems and controls that can promptly produce and
make available, both in normal times and during resolution, relevant
data and information needed by the authorities for purposes of timely
resolution planning and resolution . . . .'' \159\ The Commission is
proposing in new Sec. 39.39(f) to clarify that the requirement that a
DCO have procedures in place to provide information directly to the
Commission and the FDIC for resolution planning purposes means that the
DCO must provide such information to the Commission. The Commission
would no longer be requiring DCOs to provide information related to
resolution planning directly to the FDIC. The Commission provides such
information related to resolution planning to the FDIC under the MOU.
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\159\ Key Attributes FMI Annex, at section 12.1.
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The Commission is also proposing, consistent with the Key
Attributes FMI Annex, to require that SIDCOs and Subpart C DCOs
maintain information systems and controls that can promptly produce and
make available data and information requested by the Commission for
purposes of resolution planning and resolution in the form and manner
specified by the Commission. The Commission expects that the form and
manner would be designed to facilitate the Commission's ability to
share the information with the FDIC. Such systems and controls are, for
the most part, already in place during business as usual between each
DCO and the Commission. The explicit requirement that a SIDCO and
Subpart C DCO ensure that its systems will continue to be able to
provide information to the Commission during resolution is sound public
policy, as it will ensure the Commission receives critical information
during this transitional period. The requirements of the CEA apply to
any DCO as long as it is doing business, and the affirmation that a
DCO's systems will be designed to be able to continue to function
should help to provide assurances to stakeholders and market
participants that clearing services will continue through all potential
exigencies.
Accordingly, the Commission is proposing new Sec. 39.39(f) to
require that a SIDCO or Subpart C DCO maintain information systems and
controls to provide to the Commission any data and information
requested for purposes of resolution planning and resolution, and that
each must supply such information and data electronically, in the form
and manner specified by the Commission.
2. Required Information--Sec. 39.39(f)(1)-(7)
It is sound regulatory policy for the Commission to be transparent
about the types of information that a SIDCO or Subpart C DCO might
anticipate providing to the Commission, upon request, in order to
enable the Commission to aid the FDIC in planning for resolution under
Title II of the Dodd-Frank Act. This transparency is sound public
policy because it would help assure stakeholders that, in the
extraordinarily unlikely event that resolution of a SIDCO or Subpart C
DCO under Title II becomes necessary, there will be an effective and
efficient transition of the DCO to the FDIC receivership, and a
successful resolution under Title II would be forthcoming. Thorough
preparation is also helpful in supporting market confidence, and the
[[Page 48985]]
confidence of foreign counterparts to the United States agencies.\160\
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\160\ To date, the Commission has requested information for
resolution planning only from SIDCOs.
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Resolution planning necessarily involves assessing a number of
types of information: information that is publicly available,
information that is otherwise reported to the Commission under part 39,
and information that is in the possession of the DCOs but that is not
otherwise reported to the Commission.
Over past years, Commission staff has worked with staff from the
FDIC and the SIDCOs to identify and obtain information for the purpose
of planning for the highly unlikely event of a SIDCO entering into
resolution.\161\ Global guidance on standards for resolution planning
developed since 2013 have informed these information requests.
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\161\ This is consistent with section 6.4 of the 2017 FSB
Resolution Guidance.
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Under Core Principle J, the Commission may request any information
from a DCO that the Commission determines to be necessary to conduct
oversight of the DCO.\162\ The Commission believes that certain
information for resolution planning that goes beyond the information
usually obtained during business as usual under the Core Principles and
associated Part 39 regulations should be available when a DCO is
systemically important to the financial system, may be approaching such
systemic importance, or has opted into Subpart C.\163\ As noted above,
the FDIC must be ready to step in as receiver of a failing DCO on very
short notice and work to achieve a resolution that mitigates risks to
financial stability created by the DCO's failure, including by
restoring market confidence and preventing contagion. The information
proposed to be requested will assist in planning for resolution,
thereby helping the FDIC to fulfill its role and accomplish its
objectives, which in turn helps accomplish one of the purposes of the
CEA, the avoidance of systemic risk.
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\162\ Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a-1(c)(2)(J).
See also 17 CFR 39.19(c)(5)(i) (a DCO shall provide upon request any
information related to its business as a clearing organization.)
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Proposed subparts (1) through (7) describe seven types of
information that are relevant to planning for resolution under Title II
of the Dodd-Frank Act. The frequency with which information may be
requested may vary over time, with some information requested only
once, while other information may be requested multiple times (e.g.,
annually, or upon significant changes to the structure of the DCO's
business arrangements). The Commission expects that, in the latter
case, the frequency of the requests may change over time, as the
Commission gains more knowledge.
i. Structure and Activities--Sec. 39.39(f)(1)
As part of planning for resolution, the FDIC develops resolution
options that are underpinned by an understanding of the structure of
the SIDCO or Subpart C DCO. Proposed Sec. 39.39(f)(1) would cover
information related to the SIDCO's and Subpart C DCO's structure and
activities and would include, among other things, documents and
information about the SIDCO's and Subpart C DCO's legal structure and
hierarchy. The Commission anticipates that this information would
include current comprehensive organizational charts (including all
direct and indirect subsidiaries where the SIDCO directly or indirectly
owns more than a fifty percent controlling interest), governing
documents and arrangements, rights and powers of shareholders, and
current organizational documents (including by-laws, articles of
incorporation or association/organization, and committees). The
Commission acknowledges that some of this information may be publicly
available on a SIDCO's website, may be included in recovery plans, or
may otherwise be reported to the Commission under part 39. In the event
that information is required that is not readily available through the
ordinary course of regulatory oversight, a SIDCO and Subpart C DCO must
be prepared to provide current information under the umbrella of
``structure and activities'' upon request.\164\
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\164\ In some cases, the response may include cross-references
to specific places where the information is already available, or
has previously been provided, and assurance that the information
remains current.
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Proposed Sec. 39.39(f)(1) would request information related to the
SIDCO's or Subpart C DCO's organizational structure and corporate
structure, activities, governing documents and arrangements, rights and
powers of shareholders, committee members and responsibilities.
The Commission requests comment on this aspect of the proposal.
ii. Information About Clearing Members--Sec. 39.39(f)(2)
Another aspect of resolution planning is developing an
understanding of the risks that may trigger consideration of orderly
wind-down and the implications for resolution should that orderly wind-
down fail. In order to understand these risks, certain information
about a SIDCO's or Subpart C DCO's clearing members may be instructive.
Generalized or anonymized information about clearing members such as
types and amounts of collateral posted (for both house and customer
accounts), variation margin, and contributions to default and guaranty
funds may be instructive, both for ex ante planning and in the runway
to resolution. Such information may provide insight into the risks that
clearing members and the markets would be exposed to in the event of a
systemic failure, and of the potential interplay between those risks.
The information requested in the category may also include general
information regarding exposures or other measures of business risk with
respect to all or a subset of clearing members. This type of
information may assist in the planning for potential triggers for
resolution and for understanding potential challenges in executing a
resolution. The Commission recognizes that this type of information
changes over time; accordingly, the Commission anticipates that it may
request such information on an annual basis or more frequently in the
run-up to resolution. Proposed Sec. 39.39(f)(2) would permit requests
for information on clearing members generally, including (for both
house and customer accounts) information regarding collateral,
variation margin, and contributions to default and guaranty funds.
The Commission requests comment on this aspect of the proposal.
iii. Arrangements With Other Clearing Entities--Sec. 39.39(f)(3)
In order to plan for continuity of operations in resolution, the
Commission and FDIC must understand how the SIDCO or Subpart C DCO
interacts with the operations of other DCOs and financial market
infrastructures.\165\ In particular, the Commission and FDIC must
understand the SIDCO's or Subpart C DCO's cross-margining or mutual
offset arrangements. These agreements and arrangements may require
additional handling in resolution, both because of the exposures and
obligations the SIDCO may be subject to, as well as the resources and
tools they may provide.
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\165\ For example, these relationships may be between DCOs
registered with the Commission, e.g., Chicago Mercantile Exchange
(CME) and Options Clearing Corporation, or between a DCO registered
with the Commission and another CCP supervised by an agency other
than the CFTC, e.g., CME and the Fixed Income Clearing Corporation.
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The Commission proposes to require that SIDCOs and Subpart C DCOs
provide to the Commission upon request copies of the most current
versions of mutual offsetting
[[Page 48986]]
arrangements or agreements for cross-margining arrangements with
external entities. Additionally, for each such arrangement or
agreement, the SIDCO or Subpart C DCO should be prepared to provide
data concerning the recent scope of the relationship, such as
information related to amounts of daily initial margin. The Commission
proposes to require that SIDCOs and Subpart C DCOs update such
information upon request by the Commission.
Proposed Sec. 39.39(f)(3) would request information on
arrangements and agreements with other clearing entities relating to
clearing operations, including offset and cross-margin arrangements.
The Commission requests comment on this aspect of the proposal.
iv. Financial Schedules and Supporting Details--Sec. 39.39(f)(4)
In order to prepare for receivership operations in resolution, and
to develop resolution strategy options, there needs to be a clear
understanding of the SIDCO's or Subpart C DCO's financial position and
capital structure, which may include some combination of assets,
liabilities, revenues and expenses, in advance of an extreme event. A
DCO's financial statements and exhibits reported to the Commission
contain relevant information that will assist the Commission and FDIC
in forming a detailed understanding of the potential resources and
financial exposures of the SIDCO or Subpart C DCO that would be
important to the success of a Title II receivership. To prepare for
resolution, the Commission and FDIC require a detailed understanding of
the potential supports for and impediments to potential resolution
strategies, including sources and uses of funds in resolution.
In order to form this understanding, it would be useful for the DCO
to identify potential creditor claims and the potential resources
available to satisfy such claims. There may be information in
possession of the DCO that may not be available in public filings, on a
DCO's website, or in financial reports and schedules required to be
filed under other provisions of part 39, including off-balance sheet
obligations or contingent liabilities.
The type of information requested under proposed Sec. 39.39(f)(4)
would include requests for information on off-balance sheet obligations
or contingent liabilities, and obligations to creditors, shareholders,
or affiliates not otherwise reported under Part 39.
The Commission requests comment on this aspect of the proposal.
v. Interconnections and Interdependencies With Internal and External
Service Providers--Sec. 39.39(f)(5)
The evaluation of possible obstacles to the continuation of
essential services provided by internal and external service providers
(including affiliates and other third parties), and the use of
software, information, and other tools provided under license, is
integral to resolution planning. While the recovery plans required
under Sec. 39.39(b) should include much of this information, effective
planning for receivership may include the need for a more detailed
understanding of the requirements to continue making use of identified
services (and thus understanding of the steps to meet such
requirements).
Each SIDCO or Subpart C DCO must provide the Commission, upon
request, copies of external or inter-affiliate contracts or agreements
that permit the SIDCO or Subpart C DCO to perform its critical
functions (including third-party or affiliate service agreements,
building or equipment leases, etc.). In the case of inter-affiliate
arrangements, the DCO should identify which entity in the group is the
contracting party and, where relevant, whether there are any inter-
affiliate service agreements that address provision of services. This
type of information should inform the resolution plan by revealing any
dependencies on affiliates for essential support functions provided to
the SIDCO or Subpart C DCO. It may also foster planning for
alternatives where required. The Commission may also request copies of
inter-affiliate contracts or agreements, where the SIDCO or Subpart C
DCO provides essential support to other affiliates.
Additionally, where some of the contracts and agreements for
services would grant the service provider the option to terminate the
contract in the event of assignment to a bridge financial company
(i.e., may not be ``resolution resilient''), the resolution plan may
need to identify alternatives. Thus, providing CFTC (and, ultimately,
FDIC) with information that could help identify those contracts and
agreements for services that are not resolution resilient would assist
planning in advance of entry into resolution.
Further, because application of the FDIC's authority under Title II
with respect to continuation of pre-receivership contracts \166\ in the
case of a non-U.S. contracting party may be less straightforward than
with respect to a U.S.-based contracting party, the Commission may
request that a SIDCO or Subpart C DCO provide a list of critical
interconnections or interdependencies that are subject to material
contracts/agreements governed in whole or in part by non-U.S. law.
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\166\ See Section 210(c)(13) of the Dodd-Frank Act (``Authority
to Enforce Contracts''), 12 U.S.C. 5390(c)(13).
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Lastly, the resolution plan may need to maintain important tools
and capabilities provided under license arrangements. For instance, the
resolution plan may need to cover the transfer of licenses to the
bridge financial company for products or indices underlying the
contracts cleared by the SIDCO or Subpart C DCO. To accomplish this,
the Commission may request that a SIDCO or Subpart C DCO provide a copy
of such licenses and licensing agreements.
The Commission anticipates that the type of information described
above would be requested on a one-time basis, with updates to be
provided upon significant changes to the structure of the DCO's
business arrangements (including change to the agreements), or when new
agreements are executed. Proposed Sec. 39.39(f)(5) would require
SIDCOs and Subpart C DCOs to provide information regarding
interconnections and interdependencies with internal and external
service providers, licensors, and licensees, including information
regarding services provided by or to affiliates and other third parties
and related agreements, upon request by the Commission.
The Commission requests comment on this aspect of the proposal.
vi. Information Concerning Critical Personnel--Sec. 39.39(f)(6)
While the recovery and orderly wind-down plans contain information
related to critical positions and resilient staffing, in order to plan
for resolution, a DCO may have to take steps to ensure that those
positions remain filled. This includes steps to ensure that there is an
adequate pool of financial resources readily available to ensure that
during times of stress, there is staff in place. During times of
extreme stress, people in critical positions may have terminated (or
may terminate) their association with the DCO, or their association may
have been terminated (or may be terminated). Proposed Sec. 39.39(f)(6)
would require a SIDCO or Subpart C DCO to provide information for all
critical positions described in the recovery and orderly wind-down
plans.\167\ The Commission believes that this information is essential
if the FDIC is to succeed in a Title II receivership,
[[Page 48987]]
as they will need qualified personnel to fill these positions in order
to manage and operate the entity.
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\167\ As in all cases, such information would be provided and
obtained under security arrangements appropriate to the sensitivity
of the information.
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The Commission requests comment on this aspect of the proposal.
vii. Other Required Information--Sec. 39.39(f)(7)
Proposed Sec. 39.39(f)(7) would recognize that resolution planning
is a complex, ongoing, and developing process, and that information
requirements may change over time as the Commission and the FDIC gain
experience with resolution planning for DCOs, and as information needs
and business models change. Thus, certain information requirements may
not be covered by the specific items listed in proposed Sec.
39.39(f)(1)-(6). In that regard, proposed Sec. 39.39(f)(7) would
include a broad provision to encompass information which the Commission
requires for this purpose, but not covered by the specific categories
of information in proposed Sec. 39.39(f)(1)-(6).
The Commission requests comment on this aspect of the proposal.
3. Requested Reporting--Sec. 39.19(c)(5)(iii)
The Commission proposes to add a new requested reporting
requirement to Sec. 39.19 to reflect updates to the information
requested in proposed Sec. 39.39(f)(1)-(7). Proposed Sec.
39.19(c)(5)(iii) would require a SIDCO or Subpart C DCO that submits
information pursuant to Sec. 39.39(f) to update the information upon
request by the Commission. The Commission needs timely and an accurate
information to monitor a SIDCO or Subpart C DCO, especially during
stressful times. Depending upon the nature of the change and the
information previously submitted, the response may be a confirmation
that the information previously submitted remains accurate.
The Commission requests comment on this aspect of the proposal.
D. Renaming Sec. 39.39
When codified in 2013, Sec. 39.39 covered the Commission's
expectations regarding a SIDCO's or Subpart C DCO's obligations with
regard to recovery and orderly wind-down plans. The Commission proposes
to change the title of Sec. 39.39 to reflect that the proposed
regulations, if adopted by the Commission, will encompass recovery and
orderly wind-down planning for SIDCOs and Subpart C DCOs, as well as
information required to plan for resolution.
The Commission requests comment on this aspect of the proposal.
III. Orderly Wind-Down Plans for DCOs That Are Not SIDCOs or Subpart C
DCOs
The Commission is proposing, as reasonably necessary to effectuate
Core Principle D(i),\168\ to require DCOs that are neither SIDCOs nor
Subpart C DCOs to maintain and submit to the Commission plans for
orderly wind-down, with requirements that are substantially similar to
the proposed requirements for the orderly wind-down plans to be
submitted by SIDCOs and Subpart C DCOs.\169\ Given that the failure of
one of these DCOs is much less likely to have serious adverse effects
on financial stability in the United States,\170\ the Commission is not
proposing to require these DCOs to maintain recovery plans.\171\
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\168\ Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(i); see Section 8a(5) of the CEA, 7 U.S.C. 12a(5).
\169\ For orderly wind-down planning involving insolvency or
default of a DCO member or participant, the Commission also grounds
this proposed rulemaking in Core Principle G(i), which requires that
a DCO have ``rules and procedures designed for the efficient, fair,
and safe management of events'' during such scenarios. Section
5b(c)(2)(G)(i) of the CEA, 7 U.S.C. 7a-1(c)(2)(G)(i).
\170\ Section 203(b)(2) of the Dodd-Frank Act, 12 U.S.C.
5383(b)(2).
\171\ For U.S.-based DCOs that are neither SIDCOs nor Subpart C
DCOs, see discussion at supra fn. 156. Separately, foreign-based
central counterparties registered with the Commission as DCOs are
required to maintain recovery and wind-down plans by their home-
country regulators. See infra fn. 207 and accompanying text. Thus,
even if one of these were in future to be designated as systemically
important under Title VIII, they would already maintain a recovery
plan.
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A. Requirement To Maintain and Submit an Orderly Wind-Down Plan--Sec.
39.13(k)(1)(i)
The Commission is proposing to require that a DCO that is neither a
SIDCO nor a Subpart C DCO must nevertheless maintain and submit to the
Commission viable plans for orderly wind-down necessitated by default
losses and non-default losses. The possibility that such losses may
render the DCO unable to meet its obligations or to continue its
critical functions to the point it must wind down is inherently one of
the risks associated with the discharging of the DCO's
responsibilities.\172\ Additionally, the point at which a DCO must wind
down may arise suddenly, in a manner that does not allow for time to
plan. Wind-down plans are essential to help facilitate an orderly and
expeditious wind-down; moreover, planning for an orderly wind-down--
including, for example, considering the circumstances that may trigger
a wind-down, the tools the DCO would implement to help ensure an
orderly wind-down (along with the likely effects on clearing members
and the financial markets from implementing such tools), and the
governance arrangements to guide decision-making during an orderly
wind-down--can strengthen the risk management practices of the DCO
(including by identifying vulnerabilities that can be mitigated),
enhance legal certainty for the DCO, its clearing members and market
participants, and increase market confidence, three pillars of the DCO
Core Principles' aims. As discussed below, the subjects and analyses
the Commission is proposing for inclusion in a DCO's orderly wind-down
plan overlap with many of the analyses DCOs must otherwise undertake to
ensure compliance with the DCO Core Principles.
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\172\ Section 5b(c)(2)(D)(i) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(i).
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In order to facilitate accomplishment of these goals, the
Commission proposes to add new Sec. 39.13(k)(1)(i) to require that a
DCO that is not a SIDCO or Subpart C DCO maintain and, consistent with
the proposed revisions to Sec. 39.19(c)(4)(xxiv), submit to the
Commission, a viable plan for orderly wind down necessitated by default
losses and non-default losses, and supporting information.\173\ In
additional support of these goals, and as discussed further below, the
Commission is proposing to add other provisions under Sec. 39.13(k).
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\173\ In Section IV below, discussing the reporting requirement
in Sec. 39.19(c)(4)(xxiv), the Commission explains the reason for
including the term ``and supporting information.''
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The Commission requests comment on the proposed changes. In
particular, the Commission requests comment on the extent to which the
proposed requirements concerning orderly wind-down plans for DCOs that
are neither SIDCOs nor Subpart C DCOs appropriately balance seeking to
ensure that such DCOs are prepared to wind-down in an orderly manner
and mitigating the costs of preparing plans for such a wind-down. To
the extent a better balance can be achieved, please discuss both the
requirements that should be deleted or modified and the basis for the
conclusion that the regulatory goal of orderly wind-down would reliably
be achieved in light of such changes.
B. Notice of the Initiation of Pending Wind-Down--Sec. 39.13(k)(1)(ii)
Along the same lines--and consistent with the requirement for
SIDCOs and
[[Page 48988]]
Subpart C DCOs--the Commission is proposing to require that a DCO have
procedures in place to notify the Commission and clearing members, as
soon as practicable, when orderly wind-down is pending, and to provide
such notification in such circumstances. Timely notification of events
is essential for helping the Commission and clearing members
effectively to address the issues raised by the DCO's transition into
wind-down and that having the proper procedures in place beforehand
will facilitate such timely notification.
The requirement that DCOs notify the Commission and clearing
members of a pending orderly wind-down is reasonably necessary to
effectuate Core Principle J, under which a DCO shall provide to the
Commission all information that the Commission determines to be
necessary to conduct oversight of the DCO,\174\ and Core Principle L,
under which a DCO shall provide to market participants sufficient
information to enable the market participants to identify and evaluate
accurately the risks and costs associated with using the services of
the DCO and disclose publicly and to the Commission information
concerning any other matter relevant to participation in the settlement
and clearing activities of the DCO.\175\
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\174\ Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a-1(c)(2)(J).
\175\ Section 5b(c)(2)(L) of the CEA, 7 U.S.C. 7a-1(c)(2)(L).
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Accordingly, the Commission proposes to add new Sec.
39.13(k)(1)(ii) to require that each DCO shall have procedures for
informing the Commission and clearing members, as soon as practicable,
when orderly wind-down is pending, and shall notify the Commission and
clearing members consistent with proposed Sec. 39.19(c)(4)(xxv).
The Commission requests comment on these proposed changes.
C. Orderly Wind-Down Plan: Required Elements--Sec. 39.13(k)(2)-(6)
As is the case for SIDCOs and Subpart C DCOs, the Commission
believes, as a general matter, that the orderly wind-down plan of a DCO
that is not a SIDCO or a Subpart C DCO should include a summary
providing an overview of the plan followed by a detailed description of
how the DCO will implement the plan. The description of how the DCO
will implement its plans shall include an identification and
description of the critical operations and services the DCO provides to
clearing members and financial market participants, the service
providers upon which the DCO relies to provide these critical
operations and services, interconnections and interdependencies, and
staffing arrangements (including how they are resilient), obstacles to
success of the orderly wind-down plan, aggregate cost estimates for the
continuation of services during orderly wind-down, and how the DCO will
ensure that its services continue through orderly wind-down. The plan
shall also include a stress scenario analysis addressing the failure of
each critical operation and service, a description of the criteria the
DCO would consider in determining whether and when to trigger orderly
wind-down and the process for monitoring for events that may trigger
the wind-down; a description of the information-sharing and escalation
processes within the DCO's senior management and board of directors
following an event triggering consideration of orderly wind-down and
identification of the factors the board of directors would consider in
exercising judgment or discretion with respect to any decision-making
during wind down; an identification of scenarios that may trigger
orderly wind-down and analysis of the tools the DCO would use following
the occurrence of each scenario; an identification and review of
agreements to be maintained during orderly wind-down; a description of
the DCO's governance with respect to planning for orderly wind-down and
during the orderly wind-down; and testing. The Commission believes
these subjects and analyses are the minimum elements that DCOs should
incorporate in their orderly wind-down plans pursuant to their
obligation to manage the risks associated with discharging their
responsibilities under Core Principle D.\176\
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\176\ To the extent foreign CCPs are subject to home
jurisdiction regulation with different requirements for the subjects
and analyses that must be included in their wind-down plans, the
Commission welcomes comments describing those requirements, and
including suggestions on how to achieve the goals of this regulation
in a manner that appropriately addresses possible inefficiencies.
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Accordingly, the Commission is proposing new Sec. 39.13(k)(2) to
require a DCO to include in its orderly wind-down plans a summary
providing an overview of the plan followed by a detailed description of
how the DCO will implement the plan.
The Commission requests comment on this aspect of the proposal.
Each required element of the orderly wind-down plan is discussed in
more detail below.
1. Critical Operations and Services, Interconnections and
Interdependencies, and Resilient Staffing--Sec. 39.13(k)(2)(i)
In Section II, the Commission highlighted the importance of
incorporating into recovery and orderly wind-down plans an
identification and description of the critical operations and services
that the SIDCO or Subpart C DCO provides to clearing members and
financial market participants, the service providers upon which the DCO
relies upon to provide these critical operations and services,
financial and operational interconnections and interdependencies, and
resilient staffing arrangements. As set forth below, the same is true
for the orderly wind-down plans for DCOs that are not SIDCOs or Subpart
C DCOs.
i. Critical Operations and Services Provided by and to DCOs
Limiting the operational disruption and financial harm to a DCO's
clearing members and other financial market participants during an
orderly wind-down, turns on the DCO's understanding of the critical
operations and services that the DCO performs for clearing members and
other financial market participants, and, in turn, operations and
services performed by others that are critical to the DCO performing
those critical functions. Thus, the Commission is proposing to require
that a DCO's orderly wind-down plan include an identification and
description of the critical operations and services that the DCO
provides to clearing members and other financial market participants.
For any critical (to the DCO) operations or services that the DCO
relies upon that are performed by internal or external service
providers, the plan should identify those providers and describe the
critical operations or services they perform. Likewise, to the extent
the DCO's ability to discharge its functions may be affected by the
performance of ancillary service providers, the plan should identify
those ancillary service providers and describe the operations or
services they perform. By requiring the identification and description
of the DCO's critical operations and services, including those
performed by internal or external service providers, and any ancillary
service providers, the Commission seeks to ensure, to the extent
practicable, that the DCO's ability to perform the critical operations
and services that others depend upon continues during the orderly wind-
down process.
