Federal Register, Volume 78 Issue 231 (Monday, December 2, 2013)[Federal Register Volume 78, Number 231 (Monday, December 2, 2013)]
[Rules and Regulations]
[Pages 72475-72525]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27849]
[[Page 72475]]
Vol. 78
Monday,
No. 231
December 2, 2013
Part VI
Commodity Futures Trading Commission
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17 CFR Parts 39, 140, and 190
Derivatives Clearing Organizations and International Standards; Final
Rule
Federal Register / Vol. 78 , No. 231 / Monday, December 2, 2013 /
Rules and Regulations
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 39, 140, and 190
RIN 3038-AE06
Derivatives Clearing Organizations and International Standards
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
adopting final regulations to establish additional standards for
compliance with the derivatives clearing organization (``DCO'') core
principles set forth in the Commodity Exchange Act (``CEA'') for
systemically important DCOs (``SIDCOs'') and DCOs that elect to opt-in
to the SIDCO regulatory requirements (``Subpart C DCOs''). Pursuant to
the new regulations, SIDCOs and Subpart C DCOs are required to comply
with the requirements applicable to all DCOs, which are set forth in
the Commission's DCO regulations on compliance with core principles, to
the extent those requirements are not inconsistent with the new
requirements set forth herein. The new regulations include provisions
concerning: procedural requirements for opting in to the regulatory
regime as well as substantive requirements relating to governance,
financial resources, system safeguards, special default rules and
procedures for uncovered losses or shortfalls, risk management,
additional disclosure requirements, efficiency, and recovery and wind-
down procedures. These additional requirements are consistent with the
Principles for Financial Market Infrastructures (``PFMIs'') published
by the Committee on Payment and Settlement Systems and the Board of the
International Organization of Securities Commissions (``CPSS-IOSCO'').
In addition, the Commission is adopting certain delegation provisions
and certain technical clarifications.
DATES: This rule is effective December 31, 2013, except for the
amendments to 17 CFR 39.31 and 140.94, which are effective December 13,
2013, and the amendments to 190.09, which are effective December 2,
2013.
FOR FURTHER INFORMATION CONTACT: Ananda Radhakrishnan, Director,
Division of Clearing and Risk (``DCR''), at 202-418-5188 or
[email protected]; Robert B. Wasserman, Chief Counsel, DCR, at
202-418-5092 or [email protected]; M. Laura Astrada, Associate Chief
Counsel, DCR, at 202-418-7622 or [email protected]; Peter A. Kals,
Special Counsel, DCR, at 202-418-5466 or [email protected]; Jocelyn
Partridge, Special Counsel, DCR, at 202-418-5926 or
[email protected]; or Tracey Wingate, Special Counsel, DCR, at 202-
418-5319 or [email protected], in each case, at the Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Regulatory Framework for Registered DCOs
B. Designation of DCOs as Systemically Important under Title
VIII of the Dodd-Frank Act
C. Existing Standards for SIDCOs
D. DCO Core Principles and Regulations for Registered DCOs
E. PFMIs
F. The Role of the PFMIs in International Banking Standards
G. New Regulations Applicable to SIDCOs and Subpart C DCOs
II. Discussion of Revised and New Regulations
A. Regulation 39.2 (Definitions)
B. Regulation 39.30 (Scope)
C. Regulation 39.31 (Election to become subject to the
provisions of Subpart C)
D. Regulation 39.32 (Governance for systemically important
derivatives clearing organizations and subpart C derivatives
clearing organizations)
E. Regulation 39.33 (Financial resources requirements for
systemically important derivatives clearing organizations and
subpart C derivatives clearing organizations)
F. Regulation 39.34 (System safeguards for systemically
important derivatives clearing organizations and subpart C
derivatives clearing organizations)
G. Regulation 39.35 (Default rules and procedures for uncovered
credit losses or liquidity shortfalls (recovery) for systemically
important derivatives clearing organizations and subpart C
derivatives clearing organizations)
H. Regulation 39.36 (Risk management for systemically important
derivatives clearing organizations and subpart C derivatives
clearing organizations)
