FR Doc 2010-31029[Federal Register: December 13, 2010 (Volume 75, Number 238)]
[Proposed Rules]
[Page 77576-77588]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13de10-24]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 39
RIN 3038-AC98
General Regulations and Derivatives Clearing Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing regulations to implement Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act). These
proposed amendments would establish the regulatory standards for
compliance with derivatives clearing organization (DCO) Core Principles
A (Compliance), H (Rule Enforcement), N (Antitrust Considerations), and
R (Legal Risk), as well as DCO chief compliance officer (CCO)
requirements set forth in Section 5b of the Commodity Exchange Act
(CEA). The proposed amendments also would revise procedures for DCO
applications, clarify procedures for the transfer of a DCO
registration, add requirements for approval of DCO rules establishing a
portfolio margining program for customer accounts carried by a futures
commission merchant (FCM) that is also registered as a securities
broker-dealer (FCM/BD), and make certain technical amendments. The
Commission also is proposing amendments to update the definitions of
``clearing member'' and ``clearing organization,'' and to add
definitions for certain other terms.
DATES: Submit comments on or before February 11, 2011.
ADDRESSES: You may submit comments, identified by RIN 3038-AC98, by any
of the following methods:
Agency Web site, via its Comments Online process: http://
comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.Regulations.gov.
Follow the instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in Sec. 145.9 of the Commission's regulations, 17 CFR
145.9.\1\
---------------------------------------------------------------------------
\1\ Commission regulations referred to herein are found at 17
CFR Ch. 1 (2010). They are accessible on the Commission's Web site
at http://www.cftc.gov.
---------------------------------------------------------------------------
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Phyllis P. Dietz, Associate Director,
202-418-5449, [email protected], or Jonathan M. Lave, Special Counsel,
202-418-5983, [email protected], Division of Clearing and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Proposed Definitional and Procedural Amendments
B. Proposed Regulations Implementing Statutory Requirements for
CCOs
C. Proposed Regulations Implementing DCO Core Principles
II. Discussion
A. Section 1.3 Definitions
B. Part 39 Scope and Definitions
1. Scope of Part 39
2. Definitions
C. Procedures for Registration as a DCO
1. Procedures for DCO Applications
2. Procedures for Transfer of a DCO Registration
D. Procedures for Submitting DCO Rules To Establish a Portfolio
Margining Program
E. Compliance With Core Principles
F. Rule Enforcement Requirements
G. Antitrust Considerations
H. Legal Risk Requirements
III. Technical Amendments
IV. Effective Date
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
1. Information Provided by Reporting Entities/Persons
2. Information Collection Comments
C. Cost-Benefit Analysis
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act.\2\ Title VII of the Dodd-Frank Act
\3\ amended the CEA \4\ to establish a comprehensive new regulatory
[[Page 77577]]
framework for swaps and security-based swaps. The legislation was
enacted to reduce risk, increase transparency, and promote market
integrity within the financial system by, among other things: (1)
Providing for the registration and comprehensive regulation of swap
dealers and major swap participants; (2) imposing clearing and trade
execution requirements on standardized derivative products; (3)
creating rigorous recordkeeping and real-time reporting regimes; and
(4) enhancing the Commission's rulemaking and enforcement authorities
with respect to all registered entities and intermediaries subject to
the Commission's oversight.
---------------------------------------------------------------------------
\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/
OTCDERIVATIVES/index.htm.
\3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\4\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
Section 725(c) of the Dodd-Frank Act amended Section 5b(c)(2) of
the CEA, which sets forth core principles with which a DCO must comply
in order to be registered and to maintain registration as a DCO. The
core principles were added to the CEA by the Commodity Futures
Modernization Act of 2000 (CFMA).\5\ The Commission did not adopt
implementing rules and regulations, but instead promulgated guidance
for DCOs on compliance with the core principles.\6\ Under Section
5b(c)(2), as amended by the Dodd-Frank Act, Congress expressly
confirmed that the Commission may adopt implementing rules and
regulations pursuant to its rulemaking authority under Section 8a(5) of
the CEA.\7\
---------------------------------------------------------------------------
\5\ See Commodity Futures Modernization Act of 2000, Public Law
106-554, 114 Stat. 2763 (2000).
\6\ See 17 CFR part 39, app. A.
\7\ See 7 U.S.C. 7a-1(c)(2). Section 8a(5) of the CEA authorizes
the Commission to promulgate such 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].'' 7
U.S.C. 12a(5).
---------------------------------------------------------------------------
The Commission continues to believe that, where possible, each DCO
should be afforded an appropriate level of discretion in determining
how to operate its business within the statutory framework. At the same
time, the Commission recognizes that specific, bright-line regulations
may be necessary in order to facilitate DCO compliance with a given
core principle and, ultimately, to protect the integrity of the U.S.
clearing system. Accordingly, in developing the proposed regulations to
update the Commission's regulations, streamline administrative
procedures, and implement the DCO core principles as amended by the
Dodd-Frank Act, the Commission has endeavored to strike an appropriate
balance between establishing general prudential standards and
prescriptive requirements.
In this notice of proposed rulemaking, the Commission is proposing
to adopt: (1) Certain definitional and procedural amendments to its
regulations for DCOs; (2) regulations to implement statutory
requirements for CCOs; and (3) requirements that would implement four
DCO core principles.
A. Proposed Definitional and Procedural Amendments
The Commission is proposing to amend the definitions of ``clearing
member'' and ``clearing organization'' in Sec. 1.3 of its regulations
to make the definitions consistent with terminology currently used in
the CEA, as amended by the Dodd-Frank Act. It is also proposing to add
to Sec. 1.3 definitions for the terms ``customer initial margin,''
``initial margin,'' ``spread margin,'' ``variation margin,'' and
``margin call.'' In addition, the Commission is proposing to amend
Sec. 39.1 to add definitions of the following terms: ``back test,''
``compliance policies and procedures,'' ``key personnel,'' ``stress
test,'' and ``systemically important derivatives clearing
organization.''
Based on its experience in reviewing DCO applications over the past
nearly ten years, the Commission is proposing to amend Sec. 39.3 to
streamline the DCO application process by eliminating the 90-day
expedited application review period. The proposed amendments also would
clarify the procedures to be followed by a DCO when requesting a
transfer of its DCO registration due to a corporate change and
procedures for submission of DCO rules to establish a portfolio
margining program.
B. Proposed Regulations Implementing Statutory Requirements for CCOs
Section 725(b) of the Dodd-Frank Act, codified as Section 5b(i) of
the CEA,\8\ requires each DCO to designate a CCO and further specifies
the duties of the CCO.\9\ Among the CCO's responsibilities are the
preparation and submission to the Commission of an annual compliance
report. Proposed Sec. 30.10 codifies the statutory requirements for
CCOs and sets forth additional provisions relating to CCOs.
---------------------------------------------------------------------------
\8\ 7 U.S.C. 7a-1(i).
\9\ The Dodd-Frank Act established comparable CCO requirements
for swap data repositories, swap dealers and major swap
participants, FCMs, and swap execution facilities. See Sections 728,
731, 732, and 733, respectively, of the Dodd-Frank Act.
---------------------------------------------------------------------------
C. Proposed Regulations Implementing DCO Core Principles
The Commission is proposing to codify the DCO core principles in
Commission regulations and implement those statutory standards with
regulatory requirements to the extent necessary to ensure that DCOs are
subject to a comprehensive, prudential regulatory regime. This
rulemaking is one of a series that will, in its entirety, propose
regulations to implement all 18 DCO core principles.\10\ Section 725(c)
of the Dodd-Frank Act amended Core Principle A, Compliance, to require
a DCO to comply with each core principle set forth in Section 5b(c)(2)
of the CEA and any requirement that the Commission may impose by rule
or regulation pursuant to Section 8a(5) of the CEA.\11\ Proposed Sec.
39.10 would implement Core Principle A.
---------------------------------------------------------------------------
\10\ See 75 FR 63732 (Oct. 18, 2010) (proposing regulations to
implement Core Principle P (Conflicts of Interest)); and 75 FR 63113
(Oct. 14, 2010) (proposing regulations to implement Core Principle B
(Financial Resources)). Concurrent with issuing this notice, the
Commission also is proposing regulations to implement Core
Principles J (Reporting), K (Recordkeeping), L (Public Information),
and M (Information Sharing). The Commission expects to issue two
additional notices of proposed rulemaking to implement DCO core
principles.
\11\ Additionally, Section 805(a) of the Dodd-Frank Act allows
the Commission to prescribe regulations for DCOs that the Financial
Stability Oversight Council has determined are systemically
important financial market utilities. In a future notice of proposed
rulemaking, the Commission intends to propose a provision that would
require all DCOs, including systemically important DCOs (SIDCOs), to
comply with the core principles and the regulations thereunder,
except to the extent that there are special requirements applicable
to SIDCOs set forth in part 39 of the Commission's regulations.
---------------------------------------------------------------------------
Section 725(c) also amended Core Principle H, Rule Enforcement, to
require a DCO to report to the Commission rule enforcement activities
and sanctions imposed against clearing members. Proposed Sec. 39.17
would implement Core Principle H.
The Dodd-Frank Act amended Core Principle N, Antitrust
Considerations, and Core Principle N now conforms to the amended
antitrust core principle for designated contract markets (DCMs).
Proposed Sec. 39.23 would codify and implement Core Principle N.
Finally, Section 725(c) of the Dodd-Frank Act established a new
Core Principle R, Legal Risk, which is consistent with the legal risk
standard recommended by the Committee on Payment and Settlement Systems
of the central banks of the Group of Ten countries (CPSS) and the
Technical Committee of the International Organization of Securities
Commissions (IOSCO).\12\ Proposed Sec. 39.27 would implement Core
Principle R.