In the same vein, the Commission is proposing to require that a
DCO's
[[Page 48989]]
orderly wind-down plan identify and describe the obstacles to success
of the plan, and the DCO's plan to address the risks associated with
the failure of each such critical operation and service. A stress
scenario analysis (or similar undertaking) addressing the failure of
each critical operation and service while the DCO is still a going
concern should highlight whether and how the operation or service can
continue in orderly wind-down. The Commission expects the DCO's orderly
wind-down plan to address the full range of options in order to ensure
that operations and services critical to the DCO continue in the
orderly wind-down process. In considering and analyzing the magnitude
of the costs associated with an orderly wind-down, certain of the DCO's
expenses will likely increase, including, for example, legal fees,
accounting fees, financial advisor fees, the costs associated with
employee retention programs, and other incentives that may be necessary
to maintain critical staff. Other costs, such as marketing or those for
developing new products, may decrease as a result of wind-down.
Further, a DCO shall proceed under the conservative assumption that any
resources it may have consumed as part of its recovery efforts, if any,
will not be available to fund critical operations and services in an
orderly wind-down.
ii. Interconnections and Interdependencies
The Commission is additionally proposing to require that the
orderly wind-down plan identify and describe the DCO's financial and
operational interconnections and interdependencies. Given the web of
relationships that may exist among the DCO and its relevant affiliates,
internal and external service providers, and other relevant
stakeholders, identifying and describing the interconnections and
interdependencies could provide much-needed transparency and clarity
for purposes of developing and implementing an orderly wind-down plan.
For instance, the financial resources available to a DCO during wind-
down may be limited when one financial entity serves multiple roles and
relationships with respect to the DCO or when multiple affiliates of
the DCO depend upon the same intercompany loan agreement or insurance
policy with group coverage limits. Interconnections and
interdependencies may also adversely impact the value of the DCO's
assets, which can be crucial in wind-down where a DCO is trying to meet
costs associated with preserving critical operations and services and
meeting liquidity needs. Accordingly, a DCO's orderly wind-down plan
should identify and describe any interconnections and interdependencies
and address the effect such relationships may have on the DCO's ability
to continue performing its functions during the wind-down process.
iii. Resilient Staffing and Support Services Arrangements
As noted in section II, a DCO in wind-down cannot maintain critical
operations and services without both essential personnel and support
services. Accordingly, the Commission is proposing to require that the
orderly wind-down plan identify and describe plans for resilient
staffing arrangements under which personnel essential for critical
operations and services would be maintained and services supporting the
DCO's critical operations and services would continue. To the extent
the DCO relies upon contractors as personnel providing critical
operations and services, the DCO should have staffing arrangements and
agreements in place for such contracting work to continue in wind-down.
Similarly, to the extent the DCO relies upon third-party service
providers to provide critical operations and services, including
facilities, utilities, and communication technologies, the DCO should
have arrangements and agreements in place for such third-party services
to continue in wind-down. Further, to promote its ability to ensure the
success of the plan, the DCO should identify obstacles to that success.
Additionally, as part of the DCO's responsibility to maintain critical
operations and services, the Commission is proposing to require that
the orderly wind-down plan include aggregate cost estimates for
essential personnel and support services, and address the manner in
which the DCO will meet the associated costs. Just as the case may be
for SIDCOs and Subpart C DCOs, other DCOs may be vulnerable to key
person risk; accordingly, plans for resilient staffing arrangements
should identify, to the extent applicable, key person risk within the
DCO or (as relevant) affiliated legal entities that the DCO relies upon
to provide its critical operations and services, and how the DCO has
planned to address such risk.
Accordingly, the Commission is proposing new Sec. 39.13(k)(2)(i)
to require that the DCO's orderly wind-down plan include the
identification and description of the DCO's critical operations and
services, interconnections and interdependencies, and resilient
staffing arrangements, obstacles to success of the orderly wind-down
plan, as well as a stress scenario analysis addressing the failure of
each identified critical operation or service. Additionally, the
orderly wind-down plan must include aggregate cost estimates for the
continuation of critical operations and services and a description of
how the DCO will ensure that such operations and services continue
through orderly wind-down.
The Commission requests comment on this aspect of the proposal.
2. Triggers for Consideration of Orderly Wind-Down and Processes for
Information-Sharing and Decision-Making--Sec. 39.13(k)(2)(ii)-(iii)
The Commission is proposing to require that orderly wind-down plans
for DCOs include a description of the criteria that would guide the DCO
in considering whether and when to implement wind-down, and the process
for monitoring for events that may trigger consideration of orderly
wind-down. As noted in section II, any viable orderly wind-down plan
must establish and define criteria (which may be in the alternative)
that the DCO would consider in triggering consideration of wind-down.
The criteria may be quantitative, such as the case where the DCO does
not have the financial resources to continue as a going concern, or
qualitative, such as the case where judgment may be needed (for
instance, in circumstances involving litigation that is proceeding in a
manner that suggests that a large, adverse finding is likely).
Predefined criteria should help avoid undue delays in deciding whether
to wind-down, which, in turn, should help increase the opportunity for
an orderly wind-down. By monitoring for events that may trigger the
consideration of wind-down, moreover, a DCO will be better situated to
make a timely decision regarding wind-down. Further, predefined
criteria will provide confidence to market participants and the public
that the DCO has proper plans in place to monitor for and manage
situations that may require an orderly wind-down.
Additionally, the Commission is proposing to require that the
orderly wind-down plan include a description of the information-sharing
and escalation processes within the DCO's senior management and board
of directors following an event triggering consideration of an orderly
wind-down. By establishing automatic procedures under which the
relevant decision-makers may obtain the necessary information, the DCO
may avoid undue
[[Page 48990]]
delays in ultimately deciding whether to wind-down.
Similarly, the Commission is proposing to require that orderly
wind-down plans include the factors that the board of directors
anticipates that it would consider in any decision-making regarding
wind-down where judgment or discretion is required. The Commission
believes that the factors enumerated in the orderly wind-down plan
should be those that the DCO considers most important in guiding the
discretion of the board of directors. A predefined framework within
which the board may exercise judgment and discretion should facilitate
a timely decision regarding wind-down.
Accordingly, the Commission is proposing new Sec. 39.13(k)(2)(ii)-
(iii) to require that the DCO's orderly wind-down plan include a
description of the criteria that the DCO would consider in determining
whether to implement wind-down and, relatedly, the process for
monitoring for events that may trigger consideration of an orderly
wind-down; a description of the information-sharing and escalation
processes within the DCO's senior management and board of directors
following an event triggering consideration of an orderly wind-down;
and the identification of the factors that the DCO considers most
important in guiding the board of directors' judgment or discretion
with respect to any decision-making during the wind-down.
The Commission requests comment on this aspect of the proposal.
3. Orderly Wind-Down Scenarios and Tools--Sec. 39.13(k)(3)
The Commission is proposing to require that a DCO's orderly wind-
down plan (i) identify the scenarios that may lead to an orderly wind-
down, i.e., those scenarios that may prevent the DCO from meeting its
obligations or providing its critical operations and services as a
going concern, and (ii) analyze the tools the DCO would use following
the occurrence of each scenario. Specifically, the Commission is
proposing to require that the analysis describe the tools the DCO would
expect to use in an orderly wind-down that comprehensively address how
the derivatives clearing organization would continue to provide
critical operations and services; describe the order in which the DCO
would expect to implement any identified tools; describe the governance
and approval processes and arrangements that will guide the exercise of
any available discretion in the use of each tool; describe the
processes to obtain any approvals external to derivatives clearing
organization (including any regulatory approvals) that would be
necessary to use each of the tools available, and the steps that might
be taken if such approval is not obtained; establish the time frame
within which the DCO may use each tool; set out the steps necessary to
implement each tool; describe the roles and responsibilities of all
parties in the use of each tool; provide an assessment of the
likelihood that the tools, individually and taken together, would
result in orderly wind-down; and provide an assessment of the
associated risks to non-defaulting clearing members and those clearing
members' customers with respect to transactions cleared on the DCO, and
linked financial market infrastructures.
As may be the case for SIDCOs and Subpart C DCOs, the scenarios
that may trigger consideration for wind-down are typically those where
recovery efforts (if any) are deemed to have failed. At that point, the
DCO will no longer be able to meet its obligations or provide its
critical operations and services as a going concern. For each scenario
where the DCO may reach such a point, the Commission is proposing to
require that the orderly wind-down plan analyze the tools available to
effectuate an orderly wind-down.
The DCO's tools--i.e., the wind-down options available to the DCO
in each particular scenario--comprise those actions it may take to
effect, in an orderly manner, the sale or transfer, or if necessary in
extreme circumstances, permanent cessation, of its clearing and other
services. The Commission intends that the proposed analysis will
require the DCO to assess the effectiveness of a full range of actions
for orderly wind-down.
Among other things, an effective set of wind-down tools enables the
DCO to manage liquidity requirements in a manner in which critical
operations and services would be maintained during the orderly wind-
down period. Various factors may prevent an action from being
effective, including, for instance, the number of steps required to
implement the action (e.g., disclosure, risk reduction, trade
reduction, transfer or close-out of positions, and liquidation of
investments), the time required to complete each step (e.g., contract
termination and other relevant requirements following disclosure), the
discretion of various parties affecting the use or sequence of the
action (including non-defaulting parties), and any legal limits
regarding the action (e.g., the relevant DCO rules or rule amendments
necessary to support the use of the action and the roles, obligations
and responsibilities of the various parties in the use of the action).
Additionally, any action involving a proposed transfer may turn out
to be difficult to achieve due to the financial and operational
capacity that would be required of a transferee or the status of the
DCO as a distressed seller. Further, the action may have adverse
consequences on clearing members or other financial market
participants. The Commission proposes to require this analysis in order
to assist the DCO in determining which actions may effectuate an
orderly wind-down where critical operations and services would be
maintained throughout the orderly wind-down period while minimizing
public harm.
Accordingly, the Commission is proposing new Sec. 39.13(k)(3) to
require that a DCO's orderly wind-down plan include, following a
thorough analysis, the set of scenarios that may trigger consideration
of orderly wind-down and an analysis of the tools the DCO would use in
each scenario. The Commission is proposing to require that the analysis
describe the tools the DCO would expect to use in an orderly wind-down;
describe the order in which the DCO would expect to implement any
identified tools; describe the governance, approval processes and
arrangements that will guide the exercise of any available discretion
in the use of each tool; establish the time frame within which the DCO
may use each tool; set out the steps necessary to implement each tool;
describe the roles and responsibilities of all parties in the use of
each tool; provide an assessment of the likelihood that the tool would
result in orderly wind-down; and provide an assessment of the
associated risks to non-defaulting clearing members and their
customers, linked financial market infrastructures, and the financial
system more broadly, from the use of each tool.
The Commission requests comment on this aspect of the proposal.
4. Agreements To Be Maintained During Orderly Wind-Down--Sec.
39.13(k)(4)
The Commission is proposing to require that a DCO's orderly wind-
down plan identify any agreements associated with the provision of its
critical services and operations that are subject to alteration or
termination as a result of winding down and describe the actions the
DCO has taken to ensure such operations and services will continue
during wind-down. Similar to SIDCOs and Subpart C DCOs, the DCO may
have a variety of contractual agreements with clearing members,
affiliates, linked central counterparties, counterparties,
[[Page 48991]]
external service providers, and other third parties. The contractual
agreements may take the form of contracts, arrangements, agreements,
and licenses associated with the provision of its services as a DCO,
and may cover the DCO's rules and procedures, agreements for the
provision of operational, administrative and staffing services,
intercompany loan agreements, mutual offset agreements or cross-
margining agreements, and credit agreements. Under the Commission's
proposed requirement, the DCO's orderly wind-down plan must review and
analyze its agreements to determine if they contain covenants, material
adverse change clauses, or other provisions that may render the
continuation of the DCO's critical operations and services difficult or
impracticable upon implementation of the orderly wind-down plan. The
Commission is proposing to require that the DCO take proactive steps to
ensure that its critical operations and services would continue in an
orderly wind-down, notwithstanding any contractual provision to the
contrary.
As is the case for SIDCOs and Subpart C DCOs, a requirement
ensuring that the DCO's agreements do not hinder its ability to
continue critical operations and services in an orderly wind-down, or,
if they do, that the orderly wind-down plan provides viable strategies
to address the situation, is important to an orderly wind-down.
Additionally, this requirement will aid in providing a higher degree of
confidence with respect to this group of DCOs in the public markets
even in extreme market conditions with the potential to trigger the
consideration of implementation of orderly wind-down plans. In addition
to Core Principle D(i), this proposed requirement is supported by Core
Principle R, requiring that the DCO have an enforceable legal framework
for each aspect of its activities.\177\ To the extent any agreement
prohibits the DCO from continuing its critical operations and services
in an orderly wind-down, a DCO may not have an enforceable legal
framework within which to carry out all of its activities, specifically
those associated with an orderly wind-down.
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\177\ Section 5b(c)(2)(R) of the CEA, 7 U.S.C. 7a-1(c)(2)(R).
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Accordingly, the Commission is proposing new Sec. 39.13(k)(4) to
require that a DCO's orderly wind-down plan identify any contracts,
arrangements, agreements, and licenses associated with the provision of
its critical services and operations that are subject to alteration or
termination as a result of the implementation of the orderly wind-down
plan. The orderly wind-down plan shall describe the actions the DCO has
taken to ensure such operations and services can continue during
orderly wind-down, despite such potential alteration or termination.
5. Governance--Sec. 39.13(k)(5)
The Commission is proposing to require that a DCO's orderly wind-
down plan include predefined governance arrangements with respect to
wind-down planning and orderly wind-down that set forth the
responsibilities of the board of directors, board members, senior
executives and business units, describe the processes that the DCO will
use to guide its discretionary decision-making relevant to the orderly
wind-down plan, and describe the DCO's process for identifying and
managing the diversity of stakeholder views and any conflict of
interest between stakeholders and the DCO. Additionally, the Commission
is proposing to require that the DCO's board of directors formally
approve and annually review the orderly wind-down plan.
An effective governance arrangement will assist DCOs in reacting
quickly to adverse scenarios, provide transparency to the orderly wind-
down process, and help ensure that DCOs properly vet wind-down
decisions with consideration of the interests of all relevant parties.
Further, the proposed requirements with respect to governance are
supported by Core Principle O, which requires that DCOs establish
transparent governance arrangements to fulfill public interest
requirements and permit the consideration of the views of owners and
participants,\178\ and Core Principle P, which requires that DCOs
establish both rules to minimize conflicts of interest in the decision
making-process and a process for resolving conflicts of interest.\179\
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\178\ Section 5b(c)(2)(O) of the CEA, 7 U.S.C. 7a-1(c)(2)(O).
\179\ Section 5b(c)(2)(P) of the CEA, 7 U.S.C. 7a-1(c)(2)(P).
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Accordingly, the Commission is proposing new Sec. 39.13(k)(5) to
require that a DCO's orderly wind-down plan describe an effective
governance structure that clearly defines the responsibilities of the
board of directors, board members, senior executives and business
units, describe the processes that the DCO will use to guide its
discretionary decision-making relevant to the orderly wind-down plan,
and describe the DCO's process for identifying and managing the
diversity of stakeholder views and any conflict of interest between
stakeholders and the DCO. Additionally, the Commission is proposing to
require that a DCO's board of directors formally approve and annually
review the orderly wind-down plan.
The Commission requests comment on this aspect of the proposal.
6. Testing--Sec. 39.13(k)(6)
For DCOs that are neither SIDCOs nor Subpart C DCOs, the Commission
is proposing a testing requirement as part of the orderly wind-down
plan that is similar, but not identical, to proposed new Sec.
39.39(c)(8). Specifically, the Commission is proposing new Sec.
39.13(k)(6) to require that the orderly wind-down plan for these DCOs
include procedures for testing the DCO's ability to implement the tools
upon which the orderly wind-down plan relies. The orderly wind-down
plan must include the types of testing that will be performed, to whom
the findings of such tests will be reported, and the procedures for
updating the plan in light of the findings resulting from such tests.
Such testing must occur following any material change to the orderly
wind-down plan, but in any event not less frequently than once
annually.
The testing requirement for DCOs that are neither SIDCOs nor
Subpart C DCOs should emphasize the reliable operability of the tools
that potentially would be implemented in a wind-down; as such, the
Commission is not proposing to require these DCOs to conduct crisis
management drills or similar exercises as part of the testing
requirement. Moreover, because of the wide range of possible types of
clearing members, the Commission is not proposing to require these DCOs
to conduct testing with the participation of clearing members.\180\
Nonetheless, where the plan relies upon the performance of clearing
members and other internal stakeholders, or external stakeholders such
as service providers, such DCOs should consider whether involving such
parties is practical.
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\180\ Such DCOs that are subject to regulation by other
authorities may be subject to more stringent requirements with
respect to testing by those authorities.
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As discussed above, however, testing the orderly wind-down plan--
through assessing the operation and sufficiency of tools and resources
to address losses--and updating the plan accordingly is a critical part
of a DCO's risk management practice. Testing can reveal deficiencies in
the effectiveness of specific tools. It can also enhance the tools and
resources for identifying, measuring, monitoring, and managing risk in
general. Periodic testing, moreover may reveal any deficiencies or
[[Page 48992]]
weaknesses in a DCO's infrastructure which may hamper wind-down
efforts.
The Commission requests comment on this aspect of the proposal. The
Commission specifically requests comment on the proposed requirement
that tests be conducted not less than annually: would a different
minimum frequency be more appropriate for DCOs other than SIDCOs or
Subpart C DCOs?
D. Conforming Changes to Bankruptcy Provisions--Part 190
The Commission is proposing several conforming changes to Part
190's bankruptcy provisions that follow from the proposed requirement
that all DCOs maintain viable plans for orderly wind-down. First,
current Sec. 190.12(b)(1) requires that a DCO in a Chapter 7
proceeding provide to the trustee copies of, among other things, the
wind-down plan it must maintain pursuant to Sec. 39.39(b).\181\ The
Commission is proposing that the regulation be amended to include
orderly wind-down plans that DCOs must maintain pursuant to proposed
new Sec. 39.13(k) in addition to Sec. 39.39(b).
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\181\ 17 CFR 190.12(b)(1).
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Second, current Sec. 190.15(a) requires that the trustee not avoid
or prohibit certain actions taken by the DCO either reasonably within
the scope of, or provided for in, any wind-down plan maintained by the
DCO and filed with the Commission pursuant to Sec. 39.39.\182\ The
Commission is proposing that the regulation be amended to include
orderly wind-downs plans maintained by DCOs and filed with the
Commission pursuant to proposed new Sec. 39.13(k) in addition to Sec.
39.39.
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\182\ 17 CFR 190.15(a).
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Third, current Sec. 190.15(c) requires that the trustee act in
accordance with any wind-down plan maintained by the debtor and filed
with the Commission pursuant to Sec. 39.39 in administering the
bankruptcy proceeding.\183\ The Commission is proposing that the
regulation be amended to include orderly wind-downs plans maintained by
DCOs and filed with the Commission pursuant to proposed new Sec.
39.13(k) in addition to Sec. 39.39.
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\183\ 17 CFR 190.15(c).
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Last, current Sec. 190.19(b)(1) requires that a shortfall in
certain funds be supplemented in accordance with the wind-down plan
maintained by the DCO pursuant to Sec. 39.39 and submitted pursuant to
Sec. 39.19.\184\ The Commission is proposing that the paragraph be
amended to include orderly wind-downs plans maintained by DCOs pursuant
to proposed new Sec. 39.13(k) in addition to Sec. 39.39.
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\184\ 17 CFR 190.19(b)(1).
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The Commission requests comment on this aspect of the proposal.
IV. Establishment of Time To File Orderly Wind-Down Plan--Sec.
39.19(c)(4)(xxiv)
In light of the proposed requirement that all DCOs maintain and
submit to the Commission viable plans for orderly wind down and
supporting information, the Commission is proposing to establish the
timing for submitting orderly wind-down plans and supporting
information for DCOs currently registered with the Commission. As the
Commission is proposing to amend Sec. 39.19(c)(4)(xxiv) to establish
the time for SIDCOs and Subpart C DCOs to file a recovery plan and an
orderly wind-down plan, the Commission proposes to amend the same
section to establish a fixed deadline for DCOs currently registered
with the Commission to file orderly wind-down plans. Under the proposed
rule, DCOs currently registered with the Commission must complete and
submit orderly wind-down plans and supporting information within six
months from the effective date of the rule (if it is adopted). Pursuant
to Core Principle D(i), all DCOs must already ensure they possess the
ability to manage the risks associated with discharging their
responsibilities through the use of appropriate tools and procedures. A
potential wind down, due either to default or non-default losses, is
always a latent risk for any DCO engaged in clearing and settlement
activities; accordingly, DCOs should already have some plans in place
for implementing tools and procedures to manage an orderly wind-down.
The Commission proposes to require that any DCO that submits an
application for registration with the Commission six months or more
after the effective date of this rulemaking (if it is adopted), must
submit its orderly wind-down plans and supporting information at the
time it submits an application for registration with the Commission
under Sec. 39.3.\185\ The Commission is also requiring that all DCOs,
upon revising their plans, but in any event no less frequently than
annually, submit the current plan(s) and supporting information to the
Commission, along with a description of any changes and the reason(s)
for such changes.\186\
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\185\ For any DCO that submits (or has submitted) an application
for registration with the Commission before the date that is six
months after the effective date of this rulemaking, if it is
adopted, the Commission is proposing to require that the DCO have
until the date that is six months after the effective date of this
rulemaking to submit its orderly wind-down plan and supporting
information.
\186\ See Section 5b(c)(2)(J) of the CEA, 7 U.S.C. 7a-1(c)(2)(J)
(``Core Principle J--Reporting'') (requiring that DCOs provide to
the Commission all information that the Commission determines to be
necessary to conduct oversight of the DCO).
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In Sec. 39.19(c)(4)(xxiv), as well as in Sec. 39.13(k) and Sec.
39.39(b), the Commission is proposing to add the words ``and supporting
information'' to references to submitting recovery and/or orderly wind-
down plans. DCOs may, in some instances, include supporting information
within their plans, or may organize the documentation with supporting
information kept separately, e.g., as an appendix or annex. To avoid
confusion as to whether such separately kept information is required to
be submitted to the Commission, and to ensure that the Commission has
timely access to such supporting information, the Commission is
proposing to amend Sec. Sec. 39.19(c)(4)(xxiv), 39.13(k) and 39.39(b)
to require its submission explicitly.
Accordingly, the Commission proposes to amend Sec.
39.19(c)(4)(xxiv). Specifically, the Commission proposes to require
that any DCO not currently registered with the Commission submit its
viable plans for orderly wind-down and supporting information at the
time it files its application for registration with the Commission
under Sec. 39.3. Because the Commission is proposing to require that
all DCOs must maintain and submit plans for orderly-wind down and
supporting information, the Commission proposes to remove the current
language from Sec. 39.19(c)(4)(xxiv) suggesting or providing that DCOs
that are not SIDCOs or Subpart C DCOs may maintain and submit orderly
wind-down plans to the Commission. For DCOs that are currently
registered with the Commission and are not SIDCOs or Subpart C DCOs,
the Commission is proposing to require that they submit their viable
plans for orderly wind-down and supporting information no later than
six months after this rulemaking, if finalized, is published. Upon
revising their plans, moreover, but in any event no less frequently
than annually, all DCOs shall submit the current plan(s) and supporting
information to the Commission, along with a description of any changes
and the reason(s) for such changes.
The Commission requests comment on this aspect of the proposal. The
Commission specifically requests comment concerning whether a DCO
should additionally be required to update its recovery and orderly
wind-
[[Page 48993]]
down plans upon changes to the DCO's business model, operations, or the
environment in which it operates, to the extent such changes
significantly affect the viability or execution of the recovery and
orderly wind-down plans. The Commission also specifically requests
comment concerning whether six months is sufficient time to develop
these plans, or if a longer time (e.g., one year) would be more
appropriate.
V. Amendment to Sec. 39.34(d)
As discussed in the context of recovery plans and orderly wind-down
plans, the Commission proposes to discontinue the process by which the
Commission could grant, upon request of a SIDCO or DCO that is electing
to become subject to subpart C, up to one year to comply with
Sec. Sec. 39.39 and 39.35.\187\ The Commission is proposing to remove
a similar provision in Sec. 39.34(d) wherein a SIDCO or Subpart C DCO
could request, and the Commission may grant, up to one year to comply
with any provision of Sec. 39.34 (System safeguards for SIDCOs and
Subpart C DCOs) because granting such requests would be inconsistent
with the system safeguard rules for SIDCOs and Subpart C DCOs that have
been in effect for years.\188\ The Commission is therefore proposing to
remove Sec. 39.34(d) in its entirety.
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\187\ See 17 CFR 39.39(f).
\188\ See System Safeguards Testing Requirements for Derivatives
Clearing Organizations, 81 FR 64322 (Sept. 19, 2016).
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The Commission requests comment on this aspect of the proposal.
VI. Amendments to Appendix B to Part 39--Subpart C Election Form
The Commission is proposing to amend the Subpart C Election Form to
reflect the above proposed changes to Part 39. One of these amendments
will reflect the elimination of the request for an extension of up to
one year to comply with any of the provisions of Sec. Sec. 39.34,
39.35, or 39.39. The ``General Instructions'' and ``Elections and
Certifications'' portions of the Subpart C Election Form are proposed
to be amended to delete the references to requests for relief of up to
one year for those sections of part 39. Another amendment will modify
Exhibit F-1 to include the DCO's recovery plan, orderly wind-down plan,
supporting information for these plans, and a demonstration that the
plans comply with the requirements of Sec. 39.39(c).