I. Regulation 39.37 (Additional disclosure for systemically
important derivatives clearing organizations and subpart C
derivatives clearing organizations)
J. Regulation 39.38 (Efficiency for systemically important
derivatives clearing organizations and subpart C derivatives
clearing organizations)
K. Regulation 39.39 (Recovery and wind-down for systemically
important derivatives clearing organizations and subpart C
derivatives clearing organizations)
L. Regulation 39.40 (Consistency with the Principles for
Financial Market Infrastructures)
M. Regulation 39.41 (Special enforcement authority for
systemically important derivatives clearing organizations)
N. Regulation 39.42 (Advance notice of material risk-related
rule changes by systemically important derivatives clearing
organizations)
O. Regulation 140.94 (Delegation of authority to the Director of
the Division of Clearing and Risk)
P. Regulation 190.09 (Member property)
III. Effective Date
A. Congressional Review Act
B. Administrative Procedure Act
IV. Related Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Consideration of Costs and Benefits
I. Background
A. Regulatory Framework for Registered DCOs
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII
of the Dodd-Frank Act, entitled the ``Wall Street Transparency and
Accountability Act of 2010,'' \2\ amended the Commodity Exchange Act
(``CEA'' or the ``Act'') \3\ to establish a comprehensive regulatory
framework for over-the-counter (``OTC'') derivatives, including swaps.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-
Frank Act may be accessed at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
\2\ Section 701 of the Dodd-Frank Act.
\3\ 7 U.S.C. 1 et seq.
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Section 725(c) of the Dodd-Frank Act amended Section 5b(c)(2) of
the CEA, which sets forth core principles that a DCO must comply with
in order to register and maintain registration with the Commission. In
furtherance of the goals of the Dodd-Frank Act to reduce risk, increase
transparency, and promote market integrity, the Commission, pursuant to
the Commission's enhanced rulemaking authority,\4\ adopted regulations
establishing standards for compliance with the DCO core principles.\5\
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\4\ See Section 725(c)(2)(i) of the Dodd-Frank Act (giving the
Commission explicit authority to promulgate rules regarding the core
principles pursuant to its rulemaking authority under Section 8a(5)
of the CEA, 7 U.S.C. 12a(5)).
\5\ See Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334 (Nov. 8, 2011). These regulations are
set forth in Subpart A and Subpart B of part 39 of the Commission's
regulations (``Subpart A'' and ``Subpart B,'' respectively).
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B. Designation of DCOs as Systemically Important under Title VIII of
the Dodd-Frank Act
Title VIII of the Dodd-Frank Act, entitled ``Payment, Clearing, and
Settlement Supervision Act of 2010,'' \6\
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was enacted to mitigate systemic risk in the financial system and
promote financial stability.\7\ Section 804 of the Dodd-Frank Act
requires the Financial Stability Oversight Council (``Council'') to
designate those financial market utilities (``FMUs'') \8\ that the
Council determines are, or are likely to become, systemically
important.\9\
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\6\ Section 801 of the Dodd-Frank Act.
\7\ Section 802(b) of the Dodd-Frank Act.
\8\ An FMU includes any person that manages or operates a
multilateral system for the purpose of transferring, clearing, or
settling payments, securities, or other financial transactions among
financial institutions or between financial institutions and the
person. Section 803(6)(A) of the Dodd-Frank Act.
\9\ Section 804(a)(1) of the Dodd-Frank Act. The term
``systemically important'' means a situation where the failure of or
a disruption to the functioning of a financial market utility could
create, or increase, the risk of significant liquidity or credit
problems spreading among financial institutions or markets and
thereby threaten the stability of the financial system of the United
States. Section 803(9) of the Dodd-Frank Act. See also Authority to
Designate Financial Market Utilities as Systemically Important, 76
FR 44763, 44774 (July 27, 2011) (final rule).