---------------------------------------------------------------------------
\12\ See infra n. 47.
---------------------------------------------------------------------------
The Commission requests comment on all aspects of the proposed
rules, as well as comments on the specific provisions and issues
highlighted in the discussion below.
[[Page 77578]]
II. Discussion
A. Section 1.3 Definitions
The Commission proposes to amend the definitions of ``clearing
member,'' ``clearing organization,'' and ``customer'' found in Sec.
1.3 of its regulations to conform them to the concepts and terminology
of the CEA, as amended. The Commission also is proposing to add to
Sec. 1.3, definitions for ``clearing initial margin,'' ``customer
initial margin,'' ``initial margin,'' ``margin call,'' ``spread
margin,'' and ``variation margin.''
Clearing member. The term ``clearing member'' is currently defined
in Sec. 1.3(c) to mean ``any person who is a member of, or enjoys the
privilege of clearing trades in his own name through, the clearing
organization of a designated contract market or registered derivatives
transaction execution facility.'' \13\ The Commission proposes to amend
Sec. 1.3(c) to define a ``clearing member'' as ``any person \14\ that
has clearing privileges such that it can process, clear and settle
trades through a derivatives clearing organization on behalf of itself
or others.'' This revised definition reflects the fact that a clearing
member could have clearing privileges in connection with contracts that
are not traded on a DCM, and it further clarifies that the term
``clearing member,'' for purposes of the Commission's regulations, is
intended to refer to a person who is authorized to clear through a
registered DCO, even if the DCO is not a membership organization.
---------------------------------------------------------------------------
\13\ 17 CFR 1.3(c).
\14\ The term ``person'' is defined as an individual,
association, partnership, corporation, or trust. See Section 1a(38)
of the CEA; 7 U.S.C. 1a(38); and 17 CFR 1.3(u).
---------------------------------------------------------------------------
Clearing organization. The term ``clearing organization'' is
currently defined in Sec. 1.3(d) as ``the person or organization which
acts as a medium for clearing transactions in commodities for future
delivery or commodity option transactions, or for effecting settlements
of contracts for future delivery or commodity option transactions, for
and between members of any designated contract market or registered
derivatives transaction execution facility.'' \15\ Recognizing that
there may be CFTC regulations or other issuances that remain in effect
and use the term ``clearing organization'' instead of ``derivatives
clearing organization,'' the Commission proposes to include both terms
as alternatives that have the same meaning. The definition would be the
same as the definition of ``derivatives clearing organization'' in
Section 1a(15) of the CEA.\16\ Accordingly, the definition would
eliminate the references to DCMs and derivatives transaction execution
facilities, thereby allowing the definition to encompass futures
contracts and swaps, including swaps traded on a swap execution
facility (SEF).
---------------------------------------------------------------------------
\15\ 17 CFR 1.3(d).
\16\ Section 1a(15) of the CEA; 7 U.S.C. 1a(15), defines a
derivatives clearing organization as follows:
(A) IN GENERAL.--The term ``derivatives clearing organization''
means a clearinghouse, clearing association, clearing corporation,
or similar entity, facility, system, or organization that, with
respect to an agreement, contract, or transaction--
(i) enables each party to the agreement, contract, or
transaction to substitute, through novation or otherwise, the credit
of the derivatives clearing organization for the credit of the
parties;
(ii) arranges or provides, on a multilateral basis, for the
settlement or netting of obligations resulting from such agreements,
contracts, or transactions executed by participants in the
derivatives clearing organization; or
(iii) otherwise provides clearing services or arrangements that
mutualize or transfer among participants in the derivatives clearing
organization the credit risk arising from such agreements,
contracts, or transactions executed by the participants.
(B) EXCLUSIONS.--The term ``derivatives clearing organization''
does not include an entity, facility, system, or organization solely
because it arranges or provides for--
(i) settlement, netting, or novation of obligations resulting
from agreements, contracts, or transactions, on a bilateral basis
and without a central counterparty;
(ii) settlement or netting of cash payments through an interbank
payment system; or
(iii) settlement, netting, or novation of obligations resulting
from a sale of a commodity in a transaction in the spot market for
the commodity.
---------------------------------------------------------------------------
Customer. The Dodd-Frank Act expanded the Commission's regulatory
authority over swaps. The term ``customer'' in Sec. 1.3(k) is
currently defined to refer to a customer trading in any commodity.\17\
The Commission proposes to define customer to refer to trading in any
commodity or swap as defined in Section 1a(47) of the CEA.
---------------------------------------------------------------------------
\17\ 17 CFR 1.3(k).
---------------------------------------------------------------------------
The Commission also is proposing to amend Sec. 1.3 to add
definitions of terms that it expects will be used in future proposed
regulations to implement Core Principle D, Risk Management, as well as
other provisions of the CEA.
Clearing initial margin. Proposed Sec. 1.3(jjj) would define the
term ``clearing initial margin'' to mean initial margin posted by a
clearing member with a DCO.
Customer initial margin. Proposed Sec. 1.3(kkk) would define the
term ``customer initial margin'' to mean initial margin posted by a
customer with an FCM, or by a non-clearing member FCM with a clearing
member.
Initial margin. Proposed Sec. 1.3(lll) would define the term
``initial margin'' to mean money, securities, or property posted by a
party to a futures, option, or swap as performance bond to cover
potential future exposures arising from changes in the market value of
the position.
Margin call. Proposed Sec. 1.3(mmm) would define the term ``margin
call'' to mean a request from an FCM to a customer to post customer
initial margin; or a request by a DCO to a clearing member to post
clearing initial margin or variation margin. This would include margin
calls for additional funds, sometimes referred to as ``super margin''
calls or ``special margin'' calls, both of which are effectively calls
for initial margin.
Spread margin. Proposed Sec. 1.3(nnn) would define the term
``spread margin'' to mean a reduced initial margin that takes into
account correlations between certain related positions held in a single
account.
Variation margin. Proposed Sec. 1.3(ooo) would define the term
``variation margin'' to mean a payment made by a party to a futures,
option, or swap to cover the current exposure arising from changes in
the market value of the position since the trade was executed or the
previous time the position was marked to market.
B. Part 39 Scope and Definitions
The Commission proposes to revise the statement of the scope of
part 39 and to add definitions that will appear elsewhere in part 39.
1. Scope of Part 39
In a future rulemaking, the Commission intends to reorganize part
39 into three subparts, with one subpart containing provisions
applicable only to SIDCOs. Accordingly, the Commission intends to
revise the statement of scope in a future rulemaking to establish that
the provisions of subparts A and B of part 39 will apply to all DCOs,
except to the extent that there are superseding provisions that apply
to SIDCOs in subpart C.\18\ Because this reorganization is not being
proposed in the current rulemaking, the Commission is not yet proposing
any change to the text of Sec. 39.1. However, as a technical matter in
order to propose certain definitions, the Commission is proposing to
redesignate the current text of Sec. 39.1 as Sec. 39.1(a) ``Scope,''
and to add a new paragraph (b) ``Definitions.''
---------------------------------------------------------------------------
\18\ In this future rulemaking, the Commission also expects to
propose a technical amendment to update the Sec. 39.1 citation to
the definition of ``derivatives clearing organization'' in the CEA
(term formerly defined in Section 1a(9) of the CEA; renumbered as
Section 1a(15) by the Dodd-Frank Act).
---------------------------------------------------------------------------
[[Page 77579]]
2. Definitions
Proposed Sec. 39.1(b) would define certain terms, for purposes of
part 39. Although some of these terms may be defined in Sec. 1.3 or
other sections of the Commission's regulations, the definitions set
forth in Sec. 39.1(b) would apply to provisions contained in part 39
and such other rules as may explicitly cross-reference these
definitions.
Back test. The proposed rule would define the term ``back test'' to
mean a test that compares a DCO's initial margin requirements with
historical price changes to determine the extent of actual margin
coverage. The Commission anticipates using this term in regulations
relating to Core Principle D, Risk Management.\19\
---------------------------------------------------------------------------
\19\ See Section 5b(c)(2)(D) of the CEA; 7 U.S.C. 7a-1(c)(2)(D).
---------------------------------------------------------------------------
Compliance policies and procedures. The proposed rule would define
the term ``compliance policies and procedures'' to mean all policies,
procedures, codes, including a code of ethics, safeguards, rules,
programs, and internal controls that are required to be adopted or
established by a DCO pursuant to the CEA, Commission regulations, or
orders. Compliance policies and procedures would include those policies
and procedures that are not explicitly required by law, such as those
relating to customer record protection and procedures and safeguards
for electronic signatures.
Customer account or customer origin. The proposed rule would define
these terms to mean a clearing member's account held on behalf of
customers, as defined in Sec. 1.3(k) of the Commission's regulations.
A customer account is also a futures account, as that term is defined
by Sec. 1.3(vv) of the Commission's regulations. The Commission
proposes to define these terms as distinguishable from a ``house
account'' or ``house origin,'' in connection with proposed reporting
and other requirements under part 39, which may make such a
distinction.\20\
---------------------------------------------------------------------------
\20\ For example, in a separate notice of proposed rulemaking,
the Commission proposes to require DCOs to provide the Commission
with a daily report of initial margin requirements and margin on
deposit for each clearing member, by customer origin and house
origin.
---------------------------------------------------------------------------
House account or house origin. The proposed rule would define
``house account'' or ``house origin'' to mean a clearing member's
combined proprietary accounts, as defined in Sec. 1.3(y).