The Commission requests comment on this aspect of the proposal.
VII. Amendments to Appendix A to Part 39--Form DCO
The Commission is proposing to amend Form DCO, in particular,
Exhibit D--Risk Management to reflect the above proposed changes to
Part 39. The amendment will add an Exhibit D-5 to include the DCO's
orderly wind-down plan, and a demonstration that the plan complies with
the requirements of proposed Sec. 39.13(k).
The Commission requests comment on this aspect of the proposal.
VIII. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\189\ The
regulations proposed by the Commission will affect only DCOs. The
Commission has previously established certain definitions of ``small
entities'' to be used by the Commission in evaluating the impact of its
regulations on small entities in accordance with the RFA.\190\ The
Commission has previously determined that DCOs are not small entities
for the purposes of the RFA.\191\ Accordingly, the Chairman, on behalf
of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that
the proposed regulations will not have a significant impact on a
substantial number of small entities.
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\189\ 5 U.S.C. 601-612.
\190\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618 (Apr. 30, 1982).
\191\ See A New Regulatory Framework for Clearing Organizations,
66 FR 45604, 45609 (Aug. 29, 2001).
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B. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\192\
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\192\ Section 15(b) of the CEA, 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether the proposed rules implicate any other
specific public interest to be protected by the antitrust laws.
The Commission has considered the proposed rulemaking to determine
whether it is anticompetitive and has identified no anticompetitive
effects. The Commission requests comment on whether the proposed
rulemaking is anticompetitive and, if it is, what the anticompetitive
effects are.
Because the Commission has preliminarily determined that the
proposed rules are not anticompetitive and have no anticompetitive
effects, the Commission has not identified any less anticompetitive
means of achieving the purposes of the CEA. The Commission requests
comment on whether there are less anticompetitive means of achieving
the relevant purposes of the CEA that would otherwise be served by
adopting the proposed rules.
C. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \193\ provides that Federal
agencies, including the Commission, may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid control number from the Officer of
Management and Budget (OMB). The PRA is intended, in part, to minimize
the paperwork burden created for individuals, businesses, and other
persons as a result of the collection of information by federal
agencies, and to ensure the greatest possible benefit and utility of
information created, collected, maintained, used, shared, and
disseminated by or for the Federal Government.\194\ The PRA applies to
all information, regardless of form or format, whenever the Federal
Government is obtaining, causing to be obtained, or soliciting
information, and includes required disclosure to third parties or the
public, of facts or opinion, when the information collection calls for
answers to identical questions posed to, or identical reporting or
recordkeeping requirements imposed on, ten or more persons.\195\ This
proposed rulemaking contains reporting and recordkeeping requirements
that are collections of information within the meaning of the PRA. This
section addresses the impact of the proposal on existing information
collection requirements associated with part 39 of the Commission's
regulations. Changes to the existing information requirements as a
result of this proposal are set forth below. OMB has assigned Control
No 3038-006, ``Requirements for Derivatives Clearing Organizations,''
to the information collections associated
[[Page 48994]]
with these regulations.\196\ The Commission is revising its total
burden estimates for this clearance to reflect the proposed amendments.
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\193\ 44 U.S.C. 3501 et seq.
\194\ 44 U.S.C. 3501.
\195\ 44 U.S.C. 3502(3).
\196\ For the previously approved estimates, see ICR Reference
No. 202303-3038-001, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202303-3038-001.
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The Commission therefore is submitting this proposal to the OMB for
its review in accordance with the PRA.\197\ Responses to this
collection of information would be mandatory. The Commission will
protect any proprietary information according to the Freedom of
Information Act and part 145 of the Commission's regulations.\198\ In
addition, section 8(a)(1) of the CEA strictly prohibits the Commission,
unless specifically authorized by the CEA, from making public any
``data and information that would separately disclose the business
transactions or market positions of any person and trade secrets or
names of customers.'' \199\ Finally, the Commission is also required to
protect certain information contained in a government system of records
according to the Privacy Act of 1974.\200\
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\197\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
\198\ 5 U.S.C. 552; 17 CFR part 145 (Commission Records and
Information).
\199\ 7 U.S.C. 12(a)(1).
\200\ 5 U.S.C. 552a.
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1. Event-Specific Reporting--Sec. 39.19(c)(4)
Proposed Sec. 39.39(b) would require a SIDCO or Subpart C DCO to
submit written recovery plans and orderly wind-down plans within six
months of designation as a SIDCO or upon a DCO's election as a Subpart
C DCO (in each case, if this happens subsequent to the effective date),
consistent with current Sec. 39.19(c)(4)(xxiv). This reporting
requirement is already included in the information collection burden
associated with the collection of information titled ``Requirements for
Derivatives Clearing Organizations, OMB Control No. 3038-0076.'' The
Commission has previously estimated that this requirement entails an
estimated 4,320 burden hours for all covered DCOs along with an
associated annual cost burden of $341,280.\201\ While the timing for
this reporting requirement has changed, there is no change in
frequency, and the Commission does not anticipate any other change to
this reporting requirement caused by this change to the timing for the
report to be submitted. However, because of enhancements to the
requirements for these plans, the Commission anticipates an increase in
the reporting burden from the proposed subjects and analyses that
SIDCOs and Subpart C DCOs would be required to include in their
recovery and orderly wind-down plans from 480 hours to 600 hours. The
Commission will use a blended rate of 50% financial examiners ($237/
hour) and 50% lawyers ($499/hour) resulting in $368/hour.\202\
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\201\ This is based on the Commission's estimate that nine
covered DCOs will be required to submit one written recovery plan
and wind-down plan annually. The Commission had estimated that
covered DCOs will require 480 hours on average to draft the required
plans at a previously estimated $79 per hour.
\202\ According to the May 2021 National Occupational Employment
and Wage Estimates Report produced by the U.S. Bureau of Labor
Statistics, available at https://www.bls.gov/oes/current/oes_nat.htm, the mean salary for category 23-1011, ``Lawyers,'' is
$198,900. This number is (a) divided by 1800 work hours in a year to
account for sick leave and vacations, (b) multiplied by 4.0 to
account for retirement, health, and other benefits or compensation,
as well as for office space, computer equipment support, and human
resources support, and (c) in light of recent high inflation,
further multiplied by 1.1294 to account for the change in the
Consumer Price Index for Urban Wage-Earners and Clerical Workers
from 263.612 in May of 2021 to 297.730 in April of 2023, all of
which yields an hourly rate of $499. Using a similar analysis,
category 13-2061, ``Financial Examiners,'' under business and
financial services occupations, has a mean annual salary of $94,270,
yielding an hourly rate of $237.
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The Commission specifically invites public comment on the accuracy
of its estimates that the proposed regulations will not impose a new
reporting burden but increase the reporting burden estimate to 600
hours.
The Commission's burden estimate for Sec. 39.19(b), including
drafting or updating, approving, and testing the wind-plan, is as
follows:
Estimated number of respondents: 6.
Estimated number of reports per respondent: 1.
Average number of hours per report: 600.
Estimated annual hours burden: 3,600.
Estimated gross annual reporting burden: $1,324,800.
Proposed Sec. 39.13(k)(1)(i) would require a DCO that is neither a
SIDCO nor a Subpart C DCO to submit, pursuant to Sec.
39.19(c)(4)(xxiv), a written orderly wind-down plan. Given the
similarities between the recovery plan and orderly wind-down plan, and
the consequent efficiencies in preparing both plans, the Commission
estimates that the orderly wind-down plan would require 400 hours to
develop for non-SIDCO and non-Subpart C DCOs and 100 hours/year to
update. The estimated 400 hours represents a reduction of one-third the
amount of time that the Commission estimates is required for SIDCOs and
Subpart C DCOs to develop both the recovery plan and orderly wind-down
plan. This proposed amendment, if adopted, would increase the existing
annual burden for this clearance by 3,600 hours.\203\ The Commission
will use the same blended rate of $368/hour. The Commission
specifically invites public comment on the accuracy of its estimates.
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\203\ In an effort to adequately estimate the potential burden,
the Commission will ignore the fact that, as discussed elsewhere in
this NPRM, some DCOs have developed, and regularly update, their
orderly wind-down plans pursuant to regulations imposed by non-U.S.
regulators.
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The Commission's burden estimate for Sec. 39.19(c)(4)(xxiv),
including drafting or updating, approving, and testing the wind-plan,
is as follows:
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 400.
Estimated annual hours burden: 3,600.
Estimated gross annual reporting burden: $1,324,800.
The Commission is proposing to add new Sec. 39.19(c)(4)(xxv) to
require that each SIDCO or Subpart C DCO that is required to have a
procedure for informing the Commission when the recovery plan is
initiated or that orderly wind-down is pending pursuant to either Sec.
39.39(b)(2) or Sec. 39.13(k)(1) shall notify the Commission and
clearing members as soon as practicable when the DCO has initiated its
recovery plan or that orderly wind-down is pending. SIDCOs and Subpart
C DCOs are currently required under Sec. 39.39(c)(1) to have
procedures in place to notify the Commission when a recovery plan or
orderly wind-down was initiated and the Commission is now proposing to
codify this as a formal notification requirement, thus, the Commission
does not view this aspect of the proposed regulation as a new reporting
requirement under OMB Control No. 3038-0076. However, the requirement
to notify clearing members was set out in CFTC Letter No. 16-61 but was
not codified, and may therefore be considered a new event-specific
reporting requirement. The Commission anticipates that, if adopted, the
notification to the Commission and to clearing members will be drafted
by a lawyer (and thus involve a cost/hour of $308) and will be an
electronic notification. The current regulation requires procedures be
in place to notify the Commission, and the proposed regulation requires
that the notification be sent to the Commission and to clearing
members. The Commission anticipates that proposed Sec. Sec.
39.39(b)(2), 39.13(k)(1)(ii), and 39.19(c)(4)(xxv)
[[Page 48995]]
would increase the event-specific reporting burden estimate marginally.
Since notifications of this type are accomplished by electronic
means, the existing procedure will have to be updated to include notice
to the DCO's clearing members. Since this can be accomplished using
methods and tools that the DCO currently uses to provide notices to
members of, e.g., changes in DCO rules or procedures, it is unlikely
that the DCO will need to design and implement new tools.
While no DCO (and no CFTC-regulated clearinghouse prior to the
amendments to the CEA that provided for regulation of DCOs) has ever
initiated recovery, several have (due to a paucity of business) made
the decision to wind-down operations. The Commission conservatively
estimates that one notification (total) under Sec. 39.19(c)(4)(xxv)
would occur every four years.
The Commission's burden estimate for Sec. 39.19(c)(4)(xxv) is as
follows:
Estimated number of respondents: 1.
Estimated number of reports per respondent: 0.25.
Average number of hours per report: 1.
Estimated annual hours burden: 0.25.
Estimated gross annual reporting burden: $125.
2. Requested Reporting--Sec. 39.19(c)(5)
The Commission is proposing to add a new requested reporting
requirement for SIDCOs and Subpart C DCOs that submit information to
the Commission pursuant to Sec. 39.39(f)(2). Proposed Sec.
39.19(c)(5)(iii) would require a SIDCO or Subpart C DCO that submits
information for resolution planning purposes to update the information
upon request of the Commission. The Commission believes this is a new
requested reporting requirement, which will be performed by lawyers at
a cost of $499/hour. This proposed amendment, if adopted, would
increase the existing annual burden for this clearance by an estimated
600 hours. The Commission's burden estimate for this new reporting
requirement under Sec. 39.39(c)(5) is as follows:
Estimated number of respondents: 6.
Estimated number of reports per respondent: 1.
Average number of hours per report: 100.
Estimated annual hours burden: 600.
Estimated gross annual reporting burden: $299,400.
These proposed information collection requirements would result in
an incremental increase in the annual hours burden associated with OMB
Clearance No. 3038-0076. The Commission estimates the proposed
amendments, if adopted, would yield the following incremental totals:
Estimated number of annual responses for all respondents: 15.25.
Estimated total annual burden hours for all respondents: 4,920.25.
Estimated gross annual reporting burden: $1,889,285.
Request for comment
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussion above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission will consider public comments on this proposed collection of
information in:
(1) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(2) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(3) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(4) Minimizing the burden of the proposed information collection
requirements on registered entities, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
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, if the Commission determined to promulgate a final rule, all
comments can be summarized and addressed in the final rule preamble.
Please refer to the ADDRESSES section of this rulemaking for
instructions on submitting comments to the Commission. A copy of the
supporting statements for the collections of information discussed
above may be obtained by vising RegInfo.gov. OMB is required to make a
decision concerning the proposed information collection requirements
between thirty (30) and sixty (60) days after the publication of the
Notice of Proposed Rulemaking in the Federal Register. Therefore, a
comment to OMB is best assured of receiving full consideration if OMB
receives it within 30 calendar days of publication of this NPRM.
Nothing in the foregoing affects the deadline enumerated above for
public comments to the Commission on the proposed rules.
D. Cost-Benefit Considerations
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\204\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five specific considerations identified in section 15(a) of the CEA
(collectively referred to as section 15(a) factors) addressed below.
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\204\ Section 15(a) of the CEA, 7 U.S.C. 19(a).
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The Commission recognizes that the proposed amendments may impose
costs. The Commission has endeavored to assess the expected costs and
benefits of the proposed amendments in quantitative terms, including
PRA-related costs, where possible. In situations where the Commission
is unable to quantify the costs and benefits, the Commission identifies
and considers the costs and benefits of the applicable proposed
amendments in qualitative terms. The lack of data and information to
estimate those costs is attributable in part to the nature of the
proposed amendments, in that they will require DCOs to undertake
analyses that are specific to the characteristics of each DCO,
including the specifics of the DCO's business model, services and
operations provided by the DCO to clearing members and other financial
market participants, products cleared (and the DCO's role in the
financial sector), services and operations provided by others that the
DCO relies upon to provide its services and operations to others,
infrastructure, and governance arrangements. Both the initial costs,
and any initial and recurring compliance costs, will also depend on the
size, existing infrastructure, practices, and cost structure of each
DCO.
The Commission generally requests comment on all aspects of its
cost-benefit considerations, including the identification and
assessment of any
[[Page 48996]]
costs and benefits not discussed herein; data and any other information
to assist or otherwise inform the Commission's ability to quantify or
qualitatively describe the costs and benefits of the proposed
amendments; and substantiating data, statistics, and any other
information to support positions posited by commenters with respect to
the Commission's discussion. The Commission welcomes comment on such
costs, particularly from existing SIDCOs and Subpart C DCOs that can
provide quantitative cost data based on their respective experiences.
Commenters may also suggest other alternatives to the proposed
approach.
2. Baseline
The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking are: (1) the DCO Core Principles
set forth in section 5b(c)(2) of the CEA; (2) the Commission's
regulations in Subpart C of part 39, which establish additional
standards for compliance with the core principles for those DCOs that
are designated as SIDCOs or have elected to opt-in to the Subpart C
requirements in order to achieve status as a QCCP; and (3) the subpart
C Election Form in appendix B to part 39.
Some of the proposed revisions and amendments to Sec. 39.39 would
codify staff guidance and international standards. To the extent that
market participants have relied upon the staff guidance that is
proposed to be codified, the actual costs and benefits of the proposed
rules, as discussed in this section of the proposal, may not be as
significant. Additionally, the proposed changes to Sec. 39.39 would
not apply to all fifteen DCOs currently registered with the Commission.
Rather, the proposed amendments to Sec. 39.39 apply to SIDCOs and
Subpart C DCOs. There are currently two SIDCOs,\205\ and four Subpart C
DCOs.\206\ All SIDCOs and Subpart C DCOs have recovery plans and
orderly wind-down plans on file with the Commission which may generally
be consistent with the staff guidance issued in CFTC Letter No. 16-61
and current Sec. 39.39(b). Additionally, the SIDCOs have already
provided information related to resolution planning which may fulfill
requests for information under current Sec. 39.39(c)(2), which is
proposed to be revised as Sec. 39.39(f).
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\205\ CME and ICC.
\206\ ICE Clear US, Inc.; Minneapolis Grain Exchange, LLC; Nodal
Clear, LLC; and OCC.
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As discussed further below, the Commission is proposing to require
that DCOs that are neither SIDCOs nor electors into Subpart C to
develop and maintain plans for orderly wind-down. This would be a new
requirement. However, of the nine such DCOs that are currently
registered, five are based in jurisdictions that implement regulatory
requirements that are consistent with the PFMI.\207\ These include
standards that require both recovery and orderly wind-down plans.
Accordingly, to the extent that these five DCOs have already designed
and maintain plans for orderly wind-down that are consistent with the
proposed rules, the actual costs and benefits of the proposed rules, as
discussed in this section of the proposal, may be reduced.\208\ These
standards will be new, however, for the remaining four non-Subpart C
DCOs (and for any new DCOs that are similarly situated).\209\
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\207\ These are ICE NGX Canada, Inc. (Canada), LCH SA (France),
Eurex Clearing AG (Germany), as well as ICE Clear Europe and LCH Ltd
(United Kingdom). Each of these jurisdictions has reported that they
have fully implemented the standards in the PFMI. See https://www.bis.org/cpmi/level1_status_report.htm.
\208\ To the extent foreign CCPs are subject to home
jurisdiction regulation with different requirements for the subjects
and analyses that must be included in their orderly wind-down plans,
the Commission welcomes comments describing those requirements, and
including suggestions on how to achieve the goals of this regulation
in a manner that appropriately addresses possible inefficiencies.
\209\ CBOE Clear Digital, LLC, CX Clearinghouse, L.P., LedgerX
LLC, and North American Derivatives Exchange, Inc.
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The Commission's analysis below compares the proposed amendments to
the regulations in effect today; however, it then takes into account
current industry practices that may mitigate some of the costs and
benefits set out in each section. The Commission seeks comment on all
aspects of the baseline.
3. Recovery Plan and Orderly Wind-Down Plan--Sec. 39.39(b)
The Commission is clarifying that each SIDCO and Subpart C DCO must
submit its recovery plan and orderly wind-down plan to the Commission
consistent with existing Sec. 39.19(c)(4)(xxiv). The Commission is
further proposing in Sec. 39.39(b)(2) to require that a SIDCO or
Subpart C DCO notify the Commission and clearing members when the
recovery plan is initiated or orderly wind-down is pending, and to add
a corresponding event-specific reporting requirement in Sec.
39.19(c)(4)(xxv). Proposed Sec. 39.39(b)(3) would also establish that
a SIDCO must file its recovery plan and (to the extent it has not
already filed one) orderly wind-down plan within six months of
designation as a SIDCO, and a DCO electing to be subject to Subpart C
of the Commission's regulations must file its recovery plan and (to the
extent it has not already filed one) orderly wind-down plan on the
effective date of its election.
i. Benefits
Proposed Sec. 39.39(b)(1) explicitly requires that a SIDCO and a
Subpart C DCO must have plans for recovery and orderly wind-down, and
that these plans must each cover both default losses and non-default
losses. This has the benefit of enhancing the resilience of these DCOs,
and reducing the risk that they pose to clearing members and other
financial market participants (and, in some cases, to the financial
system), by requiring these plans to cover the full range of risks.
Proposed Sec. 39.39(b)(2) requires that SIDCOs and Subpart C DCOs
have procedures to notify the Commission and clearing members that
recovery is initiated or orderly wind-down is pending as soon as
practicable, and that such notice is provided to the Commission and
clearing members. The requirement to notify the Commission is not a new
requirement, and the requirement to notify clearing members, which was
explicit in the staff guidance, will aid clearing members in protecting
their interests.
Finally, establishing a date for the filing of recovery plans and
orderly wind-down plans in proposed Sec. 39.39(b)(3),\210\ is
responsive to commenters' requests made over time for date certainty,
and choosing six months as that certain date takes into account both
resilience and practicality. Requiring that a newly-designated SIDCO
submit its plans no later than six months after designation and that a
DCO submit its plans at the time of making the election to become
subject to Subpart C (if it has not already done so) fosters the
objectives of promoting resiliency and prepares SIDCOs and Subpart C
DCOs to meet the challenges of recovery or orderly wind-down in the
event that they are necessary. Further, allowing newly designated
SIDCOs six months to submit their plans should provide enough time to
develop the plans. The Commission believes that these regulations will
benefit registrants and market participants.
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\210\ With respect to orderly wind-down plans, the Commission
notes that this requirement would be applicable only to the extent
the DCO does not have an orderly wind-down plan on file at the
Commission.
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ii. Costs
The current regulations require a SIDCO or Subpart C DCO to
maintain viable plans for recovery and orderly wind-down, and to submit
such plans to the Commission. DCOs already have systems in place to
notify clearing
[[Page 48997]]
members when specific actions are taken, and the Commission believes
that these existing systems can be used to notify clearing members when
the recovery plan is initiated or orderly wind-down is pending. Thus,
the costs involved would be the effort involved in preparing to use
these existing systems to notify clearing members when the recovery
plan is initiated or orderly wind-down is pending (including testing),
and, if and when necessary, using them to make such notifications.
Moreover, it does not appear that establishing the specified periods
for filing the will cause additional costs above those involved in
developing the recovery and orderly wind-down plans.
iii. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of sections
15(a)(2)(A), (B), (D), and (E) of the CEA, the proposed amendments will
protect market participants, enhance the financial integrity of futures
markets, reflect sound risk management practices, and enhance the
public interest, by ensuring that the Commission and clearing members
are notified when the recovery plan is initiated or orderly wind-down
is pending, thereby aiding the Commission in taking action to protect
markets and the broader financial system, and enabling clearing members
to protect their own interests.
Section 15(a)(2)(C), price discovery, is not implicated by the
proposed amendments.
4. Recovery Plan and Orderly Wind-Down Plan: Required Elements--Sec.
39.39(c)
Proposed Sec. 39.39(c) would establish the required content of a
SIDCO's or Subpart C DCO's recovery plan and orderly wind-down plan
consistent with the guidance set forth in CFTC Letter No. 16-61.
Proposed Sec. 39.39(c)(1)-(8) would require that each plan's
description include the identification and description of the critical
operations and services the DCO provides to clearing members and other
financial market participants, the service providers the DCO relies
upon to provide these critical operations and services,
interconnections and interdependencies, resilient staffing
arrangements, obstacles to success of the plan, stress scenario
analyses, potential triggers for recovery and orderly wind-down,
available recovery and orderly wind-down tools, analyses of the effect
of the tools on each scenario, lists of agreements to be maintained
during recovery and orderly wind-down, and governance arrangements.
i. Benefits
Current Sec. 39.39 does not provide explicit regulations governing
the required elements of a SIDCO's or Subpart C DCO's recovery plan and
orderly wind-down plan. At the time the 2013 rule was promulgated, the
international standards and guidance covering such elements (with which
a SIDCO and Subpart C DCO must comply) were consultative and not
finalized. CFTC Letter No. 16-61 provided SIDCOs and Subpart C DCOs
with comprehensive guidance related to the elements of acceptable
recovery plans and orderly wind-down plans. Proposed Sec. 39.39(c)
would codify elements for a recovery plan and orderly wind-down plan
that are, in general, drawn from the guidance on international
standards related to recovery plans and orderly wind-down plans adopted
by international standards-setting bodies since 2013, and described in
detail in CFTC Letter No. 16-61.
Codifying the guidance set out in CFTC Letter No. 16-61, and
enhancing the set of elements discussed in that guidance through
proposed Sec. 39.39(c)(1)-(8) should benefit market participants,
including both DCOs and their members, by establishing specific
regulatory requirements for well-designed and effective recovery and
orderly wind-down plans. The requirements of proposed Sec.
39.39(c)(1)-(8) should contribute to DCOs achieving a better ex ante
understanding of, the critical services and operations that it provides
clearing members and other financial market participants, the services
and operations provided by others (including internal staff) upon which
it depends to provide those services and operations (and contractual
arrangements with such others that might be altered or terminated as a
result of the circumstances that lead to the need for recovery or
orderly wind-down), the scenarios that might lead to recovery or
orderly wind-down, of the challenges a DCO would face in a recovery or
wind-down scenario, the tools that the DCO would rely upon to meet
those challenges, and the challenges and complexities in using those
tools, and the DCO's governance arrangements for recovery and orderly
wind-down. This understanding will be significantly enhanced if the DCO
engages in annual testing of its plans, and modifies those plans in
light of the results of such testing.
Thus, the DCOs, clearing members, and other financial market
participants will benefit through the DCO being better prepared to meet
those challenges successfully (and thus being more likely to continue
to provide those critical services and operations upon which clearing
members and other financial market participants depend, and to avoid
the potential harms to clearing members, other financial market
participants, and the financial system more broadly, from a disorderly
cessation of those services and operations).
Including these explicit and specific requirements for recovery
plans and orderly wind-down plans should significantly enhance the
DCO's ability to implement its recovery plan (or, if necessary, orderly
wind-down plan) promptly and effectively. Additionally, the information
will better enable a newly designated SIDCO, or a DCO that is electing
subpart C status, to understand the requirements for well-developed and
effective plans, and to consider relevant issues including the tools it
intends to activate, its process for monitoring for triggers, the
sequencing of tools, impediments to the timely or successful use of its
tools, its governance arrangements, internal and external approval
processes, and whether contractual agreements will continue during
recovery and orderly wind-down; moreover, it will have a plan in place
to handle exigencies in a manner that mitigates the risk of financial
instability or contagion.
ii. Costs
The specific requirements for a recovery plan's and orderly wind-
down plan's description, analysis, and testing set forth in this
regulation will require substantial time to be spent on analytical
effort by DCO staff, including attorneys, compliance staff, and other
subject matter experts. DCO staff will spend time to review existing
plans and supporting arrangements, compare them to the proposed rules
(to the extent that they are ultimately adopted), and make
modifications or additions to those plans, in light of, inter alia, the
specifics of each DCO's business model, services and operations
provided by the DCO to clearing members and other financial market
participants, products cleared (and the DCO's role in the financial
sector), services and operations provided by others that the DCO relies
upon to provide its services and operations to others, infrastructure,
and governance arrangements. The revised plans will then need to be
reviewed, first by senior management and then by the board of
directors, at the cost of the
[[Page 48998]]
time of those persons, and potentially further amended in light of the
results of such reviews (resulting in the further expenditure of time).