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In determining whether an FMU is systemically important, the
Council uses a detailed two-stage designations process, using certain
statutory considerations \10\ and other metrics to assess, among other
things, ``whether possible disruptions [to the functioning of an FMU]
are potentially severe, not necessarily in the sense that they
themselves might trigger damage to the U.S. economy, but because such
disruptions might reduce the ability of financial institutions or
markets to perform their normal intermediation functions.'' \11\ On
July 18, 2012, the Council designated eight FMUs as systemically
important under Title VIII.\12\ Two of these are CFTC-registered DCOs
\13\ for which the Commission is the Supervisory Agency.\14\
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\10\ Under Section 804(a)(2) of the Dodd-Frank Act, in
determining whether an FMU is or is likely to become systemically
important, the Council must take into consideration the following:
(A) The aggregate monetary value of transactions processed by the
FMU; (B) the aggregate exposure of an FMU to its counterparties; (C)
the relationship, interdependencies, or other interactions of the
FMU with other FMUs or payment, clearing or settlement activities;
(D) the effect that the failure of or a disruption to the FMU would
have on critical markets, financial institutions or the broader
financial system; and (E) any other factors the Council deems
appropriate.
\11\ 76 FR 44766.
\12\ See Press Release, Financial Stability Oversight Council,
Financial Stability Oversight Council Makes First Designations in
Effort to Protect Against Future Financial Crises (July 18, 2012),
available at http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
\13\ While Chicago Mercantile Exchange, Inc. (``CME Clearing''),
ICE Clear Credit LLC (``ICE Clear Credit''), and The Options
Clearing Corporation (``OCC'') are the CFTC-registered DCOs that
were designated as systemically important by the Council, the CFTC
is the Supervisory Agency only for CME Clearing and ICE Clear
Credit; the Securities and Exchange Commission (``SEC'') serves as
OCC's Supervisory Agency.
\14\ See Section 803(8)(A) of the Dodd-Frank Act (defining
``Supervisory Agency'' as the federal agency that has primary
jurisdiction over a designated financial market utility under
federal banking, securities or commodity futures laws).
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C. Existing Standards for SIDCOs
Section 805 of the Dodd-Frank Act directs the Commission to
consider relevant international standards and existing prudential
requirements when prescribing risk management standards governing the
operations related to payment, clearing, and settlement activities for
FMUs that are (1) designated as systemically important by the Council
and (2) engaged in activities for which the Commission is the
Supervisory Agency.\15\ More generally, Section 752 of the Dodd-Frank
Act directs the Commission to consult and coordinate with foreign
regulatory authorities on the establishment of consistent international
standards with respect to the regulation of, among other things, swaps,
futures, and options on futures.\16\
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\15\ See Section 805(a)(2) of the Dodd-Frank Act. The Commission
notes that, under section 805 of the Dodd-Frank Act, the Commission
also has the authority to prescribe risk management standards
governing the operations related to payment, clearing, and
settlement activities for FMUs that are designated as systemically
important by the Council and are engaged in activities for which the
Commission is the appropriate financial regulator.
\16\ Section 752(a) of the Dodd-Frank Act, codified at 15 U.S.C.
8325, provides, in relevant part, that in order to promote effective
and consistent global regulation of swaps and security based swaps,
the CFTC, the SEC, and the prudential regulators (as that term is
defined in section 1a(30) of the CEA), as appropriate, shall consult
and coordinate with foreign regulatory authorities on the
establishment of international standards with respect to the
regulation of swaps and swap entities. In addition, section 752(b)
of the Dodd-Frank Act states that in order to promote effective and
consistent global regulation of contracts of sale of a commodity for
future delivery and options on such contracts, the CFTC shall
consult and coordinate with foreign regulatory authorities on the
establishment of international standards with respect to the
regulation of contracts of a sale of a commodity for future delivery
and on options on such contracts.
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In 2013, after careful consideration of the comments on the rules
that it had proposed for SIDCOs in 2010 and 2011,\17\ and in light of
domestic and international market and regulatory developments, the
Commission finalized regulations for SIDCOs in a manner consistent with
the PFMIs.\18\ Most recently, the Commission proposed the regulations
for SIDCOs and Subpart C DCOs that are being adopted herein (the
``Proposal'').\19\
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\17\ See Financial Resources Requirements for Derivatives
Clearing Organizations, 75 FR 63113, 63119 (Oct. 14, 2010) (notice
of proposed rulemaking) and Risk Management Requirements for
Derivatives Clearing Organizations, 76 FR 3697 (Jan. 20, 2011)
(notice of proposed rulemaking).