Key personnel. The proposed rule would define the term ``key
personnel'' to mean personnel who play a significant role in the
operation of the DCO, provision of clearing and settlement services,
risk management, or oversight of compliance with the CEA and Commission
regulations. Key personnel would include, but would not be limited to,
those persons who are or perform the functions of any of the following:
The chief executive officer; president; CCO; chief operating officer;
chief risk officer; chief financial officer; chief technology officer;
and emergency contacts or persons who are responsible for business
continuity or disaster recovery planning or program execution.
Stress test. The proposed rule would define the term ``stress
test'' to mean a test that compares the impact of a potential price
move, change in option volatility, or change in other inputs that
affect the value of a position, to the financial resources of a DCO,
clearing member, or large trader to determine the adequacy of such
financial resources.
Systemically important derivatives clearing organization. The
proposed rule would define the term ``systemically important
derivatives clearing organization'' to mean a financial market utility
that is a DCO registered under Section 5b of the CEA, and which has
been designated by the Financial Stability Oversight Council to be
systemically important. As noted above, the Commission intends that
certain proposed rules would apply only to SIDCOs.
C. Procedures for Registration as a DCO
1. Procedures for DCO Applications
The proposed rules would remove the 90-day expedited review
provision. In 2001, the Commission adopted Sec. 39.3 to implement the
CFMA's core principle regime and to establish registration standards
and procedures for DCOs, which were then a new category of
registrant.\21\ Although the CEA does not require the Commission to
review DCO applications within a prescribed time period or subject to
any prescribed procedures, the Commission nonetheless adopted the time
period and procedures specified in Section 6(a) of the CEA for review
of applications for designation of a contract market or registration of
a derivatives transaction execution facility.\22\ The Commission
initially provided for an expedited 60-day review process, which it
changed to a 90-day review process in 2006.\23\
---------------------------------------------------------------------------
\21\ See 66 FR 45604 (Aug. 29, 2001).
\22\ See 17 CFR 39.3(a) (providing that the Commission will
review the application for registration as a DCO pursuant to the
180-day time frame and procedures specified in Section 6(a) of the
CEA).
\23\ See 71 FR 1953 (Jan. 12, 2006) (extending the 60-day review
period to 90 days based on the Commission's experience in processing
applications).
---------------------------------------------------------------------------
Since 2006, the Commission has learned that a 90-day expedited
review period is not practicable in most instances, particularly in
cases where the margin methodology to be applied or the products to be
cleared are novel or complex. The proposed amendments to Sec. 39.3
would therefore eliminate the 90-day expedited review period provided
under Sec. 39.3(a)(3) and remove related provisions for termination of
the 90-day review under Sec. 39.3(b). The Commission notes that the
180-day review period does not preclude it from rendering a decision in
less than 180 days.
2. Procedures for Transfer of a DCO Registration
The Commission is proposing to add a new paragraph (h) to Sec.
39.3 to formalize the procedures that a DCO must follow when requesting
the transfer of its DCO registration and positions comprising open
interest for clearing and settlement, in anticipation of a corporate
change (e.g., a merger, corporate reorganization, or change in
corporate domicile), which results in the transfer of all or
substantially all of the DCO's assets to another legal entity. Under
proposed Sec. 39.3(h), the DCO would submit to the Commission a
request for transfer no later than three months prior to the
anticipated corporate change, in accordance with the reporting
requirements of proposed Sec. 39.19.\24\ The request would include:
(1) The underlying agreement that governs the corporate change; (2) a
narrative description of the corporate change, including the reason for
the change, its impact on the DCO's financial resources, governance,
and operations, and its impact on the rights and obligations of
clearing members and market participants holding the positions that
comprise the DCO's open interest; (3) a discussion of the transferee's
ability to comply with the CEA, including the core principles
applicable to DCOs, and the Commission's regulations thereunder; (4)
the governing documents of the transferee, including but not limited to
articles of incorporation and bylaws; (5) the transferee's rules marked
to show changes from the current rules of the
[[Page 77580]]
DCO; and (6) a list of contracts, agreements, transactions, or swaps
for which the DCO requests transfer of open interest.
---------------------------------------------------------------------------
\24\ In a separate notice of proposed rulemaking, the Commission
is proposing to require a DCO to notify the Commission of various
corporate events, all of which would require three months advance
notice. The Commission is proposing to allow an exception to the
three-month prior reporting requirement if the DCO does not know and
reasonably could have not have known of the anticipated change three
months prior to that change. In such event, the DCO would be
required to promptly report such change to the Commission as soon as
it knows of the change.
---------------------------------------------------------------------------
Proposed Sec. 39.3(h) also would require, as a condition of
approval, that the DCO submit a representation that it is in compliance
with the CEA, including the DCO core principles, and the Commission's
regulations. In addition, the DCO would have to submit a representation
by the transferee that the transferee understands that a DCO is a
regulated entity that must comply with the CEA, including the DCO core
principles and the Commission's regulations, in order to maintain its
registration as a DCO; and further, that the transferee will continue
to comply with all self-regulatory requirements applicable to a DCO
under the CEA and the Commission's regulations.
The Commission would review any requests for transfer of
registration and open interest as soon as practicable and determine
whether the transferee would be able to continue to operate the DCO in
compliance with the CEA and the Commission's regulations. The request
would be approved or denied pursuant to a Commission order.
The Commission notes that there are differences in the proposed
procedures for registration/designation transfer requests for DCOs,
DCMs, swap execution facilities, and swap data repositories. The
Commission requests comment on the proposed requirements for
registration transfer requests under Sec. 39.3(h), generally, and,
more specifically, solicits comment on the extent to which there should
be uniformity or differentiation in procedures applied to different
types of registrants.
D. Procedures for Submitting DCO Rules To Establish a Portfolio
Margining Program
Section 713(a) of the Dodd-Frank Act amended Section 15(c)(3) of
the Securities Exchange Act of 1934 \25\ to require the SEC to adopt
rules that permit securities to be held in a portfolio margining
account that is regulated as a futures account pursuant to a portfolio
margining program approved by the Commission. Similarly, Section 713(b)
of the Dodd-Frank Act amended Section 4d of the CEA\26\ to require the
Commission to adopt rules that permit futures and options on futures to
be held in a portfolio margining account regulated as a securities
account pursuant to a portfolio margining program approved by the SEC.
In both cases, the SEC and the Commission are required to consult with
each other in the adoption of such rules in order to ensure that the
relevant transactions and accounts are subject to comparable
requirements to the extent practicable for similar products.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78o(c)(3).
\26\ 7 U.S.C. 6d.
---------------------------------------------------------------------------
As a first step towards meeting this goal, the Commission is
proposing to amend part 39 to include procedural requirements for a DCO
that intends to offer a portfolio margining program. Under proposed
Sec. 39.4(e), a DCO seeking to provide clearing and settlement
services for a futures portfolio margining account that holds
securities would have to submit its proposed portfolio margining rules
for Commission approval under Sec. 40.5 of the Commission's
regulations. This will enable the DCO to satisfy the statutory
requirement that the futures portfolio margining program be approved by
the Commission, as a pre-condition to the SEC permitting securities to
be held in the account. Concurrent with its request for rule approval,
the DCO also would be required to submit a petition for a related order
under Section 4d of the CEA.\27\
---------------------------------------------------------------------------
\27\ An order under Section 4d of the CEA would permit the
commingling of exchange-traded futures and options on futures with
securities.
---------------------------------------------------------------------------
The Commission is proposing only procedural requirements as part of
this notice. It anticipates consulting with the SEC in the future to
determine the substantive requirements it would impose in approving a
futures portfolio margining program and, additionally, in granting an
exemption under Section 4(c) of the CEA and an order under Section 4d
of the CEA to permit futures and options on futures to be held in a
securities portfolio margining account. The Dodd-Frank Act does not set
a deadline for these actions, and the Commission believes that it is
important to give this matter due consideration, both in terms of
consultation with the SEC and, more broadly, in obtaining industry
views on the topic before proposing substantive regulations or other
guidance. The Commission requests comment on possible strategies for
the Commission and the SEC to address issues raised by portfolio
margining and to facilitate the availability of portfolio margining
programs for qualified participants.
E. Compliance With Core Principles
As noted above, Section 725(c) of the Dodd-Frank Act amended Core
Principle A to require a registered DCO to comply with each core
principle set forth in Section 5b(c)(2) of the CEA and any requirement
that the Commission may impose by rule or regulation pursuant to
Section 8a(5) of the CEA.\28\ The Dodd-Frank Act also provides a DCO
with reasonable discretion to establish the manner by which it complies
with each core principle.\29\ Proposed Sec. Sec. 39.10(a) and 39.10(b)
would codify these provisions, respectively.
---------------------------------------------------------------------------
\28\ Core Principle A provides that ``To be registered and to
maintain registration as a derivatives clearing organization, a
derivatives clearing organization shall comply with each core
principle described in this paragraph and any requirement that the
Commission may impose by rule or regulation pursuant to section
8a(5).'' 7 U.S.C. 7a-1(c)(2)(A)(i).
\29\ Core Principle A provides that ``Subject to any rule or
regulation prescribed by the Commission, a derivatives clearing
organization shall have reasonable discretion in establishing the
manner by which the derivatives clearing organization complies with
each core principle described in this paragraph.'' 7 U.S.C. 7a-
1(c)(2)(A)(ii).