All of these DCOs will need to incur the cost of staff time to
undertake additional analysis to (a) ensure that their recovery and
orderly wind-down plans meet those portions of the proposed
requirements that represent codification of staff guidance, and (b)
meet those portions of the proposed requirements that represent
enhancements to the staff guidance (this includes enhancements
resulting from changes to definitions, e.g., calling for considerations
of non-default losses due to the actions of malicious actors, including
internal, external, and nation-states).
This additional analysis includes developing an overview of each
plan and describing how the plan will be implemented, ensuring that
each plan identifies and describes (i) the critical operations and
services that the DCO provides to clearing members and other financial
market participants, (ii) the service providers upon which the DCO
relies to provide these operations and services, (iii) plans for
resilient staffing arrangements for continuity of operations, (iv)
obstacles to success of the plans, (v) plans to address the risks
associated with the failure of each critical operation and service,
(vi) how the DCO will ensure that the identified operations and
services continue thorough recovery and orderly wind-down.
Further, the DCO will need to ensure that the analysis of scenarios
for its recovery plan includes each of the scenarios specified in Sec.
39.39(c)(2)(ii)(A)-(K) and (iii), or that the analysis documents why
such scenario is not possible in light of the DCO's structure and
activities, and that, for each possible scenario, the analysis includes
the elements specified in Sec. 39.39(c)(2)(i)(A)-(F). The DCO will
need to ensure that the analysis establishes triggers for recovery or
consideration of orderly wind-down, and the information-sharing and
governance process within senior management and board of directors. The
DCO will also need to ensure that the plans describe the tools that it
would use to meet the full scope of financial deficits that the DCO
might need to remediate, and, for each set of tools, provides the
additional analysis described in Sec. 39.39(c)(4)(ii)-(ix) (for the
recovery plan) and Sec. 39.39(c)(5)(iii)-(x) (for the orderly wind-
down plan).
Additionally, the DCO will need to ensure that its plans include
determinations of which of the contracts, etc. associated with the
provision of its services as a DCO are subject to alteration or
termination as a result of the implementation of recovery or orderly
wind-down, and the actions that the DCO has taken to ensure that its
critical operations and services will continue during recovery and
orderly wind-down despite such alteration or termination. The DCO will
also need to ensure that the plans are formally approved, and annually
reviewed, by the board of directors, describe effective governance
structures and processes to guide discretionary decision-making
relevant to each plan, and describe the DCO's process for identifying
and managing the diversity of stakeholder views and any conflict of
interest between stakeholders and the DCO.
Moreover, the DCO will need to ensure that its plans include
procedures for testing their viability, including the DCO's ability to
implement the tools that each plan relies upon. This also includes the
types of testing to be performed, to whom the results are reported, and
procedures for updating the plans in light of the findings resulting
from such tests. The tests need to include the participation of
clearing members, where the plans rely upon their participation. The
tests must be repeated following any material change to the recovery
plan or orderly wind-down plan, but in any event not less than once
annually.
If the foregoing recovery or orderly wind-down planning identifies
vulnerabilities that need to be improved upon, the DCO will incur the
cost of remediating such vulnerabilities.
As noted earlier in this section, plans revised in light of the
foregoing analysis will then need to be reviewed, first by senior
management and then by the board of directors, at the cost of the time
of those persons, and potentially further amended in light of the
results of such reviews (resulting in the further expenditure of time).
It is impracticable to quantify these costs, because they depend on
the specific design and other circumstances of each DCO. including the
specific services and operations that the DCO provides to clearing
members and other financial participants, the services and operations
provided by others that the DCO relies upon to provide those services,
the contractual arrangements between and those service providers, and
the DCO's current recovery and orderly wind-down plans., It seems
likely that these requirements will require hundreds of hours of the
effort of skilled professionals, at a cost of tens of (perhaps more
than a hundred) thousands of dollars.
For DCOs that are currently SIDCOs or Subpart C DCOs, or other DCOs
that may currently maintain recovery and orderly wind-down plans, the
amount of time required for each DCO to initially amend its recovery
plan and orderly wind-down plan may vary depending on the extent to
which the DCO already addressed the foregoing requirements in its
existing plans. The analysis and plan preparation that a SIDCO or
Subpart C DCO will undertake to comply with this regulation, including
designing and implementing changes to existing plans, was, to a
significant extent, established in the 2016 staff guidance, and, based
on staff's experience, SIDCOs and Subpart C DCOs generally already
follow those standards. To that extent, for these DCOs, those costs may
be reduced.
The Commission requests comment from existing SIDCOs and Subpart C
DCOs concerning their estimates of the time, and corresponding costs,
they would expect to incur in ensuring that their existing plans meet
the requirements of the proposed rule, along with supporting data
concerning the amount of effort expended on preparing existing plans,
and the extent to which additional time may need to be spent to conform
such plans to the proposed rules. The Commission also seeks comment
from the public more generally as to estimates, along with supporting
data, of the time, and corresponding costs that might be incurred in
developing recovery and orderly wind-down plans that meet those
requirements.
Additionally, to what extent are existing SIDCOs and Subpart C DCOs
following the staff guidance in CFTC Letter No. 16-61? What is the
impact of current practice among existing SIDCOs and Subpart C DCOs
with respect to that staff guidance on the costs and benefits that
would result from implementation of the proposed rules?
iii. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the section 15(a) factors. In
consideration of sections 15(a)(2)(A), (B), (D), and (E) of the CEA,
the Commission believes the proposed amendments to Sec. 39.39(c)(1)-
(8) would enhance existing protection of market participants and the
public and the financial integrity of futures markets, and the
regulations should aid in sound risk management practices by ensuring
that the DCO considers in advance the impact that recovery and orderly
wind-down would have on its operations and customers. Moreover,
specifying the contents of the plans in the regulation
[[Page 48999]]
should increase the possibility that a DCO could continue to provide
the critical services and operations upon which its clearing members
and other financial market participants depend, and reduce the
possibility that a DCO would fail in a disorganized fashion. The
proposed rule should reduce the likelihood of a DCO's failure to meet
its obligations to its members, thereby enhancing protection for a
DCO's members and their customers, and should help to avoid the
systemic effects of a DCO failure. Having the requisite plans in place,
moreover, should allow DCOs to handle exigencies in a manner that
mitigates the risk of financial instability or contagion. These
benefits favor the public interest. Section 15(a)(2)(C), price
discovery, does not appear to be implicated by the proposed amendments.
5. Information for Resolution Planning--Sec. 39.39(f)
The Commission is proposing in Sec. 39.39(f) to require that a
SIDCO and Subpart C DCO maintain information systems and controls to
provide data and information necessary for the purposes of resolution
planning to the Commission, and upon request provide such data and
information to the Commission, electronically, in the form and manner
specified by the Commission. Proposed Sec. 39.39(f)(1)-(7) describes
the types of information deemed pertinent to planning for resolution of
a SIDCO or Subpart C DCO under Title II of the Dodd-Frank Act. Much of
this information may already be provided to the Commission, and thus
may not be requested. The proposed regulation expands on current Sec.
39.39(c)(2) and lists explicitly the types of information that SIDCOs
and Subpart C DCOs may be required to provide upon request because they
are relevant to resolution planning, but which may not ordinarily be
required to be provided under other sections of part 39.
i. Benefits
Proposed Sec. 39.39(f)(1)-(7) describes the types of information
that the Commission proposes to require for resolution planning under
Title II of the Dodd-Frank Act. Thorough preparation ex ante is crucial
for successfully managing matters relating to the resolution of a SIDCO
or Subpart C DCO, as well as for establishing market confidence and the
confidence of foreign counterparts to the Commission and to the United
States agencies responsible for resolution of a SIDCO or Subpart C DCO.
Because of the nature of principles-based regulation, there is some
information in the possession of the DCO that, while important for
resolution planning purposes, may not ordinarily be reported to the
Commission and may not be publicly available. Thus, the primary benefit
from this regulation is that the type of information to be requested
will be available to the DCO, and upon request, the Commission may
obtain the information in order to assist the Commission in planning
and preparing for the resolution of a distressed DCO. There is also
considerable public benefit in enhancing preparedness for resolution by
making available to FDIC, as the resolution authority, information
relevant to planning for the resolution of a SIDCO or Subpart C DCO.
ii. Costs
The proposal assumes that there is information relevant to
resolution planning that is not ordinarily reported to the Commission
under Sec. 39.19, but which is in the possession of the DCO. As such,
SIDCOs and Subpart C DCOs will face certain incremental costs (from
gathering the information, reviewing it for accuracy, and transmitting
it to the Commission) to produce this information upon request as
required by proposed Sec. 39.39(f)(1)-(7). Gathering the information
and transmitting it would likely be accomplished by paraprofessionals,
while review may require the work of paraprofessionals or
professionals. The time that would be required to accomplish these
tasks would depend on the information requested and the DCO's
information system architecture. A crude estimate of the time required
might be 10-20 hours, at a cost of $3,000-$6,000, once or twice a year
for a SIDCO, and once every five years for a Subpart C DCO.
To the extent that some of this information requires analyses by
the DCO that are not currently conducted, such incremental costs may be
more significant. Here, the DCO would need to develop tools to analyze
its information (which may involve new uses for existing tools, or may
in some cases require the development of new tools), gather the
underlying data, use the tools, review the results, and then transmit
those results to the Commission. This may also involve effort in
working with Commission staff to clarify and/or to sharpen the request.
While some of this effort might be accomplished by paraprofessionals,
the proportion that would need the effort of professionals would likely
be greater than in the previous paragraph. A crude estimate of the time
required might be 30-60 hours, at a cost of $12,000-$24,000, once a
year for a SIDCO, and once every ten years for a Subpart C DCO.
It should be noted that the Commission does not anticipate asking
Subpart C DCOs for information for resolution planning in the near
term. This is because, even in the highly unlikely event that a Subpart
C DCO would enter recovery, and that such recovery would fail, the
likelihood of such a DCO qualifying for resolution under Title II is
fairly low.
The Commission seeks comments, in particular from SIDCOs and
Subpart C DCOs, on the accuracy of these estimates (with respect to
both time required and cost), and on how they may be improved. In
particular, SIDCOs that have responded to similar requests in the past
are invited to discuss the costs that they incurred in doing so (both
in building tools where necessary and in gathering and reviewing the
information), and to provide insight into expected costs to do so in
the future.
iii. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specified considerations
identified in section 15(a) of the CEA. In consideration of sections
15(a)(2)(A), (B), (D), and (E) of the CEA, the Commission preliminarily
believes that proposed Sec. 39.39(f)(1)-(7) would protect market
participants and the public, and support the financial integrity of
futures markets, by enhancing preparation for resolution of DCO in
advance of systemic failure, and thus increasing the likelihood that
resolution would be successful. Furthermore, advance planning may
identify issues that should and can be corrected in advance of market
failure, thereby providing an opportunity to improve DCO risk
management practices and further enhance the protection of market
participants and the public, and the financial integrity of the
derivatives markets. Finally, there is a strong public interest in
holding CFTC-registered SIDCOs and Subpart C DCOs to regulations that
incorporate international standards and guidance. Section 15(a)(2)(C),
price discovery, does not appear to be implicated by this proposal.
6. Requested Reporting--Sec. 39.19(c)(5)(iii)
Proposed Sec. 39.39(f)(1)-(7) requires a corresponding amendment
to Sec. 39.19(c)(5) regarding requested reporting. Proposed Sec.
39.19(c)(5)(iii) would require that a SIDCO or Subpart C DCO that
submits information related to resolution planning to the Commission
pursuant to Sec. 39.39(f)(1)-
[[Page 49000]]
(7), shall update the information upon request.
i. Benefits
The Commission is proposing an additional requirement to clarify
that the information for resolution planning requested under proposed
Sec. 39.39(f) would be updated upon request. By requesting (and then
providing to the FDIC) current, accurate, and pertinent information for
resolution planning, the Commission may be able to assist in resolution
planning more effectively. The financial system benefits as a whole
when the FDIC can obtain, with the aid of the Commission, current,
accurate, and pertinent information for resolution planning related to
a SIDCO's or Subpart C DCO's structure and activities (Sec.
39.39(f)(1)), clearing members (Sec. 39.39(f)(2)), arrangements with
other DCOs (Sec. 39.39(f)(3)), financial schedules and supporting
details (Sec. 39.39(f)(4)), interconnections and interdependencies
with internal and external service providers (Sec. 39.39(f)(5)),
information concerning critical personnel (Sec. 39.39(f)(6)), and
other necessary information (Sec. 39.39(f)(7)).
ii. Costs
The Commission anticipates that proposed Sec. 39.19(c)(5) would
add incremental costs to the business-as-usual activities of the DCOs.
For information that is regularly maintained by the DCO, this would
involve repeating the efforts described above in Section VIII.D.5(ii)
of gathering, reviewing, and transmitting the information. For
information that requires analyses that are not currently conducted by
the DCO, the corresponding efforts described above in Section
VIII.D.5(ii) would be called for, but some may be reduced or
eliminated: the DCO would once again need to gather the information,
but would presumably be able to use the tools that it repurposed (or
newly developed) when it responded to the information request for the
first time. Moreover, there may not be a need to clarify or sharpen the
request, to the extent that the request is identical (except for time-
period) to the first request. The DCO would still need to review the
results, and transmit them to the Commission.
iii. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specified considerations
identified in section 15(a) of the CEA. In consideration of sections
15(a)(2)(A), (B), (D), and (E) of the CEA, the Commission believes that
Sec. 39.39(f)(1)-(7) protects market participants and the public, and
promotes the financial integrity of futures markets, by ensuring that
resolution plans are based on current, accurate, and pertinent
information. Further, planning for resolution is a pillar of sound risk
management principles, and supports the public interest. Section
15(a)(2)(C), price discovery, does not appear to be implicated by this
proposal.
7. Viable Plans for Orderly Wind-Down for DCOs That Are Neither SIDCOs
Nor Subpart C DCOs--Sec. 39.13(k)
Proposed Sec. 39.19(k)(1)(a) would require that DCOs that are
neither SIDCOs nor Subpart C DCOs maintain and submit to the Commission
viable plans for orderly wind down necessitated by default losses and
non-default losses. As discussed above, proposed Sec. 39.19(k)(2)-(6)
would enumerate the information required to be incorporated in an
orderly wind-down plan.
i. Benefits
Requiring DCOs that are neither SIDCOs nor Subpart C DCOs to
maintain viable plans for orderly wind-down should contribute to a
better ex ante understanding by such DCOs of the critical services and
operations that clearing members and other financial market
participants depend upon them to provide, and of the challenges the DCO
would face in doing so. DCOs will benefit through better preparation to
meet those challenges; moreover, by enumerating certain subjects,
analyses, and testing that all DCOs must include in their orderly wind-
down plans, a DCO's ability to wind-down promptly and in an orderly
manner during any exigency should be significantly enhanced. To the
extent that this analysis identifies vulnerabilities, the DCO will have
the opportunity to remediate them.\211\
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\211\ To the extent that a foreign-based DCO already maintains
an orderly wind-down plan, pursuant to the regulations of its home-
country regulator, that meets the standards set in the proposed
regulation, these benefits would be reduced or eliminated.
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Importantly, an orderly and expeditious wind-down will help
mitigate the damage to the DCO's participants (and their customers, if
any) by facilitating either the continuation of the DCO's services
(potentially through another DCO) or the prompt return of their
participants' collateral.
ii. Costs
The Commission anticipates that some DCOs may bear a significant
cost burden, as described further below, due to the proposed
regulation, because of the various analyses and testing these DCOs
would be required to conduct.
The specific requirements for an orderly wind-down plan's
description, analysis, and testing set forth in this regulation will
require substantial time to be spent on analytical effort by DCO staff,
including attorneys, compliance staff, and other subject matter
experts. DCO staff will need to draft plans and supporting arrangements
that meet the standards set in the proposed rules (to the extent that
they are ultimately adopted) in light of, inter alia, the specifics of
each DCO's business model, services and operations provided by the DCO
to clearing members and other financial market participants, products
cleared (and the DCO's role in the financial sector), services and
operations provided by others that the DCO relies upon to provide its
services and operations to others, infrastructure, and governance
arrangements. The plans will then need to be reviewed, first by senior
management and then by the board of directors, at the cost of the time
of those persons, and potentially further amended in light of the
results of such reviews (resulting in the further expenditure of time).
These analyses include developing an overview of the orderly wind-
down plan and describing how the plan will be implemented, ensuring
that the orderly wind-down plan identifies and describes (i) the
critical operations and services that the DCO provides to clearing
members and other financial market participants, (ii) the service
providers upon which the DCO relies to provide these operations and
services, (iii) plans for resilient staffing arrangements for
continuity of operation, (iv) obstacles to success of the plan, (v)
plans to address the risks associated with the failure of each critical
operation and service, (vi) how the DCO will ensure that the identified
operations and services continue thorough orderly wind-down.
Further, the DCO will need to ensure that the analysis of scenarios
for its orderly wind-down plan identifies scenarios that may prevent
the DCO from meeting its obligations or providing critical operations
and services as a going concern. The DCO will need to ensure that the
analysis establishes triggers for consideration of orderly wind-down,
and the information-sharing and governance process within senior
management and board of directors. The DCO will also need to ensure
that the plan describes the tools that it would use in an orderly wind-
down that comprehensively address how the DCO would continue to
[[Page 49001]]
provide critical services, the governance and approval processes and
arrangements that will guide the exercise of any available discretion,
the steps necessary to implement each tool, the roles and
responsibilities of all parties in the use of each tool, an assessment
of the likelihood that the tools, individually and taken together,
would result in an orderly wind-down, and an assessment of the risks to
non-defaulting clearing members and their customers, and linked
financial market infrastructures.
Additionally, the DCO will need to ensure that its plan includes
determinations of which of the contracts, etc. associated with the
provision of its services as a DCO are subject to alteration or
termination as a result of the implementation of the orderly wind-down
plan, and the actions that the DCO has taken to ensure that its
critical operations and services will continue during orderly wind-down
despite such alteration or termination. The DCO will also need to
ensure that the plans are formally approved, and annually reviewed, by
the board of directors, describe effective governance structures and
processes to guide discretionary decision-making relevant to the plan,
and describe the DCO's process for identifying and managing the
diversity of stakeholder views and any conflict of interest between
stakeholders and the DCO.
Moreover, the DCO will need to ensure that its plan includes
procedures for testing the DCO's ability to implement the tools that
the orderly wind-down plan relies upon. This also includes describing
the types of testing to be performed, to whom the results are reported,
and procedures for updating the plans in light of the findings
resulting from such tests. The tests must be repeated following any
material change to the orderly wind-down plan, but in any event not
less than once annually.
If the foregoing wind-down planning identifies vulnerabilities that
need to be improved upon, the DCO will incur the cost of remediating
such vulnerabilities.
As noted earlier in this section, plans revised in light of the
foregoing analysis will then need to be reviewed, first by senior
management and then by the board of directors, at the cost of the time
of those persons, and potentially further amended in light of the
results of such reviews.
While it is impracticable to quantify these costs, because they
depend on the specific design and other circumstances of each DCO. it
seems likely that these requirements will require less effort than the
corresponding requirements for both recovery plans and orderly wind-
down plans for SIDCOs and Subpart C DCOs, because these DCOs are
required only to prepare, and meet the standards for, an orderly wind-
down plan. Moreover, in many cases, the business structure and
operations of these DCOs may be less complex than those of SIDCOs or
Subpart C DCOs. Nonetheless, the Commission estimates that an orderly
wind-down plan will require hundreds of hours of the effort of skilled
professionals, at a cost of tens of thousands of dollars.
For those DCOs that are based in jurisdictions that, pursuant to a
legal framework that is consistent with the PFMI, already require them
to maintain orderly wind-down plans, the cost should be substantially
less, as the requirements for orderly wind-down plans are likely to be
comparable to the requirements applicable in those other jurisdictions
(and thus these DCOs would, for the most part, be able to rely upon
their existing plans).\212\ For other DCOs that are not required to
have orderly wind-down plans pursuant to regulations of either the CFTC
or other regulators, these costs would be larger while the orderly
wind-down plans are first being developed, although there will be
additional (albeit reduced) costs in reviewing, testing, and updating
these plans on an ongoing basis. The initial costs may be mitigated to
the extent that such DCOs may already have some form of a wind-down
plan in place as part of their general risk management strategy.
Additionally, DCOs may already have performed some of the proposed
analyses as part of their existing regulatory compliance programs.
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\212\ To the extent that this assumption is incorrect, and the
proposal would require foreign-based DCOs to comply with overly
burdensome additional requirements, the Commission seeks comments
that set forth inconsistencies between the proposed requirements and
the requirements in the relevant foreign jurisdictions, and
recommendations as to how those inconsistencies can and should be
mitigated through amendments to the proposed requirements.
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iii. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the proposed
regulations should protect market participants and the public. At the
outset, a viable plan for orderly wind down reduces uncertainty in
times of market stress, since its existence enhances legal certainty
for the DCO's clearing members and market participants, and increases
the likelihood of an orderly and expeditious wind-down that will
mitigate the harm to their interests from the closing of the DCO.
Further, a viable plan for orderly wind-down should increase market
confidence, because clearing members and their customers would know
beforehand that the DCO is well prepared to undertake an orderly wind-
down, if necessary. Importantly, the proposed regulations should
enhance protection for a DCO's members and their customers by reducing
the likelihood that a DCO would fail to meet certain obligations to its
members and other market participants in orderly wind-down.
In consideration of section 15(a)(2)(B) of the CEA, with respect to
the efficiency, competitiveness, and financial integrity of markets,
plans for orderly wind-down (and for determining when orderly wind-down
might be necessary) would enhance financial integrity of markets, by
enhancing the likelihood that any wind-down would be orderly, and the
existence of these standards might enhance market participants
confidence in (and thus the competitiveness of) DCOs.
In consideration of section 15(a)(2)(D) of the CEA, the proposed
regulations would aid in sound risk management practices. The
requirement to maintain and submit to the Commission viable plans for
orderly wind-down provides greater clarity and transparency before
wind-down and facilitates timely decision-making and the continuation
of critical operations and services during orderly wind-down. Wind-down
planning--including, for example, considering the circumstances that
may trigger an orderly wind-down, the tools the DCO would implement to
help ensure an orderly wind-down (along with the likely effects on
clearing members and the financial markets from implementing such
tools), and the governance arrangements to guide decision-making during
a wind-down--also would strengthen the risk management practices of the
DCO by, among other things, identifying vulnerabilities that can be
mitigated and preparing for multiple exigencies. Having an orderly
wind-down plan in place, moreover, should allow the DCO to handle
exigencies in a manner that mitigates the risk of financial instability
or contagion. Moreover, in consideration of section 15(a)(2)(E), having
an orderly wind-down plan in place would promote the public interest.
However, section 15(a)(2)(C), price discovery, is not implicated by the
proposed amendments.
[[Page 49002]]
8. Notification Requirement for DCOs That Are Neither SIDCOs Nor
Subpart C DCOs of Pending Orderly Wind-Down--Sec. Sec. 39.19(k)(1)(b)
and 39.19(c)(4)(xxv)
The Commission is proposing in new Sec. 39.19(k)(1)(b) that DCOs
that are neither SIDCOs nor Subpart C DCOs have procedures in place for
informing the Commission and clearing members, as soon as practicable,
when orderly wind-down is pending, consistent with the requirements of
proposed new paragraph Sec. 39.19(c)(4)(xxv).\213\
---------------------------------------------------------------------------
\213\ Proposed new Sec. 39.19(c)(4)(xxv) would provide that
each DCO shall notify the Commission and clearing members as soon as
practicable when, among other things, orderly wind-down is pending.
---------------------------------------------------------------------------
i. Benefit
A DCO should notify the Commission as soon as practicable of a
pending orderly wind-down so that the Commission may promptly take
appropriate steps to monitor the wind-down process, and to protect the
interests of clearing members and other market participants. Likewise,
a DCO should notify its clearing members as soon as practicable as
well, so that they may promptly take steps to protect themselves
(including, e.g., by seeking to replace hedge positions). Such
information-sharing fosters market transparency, which can serve to
increase confidence and enhance market participants' abilities to
protect their own interests.
ii. Costs
DCOs should already have tools and procedures in place for
notifying the Commission and clearing members of other circumstances or
events triggering notification; Thus, the only costs involved would be
the effort involved in preparing to use these existing tools and
procedures to notify the Commission and clearing members when orderly
wind-down is pending (including testing), and, if and when necessary,
using them to make such notifications.
iii. Section 15(a) Factors
The proposed regulations should protect market participants and the
public under section 15(a)(2)(A) of the CEA, enhance efficiency,
competitiveness, and financial integrity of futures markets under
section 15(a)(2)(B) of the CEA, aid in sound risk management practices
under section 15(a)(2)(D) of the CEA, and promote the public interest
under section 15(a)(2)(E) of the CEA. Clearing members and their
customers cannot accurately evaluate the risks and costs associated
with using a DCO's services if they do not have sufficient information,
including when the DCO is no longer a going concern. A requirement that
clearing members be notified as soon as practicable of a pending
winding-down also allows market participants time to take action to
protect their own interests. Likewise, market participants can use a
DCO's services with the confidence that the DCO will not delay in
notifying them of a pending orderly wind-down, which should enhance
competitiveness. The requirement also reduces risk by providing DCO's
stakeholders sufficient notice to help ensure an orderly wind-down.