\18\ Specifically, in that final rulemaking, the Commission
amended part 39 by creating a Subpart C and adding regulations that
(1) increased the minimum financial resource requirements for
SIDCOs, (2) restricted the use of assessments by SIDCOs in meeting
such financial resource obligations, (3) enhanced the system
safeguards requirements for SIDCOs, and (4) granted the Commission
special enforcement authority over SIDCOs pursuant to Section 807 of
the Dodd-Frank Act. See Enhanced Risk Management Standards for
Systemically Important Derivatives Clearing Organizations, 78 FR
49663 (Aug. 15, 2013) (``SIDCO Final Rule'').
\19\ Derivatives Clearing Organizations and International
Standards, 78 FR 50260 (Aug. 16, 2013) (notice of proposed
rulemaking).
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D. DCO Core Principles and Regulations for Registered DCOs
As noted in the Proposal, in order to register and maintain
registration status with the Commission, DCOs must comply with all of
the DCO core principles set forth in Section 5b(c)(2) of the CEA, as
amended by Section 725 of the Dodd-Frank Act, as well as all applicable
Commission regulations. The Proposal did, however, identify and discuss
those core principles and related Commission regulations that were most
relevant to the proposed regulations. Specifically, the Proposal
discussed the following DCO core principles and related Commission
regulations Core Principle B (Financial Resources) and regulations
39.11 and 39.29; Core Principle D (Risk Management) and regulation
39.13; Core Principle G (Default Rules and Procedures) and regulation
39.16; Core Principle I (System Safeguards) and regulations 39.18 and
39.30; Core Principle L (Public Information) and regulation 39.21; Core
Principle O (Governance Fitness Standards); Core Principle P (Conflicts
of Interest); and Core Principle Q (Composition of Governing
Boards).\20\
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\20\ For a summary and description of these core principles and
Commission regulations, see 78 FR 50262-50263.
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E. PFMIs
1. Overview
In the SIDCO Final Rule, the Commission determined that, for
purposes of meeting its obligation pursuant to Section 805(a)(2)(A) of
the Dodd-Frank Act, the PFMIs, which were developed by CPSS-IOSCO over
a period of several years,\21\ were the
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international standards most relevant to the risk management of
SIDCOs.\22\ The PFMIs set out 24 principles which address the risk
management and efficiency of a financial market infrastructure's
(``FMI'') operations.\23\ Assessments of observance with the PFMIs
focus also on the ``key considerations'' set forth for each of the
principles.\24\ While Subpart A and Subpart B of part 39 of the
Commission's regulations incorporate the vast majority of the standards
set forth in the PFMIs,\25\ the Commission, which is a member of the
Board of IOSCO, has an obligation under Section 805(a) of the Dodd-
Frank Act to implement regulations relating to risk management that
conform with applicable international standards. The PFMIs are such
standards and, with this rulemaking, the Commission intends to adopt
rules and regulations that are fully consistent with the standards set
forth in the PFMIs by the end of 2013. To that end, the Commission has
recognized that in certain instances, the standards set forth in the
PFMIs may not be fully covered by the requirements set forth in Subpart
A and Subpart B of part 39 of the Commission's regulations. Thus, this
rulemaking revises Subpart C to address those gaps, specifically with
respect to the following PFMI principles: Principle 2 (Governance);
Principle 3 (Framework for the comprehensive management of risks);
Principle 4 (Credit risk); Principle 6 (Margin); Principle 7 (Liquidity
risk); Principle 9 (Money settlements); Principle 14 (Segregation and
portability); Principle 15 (General business risk); Principle 16
(Custody and investment risks); Principle 17 (Operational risk);
Principle 21 (Efficiency and effectiveness); Principle 22
(Communication procedures and standards); and Principle 23 (Disclosure
of rules, key procedures, and market data).\26\
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\21\ See Committee on Payment and Settlement Systems and the
Technical Committee of the International Organization of Securities
Commissions, ``Principles for Financial Market Infrastructures,''
(April 2012) available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf. See also the Financial Stability Board June 2012
Third Progress Report on Implementation, available at http://www.financialstabilityboard.org/publications/r_120615.pdf (Noting
publication of the PFMIs as achieving ``an important milestone in
the global development of a sound basis for central clearing of all
standardised OTC derivatives'').