---------------------------------------------------------------------------
Section 725(b) of the Dodd-Frank Act amended Section 5b of the CEA
to require each DCO to designate an individual as its CCO, responsible
for the DCO's compliance with Commission regulations and filing an
annual compliance report.\30\ Proposed Sec. 39.10(c)(1) would require
each DCO to establish the position of CCO and to designate a CCO. The
proposed provision also would require that the DCO provide the CCO with
the responsibility and authority to develop and enforce appropriate
compliance policies and procedures to fulfill his or her duties.
---------------------------------------------------------------------------
\30\ See Section 5b(i) of the CEA; 7 U.S.C. 7a-1(i).
---------------------------------------------------------------------------
Proposed Sec. 39.10(c)(1)(i) would require a DCO to designate an
individual with the background and skills appropriate for fulfilling
the responsibilities of the position. The rule also would require the
person to meet minimum ethical requirements, and prohibit from serving
as a CCO any person who would be disqualified from registration under
Sections 8a(2) or 8a(3) of the CEA.\31\
---------------------------------------------------------------------------
\31\ 7 U.S.C. 12a(2) and (3).
---------------------------------------------------------------------------
The Dodd-Frank Act requires that a CCO report directly to the board
of directors or the senior officer of the DCO.\32\ This requirement is
codified as proposed Sec. 39.10(c)(1)(ii). The proposed rule also
would require the board of directors or the senior officer to approve
the compensation of the CCO.
---------------------------------------------------------------------------
\32\ See Section 5b(i)(2)(A) of the CEA; 7 U.S.C. 7a-1(i)(2)(A).
Proposed Sec. 1.3(zz) defines the term ``Board of Directors'' to
mean ``the Board of Directors or Board of Governors of a company or
organization, or equivalent governing body.'' See 75 FR at 63747.
---------------------------------------------------------------------------
Proposed Sec. 39.10(c)(1)(iii) would require a CCO to meet with
the board of directors or the senior officer at least once a year to
discuss the effectiveness of the DCO's compliance policies and
[[Page 77581]]
procedures, as well as the administration of those policies and
procedures by the CCO. The meeting would afford an opportunity for the
CCO and the board of directors or the senior officer to speak freely
about any compliance issues of concern, and would further the
Commission's goal of promoting self-assessment and internal oversight
of compliance matters. The Commission notes that the requirement for an
annual discussion would not preclude the board of directors or the
senior officer from meeting with the CCO more frequently.\33\
---------------------------------------------------------------------------
\33\ In addition to the board of directors or the senior
officer, under the Commission's proposed Sec. 39.13(g), a DCO's
Risk Management Committee would be required to review the
performance of the CCO and make recommendations to the board. See 75
FR at 63750.
---------------------------------------------------------------------------
Proposed Sec. 39.10(c)(1)(iv) would require that a change in the
designation of the individual serving as the CCO be reported to the
Commission, in accordance with the requirements of proposed Sec.
39.19(c)(4)(xi).\34\
---------------------------------------------------------------------------
\34\ The notification requirement is being proposed by the
Commission in a separate notice of proposed rulemaking.
---------------------------------------------------------------------------
The Dodd-Frank Act sets forth the duties of a CCO,\35\ and proposed
Sec. 39.10(c)(2) codifies those duties in paragraphs (i)-(vi).\36\ The
Commission believes the statutory duties are largely self-explanatory,
but in the interest of clarity, those duties are briefly discussed.
---------------------------------------------------------------------------
\35\ See Section 5b(i)(2) of the CEA; 7 U.S.C. 7a-1(i)(2).
\36\ The Commission notes, however, that the first statutory
requirement identified under the heading ``duties,'' i.e., that the
CCO report to the board of directors or the senior officer, is
codified in proposed Sec. 39.10(c)(1)(ii).
---------------------------------------------------------------------------
Proposed Sec. 39.10(c)(2)(i) would require the CCO to review the
DCO's compliance with each core principle.
Under proposed Sec. 39.10(c)(2)(ii), in consultation with the
board of directors or the senior officer, the CCO also would be
required to resolve any conflicts of interest that may arise. These
conflicts would include: Conflicts between business considerations and
compliance requirements; conflicts between the consideration to
restrict clearing membership to certain types of clearing members and
the requirement that a DCO provide fair and open access; conflicts
between and among different categories of clearing members of the DCO;
conflicts between a DCO's clearing members and its management; and
conflicts between a DCO's management and members of the board of
directors.
Proposed Sec. Sec. 39.10(c)(2)(iii) and (iv) would require the CCO
to administer each policy and procedure that is required under Section
5b of the CEA, and ensure compliance with the CEA and Commission
regulations relating to agreements, contracts, or transactions, and
with Commission regulations under Section 5b of the CEA, respectively.
Under proposed Sec. 39.10(c)(2)(v), the CCO also would establish
procedures for the remediation of noncompliance issues identified by
the CCO through a compliance office review, look-back, internal or
external audit finding, self-reported error, or validated complaint.
Finally, under proposed Sec. 39.10(c)(2)(vi), a CCO would establish
and follow appropriate procedures for the handling, management
response, remediation, retesting, and closing of noncompliance issues.
In addition to the duties set forth in the Dodd-Frank Act, proposed
Sec. 39.10(c)(2)(vii) would require a CCO to develop a compliance
manual designed to promote compliance with the applicable laws, rules,
and regulations, and a code of ethics designed to prevent ethical
violations and to promote ethical conduct. The Commission believes that
these tools are essential to a CCO's ability to fulfill the duties
imposed by the CEA and the Commission's regulations.
Section 725(b) of the Dodd-Frank Act requires a CCO to prepare an
annual report that describes the DCO's compliance with the CEA,
regulations promulgated under the CEA, and each policy and procedure of
the DCO, including the code of ethics and conflicts of interest
policies.\37\ Proposed Sec. 39.10(c)(3) would codify these
requirements.
---------------------------------------------------------------------------
\37\ See Section 5b(i)(3) of the CEA; 7 U.S.C. 7a-1(i)(3).
---------------------------------------------------------------------------
Proposed Sec. 39.10(c)(4) would establish requirements for
submission of the annual report to the Commission. The rule would
require the CCO to provide the annual report to the board or the senior
officer for review prior to submitting the annual report to the
Commission, and it would require the DCO to record such action in board
minutes or otherwise, as evidence of compliance with this requirement.
The proposed rule would further specify that the annual report be
electronically provided to the Commission not more than 90 days after
the end of the DCO's fiscal year,\38\ and that it be submitted
concurrently with the fiscal year-end audited financial statement that
is required to be furnished to the Commission pursuant to proposed
Sec. 39.19(c)(3)(ii).\39\
---------------------------------------------------------------------------
\38\ See also Sec. 1.10(b)(2)(ii) (90-day time period for an
FCM to submit the Form 1-FR-FCM to the Commission).
\39\ The annual reporting requirement of proposed Sec.
39.19(c)(3)(ii) is being proposed by the Commission in a separate
notice of proposed rulemaking.
---------------------------------------------------------------------------
The Dodd-Frank Act requires the CCO's annual report to include a
certification that, under penalty of law, the compliance report is
accurate and complete.\40\ Proposed Sec. 39.10(c)(4)(ii) would codify
this certification requirement.
---------------------------------------------------------------------------
\40\ See Section 5b(i)(3)(B)(ii) of the CEA; 7 U.S.C. 7a-
1(i)(3)(B)(ii).
---------------------------------------------------------------------------
Proposed Sec. 39.10(c)(4)(iii) would require a DCO to promptly
submit an amended annual report if material errors or omissions in the
report are identified after the report is submitted to the Commission.
If a DCO is unable to submit an annual report within 90 days after the
end of the DCO's fiscal year, proposed Sec. 39.10(c)(4)(iv) would
permit the DCO to request that the Commission extend the deadline,
provided the DCO's failure to submit the report in a timely manner
could not be avoided without unreasonable effort or expense. Extensions
of the deadline would be granted at the discretion of the Commission.
Proposed Sec. 39.10(c)(5) would require a DCO to maintain: (i) A
copy of the policies and procedures adopted in furtherance of
compliance with the CEA and Commission regulations; (ii) copies of
materials, including written reports provided to the board of directors
or the senior officer in connection with review of the annual report;
and (iii) any records relevant to the DCO's annual report, including
work papers and financial data. These records are designed to provide
Commission staff with a basis upon which to determine whether the DCO
has complied with the applicable Commission regulations and DCO rules
and policies. The DCO would be required to maintain these records in
accordance with Sec. 1.31 and proposed Sec. 39.20 of the Commission's
regulations.
The Commission specifically seeks comment on the degree of
flexibility in the reporting structure for CCOs that should be afforded
under the proposed rules. Specifically, the Commission requests comment
on: (i) Whether it would be more appropriate for a CCO to report to the
senior officer or the board of directors; (ii) whether the senior
officer or board of directors generally is a stronger advocate of
compliance matters within an organization; and (iii) whether the
proposed rules allow for sufficient flexibility with regard to a DCO's
business structure.
The Commission also is seeking comment on whether additional
limitations should be placed on the persons who may be designated as a
CCO. For example, should the
[[Page 77582]]
Commission restrict the CCO position from being held by an attorney who
represents the DCO or its board of directors, such as an in-house or
general counsel? The rationale for such a restriction is based on the
concern that the interests of defending the DCO would be in conflict
with the duties of the CCO.
The Commission specifically seeks comment on whether there is a
need for a regulation requiring the DCO to insulate a CCO from undue
pressure and coercion. Is it necessary to adopt rules to address the
potential conflict between and among compliance interests, commercial
interests, and ownership interests of a DCO? If there is no need for
such a provision, how would such potential conflicts be addressed?