However, section 15(a)(2)(C), price discovery, is not implicated by the
proposed amendments.
9. Timing for DCOs' Submission of Recovery and Orderly Wind-Down
Plans--Sec. 39.19(c)(4)(xxiv)
Proposed Sec. 39.19(c)(4)(xxiv) would continue to require that a
DCO that is required to maintain recovery and orderly wind-down plans
pursuant to Sec. 39.39(b) shall submit its plans to the Commission no
later than the date the DCO is required to have the plans. It would add
an explicit requirement that those plans be accompanied by supporting
information, and would newly require that a DCO that is required to
maintain orderly wind-down plans pursuant to Sec. 39.13(k) shall
submit its plans and supporting information at the time it files its
application for registration under Sec. 39.3.\214\ The Commission is
proposing a deadline of six months from the effective date of the rule
(if adopted) for those DCOs currently registered with the Commission to
complete and submit the orderly wind-down plans and supporting
information. Moreover, this proposed rule would continue to require
that a SIDCO or Subpart C DCO, upon revising the plan(s), submit the
current (formerly, ``revised'') plan(s) to the Commission, along with a
description of any changes and the reason(s) for such changes. This
requirement would be new for other DCOs. The proposal would add
requirements that the plans, including any supporting information, must
be submitted at least annually.
---------------------------------------------------------------------------
\214\ As previously noted, for any DCO that submits (or has
submitted) an application for registration with the Commission
before the date that is six months after the effective date of this
rulemaking, if it is adopted, the Commission is proposing to require
that the DCO have until the date that is six months after the
effective date of this rulemaking to submit its orderly wind-down
plans.
---------------------------------------------------------------------------
i. Benefits
DCOs seeking registration with the Commission will promptly have
orderly wind-down plans and supporting information available upon
registration. Clearing members and potential customers, moreover, will
immediately benefit from orderly wind-down planning that has already
taken place. For those DCOs currently registered with the Commission,
the Commission believes six months is sufficient with respect to both
the time and resources necessary for orderly wind-down planning, and
takes into account the need to prepare promptly viable plans for
orderly wind-down, given that a disorderly wind-down poses risks to
clearing members and other financial market participants, and
potentially, in some cases, risk to the financial system, especially in
turbulent and uncertain market environments.
Requiring that current plans be submitted at least annually would
help to ensure that the plans available to the Commission for review
remain reasonably current (given the possibility that some minor
changes or updates to the plans may be considered as not meeting the
threshold of ``revisions''), thereby aiding the Commission's exercise
of its supervisory responsibilities both in its ongoing risk-based
examination program and in case of financial distress at the DCO.
As discussed above in Section IV, DCOs may, in some instances,
include supporting information within their plans, or may organize the
documentation with supporting information kept separately, e.g., as an
appendix or annex. Adding the term ``and supporting information'' would
have the benefit of ensuring that the Commission has timely access to
such supporting information.
ii. Costs
The Commission anticipates that the costs for DCOs to submit the
viable plans for orderly wind-down that they are otherwise required to
maintain would be limited to the cost of transmission using DCOs'
already established systems and procedures to submit documents to the
Commission. Similarly, re-submitting current plans with supporting
information should involve only the costs of gathering that information
together and transmitting it, as the information must be at hand in
order to plan adequately. As discussed above, some DCOs will already
have orderly wind-down plans in place; others may already have
considered at least some of the subjects and analyses as part of their
efforts to comply with the DCO Core Principles.
iii. Section 15(a) Factors
For the same reasons as previously noted above, the Commission
believes the proposed regulations would protect
[[Page 49003]]
market participants and the public under section 15(a)(2)(A) of the
CEA, enhance competitiveness of futures markets under section
15(a)(2)(B) of the CEA, and aid in sound risk management practices
under section 15(a)(2)(D) of the CEA. Ensuring the prompt availability
of viable plans for orderly wind down would reduce uncertainty in times
of market stress, increase market confidence, and provide assurance to
market participants and the public that DCOs are meeting minimum risk
standards. Likewise, orderly wind-down plans enhance protection for a
DCO's members and their customers. Having viable plans for orderly
wind-down already in place additionally provides greater clarity and
transparency before wind-down, assists the DCO in identifying
vulnerabilities and preparing for multiple exigencies, and facilitates
timely decision-making and the continuation of critical operations and
services during orderly wind-down. Given its benefits, the Commission
believes that new DCOs should have viable plans for orderly wind-down
in place at the time they seek registration and before market
participants come to rely upon them. The Commission has considered the
other section 15(a) factors and believes they are not implicated by the
proposed amendments.
10. Conforming Changes to Bankruptcy Provisions--Part 190.
Based upon the proposed requirement that all DCOs maintain viable
plans for orderly wind-down, the Commission is proposing several
conforming changes to Part 190's bankruptcy provisions. Specifically,
current Sec. 190.12(b)(1) would be amended so that a DCO in a Chapter
7 proceeding provide to the trustee copies of, among other things,
orderly wind-down plans it must maintain pursuant to new Sec. 39.13(k)
in addition to Sec. 39.39(b). Current Sec. 190.15(a) would be amended
so that the trustee not avoid or prohibit certain actions taken by the
DCO either reasonably within the scope of, or provided for in, any
orderly wind-down plains maintained by the DCO and filed with the
Commission pursuant to new Sec. 39.13(k) in addition to Sec. 39.39.
Current Sec. 190.15(c) would be amended so that the trustee act in
accordance with any orderly wind-down plans maintained by the debtor
and filed with the Commission pursuant to new Sec. 39.13(k) in
addition to Sec. 39.39 in administering the bankruptcy proceeding.
Current Sec. 190.19(b)(1) would be amended so that a shortfall in
certain funds be supplemented in accordance with orderly wind-down
plans maintained by the DCO pursuant to new Sec. 39.19(k) in addition
to Sec. 39.39.
i. Benefits
In promulgating the current Part 190 bankruptcy rules for DCOs in
2021, the Commission found that ``directing a trustee to implement the
DCO's own default rules and procedures, and recovery and orderly wind-
down plans, would benefit the estate by providing the trustee with a
menu of purpose-built rules, procedures and plans to liquidate a DCO,
which rules, procedures and plans the DCO has developed subject to the
requirements of the Commission's regulations and supervision of the
Commission. Adding concepts of reasonability and practicability will
give the trustee the discretion to modify those rules, procedures, and
plans where and to the extent appropriate.'' \215\ Adding the orderly
wind-down plans required under proposed Sec. 39.13(k) for DCOs other
than SIDCOs and Subpart C DCOs should further achieve these benefits,
by providing such a menu in an additional context, namely the
bankruptcy of these DCOs.
---------------------------------------------------------------------------
\215\ Bankruptcy Regulations, 86 FR 19324, 19412 (Apr. 13,
2021).
---------------------------------------------------------------------------
ii. Costs
The Commission does not anticipate additional costs from the
proposed regulations. The amendments are conforming changes so that the
orderly wind-down plan of a DCO that is neither a SIDCO nor a Subpart C
DCO is given the same weight as a SIDCO's or Subpart C DCO's orderly
wind-down plan would be given in bankruptcy.
iii. Section 15(a) Factors
The proposed regulations should enhance protection for market
participants and the public under section 15(a)(2)(A) of the CEA,
enhance the competitiveness and financial integrity of futures markets
under section 15(a)(2)(B) of the CEA, aid in sound risk management
practices under section 15(a)(2)(D) of the CEA, and promote the public
interest under section 15(a)(2)(E) of the CEA. The assurance that the
orderly wind-down plan, to the extent reasonable and practicable, and
consistent with the protection of customers, will be followed in a
bankruptcy proceeding should instill confidence in a DCO's clearing
members and customers, who can make certain decisions without fear that
a trustee will inappropriately diverge from the orderly wind-down plan
in bankruptcy. Moreover, market participants in general can be assured
that the DCO's pre-bankruptcy actions will not be voided by the
trustee; likewise, the DCO's clearing members and customers can
anticipate that a shortfall will be supplemented in the manner provided
for in the orderly wind-down plan. The Commission also believes that a
viable plan for orderly wind-down should also reduce the risk of
disorderly events in bankruptcy. All of these factors would also
promote the public interest. However, section 15(a)(2)(C), price
discovery, is not implicated by the proposed amendments.
11. Requests for Up to One Year To Comply With Sec. Sec. 39.34(d),
39.35, and 39.39(f)
Conforming to the approach of setting a six-month deadline
discussed in section VIII(D)(4) above, the Commission is proposing to
discontinue the process currently provided in subpart C pursuant to
which the Commission may grant, upon request of a SIDCO or DCO that is
electing to become subject to Subpart C, up to one year to comply with
Sec. Sec. 39.34, 39.35, and 39.39. The costs and benefits, and the
application of the CEA Section 15(a) factors, for this approach were
discussed there.
12. Amendments to Appendix A and Appendix B to Part 39
The Commission is proposing to amend Exhibit D to Form DCO. The
proposal would add a requirement to provide as Exhibit D-5, the DCO's
orderly wind-down plan, and a demonstration that the plan complies with
the requirements of Sec. 39.13(k).
This proposed change would implement the proposal to require the
submission of the orderly wind-down plan. The Commission has considered
the section 15(a) of the CEA factors and believes that they are not
implicated by the proposed change to Form DCO.
The Commission is also proposing to amend the ``General
Instructions'' and ``Elections and Certifications'' portions of the
Subpart C Election Form. The proposal would remove the sections of the
forms that reference requests for an extension of time to comply with
any of the provisions of Sec. Sec. 39.34, 39.35, and 39.39. Similarly,
the Commission is proposing to amend the requirements for Exhibit F-1
to call for the attachment of the applicant's recovery plan and orderly
wind-down plan, supporting information for these plans, and a
demonstration that the plans comply with Sec. 39.39(c).
These proposed changes would implement the proposal to delete the
provision for making such requests for
[[Page 49004]]
an extension of time, and the proposal to require the submission of the
plans. The Commission does not anticipate that these proposed changes
would impose any costs on SIDCOs or Subpart C DCOs. The Commission has
considered the factors called for in section 15(a) of the CEA and
believes that they are not implicated by the proposed changes to the
Subpart C Election Form.
List of Subjects
17 CFR Part 39
Default rules and procedures, Definitions, Reporting requirements,
Risk management, Recovery and Orderly wind-down, System safeguards.
17 CFR Part 190
Bankruptcy, Brokers, Reporting and recordkeeping requirements.
For the reasons stated in the preamble the Commodity Futures
Trading Commission proposes to amend 17 CFR Chapter I as follows:
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
1. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464;
15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July
21, 2010, 124 Stat. 1749.
0
2. Amend Sec. 39.2 by adding the definitions of ``Default losses,''
``Nondefault losses,'' ``Orderly wind-down or wind-down,'' and
``Recovery'' in alphabetical order to read as follows:
Sec. 39.2 Definitions.
* * * * *
Default losses means credit losses or liquidity shortfalls created
by the default of a clearing member in respect of its obligations with
respect to cleared transactions.
* * * * *
Non-default losses means losses from any cause, other than default
losses, that may threaten the derivative clearing organization's
viability as a going concern. These include, but are not limited to,
(1) any potential impairment of a 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) losses incurred by the derivatives clearing organization on
assets held in custody or on deposit in the event of a custodian's (or
subcustodian's or depository's) insolvency, negligence, fraud, poor
administration or inadequate record-keeping,
(3) losses incurred by the derivatives clearing organization from
diminution of the value of investments of its own or its participants'
resources, including cash or other collateral,
(4) losses from adverse judgments, or other losses, arising from
legal, regulatory, or contractual obligations, including damages or
penalties, and the possibility that contracts that the derivatives
clearing organization relies upon are wholly or partly unenforceable,
and
(5) losses occasioned by deficiencies in information systems or
internal processes, human errors, management failures, malicious
actions (whether by internal or external threat actors), disruptions to
services provided by third parties, or disruptions from internal or
external events that result in the reduction, deterioration, or
breakdown of services provided by the derivatives clearing
organization.
* * * * *
Orderly wind-down or wind-down means the actions of a derivatives
clearing organization to effect the permanent cessation, sale, or
transfer, of one or more of its critical operations or services, in a
manner that would not increase the risk of significant liquidity,
credit, or operational problems spreading among financial institutions
or markets and thereby threaten the stability of the U.S. financial
system.
* * * * *
Recovery means the actions of a derivatives clearing organization,
consistent with its rules, procedures, and other ex-ante contractual
arrangements, to address any uncovered credit loss, liquidity
shortfall, inadequacy of financial resources, 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 derivatives clearing organization's viability
as a going concern.
* * * * *
0
3. In 39.13, add and reserve paragraph (j), and add paragraph (k) to
read as follows:
Sec. 39.13 Risk management.
* * * * *
(j) [Reserved].
(k) Orderly wind-down plan. (1) Orderly wind-down plan required.
Each derivative clearing organization that is not a systemically
important derivatives clearing organization or a subpart C derivatives
clearing organization shall:
(i) Maintain and, consistent Sec. 39.19(c)(4)(xxiv), submit to the
Commission, a viable plan for orderly wind-down that may be
necessitated by default losses and by non-default losses, including
supporting information for that plan.
(ii) Have procedures for informing the Commission and clearing
members, as soon as practicable, when orderly wind-down is pending, and
shall notify the Commission and clearing members consistent with Sec.
39.19(c)(4)(xxv).
(2) Orderly wind-down plan description. The orderly wind-down plan
required by paragraph (k)(1) of this section shall include an overview
of the plan and a description of how the plan will be implemented. The
description of the plan shall include the identification and
description of the derivatives clearing organization's critical
operations and services, interconnections and interdependencies,
resilient staffing arrangements, stress scenario analyses, potential
triggers for consideration of implementing the orderly wind-down plan,
available wind-down tools, analyses of the effect of the tools on each
scenario, lists of agreements to be maintained during orderly wind-
down, and governance arrangements.
(i) Critical operations and services, interconnections and
interdependencies, and resilient staffing arrangements. The orderly
wind-down plan shall identify and describe the critical operations and
services the derivatives clearing organization provides to clearing
members and other financial market participants, the service providers
upon which the derivatives clearing organization relies to provide
these critical operations and services, including internal and external
service providers and ancillary services providers, financial and
operational interconnections and interdependencies, aggregate cost
estimates for the continuation of services during orderly wind-down,
plans for resilient staffing arrangements for continuity of operations,
obstacles to success of the orderly wind-down plan, plans to address
the risks associated with the failure of each critical operation and
service, and how the derivatives clearing organization will ensure that
each identified operation and service continues through orderly wind-
down.
(ii) Orderly wind-down triggers. The orderly wind-down plan shall
establish the criteria that may trigger consideration of implementation
of that plan, and the process the derivatives
[[Page 49005]]
clearing organization has in place for monitoring for events that may
trigger implementation of the plan.
(iii) Governance description. The orderly wind-down plan shall
include a description of the pre-determined information-sharing and
escalation process within the derivatives clearing organization's
senior management and the board of directors. The derivatives clearing
organization must have a defined process that will be used that will
include the factors the derivatives clearing organization considers
most important in guiding the board of directors' exercise of judgment
and discretion with respect to its orderly wind-down plan in light of
those triggers and that process.
(3) Orderly wind-down scenarios and tools. The orderly wind-down
plan shall:
(i) identify scenarios that may prevent the derivatives clearing
organization from meeting its obligations or providing critical
operations and services as a going concern;
(ii) describe the tools that the derivatives clearing organization
would expect to use in an orderly wind-down that comprehensively
address how the derivatives clearing organization would continue to
provide critical operations and services;
(iii) describe the order in which each such tool would be expected
to be used;
(iv) describe the governance and approval processes and
arrangements within the derivatives clearing organization for the use
of each of the tools available, including the exercise of any available
discretion;
(v) describe the processes to obtain any approvals external to
derivatives clearing organization (including any regulatory approvals)
that would be necessary to use each of the tools available, and the
steps that might be taken if such approval is not obtained;
(vi) establish the time frame within which each such tool could be
used;
(vii) set out the steps necessary to implement each such tool;
(viii) describe the roles and responsibilities of all parties in
the use of each such tool;
(ix) provide an assessment of the likelihood that the tools,
individually and taken together, would result in orderly wind-down; and
(x) provide an assessment of the associated risks from the use of
each such tool to non-defaulting clearing members and those clearing
members' customers with respect to transactions cleared on the
derivatives clearing organization, and linked financial market
infrastructures.
(4) Agreements to be maintained during orderly wind-down. The
derivatives clearing organization shall determine which of its
contracts, arrangements, agreements, and licenses associated with the
provision of its critical operations and services as a derivatives
clearing organization are subject to alteration or termination as a
result of implementation of the orderly wind-down plan. The orderly
wind-down plan shall describe the actions that the derivatives clearing
organization has taken to ensure that its critical operations and
services will continue during orderly wind-down, despite such potential
alteration or termination.
(5) Governance. The derivatives clearing organization's orderly
wind-down plan shall:
(i) Be formally approved, and annually reviewed, by the board of
directors;
(ii) Describe an effective governance structure that clearly
defines the responsibilities of the board of directors, board members,
senior executives and business units;
(iii) Describe the processes that the derivatives clearing
organization will use to guide its discretionary decision-making
relevant to the orderly wind-down plan; and
(iv) Describe the derivatives clearing organization's process for
identifying and managing the diversity of stakeholder views and any
conflict of interest between stakeholders and the derivatives clearing
organization.
(6) Testing. Each derivatives clearing organization's orderly wind-
down plan shall include procedures for testing the derivatives clearing
organization's ability to implement the tools that the orderly wind-
down plan relies upon. The orderly wind-down plan shall include the
types of testing that will be performed, to whom the findings of such
tests are reported, and the procedures for updating the orderly wind-
down plan in light of the findings resulting from such tests. Such
testing shall occur following any material change to the orderly wind-
down plan, but in any event not less than once annually, and the plan
shall be promptly updated in light of the findings resulting from such
testing.
* * * * *
0
4. In Sec. 39.19, revise paragraph (c)(4)(xxiv) and add paragraphs
(xxv) and (c)(5)(iii) to read as follows:
Sec. 39.19 Reporting.
* * * * *
(c) * * *
(4) * * *
(xxiv) A derivatives clearing organization that is required to
maintain recovery and orderly wind-down plans pursuant to Sec.
39.39(b) shall submit its plans and supporting information to the
Commission no later than the date on which the derivatives clearing
organization is required to have the plans. A derivatives clearing
organization that is required to maintain an orderly wind-down plan
pursuant to Sec. 39.13(k) shall submit its plan and supporting
information to the Commission at the time it files its application for
registration under Sec. 39.3. A derivatives clearing organization
shall, upon revising its recovery plan or orderly wind-down plan, but
in any event no less frequently than annually, submit the current
plan(s) and supporting information to the Commission, along with a
description of any changes and the reason(s) for such changes.
(xxv) Each derivatives clearing organization shall notify the
Commission and clearing members as soon as practicable when the
derivatives clearing organization has initiated its recovery or when
orderly wind-down is pending.
* * * * *
(5) * * *
(iii) Information for resolution planning. A systemically important
derivatives clearing organization or subpart C derivatives clearing
organization that submits information to the Commission pursuant to
Sec. 39.39(f)(2) shall update such information upon request.
* * * * *
0
5. In Sec. 39.34, remove and reserve paragraph (d) to read as follows:
Sec. 39.34 System safeguards for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
* * * * *
(d) [Reserved].
* * * * *
0
6. In Sec. 39.39, revise the section heading and paragraphs (a), (b),
(c), and (f) to read as follows:
Sec. 39.39 Recovery and orderly wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations; Information for resolution planning.
* * * * *
(a) Definitions. For the purposes of this section: Unencumbered
liquid financial assets include cash and highly liquid securities.
* * * * *
(b) Recovery plan and orderly wind-down plan. (1) Each systemically
[[Page 49006]]
important derivatives clearing organization and subpart C derivatives
clearing organization shall maintain and, consistent with Sec.
39.19(c)(4)(xxiv), submit to the Commission, viable plans for recovery
and orderly wind-down that may be necessitated, in each case, by
default losses and by non-default losses, including supporting
information for such plans.
(2) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall have procedures
for informing the Commission and clearing members, as soon as
practicable, when the recovery plan is initiated or orderly wind-down
is pending, and shall notify the Commission and clearing members
consistent with Sec. 39.19(c)(4)(xxv).
(3) Each systemically important derivatives clearing organization
shall file a recovery plan and (to the extent it has not already done
so) an orderly wind-down plan, and supporting information for these
plans, within 6 months of designation as systemically important by the
Financial Stability Oversight Council. Each derivatives clearing
organization electing to become subject to the provisions of Subpart C
of this chapter shall file a recovery plan and (to the extent it has
not already done so) an orderly wind-down plan, and supporting
information for these plans, as part of its election. Each recovery
plan and orderly wind-down plan shall be updated annually.
(c) Requirements for recovery plan and orderly wind-down plan. The
recovery plan and orderly wind-down plan required by paragraph (b) of
this section shall include an overview of each plan and a description
of how each plan will be implemented. The description of each plan
shall include the identification and description of the derivatives
clearing organization's critical operations and services,
interconnections and interdependencies, resilient staffing
arrangements, stress scenario analyses, potential triggers for recovery
and orderly wind-down, available recovery and wind-down tools, analyses
of the effect of the tools on each scenario, lists of agreements to be
maintained during recovery and orderly wind-down, and governance
arrangements.
(1) Critical operations and services, interconnections and
interdependencies, and resilient staffing arrangements. The recovery
plan and orderly wind-down plan shall identify and describe the
critical operations and services the derivatives clearing organization
provides to clearing members and other financial market participants,
the service providers upon which the derivatives clearing organization
relies to provide these critical operations and services, including
internal and external service providers and ancillary services
providers, financial and operational interconnections and
interdependencies, aggregate cost estimates for the continuation of
services during recovery and orderly wind-down, plans for resilient
staffing arrangements for continuity of operations, obstacles to
success of the recovery plan and orderly wind-down plan, plans to
address the risks associated with the failure of each critical
operation or service, and how the derivatives clearing organization
will ensure that each identified operation or service continues through
recovery and orderly wind-down.
(2) Recovery scenarios and analysis. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall identify scenarios that may prevent it from meeting
its obligations or providing its critical services as a going concern.
(i) For each scenario, the recovery plan shall provide an analysis
that includes:
(A) a description of the scenario;
(B) the events that are likely to trigger the scenario;
(C) the derivatives clearing organization's process for monitoring
for such events;
(D) the market conditions and other relevant circumstances that are
likely to result from the scenario;
(E) the potential financial and operational impact of the scenario
on the derivatives clearing organization and on its clearing members,
internal and external service providers and relevant affiliated
companies, both in an orderly market and in a disorderly market; and
(F) the specific steps the derivatives clearing organization would
expect to take when the scenario occurs, or appears likely to occur,
including, without limitation, any governance or other procedures that
may be necessary to implement the relevant recovery tools and to ensure
that such implementation occurs in sufficient time for the recovery
tools to achieve their intended effect.
(ii) The derivatives clearing organization's recovery plan
scenarios should also address the default risks and non-default risks
to which the derivatives clearing organization is exposed, and shall
include at least the scenarios listed in paragraphs (c)(2)(ii)(A)
through (K) of this section, to the extent such a scenario is possible
in light of the derivatives clearing organization's structure and
activities. For any scenario enumerated in paragraphs (c)(2)(ii)(A)
through (K) of this section that the derivatives clearing organization
determines is not possible in light of its structure and activities,
the derivatives clearing organization should document its reasoning.
(A) Credit losses or liquidity shortfalls created by single and
multiple clearing member defaults;
(B) Liquidity shortfall created by a combination of clearing member
default and a failure of a liquidity provider to perform;
(C) Settlement bank failure;
(D) Custodian or depository bank failure;
(E) Losses resulting from investment risk;
(F) Losses from poor business results;
(G) Financial effects from cybersecurity events;
(H) Fraud (internal, external, and/or actions of criminals or of
public enemies);
(I) Legal liabilities, including liabilities related to the
derivatives clearing organization's obligations with respect to cleared
transactions and those not specific to the derivatives clearing
organization's business as a derivatives clearing organization;
(J) Losses resulting from interconnections and interdependencies
among the derivatives clearing organization and its parent, affiliates,
and/or internal or third-party service providers; and
(K) Losses resulting from interconnections and interdependencies
with other derivatives clearing organizations.
(iii) The recovery plan shall also consider any combination of at
least two scenarios involving multiple failures (e.g., a member default
occurring simultaneously, or nearly so, with a failure of a service
provider) that, in the judgment of the derivatives clearing
organization, are particularly relevant to the derivatives clearing
organization's business. The derivatives clearing organization shall
document the reasons why the selected scenarios are particularly
relevant.
(3) Recovery and orderly wind-down triggers.
(i) A systemically important derivatives clearing organization's or
subpart C derivatives clearing organization's:
(A) recovery plan shall establish the criteria that may trigger
implementation or consideration of implementation of that plan, and the
process the derivatives clearing organization has in place for
monitoring for events that are
[[Page 49007]]
likely to trigger the scenarios identified in paragraph (c)(2) of this
section; and
(B) orderly wind-down plan shall establish the criteria that may
trigger consideration of implementation of that plan, and the process
the derivatives clearing organization has in place for monitoring for
events that may trigger implementation of the plan.