\22\ In making this determination, the Commission noted that
``the adoption and implementation of the PFMIs by numerous foreign
jurisdictions highlights the role these principles play in creating
a global, unified set of international risk management standards for
CCPs.'' See 78 FR 49666.
\23\ See id., ] 1.19.
\24\ See Committee on Payment and Settlement Systems and the
Board of the International Organization of Securities Commissions
Principles for Financial Market Infrastructures: Disclosure
Framework and Assessment Methodology (Dec. 2012) (hereinafter
``Disclosure Framework and Assessment Methodology''), available at
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
\25\ Indeed, Subpart A and Subpart B were informed by the
consultative report for the PFMIs. See generally 76 FR 69334.
\26\ For a summary and description of these principles, see 78
FR 50263-50266.
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F. The Role of the PFMIs in International Banking Standards
The Commission notes that where a central counterparty (``CCP'') is
not prudentially supervised in a jurisdiction that has domestic rules
and regulations that are consistent with the standards set forth in the
PFMIs, the implementation of certain international banking regulations
will have significant cost implications for that CCP and its market
participants. In July of 2012, the Basel Committee on Banking
Supervision (``BCBS''),\27\ the international body that sets standards
for the regulation of banks, published the ``Capital Requirements for
Bank Exposures to Central Counterparties'' (``Basel CCP Capital
Requirements''), which sets forth interim rules governing the capital
charges arising from bank exposures to CCPs related to OTC derivatives,
exchange traded derivatives, and securities financing transactions.\28\
The Basel CCP Capital Requirements create financial incentives for
banks, including their subsidiaries and affiliates,\29\ to clear
financial derivatives with CCPs that are prudentially supervised in a
jurisdiction where the relevant regulator has adopted rules or
regulations that are consistent with the standards set forth in the
PFMIs. Specifically, the Basel CCP Capital Requirements introduce new
capital charges based on counterparty risk for banks conducting
financial derivatives transactions through a CCP.\30\ These incentives
include (1) lower capital charges for exposures arising from
derivatives cleared through a qualified CCP (``QCCP'') and (2)
significantly higher capital charges for exposures arising from
derivatives cleared through non-qualifying CCPs. A QCCP is defined as
an entity that (i) is licensed to operate as a CCP, and is permitted by
the appropriate regulator to operate as such, and (ii) is prudentially
supervised in a jurisdiction where the relevant regulator has
established and publicly indicated that it applies to the CCP, on an
ongoing basis, domestic rules and regulations that are consistent with
the PFMIs.\31\
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\27\ The BCBS is comprised of senior representatives of bank
supervisory authorities and central banks from around the world
including, Argentina, Australia, Belgium, Brazil, Canada, China,
France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan,
Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia,
Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the
United Kingdom and the United States. See Bank for International
Settlements, Basel III: A Global Regulatory Framework for More
Resilient Banks and Banking Systems, December 2010 (revised June
2011), available at http://www.bis.org/publ/bcbs189.htm.
\28\ See ``Capital Requirements for Bank Exposures to Central
Counterparties'' (July 2012), available at www.bis.org/publ/bcbs227.pdf. The Basel CCP Capital Requirements are one component of
Basel III, a framework that ``is part of a comprehensive set of
reform measures developed by the BCBS to strengthen the regulation,
supervision and risk management of the international banking
sector.'' See Bank for International Settlement's Web site for
compilation of documents that form the regulatory framework of Basel
III, available at http://www.bis.org/bcbs/basel3.htm.
\29\ ``Bank'' is defined in accordance with the Basel framework
to mean a bank, banking group or other entity (i.e. bank holding
company) whose capital is being measured. See ``Basel III: A Global
Regulatory Framework,'' Definition of Capital, paragraph 51. The
term ``bank,'' as used herein, also includes subsidiaries and
affiliates of the banking group or other entity. The Commission
notes that a bank may be a client and/or a clearing member of a DCO.