The Commission additionally requests comment on an appropriate
effective date for the CCO requirements. In particular, for a DCO that
does not currently have an employee designated to perform the function
of a CCO, what is a reasonable time frame for hiring a CCO and for
implementing the required compliance policies and procedures set forth
in Sec. 39.10?
F. Rule Enforcement Requirements
Section 725(c) of the Dodd-Frank Act amended Core Principle H, Rule
Enforcement, to require a DCO to maintain adequate arrangements and
resources for the effective monitoring and enforcement of compliance
with its rules and resolution of disputes.\41\ Proposed Sec.
39.17(a)(1) would codify these requirements. Section 725(c) of the
Dodd-Frank Act also required a DCO to have the authority and ability to
discipline, limit, suspend, or terminate the activities of a member or
participant due to a violation by the member or participant of any rule
of the derivatives clearing organization.\42\ Proposed Sec.
39.17(a)(2) would codify this requirement. Additionally, pursuant to
the reporting requirement of Core Principle H, proposed Sec.
39.17(a)(3) would cross-reference the proposed rule enforcement
reporting requirements of proposed Sec. 39.19(c)(4)(xiii).\43\
---------------------------------------------------------------------------
\41\ Core Principle H provides that:
Each derivatives clearing organization shall--
(i) maintain adequate arrangements and resources for--
(I) the effective monitoring and enforcement of compliance with
the rules of the derivatives clearing organization; and
(II) the resolution of disputes;
(ii) have the authority and ability to discipline, limit,
suspend, or terminate the activities of a member or participant due
to a violation by the member or participant of any rule of the
derivatives clearing organization; and
(iii) report to the Commission regarding rule enforcement
activities and sanctions imposed against members and participants as
provided in clause (ii).
See Section 5b(c)(2)(H) of the CEA; 7 U.S.C. 7a-1(c)(2)(H).
\42\ Id.
\43\ The Commission is proposing reporting requirements in a
separate notice of proposed rulemaking.
---------------------------------------------------------------------------
Under proposed Sec. 39.17(b), the board of directors of a DCO may
delegate to the DCO's Risk Management Committee responsibility for
compliance with the requirements of paragraph (a) of Sec. 39.17,
unless the responsibilities are otherwise required to be carried out by
the CCO.
Finally, proposed Sec. 39.17(c) would cross-reference proposed
Sec. 39.10(c)(2)(ii), which provides the CCO with the duty to resolve
conflicts of interest.\44\
---------------------------------------------------------------------------
\44\ See supra Section II.E. of this notice.
---------------------------------------------------------------------------
G. Antitrust Considerations
Section 725(c) of the Dodd-Frank Act amended Core Principle N,
Antitrust Considerations, conforming the standard for DCOs to the
standard applied to DCMs under Core Principle 19.\45\ Proposed Sec.
39.23 would codify Core Principle N as amended by the Dodd-Frank Act.
The Commission is taking the same approach with respect to DCM Core
Principle 19, but requests comment on whether there are additional
standards or requirements that should be imposed to more effectively
implement the purposes of DCO Core Principle N.
---------------------------------------------------------------------------
\45\ Core Principle N provides as follows: ``Unless necessary or
appropriate to achieve the purposes of this Act, a derivatives
clearing organization shall not--(i) adopt any rule or take any
action that results in any unreasonable restraint of trade; or (ii)
impose any material anticompetitive burden.'' See Section
5b(c)(2)(N) of the CEA; 7 U.S.C. 7a-1(c)(2)(N). See also Section
5(d)(19) of the CEA; 7 U.S.C. 7(d)(19) (DCM Core Principle 19); and
proposed Sec. 38.100 of the Commission's regulations, which is
being proposed by the Commission in a separate notice of proposed
rulemaking.
---------------------------------------------------------------------------
H. Legal Risk Requirements
Section 725(c) of the Dodd-Frank Act set forth a new Core Principle
R, Legal Risk. Pursuant to Core Principle R, ``[e]ach derivatives
clearing organization shall have a well-founded, transparent, and
enforceable legal framework for each aspect of the activities of the
derivatives clearing organization.'' \46\ This core principle is
consistent with the recommendations of CPSS-IOSCO, which conclude that
``if the legal framework [of a central counterparty (CCP), in this
case, a DCO] is underdeveloped, opaque or inconsistent, the resulting
legal risk could undermine the [CCP]'s ability to operate
effectively,'' and increase the likelihood that market participants may
suffer a loss because the CCP's rules, procedures, and contracts that
support its activities, property rights, and other interests are not
supported by relevant laws and regulations.\47\
---------------------------------------------------------------------------
\46\ Section 5b(c)(2)(R) of the CEA; 7 U.S.C. 7a-1(c)(2)(R).
\47\ See Comm. on Payment & Settlement Sys. & Technical Comm. of
the Int'l Org. of the Sec. Comm'ns CPSS-IOSCO, Recommendations for
Central Counterparties, at 13, CPSS Publication No. 64 (Nov. 2004).
In November 2004, the CPSS-IOSCO Task Force on Securities Settlement
Systems issued Recommendations for Central Counterparties. The CPSS-
IOSCO recommendations identify legal risk as the risk that a CCP's
rules, procedures, and contracts are not supported by relevant laws
and regulations. Id. at 9. Under CPSS-IOSCO Recommendation 1, a CCP
should mitigate legal risk through the development of a sound, legal
framework. Id. at 4, 13. The Commission notes that CPSS and IOSCO
are currently reviewing this standard and it may be revised.
---------------------------------------------------------------------------
Proposed Sec. 39.27(a) would address these concerns, in part, by
requiring a DCO to be duly organized, legally authorized to conduct
clearing business in the relevant jurisdiction, and to remain in good
standing at all times. The proposed rule also would require a DCO that
provides clearing services outside the United States to be duly
organized to conduct business in the relevant jurisdiction, to remain
in good standing at all times, and to be authorized by the appropriate
foreign licensing authority.
Proposed Sec. 39.27 would set forth requirements for various
activities of a DCO, as applicable. Proposed Sec. 39.27(b)(1) would
require the legal framework of a DCO to provide for the DCO to act as a
counterparty, including novation. Through novation, the DCO is
substituted as the counterparty to both the buyer and the seller of the
original contract.
Proposed Sec. 39.27(b)(2) would require the legal framework of a
DCO to address netting arrangements. Netting reduces the number and
value of deliveries and payments needed to settle a set of transactions
and reduces the potential losses to a DCO in the event of a clearing
member's default.
Proposed Sec. 39.27(b)(3) would require the legal framework to
provide for the DCO's interest in collateral. Generally, collateral
arrangements involve either a pledge or a title transfer. In either
case, a DCO should have a high degree of assurance that its interest
has been validly created in the relevant jurisdiction, validly
perfected, if necessary, and is enforceable under applicable law.
Proposed Sec. 39.27(b)(4) would require the legal framework to
provide for the steps that the DCO would take to address the default of
a clearing member, including but not limited to, the unimpeded ability
to liquidate
[[Page 77583]]
collateral and close out or transfer positions in a timely manner. A
DCO must act quickly in the event of a clearing member's default, and
ambiguity over the enforceability of its procedures could delay, and
possibly prevent altogether, a DCO from taking actions that fulfill its
obligations to non-defaulting clearing members or minimize its
potential losses.
A critical issue in a DCO's settlement arrangements is the timing
of the finality of funds transfers between the DCO's settlement
accounts and the accounts of its clearing members. To address this,
proposed Sec. 39.27(b)(5) would require the legal framework of a DCO
to ensure that its settlement bank arrangements provide that funds
transfers are final, i.e., irrevocable and unconditional, when the
DCO's accounts are debited and credited.
In circumstances where a DCO crosses borders through linkages,
remote clearing members, or the taking of collateral, the rules
governing the DCO's activities should clearly indicate the law that is
intended to apply to each aspect of a DCO's operations. Potential
conflicts of law should be identified and the DCO should address
conflict of law issues when there is a difference in the substantive
laws of the jurisdictions that have potential interests in a DCO's
activities. Proposed Sec. 39.27(c)(1) would require the legal
framework of a DCO that provides clearing services outside the United
States to identify and address any conflict of law issues and, in
entering into cross-border agreements, to specify a choice of law.
Proposed Sec. 39.27(c)(2) would require a DCO to be able to
demonstrate the enforceability of its choice of law in relevant
jurisdictions and that its rules, procedures and contracts are
enforceable in all relevant jurisdictions. This could be accomplished,
for example, by means of a legal opinion.
The Commission solicits comment as to the legal risks addressed in
proposed Sec. 39.27 and whether the rule should address additional
legal risks.
III. Technical Amendments
Section 39.3(a) currently requires that an organization applying
for DCO registration must ``file electronically an application for
registration with the Secretary of the Commission at its Washington,
DC, headquarters.'' The Commission is proposing to revise this
provision and Sec. Sec. 39.3(c) (withdrawal of an application for
registration) and 39.3(f) (request for vacation of registration) by
instructing applicants to file electronically an application for
registration with the Secretary in the form and manner provided by the
Commission. Given the shift from paper-based to electronic submissions,
it is no longer necessary to specify the location of the Secretary.
Moreover, because the Commission may modify procedures for electronic
submissions from time to time, the proposed rule would not specify
filing instructions. The Commission's filing procedures will be posted
on its Web site and any further questions can be addressed to the
Office of the Secretary.
The Commission also is proposing conforming amendments to
paragraphs (a)(1), (c), (e), and (g) of Sec. 39.3, to reflect the
deletion of current paragraphs (a)(3) and (b) related to the
elimination of the 90-day expedited review period for DCO applications.