(ii) The recovery plan and orderly wind-down plan shall include a
description of the pre-determined information-sharing and escalation
process within the derivatives clearing organization's senior
management and the board of directors. The derivatives clearing
organization must have a defined governance process that will be used
that will include the factors the derivatives clearing organization
considers most important in guiding the board of directors' exercise of
judgment and discretion with respect to recovery and orderly wind-down
plans in light of those triggers and that process.
(4) Recovery tools. A derivatives clearing organization or subpart
C derivatives clearing organization shall have a recovery plan that
includes the following:
(i) a description of the tools that the derivatives clearing
organization would expect to use in each scenario required by paragraph
(b) of this section that meet the full scope of financial deficits the
derivatives clearing organization may need to remediate and
comprehensively address how the derivatives clearing organization would
continue to provide critical operations and services;
(ii) the order in which each such tool would be expected to be
used;
(iii) the time frame within which each such tool would be expected
to used;
(iv) a description of the governance and approval processes and
arrangements within the derivatives clearing organization for the use
of each of the tools available, including the exercise of any available
discretion;
(v) the processes to obtain any approvals external to the
derivatives clearing organization (including any regulatory approvals)
that would be necessary to use each of the tools available, and the
steps that might be taken if such approval is not obtained;
(vi) the steps necessary to implement each such tool;
(vii) a description of the roles and responsibilities of all
parties, including non-defaulting clearing members, in the use of each
such tool;
(viii) whether the tool is mandatory or voluntary;
(ix) an assessment of the likelihood that the tools, individually
and taken together, would result in recovery; and
(x) an assessment of the associated risks from the use of each such
tool to non-defaulting clearing members and those clearing members'
customers with respect to transactions cleared on the derivatives
clearing organization, linked financial market infrastructures, and the
financial system more broadly.
(5) Orderly wind-down scenarios and tools. Each systemically
important derivatives clearing organization and Subpart C derivatives
clearing organization shall:
(i) identify scenarios that may prevent it from meeting its
obligations or providing critical operations and services as a going
concern;
(ii) describe the tools that it would expect to use in an orderly
wind-down that comprehensively address how the derivatives clearing
organization would continue to provide critical operations and
services;
(iii) describe the order in which each such tool would be expected
to be used;
(iv) establish the time frame within which each such tool would be
expected to be used;
(v) describe the governance and approval processes and arrangements
within the derivatives clearing organization for the use of each of the
tools available, including the exercise of any available discretion;
(vi) describe the processes to obtain any approvals external to the
derivatives clearing organization (including any regulatory approvals)
that would be necessary to use each of the tools available, and the
steps that might be taken if such approval is not obtained;
(vii) set out the steps necessary to implement each such tool;
(viii) describe the roles and responsibilities of all parties,
including non-defaulting clearing members, in the use of each such
tool;
(ix) provide an assessment of the likelihood that the tools,
individually and taken together, would result in orderly wind-down; and
(x) provide an assessment of the associated risks from the use of
each such tool to non-defaulting clearing members and those clearing
members' customers with respect to transactions cleared on the
derivatives clearing organization, linked financial market
infrastructures, and the financial system more broadly.
(6) Agreements to be maintained during recovery and orderly wind-
down. A systemically important derivatives clearing organization and
subpart C derivatives clearing organization shall determine which of
its contracts, arrangements, agreements, and licenses associated with
the provision of its critical operations and services as a derivatives
clearing organization are subject to alteration or termination as a
result of implementation of the recovery plan or orderly wind-down
plan. The recovery plan and orderly wind-down plan shall describe the
actions that the derivatives clearing organization has taken to ensure
that its critical operations and services will continue during recovery
and orderly wind-down despite such alteration or termination.
(7) Governance. Each systemically important derivatives clearing
organization and Subpart C derivatives clearing organization's recovery
plan and orderly wind-down plan shall, in each case,
(i) Be formally approved, and annually reviewed, by the board of
directors;
(ii) Describe an effective governance structure that clearly
defines the responsibilities of the board of directors, board members,
senior executives, and business units;
(iii) Describe the processes that the derivatives clearing
organization will use to guide its discretionary decision-making
relevant to each plan; and
(iv) Describe the derivatives clearing organization's process for
identifying and managing the diversity of stakeholder views and any
conflict of interest between stakeholders and the derivatives clearing
organization.
(8) Testing. The recovery plan and orderly wind-down plan of each
systemically important derivatives clearing organization and Subpart C
derivatives clearing organization shall include procedures for testing
the viability of the recovery plan and orderly wind-down plan,
including testing of the derivatives clearing organization's ability to
implement the tools that each plan relies upon. The recovery plan and
the orderly wind-down plan shall include the types of testing that will
be performed, to whom the findings of such tests are reported, and the
procedures for updating the recovery plan and orderly wind-down plan in
light of the findings resulting from such tests. A systemically
important derivatives clearing organization and Subpart C derivatives
clearing organization shall conduct the testing described in this
paragraph with the participation of their clearing members, where the
plan depends on their participation, and the derivatives clearing
organization shall consider including external stakeholders that the
plan relies upon, such as service providers, to the extent practicable
and appropriate. Such testing shall occur following any material change
to the recovery plan or orderly wind-down plan, but in any event not
less than once
[[Page 49008]]
annually, and the plan shall be promptly updated in light of the
findings resulting from such testing.
* * * * *
(f) Information for resolution planning. To the extent not already
provided pursuant to paragraph (b) of this section, or required by
Sec. 39.19, a systemically important derivatives clearing organization
or subpart C derivatives clearing organization shall maintain
information systems and controls that are designed to enable the
derivatives clearing organization to provide data and information
electronically, as requested by the Commission for purposes of
resolution planning and during resolution under Title II of the Dodd-
Frank Act, and shall provide such information and data in the form and
manner specified by the Commission. This includes the following:
(1) Information regarding the derivatives clearing organization's
organizational structure and corporate structure, activities, governing
documents and arrangements, rights and powers of shareholders, and
committee members and their responsibilities.
(2) Information concerning clearing members, including (for both
house and customer accounts) information regarding collateral,
variation margin, and contributions to default and guaranty funds.
(3) Arrangements and agreements with other derivatives clearing
organizations, including offset and cross-margin arrangements.
(4) Off-balance sheet obligations or contingent liabilities, and
obligations to creditors, shareholders, or affiliates not otherwise
reported under part 39.
(5) Information regarding interconnections and interdependencies
with internal and external service providers, licensors, and licensees,
including information regarding services provided by or to affiliates
and other third parties and related agreements.
(6) Information concerning critical personnel.
(7) Any other information deemed appropriate to plan for resolution
under Title II of the Dodd-Frank Wall Street Reform and Consumer
Protection Act.
0
7. Revise Appendix A to Part 39--Form DCO Derivatives Clearing
Organization Application for Registration to read as follows:
BILLING CODE 6351-01-P
[[Page 49009]]
[GRAPHIC] [TIFF OMITTED] TP28JY23.000
[[Page 49010]]
[GRAPHIC] [TIFF OMITTED] TP28JY23.001
[[Page 49011]]
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[[Page 49012]]
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[[Page 49019]]
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[[Page 49024]]
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[[Page 49025]]
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[[Page 49037]]
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[[Page 49038]]
[GRAPHIC] [TIFF OMITTED] TP28JY23.029
0
8. Revise Appendix B to part 39--Subpart C Election Form to read as
follows:
[[Page 49039]]
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[[Page 49040]]
[GRAPHIC] [TIFF OMITTED] TP28JY23.031
[[Page 49041]]
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[[Page 49042]]
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[[Page 49043]]
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[GRAPHIC] [TIFF OMITTED] TP28JY23.036
[[Page 49046]]
[GRAPHIC] [TIFF OMITTED] TP28JY23.037
BILLING CODE 6351-01-C
PART 190--BANKRUPTCY RULES
0
9. The authority citation for part 190 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6c, 6d, 6g, 7a-1, 12, 12a, 19 and 24;
11 U.S.C. 362, 546, 548, 556, and 761-767, unless otherwise noted.
0
10. In Sec. 190.12, revise paragraph (b)(1) to read as follows:
Sec. 190.12 Required reports and records.
* * * * *
(b) * * *
(1) As soon as practicable following the commencement of a
proceeding that is subject to this subpart and in any event no later
than three hours following the later of the commencement of such
proceeding or the appointment of the trustee, the debtor shall provide
to the trustee copies of each of the most recent reports that the
debtor was required to file with the Commission under Sec. 39.19(c) of
this chapter, including copies of any reports required under Sec. Sec.
39.19(c)(2), (3), and (4) of this chapter (including the most up-to-
date version of any recovery and orderly wind-down plans of the debtor
maintained pursuant to Sec. 39.13(k) or Sec. 39.39(b) of this
chapter) that the debtor filed with the Commission during the preceding
12 months.
* * * * *
0
11. In Sec. 190.15, revise paragraphs (a) and (c) to read as follows:
Sec. 190.15 Recovery and wind-down plans; default rules and
procedures.
(a) Prohibition on avoidance of actions taken pursuant to recovery
and orderly wind-down plans. Subject to the provisions of section 766
of the Bankruptcy Code and Sec. Sec. 190.13 and 190.18, the trustee
shall not avoid or prohibit any action taken by a debtor subject to
this subpart that was reasonably within the scope of, and was provided
for, in any recovery and orderly wind-down plans maintained by the
debtor pursuant to Sec. 39.13(k) or Sec. 39.39(b) of this chapter and
filed with the Commission pursuant to Sec. 39.19 of this chapter.
* * * * *
(c) Implementation of recovery and orderly wind-down plans. In
administering a proceeding under this subpart, the trustee shall, in
consultation with the Commission, take actions in accordance with any
recovery and orderly wind-down plans maintained by the debtor pursuant
to Sec. 39.13(k) or Sec. 39.39(b) of this chapter and filed with the
Commission pursuant to Sec. 39.19 of this chapter, to the extent
reasonable and practicable, and consistent with the protection of
customers.
* * * * *
0
12. In Sec. 190.19, revise paragraph (b)(1) to read as follows:
Sec. 190.19 Support of daily settlement.
* * * * *
(b) * * *
(1) Such funds shall be supplemented with the property described in
paragraphs (b)(1)(i) through (iv) of this section, as applicable, to
the extent necessary to meet the shortfall, in accordance with the
derivatives clearing organization's default rules and procedures
adopted pursuant to Sec. 39.16 and, as applicable, Sec. 39.35 of this
chapter, and (with respect to paragraph (b)(1)(ii) of this section) any
recovery and orderly wind-down plans maintained pursuant to Sec.
39.13(k) or
[[Page 49047]]
Sec. 39.39(b) of this chapter and submitted pursuant to Sec. 39.19 of
this chapter. Such funds shall be included as member property and
customer property other than member property in the proportion
described in paragraph (a) of this section, and shall be distributed
promptly to members' house accounts and members' customer accounts
which accounts are entitled to payment of such funds as part of that
daily settlement.
* * * * *
Issued in Washington, DC, on July 3, 2023 by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Derivatives Clearing Organizations Recovery and Orderly
Wind-Down Plans; Information for Resolution Planning--Voting Summary
and Chairman's and Commissioners' Statements
Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson and
Goldsmith Romero voted in the affirmative. Commissioner Pham voted
to concur. Commissioner Mersinger voted in the negative.
Appendix 2--Statement of Support of Chairman Rostin Behnam
As a fundamental pillar of global financial reform efforts and
our most universally effective tool in the box, central clearing
reduces risks, fosters resiliency, and builds continuity and
confidence in financial markets. The global implementation of the
central clearing mandate has produced a significant demand for
clearing services and a substantial increase in overall clearing
volumes in the swaps market. However, clearing is not without risk.
Policymakers, both bank and market regulators, must take the
necessary steps to ensure that clearinghouses are not simply
commercially viable, but can continue to operate and provide
critical services as expected, even in times of extreme market
stress.
Today, the Commission considered a proposed rule to amend the
requirements related to recovery and orderly wind-down and
resolution planning for Derivatives Clearing Organizations (DCOs)
that have been designated as systemically important (SIDCOs) as well
as other DCOs that elect to comply with DCO core principles by
satisfying the higher standards for SIDCOs--referred to as ``Subpart
C DCOs.'' At a high level, the proposal would codify and expand
existing staff guidance,\1\ as well as propose to specify the types
of information that a SIDCO or Subpart C DCO may be required to
provide to the Commission to share with the FDIC for resolution
planning. Building on the themes of risk management, resilience and
contingency planning, this proposal aims to build consistency,
awareness, and preparedness across SIDCOs and Subpart C DCOs by
providing greater predictability should an unlikely event occur that
prevents a DCO from being able to meet its obligations, provide
critical services to its members, or if a DCO ultimately needs to
wind-down operations in an orderly manner. That is why I fully
support the proposal.
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\1\ See CFTC Letter No. 16-61, Recovery Plans and Wind-down
Plans Maintained by Derivatives Clearing Organizations and Tools for
the Recovery and Orderly Wind-down of Derivatives Clearing
Organizations (July 21, 2016), available at https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=16-61&field_csl_letter_types_target_id%5B%5D=711&field_csl_letter_year_value=.
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Today's proposal would set forth in Commission regulation an
expectation that SIDCOs and Subpart C DCOs, as financial market
infrastructures, have comprehensive and effective recovery plans and
orderly wind-down plans. These plans would analyze the services that
clearing members and others rely upon the DCOs to provide, as well
as the necessary services that others provide to the DCOs. DCOs
would also be required to consider, as part of their planning
process, a thorough set of scenarios that might potentially create
losses that challenge their ability to provide their critical
operations and services. Some scenarios that we specify may not be
applicable to every DCO, and the proposal notes scenarios are to be
considered to the extent they are possible in light of the DCO's
structure and activities. However, the proposal, reiterating
existing guidance, cautions DCOs considering whether a scenario is
possible to avoid confusing ``low risk'' with ``zero risk.'' There
is a difference. A low risk scenario, which is remotely possible,
must be addressed by the plans whereas a scenario that is not
possible would not. It is critical that scenario analyses and, in
turn, the preparation of recovery and orderly wind-down plans occur
during business-as-usual operations, and not during times of stress,
in order to ensure thorough preparation and planning.
I have remarked before, among the many lessons learned from the
2008 financial crisis, the interconnectedness of our global
financial system is one of, if not the single, most important. All
risk analyses must include a holistic examination of the systemic
relationships throughout all of our financial markets. The proposal
would require a SIDCO and Subpart C DCO to identify its financial
and operational interconnections and interdependencies, plans for
resilient staffing arrangements, governance structure, and any
contracts or agreements subject to alteration in the event of
orderly wind-down. The proposal also requires each SIDCO and Subpart
C DCO to assess the full range of options for recovery and orderly
wind-down, to test the plans, and to notify clearing members when
recovery or wind-down is initiated.
In light of recent market events, the proposal approved by the
Commission would require all DCOs, not just SIDCOs and Subpart C
DCOs, to submit viable plans for orderly wind-down. The wind-down
plan requirements for non-SIDCOs that are not Subpart C DCOs are
similar in that the plan must identify scenarios, triggers, and
available tools.
Finally, the proposal expands on existing regulation requiring
SIDCOs and Subpart C DCOs to have procedures in place for providing
the Commission with information needed for resolution planning. In
the spirit of regulatory transparency, this proposal identifies
categories of information that a SIDCO or Subpart C DCO would be
required to provide to the Commission for such planning.
I look forward to the public's submission of comments and
feedback on this proposed rulemaking.
Appendix 3--Statement of Commissioner Kristin N. Johnson
Derivatives clearing organizations (DCOs) play a significant
role in our markets by providing essential clearing and settlement
market infrastructure. As intermediaries, these firms serve a
fundamental role in creating stability. DCOs face substantial risks
including custody, credit, and liquidity risk; general business,
operational, and legal risks; as well as the risk of clearing member
defaults. Such risks may pose a threat to a DCO's continuity of
operations, as well as its clearing members and the broader
financial system.
During periods of stress, DCOs provide services that are crucial
for continuity in the financial markets they serve. Given the
significance of DCOs in our markets, a liquidity or solvency crisis
event at a DCO may trigger effects that have far-reaching
consequences throughout the entire financial system. Recovery and
wind-down plans are critical to prevent losses across our markets
and any knock-on effects or spill over into other markets. It is
essential that DCOs have recovery and orderly wind-down plans to
prevent significant market disruption throughout our financial
system.
I support the Commission's consideration of the proposed
regulations on recovery and orderly wind-down plans for DCOs. The
proposed rule addresses the longstanding need for DCOs to have wind-
down plans. While the Commission has previously taken appropriate
steps to introduce recovery and orderly wind-down plans for DCOs
deemed systemically important in the aftermath of the 2008 Financial
Crisis, evidence suggests the need to ensure the integrity of not
only the largest DCOs, but all DCOs. In addition, the proposal
provides for an important update to Commission regulations for DCOs
including codification of staff guidance 16-61 and incorporation of
international guidance on recovery and resolution planning issued
since 2013.\1\ The implementation of these proposed regulations
would operate to support the strength and continuity of all DCOs as
[[Page 49048]]
instructed by the reforms established in the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank).\2\
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\1\ Commodity Futures Trading Commission, Notice of Proposed
Rulemaking on Derivatives Clearing Organizations Recovery and
Orderly Wind-down Plans; Information for Resolution Planning, p. 5-6
(Jun. 7, 2023), https://www.cftc.gov/media/8711/votingdraft060723_17CFRPart39b/download (hereinafter ``NPRM on DCO
Recovery and Orderly Wind-down Plans'').
\2\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
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The History and Development of Sec. 39.39 Recovery and Wind-Down
Regulations
I. Legislative and Regulatory History
In 2010, Congress passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd Frank Act'') establishing a clearing
framework for over-the-counter derivatives, including swaps.\3\ The
Dodd Frank Act introduced statutory authority for the Commission to
promulgate regulations governing DCOs. Title VII of the Dodd-Frank
Act sets out eighteen core principles for DCOs (DCO Core
Principles), with which DCOs must comply in order to register and
maintain registration with the Commission.\4\ The DCO Core
Principles ``serve to reduce risk, increase transparency, and
promote market integrity within the financial system.'' \5\ In
conjunction with section 8a(5) of the Commodity Exchange Act (CEA),
Title VII grants the Commission authority to promulgate regulation
as necessary to implement and enforce the DCO Core Principles.\6\ In
2011, the Commission adopted regulations to implement Title VII of
Dodd-Frank.\7\ These regulations created regulatory standards for
compliance with DCO Core Principles.\8\ Among the many regulations
adopted was Part 39, including DCO Core Principle D--Risk
Management.\9\ Core Principle D requires DCOs to have policies and
procedures in place that ensure the DCO will be able to manage the
risks associated with discharging its responsibilities.\10\
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\3\ Derivatives Clearing Organizations and International
Standards, 78 FR 72,475, 72,476 (Dec. 12, 2013) (codified in 17 CFR
pt. 39) (hereinafter ``2013 DCOs Rule Release'').
\4\ 7 U.S.C. 7a-1(c)(2).
\5\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 4.
\6\ 7 U.S.C. 7a-1(c)(2)(A)(i); 7 U.S.C. 12a(5).
\7\ Derivatives Clearing Organizations General Provisions and
Core Principles, 76 FR 69,333 (Nov. 8, 2011) (codified in 17 CFR
pts. 1, 21, 29, and 140) (hereinafter ``2011 DCOs Core Principles
Release'').
\8\ 2011 DCOs Core Principles Release at 69,335.
\9\ Id. at 69,362.
\10\ 7 U.S.C. 7a-1(c)(2)(D).
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Title VIII of the Dodd-Frank Act introduced a collaborative,
multi-agency framework for regulating systemically important
financial market utilities (FMUs) providing payment, clearing, and
settlement activities.\11\ Specifically, section 804 of the Dodd-
Frank Act provides the Financial Stability Oversight Council (FSOC)
with the authority to designate certain FMUs as systemically
important.\12\ This includes the ability to designate DCOs as
systemically important (SIDCOs). In 2012, FSOC designated two CFTC-
registered DCOs as SIDCOs.\13\
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\11\ Section 805 of the Dodd-Frank Act, 12 U.S.C. 5464.
\12\ Section 804 of the Dodd-Frank Act, 12 U.S.C. 5463.
\13\ 2013 DCOs Final Rule Release at 72,477.
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In addition to establishing a multi-agency regulatory framework,
Title VIII created standards for SIDCOs for risk mitigation.\14\ The
objectives and principles for risk management at SIDCOs include (1)
promoting risk management; (2) promoting safety and soundness; (3)
reducing systemic risks; and (4) supporting the stability of the
broader financial system.\15\ The risks that DCOs face may not only
threaten the viability and strength of a DCOs operations, but also
may threaten clearing members of DCOs and the broader financial
system. Such risks include credit and liquidity risk by both the DCO
itself and its clearing members as well as other general business,
operational, custody, investment, and legal risks.\16\ All of these
risks could result in financial failures of DCOs. Disorderly failure
\17\ of DCOs--in particular SIDCOs--would likely cause significant
disruption to our financial markets.\18\ This systemic risk results
in a necessity for DCOs to have viable plans for recovery and
orderly wind-down during times of significant stress or in the event
of failure.
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\14\ Enhanced Risk Management Standards for Systemically
Important Derivatives Clearing Organizations, 78 FR 49,663, 49,665
(Aug. 15, 2023) (codified in 17 CFR pt. 39) (hereinafter ``2013
SIDCOs Final Rule Release'').
\15\ Section 805 of the Dodd-Frank Act, 12 U.S.C. 5464(b). As
outlined in section 805(c), these standards may address such areas
as: (1) Risk management policies and procedures; (2) margin and
collateral requirements; (3) participant or counterparty default
policies and procedures; (4) the ability to complete timely clearing
and settlement of financial transactions; (5) capital and financial
resources requirements for designated [FMUs]; and (6) other areas
that are necessary to achieve the objectives and principles in
[section 805](b). 2013 SIDCO Final Rule Release at 49,665 (quoting
12 U.S.C. 5464(C)).
\16\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 5.
\17\ While not formally defined in Dodd-Frank, ``disorderly
failure'' typically refers to a significant disruption to a
financial institution without a plan for recovery or wind-down that
results in the inability of the institution to maintain ongoing
viability that cause detrimental impacts to customers, clients,
related entities, and the broader financial system.
\18\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 5.
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Title VIII of the Dodd-Frank Act also directs the Commission to
consider prudential requirements and international standards when
promulgating risk management regulations that govern operations
relating to payment, clearing, and settlement activities for
SIDCOs.\19\ In 2013, the Commission considered international
standards relevant to risk management of SIDCOs as required under
section 805(a)(2)(A).\20\ At that time, the Commission determined
the most relevant international standards were the Principles for
Financial Market Infrastructure (PFMIs) established by the Bank for
International Settlements (BIS) and the International Organization
of Securities Commissions (IOSCO).\21\ The PFMIs are a ``unified set
of international risk management standards for central
counterparties'' (CCPs) that facilitate clearing and settlement.\22\
They set out a list of twenty-four principles that seek to address
the numerous risks faced by CCPs.\23\
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\19\ 2013 SIDCO Final Rule Release at 49,665.
\20\ See 2013 SIDCO Final Rule Release.
\21\ 2013 SIDCO Final Rule Release at 49,666.
\22\ Id.
\23\ Id.
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Later in 2013, the Commission implemented the Part 39
regulations setting out broad rules for recovery, wind-down, and
resolution planning for SIDCOs and Subpart C DCOs.\24\ In adopting
these wind-down and recovery regulations, the Commission considered
PFMI Principles 3 and 15.\25\ PFMI Principle 3 calls for a framework
for the comprehensive management of risks including legal, credit,
liquidity, business, and operational risks.\26\ PFMI Principle 15
covers general business risk and calls for a CCPs to identify,
monitor, and manage general business risk.\27\ The Commission
determined that although there is no DCO Core Principle that
directly calls for DCOs to establish recovery and wind-down plans,
DCO Core Principles B (financial resources), D (risk management), G
(default rules and procedures), and I (system safeguards), as well
as PFMI Principles 3 and 15, collectively support the need for DCOs
to create policies and procedures that identify scenarios that may
prevent a SIDCO or Subpart C DCO ``from providing critical
operations and services as a going concern and would assess the
effectiveness of a full range of options for recovery and wind-
down.'' \28\ In light of this determination, the Commission adopted
Regulation 39.39 which requires SIDCOs and Subpart C DCOs ``to
maintain viable plans for recovery and orderly wind-down.'' \29\
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\24\ 2013 DCOs Final Rule Release at 72,494. In 2013, the
Commission also adopted regulations to allow registered DCOs that
are not designated as SIDCOs to elect to become subject to the
provisions of Subpart C of part 39 of the Commission's regulations.
Those DCOs that make the election are referred to as Subpart C DCOs.
In making this election, Subpart C DCOs voluntarily agree to operate
in compliance with and be subject to review for compliance with
PFMIs and other heightened standards for SIDCOs. See 2013 DCOs Final
Rule Release at 72,479.
\25\ 2013 DCOs Final Rule Release at 72,495.
\26\ Id. at 72,478.
\27\ Id. at 72,495.
\28\ Id.
\29\ Id.