\30\ See Basel CCP Capital Requirements, Annex 4, Section II,
6(i). See generally 78 FR 50266-50267.
\31\ See Basel CCP Capital Requirements, Section I, A: General
Terms.
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The failure of a CCP to achieve QCCP status could result in
significant costs to its bank customers. As one market participant
noted, the ``ramifications for failure to achieve QCCP status are
onerous for banks' CCP exposures and can result in capital charges on
trade exposures that are 10-20 times larger than capital charges for
QCCP trade exposures.'' \32\ The increased capital charges for
transactions through non-qualifying CCPs may have significant business
and operational implications for U.S. DCOs that operate internationally
and are not QCCPs. For instance, banks faced with such higher capital
charges may transfer their clearing business away from such DCOs to a
QCCP in order to benefit from the preferential capital charges provided
by the Basel CCP Capital Requirements. Alternatively, banks may reduce
or discontinue their clearing business altogether. Banks may also pass
through the higher costs of transacting on a non-qualifying DCO that
result from the higher capital charges to their customers. Accordingly,
customers using such banks as intermediaries may transfer their
business to an intermediary at a QCCP. In short, a DCO's failure to be
a QCCP may cause it to face a competitive disadvantage in retaining
members and customers.
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\32\ CME at 5, n. 18.
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G. New Regulations Applicable to SIDCOs and Subpart C DCOs
As described in detail in section II below, this final rulemaking
includes a new defined term, a Subpart C DCO, to allow registered DCOs
that are not SIDCOs to elect to become subject to the provisions in
Subpart C of part 39 of the Commission's regulations (``Subpart C'').
Further, this rulemaking revises Subpart C so that Subpart C applies to
SIDCOs and Subpart C DCOs, and includes new or revised standards for
governance, financial resources, system safeguards, default rules and
procedures for uncovered losses or shortfalls, risk management,
disclosure, efficiency, and recovery and wind-down procedures. These
requirements address the remaining gaps between the Commission's
regulations and the PFMI standards. Thus, Subpart C, together with the
provisions in Subpart A and Subpart B, establish domestic rules and
regulations that are consistent with the PFMIs. Because Subparts A, B,
and C apply to SIDCOs and Subpart C DCOs on a continuing basis, SIDCOs
and Subpart C DCOs should be QCCPs for purposes of the Basel CCP
Capital Requirements.\33\
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\33\ See QCCP definition supra Section I.F.
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The Commission received twelve comment letters, nine of which
commented on the Proposal.\34\ All nine of these letters were generally
supportive of the Proposal's goals. Given the importance of obtaining
QCCP status for a U.S.-based DCO, the Commission requested comment on
additional measures that the Commission should take to help ensure that
Subpart C DCOs obtain QCCP status. MGEX responded by asserting that
steps should be taken to ``ensure that the [Commission's] proposed
regulations will be recognized by applicable regulators as being
consistent with the PFMIs and that all DCOs subject to those
regulations would be considered QCCPs in all relevant jurisdictions.''
\35\ MGEX also requested that the Commission ``coordinate with other
regulators'' to provide a ``uniform framework that recognizes the
oversight provided by multiple regulatory jurisdictions so as not to
unnecessarily burden DCOs with requirements established by multiple
regulatory jurisdictions.\36\ As noted in the Proposal, the Commission
believes that the Subpart C regulations in combination with the
provisions contained in Subpart A and Subpart B would establish
domestic rules and regulations that are consistent with the PFMIs.
Because SIDCOs and Subpart C DCOs would have the requirements of
Subpart A, Subpart B and Subpart C applied to them on a continuing
basis, such entities should qualify as QCCPs for purposes of the Basel
CCP Capital Requirements.\37\ In addition, the Commission notes that it
actively coordinates with other domestic and international regulators
informally, as required by applicable law (such as through the
rulemaking consultation process under Title VIII), and through
participation in several working groups and international organizations
(such as IOSCO).\38\ ISDA, which expressed support for the Commission's
goal of implementing regulations for DCOs that are consistent with the
PFMIs by the end of 2013, suggested that the Commission issue this
rulemaking as an interim final rule ``so that market participants will
have an opportunity to provide additional substantive comments.'' \39\
The Commission declines to do so. As is the case with other
regulations, part 39 of the Commissions regulations may be reviewed or
revised by the Commission as necessary.