In addition, the Commission is proposing amendments to the
delegation provision of current paragraph (g), to correct the reference
to ``delegates,'' by substituting the word ``designee,'' in reference
to action taken by the Director of the Division of Clearing and
Intermediary Oversight or the Director's designee with the concurrence
of the General Counsel or the General Counsel's designee.
The Commission is proposing to revise Sec. 39.4(c)(2) to remove
the reference to accepting for clearing a new product that is not
traded on a ``derivatives transaction execution facility'' and
inserting in its place a reference to a ``swap execution facility.''
IV. Effective Date
The Commission is proposing that the effective date for the
proposed regulations, except those relating to the CCO under proposed
Sec. 39.3(c), be 30 days after publication of final rules in the
Federal Register. The Commission is proposing that the requirements for
CCOs become effective not more than 180 days from the date the final
rules are published in the Federal Register. The Commission believes
that this would give DCOs adequate time to implement the CCO
regulations which, depending on the DCO, might include hiring a CCO and
putting into place a compliance program. The Commission requests
comment on whether the proposed effective dates are appropriate and, if
not, the Commission further requests comment on possible alternative
effective dates and the basis for any such alternative dates.
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \48\ requires Federal
agencies, in promulgating regulations, to consider the impact of those
regulations on small businesses. The regulations adopted herein will
affect DCOs. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its regulations on small entities in
accordance with the RFA,\49\ and it has previously determined that DCOs
are not small entities for the purpose of the RFA.\50\ Accordingly,
pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of the Commission,
certifies that the proposed regulations will not have a significant
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\48\ 5 U.S.C. 601 et seq.
\49\ ``Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,''
47 FR 18618 (Apr. 30, 1982).
\50\ See ``A New Regulatory Framework for Clearing
Organizations,'' 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \51\ imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any collection of information as defined by the PRA. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number. OMB has not yet assigned a control number to the
new collection.
---------------------------------------------------------------------------
\51\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
This proposed rulemaking would result in new collection of
information requirements within the meaning of the PRA. The Commission
therefore is submitting this proposal to the Office of Management and
Budget (``OMB'') for review. If adopted, responses to this collection
of information would be mandatory.
The Commission will protect proprietary information according to
the Freedom of Information Act and 17 CFR part 145, ``Commission
Records and Information.'' In addition, Section 8(a)(1) of the Act
strictly prohibits the Commission, unless specifically authorized by
the Act, from making public ``data and information that would
separately disclose the business transactions or market positions of
any person and trade secrets or names of customers.'' The Commission
also is required to protect certain information contained in a
government system of records according to the Privacy Act of 1974, 5
U.S.C. 552a.
1. Information Provided by Reporting Entities/Persons
Section 725 of the Dodd-Frank Act and proposed regulations require
each
[[Page 77584]]
respondent to file an annual report with the Commission. Commission
staff estimates that each respondent would expend 40-80 hours to
prepare each annual report, depending on the size of the DCO.
Commission staff estimates that respondents could expend $4,000 to
$8,000 annually, based on an hourly cost of $100, to comply with the
proposed regulations.
The proposed regulations also require each respondent to retain
certain records. Each respondent must retain: (1) A copy of the
policies and procedures adopted in furtherance of compliance with the
CEA; (2) copies of materials, including written reports provided to the
board of directors in connection with the board's review of the annual
report; and (3) any records relevant to the annual report, including,
but not limited to, work papers and other documents that form the basis
of the report, and memoranda, correspondence, other documents, and
records that are (a) created, sent or received in connection with the
annual report and (b) contain conclusions, opinions, analyses, or
financial data related to the annual report. Staff believes the cost of
keeping these electronic documents will not exceed more than $1000
annually.
2. Information Collection Comments
The Commission invites the public and other federal agencies to
comment on any aspect of the reporting and recordkeeping burdens
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (i) Evaluate whether the proposed
collection of information is necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collection of information; (iii)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (iv) minimize the
burden of the collection of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at
[email protected]. Please provide the Commission with a copy
of submitted comments so that they can be summarized and addressed in
the final rule. Refer to the Addresses section of this notice of
proposed rulemaking for comment submission instructions to the
Commission. A copy of the supporting statements for the collections of
information discussed above may be obtained by visiting RegInfo.gov.
OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication of this release.
Consequently, a comment to OMB is most assured of being fully effective
if received by OMB (and the Commission) within 30 days after
publication of this notice of proposed rulemaking.
C. Cost-Benefit Analysis
Section 15(a) of the CEA \52\ requires the Commission to consider
the costs and benefits of its actions before issuing a rulemaking under
the CEA. By its terms, Section 15(a) does not require the Commission to
quantify the costs and benefits of a rule or to determine whether the
benefits of the rulemaking outweigh its costs; rather, it requires that
the Commission ``consider'' the costs and benefits of its action.
Section 15(a) further specifies that the costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
(1) Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission may in its discretion give
greater weight to any one of the five enumerated areas and could in its
discretion determine that, notwithstanding its costs, a particular rule
is necessary or appropriate to protect the public interest or to
effectuate any of the provisions or accomplish any of the purposes of
the CEA.
---------------------------------------------------------------------------
\52\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
Summary of Proposed Requirements
Proposed amendments to part 39 of the Commission's regulations
would establish the regulatory standards for compliance with DCO core
principles regarding compliance, rule enforcement, antitrust, and legal
risk, as well as CCO requirements set forth in Section 5b of the CEA.
The proposed amendments to part 39 also would revise procedures for DCO
applications, clarify procedures for the transfer of a DCO
registration, and add requirements for approval of DCO rules
establishing a portfolio margining program for customer accounts
carried by an FCM/BD.
Costs
The Commission has determined that the cost to market participants
and the public if these rules are not adopted could be substantial.
Significantly, without these rules to promote a culture of
institutional ethics and compliance, sound risk management and the
financial integrity of the futures markets would not be strengthened,
to the detriment of market participants and the public. Moreover,
competitiveness would be affected without the prohibition against DCO
rules and other actions that would result in unreasonable restraints of
trade or material, anticompetitive burdens.
Benefits
With respect to benefits, the Commission has determined that the
benefits of the proposed rules are many and substantial. DCO
registration applications will be processed transparently and
efficiently, making clearing services available to the futures and swap
markets, in order to protect the integrity of these markets through the
sound risk management practices associated with clearing and the
efficiency that competition between clearinghouses will foster. The
protection of market participants, financial integrity of the markets,
and sound risk management will further be promoted by the compliance of
each DCO with the rules and standards that are being adopted to
implement the core principles, notably those associated with conflicts
of interest, portfolio margining, financial safeguards, and legal
certainty regarding margin, member defaults, settlement and funds
transfers, and conflicts of law.
Public Comment. The Commission invites public comment on its cost-
benefit considerations. Commenters are also invited to submit any data
or other information that they may have quantifying or qualifying the
costs and benefits of the Proposal with their comment letters.
List of Subjects
17 CFR Part 1
Definitions, Commodity futures, and Swaps.
17 CFR Part 39
Definitions, Commodity futures, Reporting and recordkeeping
requirements, and Swaps.
In light of the foregoing, the Commission hereby proposes to amend
parts 1 and 39 of Title 17 of the Code of Federal Regulations as
follows:
[[Page 77585]]
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
Authority and Issuance
1. The authority for part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c,
13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Dodd-
Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-
203, 124 Stat. 1376 (2010).
2. Amend Sec. 1.3 by revising paragraphs (c), (d), and (k), and
adding paragraphs (jjj), (kkk), (lll), (mmm), (nnn), and (ooo) to read
as follows:
Sec. 1.3 Definitions.
* * * * *
(c) Clearing member. This term means any person that has clearing
privileges such that it can process, clear and settle trades through a
derivatives clearing organization on behalf of itself or others. The
derivatives clearing organization need not be organized as a membership
organization.
(d) Clearing organization or derivatives clearing organization.
This term means a clearinghouse, clearing association, clearing
corporation, or similar entity, facility, system, or organization that,
with respect to an agreement, contract, or transaction--
(1) Enables each party to the agreement, contract, or transaction
to substitute, through novation or otherwise, the credit of the
derivatives clearing organization for the credit of the parties;
(2) Arranges or provides, on a multilateral basis, for the
settlement or netting of obligations resulting from such agreements,
contracts, or transactions executed by participants in the derivatives
clearing organization; or
(3) Otherwise provides clearing services or arrangements that
mutualize or transfer among participants in the derivatives clearing
organization the credit risk arising from such agreements, contracts,
or transactions executed by the participants.
(4) Exclusions. The terms clearing organization and derivatives
clearing organization do not include an entity, facility, system, or
organization solely because it arranges or provides for--
(i) Settlement, netting, or novation of obligations resulting from
agreements, contracts or transactions, on a bilateral basis and without
a central counterparty;
(ii) Settlement or netting of cash payments through an interbank
payment system; or
(iii) Settlement, netting, or novation of obligations resulting
from a sale of a commodity in a transaction in the spot market for the
commodity.
* * * * *
(k) Customer; commodity customer; swap customer. These terms have
the same meaning and refer to a customer trading in any commodity named
in the definition of commodity herein, or in any swap as defined in
section 1a(47) of the Act: Provided, however, an owner or holder of a
proprietary account as defined in paragraph (y) of this section shall
not be deemed to be a customer within the meaning of section 4d of the
Act, the regulations that implement sections 4d and 4f of the Act and
Sec. 1.35, and such an owner or holder of such a proprietary account
shall otherwise be deemed to be a customer within the meaning of the
Act and Sec. Sec. 1.37 and 1.46 and all other sections of these rules,
regulations, and orders which do not implement sections 4d and 4f of
the Act.