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II. CFTC Letter 16-61 and International Standards
At the time the Commission adopted Regulation 39.39, there was
no specific international guidance on wind-down and recovery
planning. In 2014, the Committee on Payments and Market
Infrastructures (CPMI) with IOSCO issued guidance for FMIs and
governing authorities on development of recovery plans (2014 CPMI-
IOSCO Recovery Guidance).\30\ The guidance considered and
interpreted key principles relevant to recovery planning, including
PFMI Principles 3 and 15.\31\ Further, the report provided guidance
on the recovery planning
[[Page 49049]]
process, contents of recovery plans, and recovery tools to be used
by FMIs.\32\
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\30\ CPMI-IOSCO, Recovery of financial market infrastructures
(Oct. 15, 2014) (hereinafter ``2014 CPMI-IOSCO Recovery Guidance'').
\31\ 2014 CPMI-IOSCO Recovery Guidance.
\32\ 2014 CPMI-IOSCO Recovery Guidance.
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In 2016, in light of 2014 CPMI-IOSCO Recovery Guidance, the
staff of the Commission's Division of Clearing and Risk (DCR) issued
Letter 16-61 to provide additional details on the subjects and
analyses that SIDCOs and Subpart C DCOs should include in their
wind-down plans.\33\ The letter provided a list of subjects DCR
believed SIDCOs and Subpart C DCOs should analyze and include in
their recovery and wind-down plans including such as inclusion of
particular tools to be used in recovery and wind-down.\34\
Specifically, the guidance provided a list of specific scenarios to
be evaluated and set out a framework for how to identify, monitor
for, and analyze the scenario and include such information in
recovery plans.\35\ Further, the guidance suggested a framework for
how to identify, implement, and analyze recovery tools in such
scenarios and how to incorporate it into recovery plans.\36\
Finally, the guidance also provided a framework for including
processes for wind-down options in the event of a failure or
inability to successfully implement a recovery plan.\37\
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\33\ CFTC Letter No. 16-61 (July 21, 2016).
\34\ Id.
\35\ Id. at 5.
\36\ Id. at 7.
\37\ Id. at 9.
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In 2017, CPMI and IOSCO issued further guidance that updated the
2014 CPMI-IOSCO Recovery Guidance.\38\ The guidance sought to
clarify, among other things, how to implement recovery plans,
replenish financial resources, and transparency in recovery
tools.\39\ Further, in 2017, the Financial Stability Board issued
guidance regarding CCP resolution planning that included
recommendations for resolution authorities about continuity of
critical functions and implementation of crisis management groups,
and development of resolution plans.\40\ Most recently, in August
2022, CPMI and IOSCO published a discussion paper on CCP practices
to address non-default loses which included a discussion of annual
testing and review of a CCP's recovery plan.\41\
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\38\ CPMI-IOSCO, Recovery of financial market infrastructures
(July 5, 2017) (hereinafter ``2017 CPMI-IOSCO Recovery Guidance'').
\39\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 15.
\40\ Id. (citing FSB, Guidance on Central Counterparty
Resolution and Resolution Planning (July 5, 2017) (hereinafter
``2017 FSB Resolution Guidance'')).
\41\ Id. at 16 (citing CPMI-IOSCO, A discussion paper on central
counterparty practices to address non-default loses (Aug. 4, 2022)).
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Recovery and Orderly Wind-Down Planning
Recovery planning is essential to DCO risk management and
provides a mechanism to consider risk scenarios and their potential
scope of impact, as well as evaluate specific tools, steps, and
contingency plans. Recovery plans provide well-established and well-
tested actionable steps that may address exigent and extreme
circumstances that may threaten the viability of DCOs. An
anticipated scenario with a thoughtful corresponding recovery plan
provides for a DCO to have an efficient and effective recovery
``such that it can continue to provide its critical services'' even
while its viability may be threatened.\42\ Additionally, recovery
plans provides stability, certainty, and clarity for a DCO's
clearing members and clients and may reduce the potential for panic
and contagion. The reduction of stress and uncertainty as a result
of advance recovery planning results in optimized, efficient, and
effective recovery actions. Recovery planning is globally recognized
as essential for market stability, and post-financial crisis reforms
emphasize this understanding. As stated by CMPI-IOSCO in 2014:
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\42\ Id. at 17.
`Recovery' concerns the ability of an FMI to recover from a threat
to its viability and financial strength so that it can continue to
provide its critical services without requiring the use of
resolution powers by authorities. Recovery therefore takes place in
the shadow of resolution.\43\
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\43\ 2014 CPMI-IOSCO Recovery Guidance.
When recovery is not a viable option or where the execution of a
recovery plan is ineffective, it is critical to financial stability
for FMIs to have orderly resolution plans. Title II of the Dodd-
Frank Act established the Orderly Liquidation Authority, an
alternative framework and process to bankruptcy to efficiently and
expeditiously wind-down financial institutions.\44\ Title II
establishes the Federal Deposit Insurance Corporation (FDIC) as the
receiver for failing financial institutions designated as
systematically important, like SIDCOs.\45\ Effective wind-down plans
provide the benefit of well-considered strategic planning for wind-
down in advance of any viability threatening event that can be
shared with the FDIC in an instance of insolvency. Wind-down plans
facilitate the efficient transition of a SIDCO into FDIC
receivership. Orderly wind-down procedures enhance financial market
stability by minimizing the fallout of financial instability and
ultimately minimize systemic risk.
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\44\ Section 204(b) of the Dodd-Frank Act (codified at 12 U.S.C.
5384(b)).
\45\ See 12 U.S.C. 5384(b).
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Amendments to Part 39
Today, the Commission--in consultation with the FDIC, the Board
of Governors of the Federal Reserve System, and the Securities and
Exchange Commission (SEC)--takes the next step in recovery and wind-
down planning for DCOs by proposing amendments that encompass all
DCOs and provide clarity and specificity on the quality of such
plans. We recognize that the failure of any DCO, not just those
deemed systemically important, might result in significant market
disruption. As such, the proposed regulations seek to provide
important clarity and consistency for not only SIDCOs and Subpart C
DCOs, but all DCOs. This NPRM codifies and expands upon DCR's 16-61
Letter and incorporates international guidance on recovery and
resolution planning issued since 2013. The DCR staff has
thoughtfully crafted proposed rules which will guide SIDCOs, Subpart
C DCOs, and all other DCOs in updating or crafting wind-down plans
and, in some instances, recovery plans.
Currently, Regulation 39.39 only applies to SIDCOs and Subpart C
DCOs. It requires these DCOs ``to maintain viable plans for recovery
and orderly wind-down.'' \46\ The regulation specifies that in
developing such plans, SIDCOs and Subpart C DCOs must identify
scenarios which may prevent the DCO from meeting its obligations,
providing its critical operations and services, and assess options
for recovery and wind-down.\47\ The wind-down plan must include
procedures to timely notify the Commission when a recovery plan is
initiated or a wind-down plan is pending as well as procedures for
providing both the Commission and FDIC with necessary information
for resolution planning.\48\ Section 39 also requires the plans to
be supported with financial resources sufficient to implement such
plans.\49\ SIDCOs and Subpart C DCOs must also maintain viable plans
for raising additional financial resources, including capital, which
must be approved by the DCO's board of directors and regularly
updated.\50\ For non-SIDCOs and non-Subpart C DCOs, no regulation
currently requires them create and maintain recovery or wind-down
plans.\51\
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\46\ 2013 DCOs Final Rule Release at 72,495; 17 CFR 39.39(b).
\47\ 17 CFR 39.39(c)(1).
\48\ 17 CFR 39.39(c)(2).
\49\ 17 CFR 39.39(d).
\50\ 17 CFR 39.39(e).
\51\ NPRM on DCO Recovery and Orderly Wind-down Plans, p. 13.
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To align part 39 with CFTC Letter No. 16-61 and international
standards, the Commission proposes to require all DCOs to create,
maintain, and submit to the Commission plans for orderly wind-down
substantially similar to those currently required for SIDCOs and
Subpart C DCOs.\52\ Additionally, the Commission proposes to amend
Regulation 39.39 for SIDCOs and Subpart C DCOs to include eight
specific sections in their wind-down and recovery plans:
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\52\ Proposed Sec. 39.13(k); NPRM on DCO Recovery and Orderly
Wind-down Plans, p. 18-19.
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1. Identify and describe critical operations and services,
interconnections and interdependencies, and agreements and plans to
address the risks associated with each.\53\
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\53\ Proposed Sec. 39.39(c)(1).
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2. Conduct a six-part analysis for each recovery scenario,
including for commonly applicable scenarios like settlement or
custodian bank failure and scenarios resulting from investment risk,
poor business results, fraud, legal liabilities, and losses
resulting from interconnectedness and interdependencies.\54\
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\54\ Proposed Sec. 39.39(c)(2).
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3. Discuss criteria that may trigger consideration or
implementation of the recovery plan, describes a plan for monitoring
events that are likely trigger the recovery plan, and includes a
description of information-sharing and escalation processes
[[Page 49050]]
with the DCO's senior management and board.\55\
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\55\ Proposed Sec. 39.39(c)(3).
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4. Describe recovery tools, the order in which they will be
used, the time frame for use of each tool, governance and approvals
to execute the tools, necessary steps to implement the tools,
whether a tool is mandatory or voluntary, and an assessment of the
risks associated with each tool.\56\
---------------------------------------------------------------------------
\56\ Proposed Sec. 39.39(c)(4).
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5. Identify and describe scenarios that would prevent the DCO
from meeting its obligations and tools that may be used in the
orderly wind-down.\57\
---------------------------------------------------------------------------
\57\ Proposed Sec. 39.39(c)(5).
---------------------------------------------------------------------------
6. Determine the agreements, arrangements, and licenses that are
subject to change or termination as a result of activation of a
recovery or wind-down plan and describe actions the DCO will take to
ensure continuity of operations and services during recovery and
wind-down despite alteration or termination.\58\
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\58\ Proposed Sec. 39.39(c)(6).
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7. Include a requirement for an annual review and formal
approval by the board of directors and describe the governance
structure that defines the responsibilities of board members, senior
executives, and business units. Must also include description of the
decision-making process.\59\
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\59\ Proposed Sec. 39.39(c)(7).
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8. Describe procedures for testing of viability plans and tools.
The description must describe the types of testing and the
procedures for updating the plans in light of findings from test
results. The testing must be conducted with participation of
clearing members.\60\
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\60\ Proposed Sec. 39.39(c)(8).
---------------------------------------------------------------------------
The other proposed amendments for Part 39 include updates to
definitions to apply generally to all DCOs, establishing a fixed
deadline to develop and file recovery and wind-down plans, requiring
DCOs to provide certain information directly to the Commission to be
shared with the FDIC \61\ as well as information upon request, and
updating the Subpart C election forms.
---------------------------------------------------------------------------
\61\ This includes information about organization structure,
activities, and governance; information about clearing members;
arrangements with other clearing entities (including offset and
cross-margin arrangements); financial schedules and supporting
details (off balance sheet obligations, contingent liabilities,
obligations to creditors, shareholders, and affiliates). Proposed
Sec. 39.39(f).
---------------------------------------------------------------------------
Conclusion
Prior to Dodd-Frank, there were limited means to facilitate
orderly resolution. The lack of planning for financial distress
proved tremendously harmful to our economy in a period of severe
disruption. I believe the proposed rules, as currently drafted,
would effectively facilitate transparency as well as provide a
foundation for quick, efficient, and effective action in instances
of market instability and risk to DCOs operations. Greater
transparency and thoughtfully developed risk plans will result in
increased confidence in our derivatives markets.
I want to thank the staff of the Division of Clearing and Risk--
Robert Wasserman, Megan Wallace, and Eric Schmelzer--for their
diligent and thoughtful work on these proposed regulations.
While I support the proposal, I look forward to carefully
considering the comments we receive to determine the best path
forward to protect our markets through the stability of DCOs. I am
hopeful the comments submitted in response to the proposal will
offer thoughtful guidance on the questions offered in the release of
the notice of proposed rule-making.
Appendix 4--Statement of Commissioner Christy Goldsmith Romero
No one expects to fail. But the lessons from the 2008 financial
crisis highlight how quickly contagion can spread between highly
interconnected institutions, threatening the viability of firms. As
the Special Inspector General for TARP (``SIGTARP''), I reported to
Congress on the decisions made by the Government to save ``too big
to fail'' Wall Street institutions. The theme that ran through our
findings was a massive failure in planning, and shock from
institutions and regulators caught unaware by dangerous
interconnections across the financial system. The Government
intervened with bailouts to avoid the chaos from disorderly bank
failures that would hurt Main Street.
Fast forward to 2023, where the financial industry and
regulators were once again shocked by bank failures--regional bank
failures that required government intervention, although not a
bailout. These failures seemed to happen at lightning speed as
online banking and other technology as well as social media played a
role in snowballing customer redemptions.\1\ Once again, the lack of
planning was apparent, and the government intervention was intended
to help Main Street.
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\1\ An unfortunate consequence of these regional bank failures
was large numbers of depositors withdrawing their funds only to
deposit them in the largest banks. See, e.g., Edward Harrison, The
Fed Is Helping Too-Big-to-Fail Banks Become Bigger, Bloomberg (May
2, 2023) available at https://www.bloomberg.com/news/newsletters/2023-05-02/the-fed-is-helping-too-big-to-fail-banks-become-bigger.
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That government intervention 15 years after Congress authorized
TARP only reinforces the importance of Dodd-Frank Act provisions
designed to protect our financial system from systemic risk. I have
reported to, and testified before, Congress on lessons learned from
the 2008 financial crisis, on how to manage systemic risk, and on
efforts to prevent future government intervention, such as
requirements for living wills from the largest banks. I testified
before the Senate in 2014 that I strongly supported the Dodd-Frank
Act's ``dual approach: front line measures aimed at keeping the
largest financial institutions safe and sound, and a last line
defense aimed at letting a company fail without damaging the
economy.'' \2\
---------------------------------------------------------------------------
\2\ Written Testimony Submitted by The Honorable Christy L.
Romero, Special Inspector General for the Troubled Asset Relief
Program Before the U.S. Senate Banking, Housing and Urban Affairs
Committee Subcommittee on Financial Institutions and Consumer
Protection, available at https://www.sigtarp.gov/sites/sigtarp/files/Testimony/SIGTARP_testimony_TBTF_and_SIFI_regulation_July_16_2014.pdf (July
16, 2014) (2014 Goldsmith Romero Testimony).
---------------------------------------------------------------------------
I support the proposed rule today because it does just that. It
strengthens both front line measures and the last line of defense by
laying out specific requirements for all clearinghouses to have
orderly wind-down plans. This expands our requirements for wind-down
plans from a handful of clearinghouses to the full range of
clearinghouses--ranging from those deemed systemically important to
new or future entrants, such as those who are digital asset-focused.
The rule today codifies and strengthens the provisions in Commission
guidance from 2016, and is designed in consideration of
international standards.
I support the proposed rule because it has two major benefits.
First, just as with bank living wills, the requirement for orderly
wind-down plans decreases the likelihood that any failure will be
disorderly, chaotic, or require government intervention, thereby
protecting financial stability--in other words, the last line of
defense. Second, the exercise of creating and maintaining the plans
with the specific requirements contained in the rule could help to
prevent the failure of clearinghouses by shoring up areas of
potential existential risk and giving the Commission insight into
risk exposure for our own oversight responsibilities--in other
words, front line measures.
I want to thank the staff for these efforts to implement the
goals of the Dodd-Frank Act and protect the financial system. I
thank them for working with my office on changes to improve the
proposal in ways that will promote greater transparency into
interconnections in our financial system and improve accountability
for clearinghouses as they develop and test their plans.
Last Line Defense: The Proposal Will Help Protect Financial Stability
in the Face of New Kinds of Market Stress by Reducing the Likelihood of
Disorderly and Chaotic Failures
As I testified to Congress in 2014, it is crucial for regulators
and institutions to make use of ``what was missing in the crisis--
time--time to understand the interconnections and the risk they
pose, and limit any dangerous risk so they are not caught unaware
again.'' \3\ While we already require systemically significant
clearinghouses and a small handful of other clearinghouses to
maintain orderly wind-down plans,\4\ we do not require it for all.
---------------------------------------------------------------------------
\3\ 2014 Goldsmith Romero Testimony.
\4\ Derivatives Clearing Organizations and International
Standards, 78 FR 72476, 72494 (Dec. 2, 2013).
---------------------------------------------------------------------------
In supporting the expansion of the requirement for orderly wind-
down plans to all clearinghouses, I am reminded of one of my
interviews with Treasury Secretary Timothy Geithner. Secretary
Geithner told me, ``What size and mix of business do you classify as
systemic?. . . . It depends too much on the state of the world at
the time. You won't be able to make a judgment about
[[Page 49051]]
what's systemic and what's not until you know the nature of the
shock.'' \5\
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\5\ See Statement of Christy Romero, Acting Special Inspector
General, Troubled Asset Relief Program Before the House Committee on
Financial Services Subcommittee on Financial Institutions and
Consumer Credit, available at https://www.sigtarp.gov/sites/sigtarp/files/Testimony/Citi_Too_Big_To_Fail_June_14_2011_Testimony.pdf
(June 14, 2011).
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Although the Financial Stability Oversight Council makes
systemic designations, the fact that the Government intervened in
regional bank failures this year emphasizes that disorderly failures
of even non-systemic financial players can cause chaos and harm
regular people. Additionally, this month our nation faced challenges
with the debt ceiling, which would have had substantial impacts,
which may not be planned for by all institutions.
By requiring orderly wind-down plans for all, and adopting the
proposed standardized requirements before a crisis hits, we can
better understand which market stresses might cause severe
disruptions across clearinghouses, and how a failure may spread
across derivatives markets, the financial system, and even the
economy. We can then engage in supervision to ensure that
clearinghouses effectively manage risk.
Front Line Measures: The Best Use of Orderly Wind-Down Plans Is Helping
To Ensure We Never Need To Rely on Them
It has been said that those who fail to plan, plan to fail. But
when it comes to financial stability, planning to fail is actually
one of the best ways to avoid failing. A handful of clearinghouses
already have wind-down plans pursuant to Commission guidance from
2016.\6\
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\6\ Staff have provided guidance on what clearing houses should
consider when developing recovery and wind-down plans, much of which
is codified in this rule. CFTC Letter No. 16-61, Recovery Plans and
Wind-down Plans Maintained by Derivatives Clearing Organizations and
Tools for the Recovery and Orderly Wind-down of Derivatives Clearing
Organizations, (July 16, 2016) (hereinafter CFTC Letter No. 16-61),
available at: https://www.cftc.gov/csl/16-61/download. The 2016
guidance was intended to be consistent with international standards.
I note that this guidance has not been updated in seven years--seven
years that included disruption and substantial market stresses.
---------------------------------------------------------------------------
I support the proposed rule with its specific requirements of
what these wind-down plans should include because it can help
mitigate the risk of failure, and prevent the need to ever rely on
them. I testified before Congress in 2014 saying, that I encouraged
regulators to use living wills to ``build a comprehensive roadmap of
interconnections to capture the common risks, linkages and
interdependencies in the financial system.'' \7\
---------------------------------------------------------------------------
\7\ 2014 Goldsmith Romero Testimony.
---------------------------------------------------------------------------
I support that the proposed rule contains those same
requirements--the inclusion of a clearinghouse's interconnections
and interdependences. In addition to the well-established
clearinghouses, our registrants include clearing houses (as well as
applicants) that are focused largely on digital assets. This
includes some clearinghouses where the clearing members are retail
customers. Given the highly interconnected nature of the digital
asset industry, and our lack of visibility into unregulated
affiliates, we could find ourselves without the information needed
to identify affiliate risk and supervise the management of that
risk. This was most notably experienced with registered
clearinghouse Ledger X, an affiliate of FTX.
Additionally, an increase in cyberattacks, including the one on
ION Markets, show how increasing reliance on third party services
and providers can create new avenues for disruption. When those
disruptions hit multiple firms at once, the damage can compound,
creating cascading failures that threaten financial stability. By
requiring clearinghouses to identify these kinds of
interdependencies and interconnections before they become a problem,
as well as to identify potential triggering events, document how
they will monitor these triggers, and conduct stress scenario
analysis, this proposal encourages a systemic perspective that would
help clearinghouses and the Commission steer away from trigger
events, and more comprehensively manage what would otherwise be
existential risk.\8\
---------------------------------------------------------------------------
\8\ It would require clearinghouses to identify scenarios that
may prevent them from fulfilling their critical role, including not
just due to adverse market outcomes, but also financial effects from
cybersecurity events and other losses from interconnections with
third party services and providers. And it requires a clearinghouse
to consider how a combination of failures, like the sort that crop
up in a financial crisis, might affect its ability to operate.
---------------------------------------------------------------------------
The proposal also requires clearinghouses to test wind-down
plans annually, or when they are updated. This is an opportunity for
a regular robust assessment of the risks that a clearinghouse faces.
The proposal recognizes that testing may be enhanced by
participation by other stakeholders. I look forward to hearing
comments about whether there are situations or scenarios where the
participation of stakeholders other than clearing members should be
required, instead of simply considered.
Clearinghouses can only identify failures caused by risks that
they consider and review. The scenarios prescribed by the proposal
would require assessing a broad range of relevant risks. I look
forward to hearing from commenters about whether there are any other
areas that might help us promote the resilience of clearinghouses
and protect against chaotic failures.
This Proposal Will Only Protect the Financial System if We Have the
Courage To Apply It
Unlike living wills for systemically important banks, there is
no formal review or acceptance requirement for these wind-down
plans. But that does not excuse us from a responsibility to
carefully scrutinize the plans to ensure that they are
comprehensive, appropriate, and rigorously tested. In 2011, I
testified before Congress that rules designed to prevent systemic
risk that would require government intervention ``are only as
effective as their application'' and that ultimately, we ``rely on
the courage of the regulators to protect our nation's broader
financial system.'' \9\
---------------------------------------------------------------------------
\9\ Statement of Christy Romero, Acting Special Inspector
General, Troubled Asset Relief Program Before the House Committee on
Financial Services Subcommittee on Financial Institutions and
Consumer Credit, available at https://www.sigtarp.gov/sites/sigtarp/files/Testimony/Citi_Too_Big_To_Fail_June_14_2011_Testimony.pdf,
(June 14, 2011).
---------------------------------------------------------------------------
We should have the courage to use these plans as a roadmap for
our own vigilant oversight of derivatives markets and a guide for
where we should focus efforts to bolster resilience to market
stresses. I welcome comment on all aspects of the proposal, but
especially those recommending additional ways we can promote
financial stability.
For these reasons, I support the proposed rule.
Appendix 5--Dissenting Statement of Commissioner Summer K. Mersinger
I cannot support the proposed amendments to Part 39 of the
Commodity Futures Trading Commission's \1\ regulations before us
today. The proposed amendments would: (1) make substantial changes
to the current recovery and orderly wind-down plan regulations
applicable to systemically important derivatives clearing
organizations (SIDCOs) and Subpart C derivatives clearing
organizations (Subpart C DCOs); \2\ (2) require for the first time
that all other CFTC-registered derivatives clearing organizations
(DCOs) have orderly wind-down plans; (3) revise the CFTC's
bankruptcy regulations that the CFTC just recently amended to now
require a bankruptcy trustee to act in accordance with a DCO's
recovery and orderly wind-down plans; and (4) require SIDCOs and
Subpart C DCOs to provide copious amounts of information to the
Federal Deposit Insurance Corporation (FDIC) through the CFTC for
the purpose of planning the potential resolution of the entity (the
Proposal).
---------------------------------------------------------------------------
\1\ This statement uses the terms CFTC or Commission to refer to
the Commodity Futures Trading Commission.
\2\ As used herein, the term Subpart C DCO refers to a
derivatives clearing organization that elects to be subject to the
provisions in Subpart C of Part 39 of the Commission's regulations.
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To be clear, in considering the Proposal, the Commission is not
debating whether SIDCOs and Subpart C DCOs should be required to
engage in thoughtful planning for recovery and orderly wind-down.
That has already been decided.\3\ They are required to do so.\4\ In
fact, they have been required to do so since December 2013.\5\
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\3\ See Derivatives Clearing Organizations and International
Standards, 78 FR 72476 (Dec. 2, 2013).
\4\ CFTC Rule 39.39(b), 17 CFR 39.39(b) (``Each [SIDCO] and
[Subpart C DCO] 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 [DCO's] viability as a going
concern.'').
\5\ See 78 FR at 72476 (stating ``the rule is effective December
31, 2013''). However, the Commission may, upon request, grant a
SIDCO or a Subpart C DCO up to one year to comply with any provision
of CFTC regulations 39.39 or 39.35. See CFTC Rule 39.39(f), 17 CFR
39.39(f).
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[[Page 49052]]
Instead, through a set of prescriptive requirements, the
Proposal takes a ``government knows best'' approach to recovery and
orderly wind-down plans and the events that might trigger them.
Furthermore, the Proposal's obligation to have an orderly wind-down
plan, and many of the Commission's prescriptive directives attendant
thereto, would extend to all DCOs, not just the SIDCOs and Subpart C
DCOs that tend to be the largest and most complex derivatives
clearinghouses.
Ignoring the Work of SIDCOs and Subpart C DCOs Over the Past Decade
Over the past decade, SIDCOs and Subpart C DCOs have spent
considerable time and resources developing viable plans for recovery
and orderly wind-down. Adoption of those plans was not a one-time
event, and those plans have not been allowed to grow stale. Indeed,
current CFTC regulations require SIDCOs and Subpart C DCOs to
maintain those plans.\6\
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\6\ CFTC Rule 39.39(b), 17 CFR 39.39(b).
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In accordance with Commission regulations, SIDCOs and Subpart C
DCOs have been revising and updating those plans and taking steps to
develop their strategies and tools, including adopting changes to
their rulebooks that explicitly set forth tools they would use and
when they would use them. Furthermore, the CFTC has engaged with
SIDCOs and Subpart C DCOs on the contents of those plans and
associated rules, including through approving rule changes and
conducting examinations.