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\34\ All comment letters are available through the Commission's
Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391. Comments addressing the Proposal were
received from the European Commission and the following parties: CME
Group Inc. (``CME''); The Futures Industry Association (``FIA'');
IntercontinentalExchange, Inc. (``ICE''); International Swaps and
Derivatives Association Inc. (``ISDA''); LCH.Clearnet Group Limited
(``LCH''); The Minneapolis Grain Exchange (``MGEX''); New York
Portfolio Clearing LLC (``NYPC''); and Chris Barnard.
\35\ MGEX at 6.
\36\ Id. In addition, ISDA's comment letter addressed the
Commission's examination of SIDCOs and Subpart C DCOs. Specifically,
ISDA stated that revised Subpart C should specify whether the
Commission will evaluate a SIDCO's or Subpart C DCO's compliance
with Subpart C as part of its general rule enforcement review
program, or whether SIDCOs and Subpart C DCOs will be subject to a
more rigorous and more frequent (e.g., annual) review process. ISDA
at 4. This comment does not pertain to any of the proposed
regulations and is, therefore, outside the scope of the Proposal.
However, the Commission notes that Section 807(a) of the Dodd-Frank
Act requires the Commission to examine a SIDCO at least once
annually.
\37\ 78 FR 50297.
\38\ The Commission intends to cooperate with other regulators,
both domestically and internationally, to foster efficient and
effective communication and consultation so that we may support each
other in fulfilling our respective mandates with respect to SIDCOs
and Subpart C DCOs. See PFMIs, Responsibility E.
\39\ ISDA at 1.
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The following section will address discuss the comments received on
specific aspects of the Proposal in connection with explaining each of
the amended and new regulations adopted herein.
II. Discussion of Revised and New Regulations
A. Regulation 39.2 (Definitions)
The Commission proposed amending regulation 39.2 by revising one
definition and adding six new defined terms. First, the Commission
proposed a technical amendment to the definition of ``systemically
important derivatives clearing organization.'' The definition had
described a SIDCO as a registered DCO ``which has been designated by
the [Council] to be systemically important . . .'' The proposed
definition described a SIDCO as a registered DCO ``which is currently
designated . . .''
Second, the Commission proposed to add a definition for the phrase
``activity with a more complex risk profile,'' to provide greater
clarity as to the types of activities that would trigger a Cover Two
financial resources requirement. The Commission proposed to define
``activity with a more complex risk profile'' to include clearing
credit default swaps, credit default futures, and derivatives that
reference either credit default swaps or credit default futures, as
well as any other activity designated as such by the Commission. The
phrase ``activity with a more complex risk profile'' currently appears
in regulation 39.29 (Financial resources requirements), which the
Commission proposed to revise and renumber as regulation 39.33.\40\
---------------------------------------------------------------------------
\40\ See Section II.E., infra.
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The Commission also proposed to add a definition for the term
``subpart C derivatives clearing organization.'' The proposed
definition would include any registered DCO that is not a SIDCO and
that has elected to become subject to Subpart C.
Finally, the Commission proposed to add definitions for
``depository institution,'' ``U.S. branch or agency of a foreign
banking organization,'' and ``trust company.'' These terms are used in
the provisions concerning liquidity set forth in paragraphs (c) and (d)
of revised regulation 39.29, which the Proposal renumbered as
regulation 39.33.\41\ As proposed, a ``depository institution'' would
have the meaning set forth in Section 19(b)(1)(A) of the Federal
Reserve Act (12 U.S.C. 461(b)(1)(A)). A ``U.S. branch or agency of a
foreign banking organization'' would mean the U.S. branch or agency of
a foreign banking organization as defined in Section 1(b) of the
International Banking Act of 1978 (12 U.S.C. 3101). A ``trust company''
would mean a trust company that is a member of the Federal Reserve
System, under
[[Page 72480]]
Section 1 of the Federal Reserve Act (12 U.S.C. 221), but that does not
meet the definition of ``depository institution.''