* * * * *
(jjj) Clearing initial margin. This term means initial margin
posted by a clearing member with a derivatives clearing organization.
(kkk) Customer initial margin. This term means initial margin
posted by a customer with a futures commission merchant, or by a non-
clearing member futures commission merchant with a clearing member.
(lll) Initial margin. This term means money, securities, or
property posted by a party to a futures, option, or swap as performance
bond to cover potential future exposures arising from changes in the
market value of the position.
(mmm) Margin call. This term means a request from a futures
commission merchant to a customer to post customer initial margin; or a
request by a derivatives clearing organization to a clearing member to
post clearing initial margin or variation margin.
(nnn) Spread margin. This term means reduced initial margin that
takes into account correlations between certain related positions held
in a single account.
(ooo) Variation margin. This term means a payment made by a party
to a futures, option, or swap to cover the current exposure arising
from changes in the market value of the position since the trade was
executed or the previous time the position was marked to market.
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
Authority and Issuance
3. The authority for part 39 is revised to read as follows:
Authority: 7 U.S.C. 2, 5, 6, 6d, 7a-1,7a-2, and 7b as amended
by the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010).
4. Amend Sec. 39.1 by:
a. Redesignating the existing text as paragraph (a);
b. Adding a new heading to newly designated paragraph (a); and
c. Adding a new paragraph (b) to read as follows:
Sec. 39.1 Scope and Definitions.
(a) Scope. * * *
(b) Definitions. For the purposes of this part,
Back test means a test that compares a derivatives clearing
organization's initial margin requirements with historical price
changes to determine the extent of actual margin coverage.
Compliance policies and procedures means all policies, procedures,
codes, including a code of ethics, safeguards, rules, programs, and
internal controls that are required to be adopted or established by a
derivatives clearing organization pursuant to the Act, Commission
regulations, or orders, or that otherwise facilitate compliance with
the Act and Commission regulations.
Customer account or customer origin means a clearing member's
account held on behalf of customers, as defined in Sec. 1.3(k) of this
chapter. A customer account is also a futures account, as that term is
defined by Sec. 1.3(vv) of this chapter.
House account or house origin means a clearing member's combined
proprietary accounts, as defined in Sec. 1.3(y) of this chapter.
Key personnel means derivatives clearing organization personnel who
play a significant role in the operations of the derivatives clearing
organization, the provision of clearing and settlement services, risk
management, or oversight of compliance with the Act and Commission
regulations and orders. Key personnel include, but are not limited to,
those persons who are or perform the functions of any of the following:
chief executive officer; president; chief compliance officer; chief
operating officer; chief risk officer; chief financial officer; chief
technology officer; and emergency contacts or persons who are
responsible for business continuity or disaster recovery planning or
program execution.
Stress test means a test that compares the impact of a potential
price move, change in option volatility, or change in other inputs that
affect the value of a position, to the financial resources of a
derivatives clearing organization, clearing member, or large trader, to
[[Page 77586]]
determine the adequacy of such financial resources.
Systemically important derivatives clearing organization means a
financial market utility that is a derivatives clearing organization
registered under section 5b of the Act (7 U.S.C. 7a-1), which has been
designated by the Financial Stability Oversight Council to be
systemically important.
5. Amend Sec. 39.3 by revising paragraph (a)(1), removing
paragraph (a)(3), removing and reserving paragraph (b), revising
paragraphs (c), (e), (f), and (g)(1), and adding paragraph (h) to read
as follows:
Sec. 39.3 Procedures for registration.
(a) * * *
(1) An organization desiring to be registered as a derivatives
clearing organization shall file electronically an application for
registration with the Secretary of the Commission in the form and
manner provided by the Commission. The Commission will review the
application for registration as a derivatives clearing organization
pursuant to the 180-day timeframe and procedures specified in section
6(a) of the Act. The Commission may approve or deny the application or,
if deemed appropriate, register the applicant as a derivatives clearing
organization subject to conditions.
* * *
(b) [Reserved].
(c) Withdrawal of application for registration. An applicant for
registration may withdraw its application submitted pursuant to
paragraph (a) of this section by filing electronically such a request
with the Secretary of the Commission in the form and manner provided by
the Commission. Withdrawal of an application for registration shall not
affect any action taken or to be taken by the Commission based upon
actions, activities, or events occurring during the time that the
application for registration was pending with the Commission.
* * * * *
(e) Reinstatement of dormant registration. Before listing or
relisting contracts for clearing, a dormant registered derivatives
clearing organization as defined in Sec. 40.1 of this chapter must
reinstate its registration under the procedures of paragraph (a) of
this section; provided, however, that an application for reinstatement
may rely upon previously submitted materials that still pertain to, and
accurately describe, current conditions.
(f) Request for vacation of registration. A registered derivatives
clearing organization may vacate its registration under section 7 of
the Act by filing electronically such a request with the Secretary of
the Commission in the form and manner provided by the Commission.
Vacation of registration shall not affect any action taken or to be
taken by the Commission based upon actions, activities or events
occurring during the time that the facility was registered by the
Commission.
(g) * * *
(1) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Clearing and Intermediary Oversight or
the Director's designee, with the concurrence of the General Counsel or
the General Counsel's designee, the authority to notify an applicant
seeking designation under section 6(a) of the Act that the application
is materially incomplete and the running of the 180-day period is
stayed.
* * * * *
(h) Request for transfer of registration and open interest. (1) In
anticipation of a corporate change that will result in the transfer of
all or substantially all of a derivatives clearing organization's
assets to another legal entity, the derivatives clearing organization
shall submit a request for approval to transfer the derivatives
clearing organization's registration and positions comprising open
interest for clearing and settlement.
(2) Timing of submission and other procedural requirements. (i) The
request shall be submitted no later than three months prior to the
anticipated corporate change, or as otherwise permitted under Sec.
39.19(c)(4)(x)(C) of this part.
(ii) The derivatives clearing organization shall submit a request
for transfer by filing electronically such a request with the Secretary
of the Commission in the form and manner provided by the Commission.
(iii) The derivatives clearing organization shall submit a
confirmation of change report pursuant to Sec. 39.19(c)(4)(x)(D) of
this part.
(3) Required information. The request shall include the following:
(i) The underlying agreement that governs the corporate change;
(ii) A narrative description of the corporate change, including the
reason for the change and its impact on the derivatives clearing
organization's financial resources, governance, and operations, and its
impact on the rights and obligations of clearing members and market
participants holding the positions that comprise the derivatives
clearing organization's open interest;
(iii) A discussion of the transferee's ability to comply with the
Act, including the core principles applicable to derivatives clearing
organizations, and the Commission's regulations thereunder;
(iv) The governing documents of the transferee, including but not
limited to articles of incorporation and bylaws;
(v) The transferee's rules marked to show changes from the current
rules of the derivatives clearing organization;
(vi) A list of contracts, agreements, transactions or swaps for
which the DCO requests transfer of open interest;
(vii) A representation by the derivatives clearing organization
that it is in compliance with the Act, including the core principles
applicable to derivatives clearing organizations, and the Commission's
regulations thereunder; and
(viii) A representation by the transferee that it understands that
the derivatives clearing organization is a regulated entity that must
comply with the Act, including the core principles applicable to
derivatives clearing organizations, and the Commission's regulations
thereunder, in order to maintain its registration as a derivatives
clearing organization; and further, that the transferee will continue
to comply with all self-regulatory requirements applicable to a
derivatives clearing organization under the Act and the Commission's
regulations thereunder.
(4) Commission determination. The Commission will review a request
as soon as practicable, and based on the Commission's determination as
to the transferee's ability to continue to operate the DCO in
compliance with the Act and the Commission's regulations thereunder,
such request will be approved or denied pursuant to a Commission order.
6. Amend Sec. 39.4 by revising paragraph (c)(2) and adding
paragraph (e) to read as follows:
Sec. 39.4 Procedures for implementing derivatives clearing
organization rules and clearing new products.
* * * * *
(c) * * *
(2) Acceptance of certain new products for clearing. A derivatives
clearing organization that accepts for clearing a new product that is
not traded on a designated contract market or a registered swap
execution facility must submit to the Commission any rules establishing
the terms and conditions of the product that make it acceptable for
clearing with a certification that the clearing of the product and the
rules and terms and conditions comply with the Act and the rules
thereunder
[[Page 77587]]
pursuant to the procedures of Sec. 40.2 of this chapter.
* * * * *
(e) Holding securities in a futures portfolio margining account. A
derivatives clearing organization seeking to provide a portfolio
margining program under which securities would be held in a futures
account as defined in Sec. 1.3(vv) of this chapter, shall submit rules
to implement such portfolio margining program for Commission approval
in accordance with Sec. 40.5 of this chapter. Concurrent with the
submission of such rules for Commission approval, the derivatives
clearing organization shall petition the Commission for an order under
section 4d of the Act.
7. Add Sec. 39.10 to read as follows:
Sec. 39.10 Compliance with Core Principles.
(a) To be registered and to maintain registration as a derivatives
clearing organization, a derivatives clearing organization shall comply
with each core principle set forth in section 5b(c)(2) of the Act and
any requirement that the Commission may impose by rule or regulation
pursuant to section 8a(5) of the Act; and
(b) Subject to any rule or regulation prescribed by the Commission,
a registered derivatives clearing organization shall have reasonable
discretion in establishing the manner by which it complies with each
core principle.