The Proposal would make significant changes to the CFTC's
current regulations addressing recovery and orderly wind-down plans.
With respect to SIDCOs and Subpart C DCOs, I do not believe that the
benefits of the rule changes in this Proposal outweigh the costs of
implementing them. Worse, I believe that the Proposal's prescriptive
requirements would undermine the ability of SIDCOs and Subpart C
DCOs to manage risks during business as usual and appropriately plan
for recovery and orderly wind-down.
The Proposal Is Too Prescriptive
I am further concerned that the Proposal would require every DCO
to consider as a potential trigger for recovery or orderly wind-
down, as applicable,\7\ a scenario that some DCOs might be able to
manage during business as usual--a much preferred outcome in my
opinion. This is not just a difference of semantics. The distinction
between whether a DCO can manage a specific factual circumstance
during business as usual or whether that fact pattern would trigger
recovery or orderly wind-down has significant financial and
governance implications.
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\7\ The Proposal would require all DCOs to have orderly wind-
down plans, and only SIDCOs and Subpart C DCOs to have recovery
plans.
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In fact, if the CFTC requires a DCO to have tools and resources
in its recovery plan to address a scenario that the DCO has
determined it can manage during business as usual, then those
resources and tools are required to be set aside for recovery and,
by definition, are not available to manage the situation during
business as usual. Not only is that inefficient and
counterproductive, it undermines the focus on the DCO's risk
management during business as usual. It is the DCO, not the
Commission, that is in the best position to determine what risks it
can manage during business as usual, and what risks would trigger
use of its recovery plan and/or orderly wind-down plan, and to
allocate its resources accordingly.
Furthermore, the Proposal would require recovery and orderly
wind-down plans to consider a potentially limitless set of
scenarios. The Proposal states, ``The [DCO's] recovery plan
scenarios should also address the default risks and non-default
risks to which the [DCO] is exposed.'' While the preamble spends a
significant amount of time pontificating on a variety of risk-
inducing scenarios, the Proposal does not define the terms ``default
risks'' or ``non-default risks'' that are used in the rule text, and
the requirement contains no limiting language. Without clear
definitions or limitations, this phrase requires a DCO to consider
every risk to which it might possibly be exposed in its recovery and
orderly wind-down plans.
The Proposal goes on to require each SIDCO and Subpart C DCO to
``identify scenarios that may prevent it from meeting its
obligations or providing its critical services as a going concern''
\8\ (emphasis added) in its recovery and orderly wind-down plans. I
am concerned that this extremely low threshold could capture
anything--and everything.
---------------------------------------------------------------------------
\8\ The Proposal uses the term ``critical services'' with
respect to recovery scenarios and the term ``critical operations and
services'' with respect to orderly wind-down scenarios.
---------------------------------------------------------------------------
As if considering the aforementioned ``risks'' and ``scenarios''
were not enough, the Proposal requires a SIDCO's or Subpart C DCO's
recovery plan to ``establish the criteria that may trigger
implementation or consideration of implementation of that plan,''
and its orderly wind-down plan to ``establish the criteria that may
trigger consideration of implementation of that plan.'' I am not
sure there is a clear distinction between ``risks,'' ``scenarios,''
and ``triggers'' in the Proposal.
A Faulty Premise and Unnecessary Requirements for All DCOs
Based on the Proposal's definition of ``orderly wind-down,'' \9\
one purpose of having an orderly wind-down plan is to effect the
permanent cessation of one or more of a DCO's critical operations or
services in a manner that would not increase the risk of significant
liquidity, credit, or operational problems spreading among financial
institutions or markets and thereby threaten the stability of the
U.S. financial system. We already have such a process--the
bankruptcy of a DCO pursuant to chapter 7 of the U.S. Bankruptcy
Code and Part 190 of the Commission's regulations.
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\9\ The Proposal defines ``orderly wind-down'' as ``the actions
of a derivatives clearing organization to effect the permanent
cessation, sale, or transfer, of one or more of its critical
operations or services, in a manner that would not increase the risk
of significant liquidity, credit, or operational problems spreading
among financial institutions or markets and thereby threaten the
stability of the U.S. financial system.''
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Indeed, the Commission engaged in an extensive effort just a few
years ago to update Part 190 of the Commission's regulations so that
they specifically address the bankruptcy of a DCO.\10\ By imposing
on every DCO costly and burdensome requirements designed to prevent
the DCO from ever going through the bankruptcy process, or to
control that process by attempting to tell a bankruptcy trustee that
it must follow the DCO's orderly wind-down plan, the Proposal
assumes that bankruptcy proceedings are so fraught with the peril of
disorder that any DCO going through bankruptcy pursuant to chapter 7
of the U.S. Bankruptcy Code and Part 190 of the Commission's
regulations would threaten the stability of the U.S. financial
system.
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\10\ See Part 190 Bankruptcy Regulations, 86 FR 19324, 19325
(Apr. 13, 2021) (stating that one of the ``major themes in the
revisions to part 190'' is that ``[t]he Commission is promulgating a
new subpart C to part 190, governing the bankruptcy of a clearing
organization. In doing so, the Commission is establishing ex ante
the approach to be taken in addressing such a bankruptcy, in order
to foster prompt action in the event such a bankruptcy occurs, and
in order to establish a more clear counterfactual (i.e., `what would
creditors receive in a liquidation in bankruptcy?') in the event of
a resolution of a clearing organization pursuant to Title II of
Dodd-Frank.'') (footnote omitted).
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I question the fundamental premise of the Proposal that every
DCO offers one or more services that is so critical that the sale,
transfer, or permanent cessation of that service would threaten the
stability of the U.S. financial system, thereby justifying the
requirement that every DCO develop an orderly wind-down plan to
avoid that. The preamble of the Proposal acknowledges that ``the
failure of [a DCO that is neither a SIDCO nor a Subpart C DCO] is
much less likely to have `serious adverse effects on financial
stability in the United States,' '' and states that, as a result of
that conclusion, ``the Commission is not proposing to require these
DCOs to maintain recovery plans.'' And yet, the Proposal would
require those DCOs to expend significant time and resources to
maintain and submit to the Commission a plan to ``effect the
permanent cessation, sale, or transfer, of one or more of its
critical operations or services, in a manner that would not increase
the risk of significant liquidity, credit, or operational problems
spreading among financial institutions or markets and thereby
threaten the stability of the U.S. financial system.''
Just as I do not believe that it is necessary for every DCO to
have an orderly wind-down plan, I certainly do not see the purpose
of a DCO applicant submitting an orderly wind-down plan to the CFTC
as part of its application for registration as a DCO. Not only does
a DCO applicant lack a magic ball to foresee its future level of
success, the applicant might not even be approved by the Commission.
We are asking applicants to plan for going-out-of-business before
they even have permission to go into business.
Unbridled Access to Information
I also am very concerned by the unbridled scope of information
the Commission could
[[Page 49053]]
demand from SIDCOs and Subpart C DCOs under the Proposal with the
goal of the Commission providing said information to the FDIC for
purposes of resolution planning. As the primary regulator of SIDCOs
and Subpart C DCOs, the CFTC can already request and receive
information necessary to appropriately oversee these entities.\11\
Additionally, pursuant to CFTC Regulation 39.39(c)(2), each SIDCO
and Subpart C DCO already must have ``procedures for providing the
Commission and the [FDIC] with information needed for purposes of
resolution planning.'' \12\
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\11\ The preamble to the Proposal notes that ``Under Core
Principle J, the Commission may request any information from a DCO
that the Commission determines to be necessary to conduct oversight
of the DCO'' and concedes that its aim is to obtain and provide to
the FDIC ``certain information for resolution planning that goes
beyond the information usually obtained during business as usual
under the Core Principles and associated Part 39 regulations.''
\12\ CFTC Rule 39.39(c)(2), 17 CFR 39.39(c)(2)
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The Proposal would specify six types of information that each
SIDCO and Subpart C DCO would be required to provide upon request.
It then includes an all-encompassing catch-all category of ``any
other information deemed appropriate to plan for resolution under
Title II of the Dodd-Frank Act.'' I do not support giving a
government regulator, let alone two federal regulators, unlimited
access to information, especially when that information is being
collected for the purpose of providing it to a federal regulator
that is not the entity's primary regulator. I am unmoved, and
certainly not comforted, by the assertion that someone (though it is
unclear who) must ``deem the information appropriate'' before it is
requested by the CFTC or shared with the FDIC.
What's more, in light of today's cybersecurity risks, government
agencies must take care in determining what information they collect
and store. We must only collect information we need to do our job as
regulators, not information we may want at some point for some event
that may or may not materialize.
Conclusion
I have great respect for the Commission's long history of
implementing principles-based regulation and allowing our regulated
entities the flexibility to build the appropriate policies and
procedures--best suited for their unique business--to satisfy those
principles. Unfortunately, this Proposal supplants prescriptions for
principles and regulatory constraints for flexibility.
Appendix 6--Concurring Statement of Commissioner Caroline D. Pham
I respectfully concur regarding the Notice of Proposed
Rulemaking for Derivatives Clearing Organizations Recovery and
Orderly Wind-down Plans; Information for Resolution Planning. While
I generally support and appreciate the diligent efforts on this
proposal, I do have several significant concerns regarding the
proposal's breadth and prescriptiveness, as well as foundational
questions on accountability and the role of the government in
resolution planning.
Strengthening the Financial System Through Global Standards
It has been almost 14 years since the G20 met in Pittsburgh to
address the financial stability risks that emerged during the 2008
global financial crisis. One pivotal outcome of that meeting was the
agreement to improve the over-the-counter (OTC) derivatives markets
by agreeing that all standardized OTC contracts should be exchange-
traded and cleared through regulated central counterparties (CCPs)
by 2012, aiming to diminish counterparty credit risk and enhance
transparency.\13\ This important decision resulted in a stronger and
more resilient financial system by aiming to prevent a recurrence of
the crisis from inadequate risk management. At that meeting, the G20
leaders pledged to implement this central clearing mandate in a
coordinated and consistent manner across jurisdictions.
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\13\ See Leaders' Statement: The Pittsburgh Summit (2009),
available at https://www.oecd.org/g20/summits/pittsburgh/G20-Pittsburgh-Leaders-Declaration.pdf.
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In 2012, the Committee on Payments and Market Infrastructures
\14\ and the International Organization of Securities Commissions
(CPMI-IOSCO) established the Principles for Financial Market
Infrastructures (PFMIs).\15\ The PFMIs are a set of international
standards that provide guidance for the operation and oversight of
certain financial market utilities (FMUs), including CCPs (such as
CFTC-regulated derivatives clearing organizations (DCOs) or SEC-
regulated clearing agencies), trade repositories, payment systems,
and central securities depositories (CSDs), that the international
community has determined to be an essential component to preserving
financial stability in the global financial markets.\16\
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\14\ The Committee on Payments and Market Infrastructures was
renamed the Committee on Payment and Settlement Systems. See History
of the CPMI, Bank for International Settlements, available at
https://www.bis.org/cpmi/history.htm.
\15\ See Principles for Financial Market Infrastructures, Bank
for International Settlements, available at https://www.bis.org/cpmi/info_pfmi.htm.
\16\ Id.
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U.S. Approach to Implementation of the PFMIs
Pursuant to Title VIII of the Dodd-Frank Act, the U.S. has
implemented the PFMIs through multiple regulators overseeing
different FMUs, including DCOs, clearing agencies, payment systems,
and CSDs.\17\ The Financial Stability Oversight Council (FSOC)
designates certain FMUs as systemically important if they pose a
risk to the stability of the U.S. financial system (designated FMUs
or DFMUs).\18\ To date, the FSOC has designated eight FMUs as
systemically important, including two systemically important
derivatives clearing organizations (SIDCOs) regulated by the
CFTC.\19\
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\17\ See Designated Financial Market Utilities, Board of
Governors of the Federal Reserve System, available at
www.federalreserve.gov/paymentsystems/designated_fmu_about.htm.
\18\ Id.
\19\ The Federal agency that has primary jurisdiction over one
of the eight designated FMUs is indicated in parentheses: The
Clearing House Payments Company, L.L.C. (Federal Reserve); CLS Bank
International (Federal Reserve); Chicago Mercantile Exchange, Inc.
(CFTC); The Depository Trust Company (Securities and Exchange
Commission (SEC)); Fixed Income Clearing Corporation (SEC); ICE
Clear Credit L.L.C. (CFTC); National Securities Clearing Corporation
(SEC); and The Options Clearing Corporation (SEC). See id.
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The CFTC, the SEC, and the Federal Reserve have all taken steps
to implement Title VIII and the PFMIs, and to promote the stability
and efficiency of FMUs subject to their oversight. All three U.S.
regulators have to achieve the same outcomes, because each is
implementing the same standards from Title VIII and the PFMIs. In
reviewing each agency's approach--the Fed's Regulation HH and the
SEC's recent proposal for recovery and wind-down plans for clearing
agencies--it seems that there is an opportunity for greater
alignment and consistency across the CFTC, SEC, and the Fed to
implementing these same requirements. I believe the U.S. should take
an outcomes-based approach to oversight of DFMUs because we all have
to get to the same destination in the end.
CFTC's 2013 Recovery and Wind-Down Rule for SIDCOs and Subpart C DCOs
In 2013, the CFTC determined that the PFMIs were the most
relevant international standards for the risk management of SIDCOs,
for purposes of meeting its obligations under Title VIII, and began
implementing rules fully consistent with the PFMIs.\20\
Specifically, the CFTC promulgated its recovery and wind-down rules
for SIDCOs and Subpart C DCOs in 2013.\21\ Since then, we have been
fortunate enough to receive valuable guidance from CPMI-IOSCO and
the Financial Stability Board regarding resolution frameworks for
FMUs, the recovery planning process, and the content of recovery
plans. These guidelines were initially published in 2014 and
subsequently updated in 2017 (``CPMI-IOSCO Recovery Guidance''),
providing us with invaluable insights.\22\ I support keeping the
CFTC's rules up-to-date and upholding international standards under
Title VIII and the PFMIs established by CPMI-IOSCO.
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\20\ See Derivatives Clearing Organizations and International
Standards, 78 FR 72475, 72478 (Dec. 2, 2013) and Derivatives
Clearing Organizations General Provisions and Core Principles, 85 FR
4800, 4822 (Jan. 27, 2020).
\21\ Id.
\22\ See CPMI-IOSCO, Recovery of financial market
infrastructures (Oct. 15, 2014), available at https://www.bis.org/cpmi/publ/d121.pdf and CPMI-IOSCO, Resilience of central
counterparties: further guidance on the PFMI (July 5, 2017),
available at https://www.bis.org/cpmi/publ/d163.htm.
---------------------------------------------------------------------------
In our derivatives markets, DCOs provide central clearing and
serve as intermediaries who effectively mitigate risk for hundreds
of thousands of transactions every day through the settlement and
central clearing of contracts. A significant portion of settlement
and clearing in the derivatives market is carried out by two CFTC-
registered DCOs
[[Page 49054]]
designated as SIDCOs by the FSOC in 2012.\23\ It is no secret that
if one of these SIDCOs were to experience a failure or collapse that
it could have far-reaching and detrimental effects on the broader
financial system. As ``giant warehouses of risk'', SIDCOs play a
crucial role in mitigating risks for the entire global financial
system. However, in the event of any DCO's financial distress or
potential failure, effective regulations are necessary to ensure an
orderly wind-down and recovery process. And that is why I believe it
is so important that our DCOs are efficiently-regulated and well-
managed at every level, and why the CFTC has long had the preeminent
regulatory framework for the oversight of CCPs and led many
international initiatives to strengthen financial stability.
---------------------------------------------------------------------------
\23\ See note 7, supra.
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While the prospect of a DCO collapse may appear to be beyond the
realm of possibility, it is crucial for regulators to avoid
succumbing to a failure of imagination. In instances where existing
regulations prove inadequate, it is our responsibility through
rulemakings to devise contingency plans for such worst-case
scenarios.
Striking a Balance in Our Rulemaking--More Is Not Always Better
I thank the staff of the Division of Clearing and Risk and the
Office of General Counsel for their work on this proposal. I would
also like to particularly thank Bob Wasserman and Eric Schmelzer for
their hard work and for the time they spent with my office on this
proposal.
Generally, it is important that the CFTC continues to
periodically review our regulations to see that they remain fit-for-
purpose and to update them as necessary to reflect developments in
international standards as well as in our markets. But as I
mentioned earlier, while I support today's proposed rulemaking, I do
have some significant concerns.
Definitions
First, regarding the definitions in this proposal. I appreciate
that we attempt to align our definition for ``orderly wind-down''
with the definition in Regulation HH, as well as considered the
definition in the recent SEC proposal. I thank the staff for making
the revisions that I requested and welcome comments.
Another definition of particular focus to me was ``legal risk.''
Given my experience implementing governance, risk, and control
frameworks--including legal risk management--I took particular care
to evaluate the proposal's definition of legal risk and worked with
the staff to try to ensure that the CFTC's definition was consistent
with both international standards as well as best practices. I drew
upon my own experience with risk governance frameworks for legal
risk. I also looked at other aspects of the CFTC rules where we
address legal risk for swap dealers and FCMs, as well as the Basel
Committee publications on operational risk (since legal risk is a
subset of operational risk), as well as the aforementioned CPMI-
IOSCO Recovery Guidance, and the Fed's definition of legal risk
(although that is for banking organizations). I then suggested, and
my language is incorporated into the proposal, that the definition
of legal risk includes ``losses arising from legal, regulatory, or
contractual obligations.'' I encourage commenters to take a look at
this proposed definition for legal risk, which builds upon some
statements in the Recovery Guidance, and to weigh in if this is an
appropriate definition, or if there's a better or alternate
formulation.
Recovery Scenarios
Second, I believe it would be helpful to have commenters provide
feedback on the likelihood of the stress scenarios and whether each
of these scenarios are events or types of risk that should be
included in all DCOs' recovery plans. I also believe that there
should be a materiality threshold in connection with determining the
recovery scenarios that need to be addressed.
One example of a materiality threshold is that the applicable
recovery scenarios would need to have a ``significant likelihood''
of being triggered, or to evaluate whether multiple scenarios
happening at the same time would pose a material risk to the DCO. I
would like to have commenters weigh in on potential approaches to
tailoring the type and number of required recovery scenarios.
Information for Resolution Planning
Third, turning to resolution planning, I believe that it is
important to consider the respective roles and responsibilities of
the CFTC as the primary regulator over our DCOs, and the FDIC as the
resolution authority under Title II. Based on my own experience
engaging with the FDIC, I understand and support the need for the
FDIC to be able to carefully engage in resolution planning to
address the financial stability risk posed by SIDCOs.
However, I believe that the accountability for sound financial
and risk management should lie squarely with CCPs, including for
stress, disruption, and even the unlikely event of resolution.
Instead, it seems that our proposal shifts accountability from CCP
management to the CFTC as regulator, and the FDIC as the primary
responsible party for resolution planning, making it the
government's job, not CCP management's job, to plan ahead. I believe
this oversteps the appropriate role of government, and even
interferes with day-to-day business operations by diverting limited
resources from critical risk areas to burdensome document
production. I will highlight a few examples.
Our proposal requires that SIDCOs produce voluminous information
and documentation directly to the CFTC on an ex ante basis, so that
the CFTC can then, in turn, review the information and documentation
and then produce it to the FDIC to maintain. This raises several
concerns.
From one perspective, I am concerned that we are shifting
accountability and responsibility from the management of the SIDCOs
where it should be, to the CFTC. One example is the proposal's
requirements with respect to producing legal contracts for internal
and external service providers, so that the CFTC and the FDIC can
identify which contracts or agreements for services are not
resolution resilient. It does not make sense to me why the burden-
shifting is first on the CFTC and the FDIC. It is critical that the
management of the SIDCOs identify and mitigate their legal risks,
and in the first instance, review their own legal contracts and make
their own determination.
I am not familiar with any other circumstance, for any other
regulator, in which that type of legal documentation is
comprehensively produced to the regulator on an ongoing basis to
maintain. I believe that it is more common for regulated entities to
be required to maintain an inventory of such legal documentation in
addition to recordkeeping and retention requirements, and to
mitigate the legal risks associated with those legal contracts or
contractual obligations. Then, the regulator would periodically
inspect or examine the framework for legal risk management and any
specific regulatory requirements associated with the specific type
of legal documentation, including the review of a sample or multiple
samples of those legal contracts as appropriate. I would like to
hear from commenters if this approach, which is standard practice
for inspections and examinations, would make sense here.
Another example of this burden-shifting from business management
to the regulators is with respect to producing copies of licenses
and licensing agreements to the CFTC so that the CFTC can then
produce them to the FDIC. I am not aware of any other regulator that
keeps its own document repository of business licenses and licensing
agreements for regulated entities.
Regarding information about clearing members that is requested
for resolution planning, I do wonder if the CFTC already has this
information because we directly regulate clearing members such as
futures commission merchants (FCMs) and swap dealers. I would like
to ensure that we are collecting any information from SIDCOs in the
most efficient way possible, in order to make the best use of the
CFTC's limited resources and to limit the administrative burden.
And, it goes without saying that I hope the CFTC will request only
information that is truly necessary, and is not information that the
CFTC already collects, in order to minimize duplication.
And more generally, because the SEC and the Fed are the other
regulators with primary jurisdiction over their respective DFMUs, I
would like to know if the SEC and the Fed will be taking the same
approach as the CFTC to the production of information for resolution
planning to the FDIC. Again, there should be alignment across all
three agencies if we are all subject to the same Dodd-Frank
statutory requirements.
Orderly Wind-Down Plans
Fourth, moving to orderly wind-down plans, there are a number of
detailed technical requirements set forth in the proposal. I will
address a few of particular concern.
Ancillary service providers. The proposal includes a requirement
to identify ancillary service providers in connection with critical
operations and services provided by and to
[[Page 49055]]
DCOs. To be clear, this requirement is referring to fourth parties,
which is the next frontier after third party risk management. I
encourage commenters to address whether this requirement is an
appropriate way to approach the risk from fourth parties, or if it
the proposal is overbroad.
Annual testing. Regarding annual testing of tools for wind-down
plans, I wonder if there is a more appropriate frequency for testing
that would make sense for smaller DCOs that present a more limited
risk profile. I believe that testing frequency should be risk-based,
and I appreciate that the staff added this question into the
proposal at my request. I also noted that it is possible that more
than one tool can be used concurrently, and the staff have added a
question regarding listing the order in which DCOs would use tools
for wind-down plans.
Wind-down scenarios. On a technical point regarding wind-down
scenarios, the proposal includes a requirement to assess the
associated risks to non-defaulting clearing members and their
customers and linked FMIs. I appreciate that the staff made some
adjustments to that language in order to reflect my concern that
because there are clearing members that are not FCMs that clear on
an agency basis for their customers, that the proposal more
accurately contemplates different types of clearing members and
clearing models or market structure.
For example, there are clearing members of a DCO that are swap
dealers and do self-clearing of their principal trading activities.
Without clarification, the rule text could have been construed to
encompass all of the clients, counterparties, and customers of a
swap dealer that is a clearing member, even if unrelated to the swap
dealer's self-clearing of swap dealing activity--such as the retail
banking customers of a commercial bank, where the federally-
chartered banking entity subject to regulation by the Office of the
Comptroller of the Currency, is also registered with the CFTC as a
swap dealer. I believe it would be overreaching for a DCO to be
required to assess the associated risks of a DCO wind-down scenario
to the retail banking customers of that legal entity.
Scope and lack of tailoring. I believe the proposal takes a one-
size-fits-all approach to DCO wind-down plans by requiring all DCOs,
regardless of size or risk profile, to adhere to the same extensive
requirements. As one example, I imagine that for fully-
collateralized DCOs which present a lesser risk profile, the cost of
the legal and consulting fees to draft such wind-down plans could
easily exceed their total annual operating budget, and a much
simpler or straightforward plan would be sufficient. Accordingly, I
believe the Commission should consider whether to allow risk-based
tailoring of wind-down plans, and I appreciate that the staff has
included a question in the proposal to reflect my concern.
Implementation of Plans
Finally, regarding implementation period, I am concerned that
the mere six months for implementation that is permitted in the
proposal is not sufficient for the incredibly thorough and detailed
plans that the proposal requires. I appreciate that the staff has
added a question on the appropriate amount of time to implement
these new requirements for DCO recovery and orderly wind-down plans.
Conclusion
The world has come a long way since the 2008 global financial
crisis to address systemic risk and financial stability in
connection with FMIs such as CCPs, and I commend the leadership of
the CFTC's efforts, alongside the G20, Financial Stability Board,
IOSCO, the Bank for International Settlements (BIS) CPMI, and both
U.S. and non-U.S. authorities. Though much work has been done, I
believe in the adage that one's work is never done. That is why I
support, and continue to support, the Commission and staff in
periodically reviewing and updating our rules to reflect
developments in international standards as well as in markets.
It is evident that the staff has invested significant time and
effort in their drafting of this proposal for DCO recovery and
orderly wind-down plans, and information for resolution planning,
and I appreciate the staff's thoughtfulness. Nonetheless, I
respectfully concur because I have several significant concerns
regarding the proposal's breadth and prescriptiveness, as well as
foundational questions on accountability and the role of the
government in resolution planning.
Further, I believe there could be important benefits to
enhancing the clarity of this proposal. The sheer length of the
proposed rule itself makes it challenging to discern and address
specific issues effectively. I believe that a more direct and
concise rule would be prudent, and I look forward to receiving
public comment.
[FR Doc. 2023-14457 Filed 7-27-23; 8:45 am]
BILLING CODE 6351-01-P