(c) Chief Compliance Officer. (1) Designation. Each derivatives
clearing organization shall establish the position of chief compliance
officer, designate an individual to serve as the chief compliance
officer, and provide the chief compliance officer with the full
responsibility and authority to develop and enforce, in consultation
with the board of directors or the senior officer, appropriate
compliance policies and procedures, as defined in Sec. 39.1(b), to
fulfill the duties set forth in the Act and Commission regulations.
(i) The individual designated to serve as chief compliance officer
shall have the background and skills appropriate for fulfilling the
responsibilities of the position. No individual who would be
disqualified from registration under sections 8a(2) or 8a(3) of the Act
may serve as a chief compliance officer.
(ii) The chief compliance officer shall report to the board of
directors or the senior officer of the derivatives clearing
organization. The board of directors or the senior officer shall
approve the compensation of the chief compliance officer.
(iii) The chief compliance officer shall meet with the board of
directors or the senior officer at least once a year to discuss the
effectiveness of the compliance policies and procedures, as well as the
administration of those policies and procedures by the chief compliance
officer.
(iv) A change in the designation of the individual serving as the
chief compliance officer of the derivatives clearing organization shall
be reported to the Commission in accordance with the requirements of
Sec. 39.19(c)(4)(xi) of this part.
(2) Chief Compliance Officer Duties. The chief compliance officer's
duties shall include, but are not limited to:
(i) Reviewing the derivatives clearing organization's compliance
with the core principles set forth in section 5b of the Act (7 U.S.C.
7a-1), and the Commission's regulations thereunder;
(ii) In consultation with the board of directors or the senior
officer, resolving any conflicts of interest that may arise;
(iii) Administering each policy and procedure that is required
under section 5b of the Act (7 U.S.C. 7a-1);
(iv) Ensuring compliance with the Act and Commission regulations
relating to agreements, contracts, or transactions, and with Commission
regulations prescribed under section 5b of the Act (7 U.S.C. 7a-1);
(v) Establishing procedures for the remediation of noncompliance
issues identified by the chief compliance officer through any
compliance office review, look-back, internal or external audit
finding, self-reported error, or validated complaint;
(vi) Establishing and following appropriate procedures for the
handling, management response, remediation, retesting, and closing of
noncompliance issues; and
(vii) Establishing a compliance manual designed to promote
compliance with the applicable laws, rules, and regulations and a code
of ethics designed to prevent ethical violations and to promote ethical
conduct.
(3) Annual report. The chief compliance officer shall, not less
than annually, prepare and sign a written report that covers the most
recently completed fiscal year of the derivatives clearing
organization, and provide the annual report to the board of directors
or the senior officer. The annual report shall, at a minimum:
(i) Contain a description of the derivatives clearing
organization's compliance with respect to the Act and Commission
regulations, and each of the derivative clearing organization's
compliance policies and procedures, including the code of ethics and
conflict of interest policies;
(ii) Review each core principle, and with respect to each:
(A) Identify the compliance policies and procedures that ensure
compliance with the core principle;
(B) Provide an assessment as to the effectiveness of these policies
and procedures;
(C) Discuss areas for improvement, and recommend potential or
prospective changes or improvements to the DCO's compliance program and
resources allocated to compliance;
(iii) List any material changes to compliance policies and
procedures since the last annual report;
(iv) Describe the financial, managerial, and operational resources
set aside for compliance with the Act and Commission regulations;
(v) Describe any material compliance matters, including incidents
of noncompliance, since the date of the last annual report and describe
the corresponding action taken; and
(vi) Delineate the roles and responsibilities of the DCO's board of
directors, relevant board committees, and staff in addressing any
conflict of interest, including any necessary coordination with, or
notification of, other entities, including regulators.
(4) Submission of Annual Report to the Commission. (i) Prior to
submitting the annual report to the Commission, the chief compliance
officer shall provide the annual report to the board of directors or
the senior officer of the derivatives clearing organization for review.
Submission of the report to the board of directors or the senior
officer shall be recorded in the board minutes or otherwise, as
evidence of compliance with this requirement.
(ii) The annual report shall be submitted electronically to the
Commission not more than 90 days after the end of the derivatives
clearing organization's fiscal year, concurrently with submission of
the fiscal year-end audited financial statement that is required to be
furnished to the Commission pursuant to Sec. 39.19(c)(3)(ii) of this
part. The report shall include a certification by the chief compliance
officer that, to the best of his or her knowledge and reasonable
belief, and under penalty of law, the annual report is accurate and
complete.
(iii) The derivatives clearing organization shall promptly submit
an amended annual report if material errors or omissions in the report
are identified after submission. An amendment must contain the
certification required under subparagraph (c)(4)(ii) of this section.
(iv) A derivatives clearing organization may request from the
Commission an extension of time to
[[Page 77588]]
submit its annual report in accordance with Sec. 39.19(c)(3) of this
part.
(5) Recordkeeping. (i) The derivatives clearing organization shall
maintain:
(A) A copy of the compliance policies and procedures, as defined in
Sec. 39.1(b), and all other policies and procedures adopted in
furtherance of compliance with the Act and Commission regulations;
(B) Copies of materials, including written reports provided to the
board of directors or the senior officer in connection with the review
of the annual report under paragraph (c)(4)(i) of this section; and
(C) Any records relevant to the annual report, including, but not
limited to, work papers and other documents that form the basis of the
report, and memoranda, correspondence, other documents, and records
that are created, sent, or received in connection with the annual
report and contain conclusions, opinions, analyses, or financial data
related to the annual report.
(ii) The derivatives clearing organization shall maintain records
in accordance with Sec. 1.31 of this chapter and Sec. 39.20 of this
part.
8. Add Sec. 39.17 to read as follows:
Sec. 39.17 Rule enforcement requirements.
(a) In general. Each derivatives clearing organization shall: (1)
Maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance with the rules of the
derivatives clearing organization and the resolution of disputes;
(2) Have the authority and ability to discipline, limit, suspend,
or terminate the activities of a clearing member due to a violation by
the clearing member of any rule of the derivatives clearing
organization; and
(3) Report to the Commission regarding rule enforcement activities
and sanctions imposed against clearing members as provided in paragraph
(a) (2) of this section, in accordance with Sec. 39.19(c)(4)(xiii) of
this part.
(b) Authority to enforce rules. The board of directors of the
derivatives clearing organization may delegate responsibility for
compliance with the requirements of paragraph (a) of this section to
the Risk Management Committee, unless the responsibilities are
otherwise required to be carried out by the chief compliance officer
pursuant to the Act or this part.
9. Add Sec. 39.23 to read as follows:
Sec. 39.23 Antitrust considerations.
Unless necessary or appropriate to achieve the purposes of the Act,
a derivatives clearing organization shall not adopt any rule or take
any action that results in any unreasonable restraint of trade, or
impose any material anticompetitive burden.
10. Add Sec. 39.27 to read as follows:
Sec. 39.27 Legal risk considerations.
(a) Legal Authorization. A derivatives clearing organization shall
be duly organized, legally authorized to conduct business, and remain
in good standing at all times in the relevant jurisdictions. If the
derivatives clearing organization provides clearing services outside
the United States, it shall be duly organized to conduct business and
remain in good standing at all times in the relevant jurisdictions, and
be authorized by the appropriate foreign licensing authority.
(b) Legal framework. A derivatives clearing organization shall
operate pursuant to a well-founded, transparent, and enforceable legal
framework that addresses each aspect of the activities of the
derivatives clearing organization. As applicable, the framework shall
provide for:
(1) The derivatives clearing organization to act as a counterparty,
including novation;
(2) Netting arrangements;
(3) The derivatives clearing organization's interest in collateral;
(4) The steps that a derivatives clearing organization would take
to address a default of a clearing member, including but not limited
to, the unimpeded ability to liquidate collateral and close out or
transfer positions in a timely manner;
(5) Finality of settlement and funds transfers that are irrevocable
and unconditional when effected (when a derivatives clearing
organization's accounts are debited and credited); and
(6) Other significant aspects of the derivatives clearing
organization's operations, risk management procedures, and related
requirements.
(c) Conflict of Laws. If a derivatives clearing organization
provides clearing services outside the United States:
(1) The derivatives clearing organization shall identify and
address any conflict of law issues. The derivatives clearing
organization's contractual agreements shall specify a choice of law.
(2) The derivatives clearing organization shall be able to
demonstrate the enforceability of its choice of law in relevant
jurisdictions and that its rules, procedures, and contracts are
enforceable in all relevant jurisdictions.
Issued in Washington, DC, on December 1, 2010 by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to General Regulations and Derivatives Clearing
Organizations--Commission Voting Summary and Statement of Chairman Gary
Gensler
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Dunn,
Sommers, Chilton and O'Malia voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the proposed rule on legal and compliance matters for
clearinghouses, which would revise procedures for derivatives
clearing organization (DCO) applications, clarify procedures for the
transfer of a DCO registration and add requirements for approval of
DCO rules for portfolio margining of futures and securities in a
futures account.
The rule is intended to ensure that sufficient resources are
devoted to compliance with laws and regulations, which is a core
component of sound risk management practices. It would fulfill the
Dodd-Frank Act's requirement that each DCO have a chief compliance
officer who is responsible for establishing and administering
compliance policies, as well as resolving certain conflicts of
interest.
Finally, the proposed rulemaking would implement DCO Core
Principles for compliance, rule enforcement, antitrust consideration
and legal risk, which would promote compliance with the CEA and
would enhance the integrity of the clearing and settlement process.
[FR Doc. 2010-31029 Filed 12-10-10; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 13, 2010