---------------------------------------------------------------------------
\41\ See id.
---------------------------------------------------------------------------
The Commission received only one comment on the substance of the
proposed definitions. Chris Barnard stated that he approved of the fact
that the definition of ``activity with a more complex risk profile''
includes credit default swaps and other activities designated as such
by the Commission under regulation 39.33(a).
In addition, the Commission received a comment regarding the
wording of a defined term. MGEX expressed concern regarding the title
``Subpart C DCO.'' Specifically, MGEX stated that the title ``itself
implies to the public that the [Subpart C] DCO is of significantly
lesser status'' as compared to a SIDCO.\42\ MGEX requested that the
Commission instead use the term ``Qualified Central Counterparty'' in
its regulations and to define that term to include any DCO that is held
to the standards set forth in Subpart C. The Commission declines to
adopt this suggestion.
---------------------------------------------------------------------------
\42\ MGEX at 4.
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SIDCOs and registered DCOs that elect to opt-in to these heightened
standards are not identically situated in that a SIDCO is required to
comply with the standards set forth in Subpart C because of its
importance to the US financial markets. In other words, a Subpart C DCO
may rescind its election whereas a SIDCO may not. In addition, there
may be circumstances in which the Commission may want to apply a
particular regulation only to SIDCOs. For example, regulation 39.41,
enacted pursuant to section 807c of the Dodd-Frank Act, grants the
Commission special enforcement authority over SIDCOs, but not Subpart C
DCOs. Moreover, SIDCOs are required to comply with regulation 40.10,
enacted consistent with section 806 of the Dodd-Frank Act, which, among
other things, requires them to provide notice to the Commission not
less than 60 days in advance of proposed changes to their rules,
procedures, or operations that could materially affect the nature or
level of risks presented by the systemically important derivatives
clearing organization. This requirement is not imposed on Subpart C
DCOs. Thus, it is necessary and appropriate for the Commission to
retain the ability to differentiate between SIDCOs and other registered
DCOs in its regulations.
Moreover, as discussed below, MGEX and other commenters have noted
that the proposed opt-in structure is important in that it allows
registered DCOs that are not SIDCOs to be eligible for QCCP status.
Once a Subpart C DCO successfully attains QCCP status, the Commission
notes that, in general, its regulations do not prohibit a Subpart C DCO
(or a SIDCO) from stating that it is a QCCP in its marketing materials.
Indeed, the Commission expects that Subpart C DCOs would market
themselves as QCCPs, which is why a Subpart C DCO is prohibited from
marketing itself as a QCCP while in the process of rescinding its
election.
For the reasons stated above, the Commission believes that the
proposed revised and new definitions are appropriate and, therefore, is
adopting them as proposed.
B. Regulation 39.30 (Scope)
The Commission proposed expanding regulation 39.28 (and renumbering
it regulation 39.30) so that Subpart C would apply to SIDCOs and
Subpart C DCOs. As described above, the rules proposed in Subpart C
address the gaps between Commission regulations and the standards set
forth in the PFMIs.\43\ As such, a DCO that is subject to the
requirements of Subpart A, Subpart B, and Subpart C should meet the
requirements for QCCP status and benefit from the lower capital charges
on clearing member banks and bank customers of clearing members for
exposures resulting from derivatives cleared through QCCPs.\44\ Such a
DCO may also be viewed more favorably by potential members or customers
of members in that it would be seen to be held to international
standards.
---------------------------------------------------------------------------
\43\ See also supra Section I.G.
\44\ See supra Section I.F.
---------------------------------------------------------------------------
The Commission requested comment on the proposed rules.
LCH and MGEX argued that the amended and new provisions of Subpart
C should pertain to all registered DCOs. LCH asserted that the BCBS
capital rules provide significant incentives for a DCO to meet the high
standards embodied in the PFMIs or face the real risk that bank
clearing members will cease to clear through them and therefore all
DCOs should be required to comply with these standards.\45\ MGEX argued
that the Commission's proposed opt-in regime grants SIDCOs an unfair
competitive advantage over other DCOs.\46\ MGEX suggested that the
Commission consider holding all registered DCOs to these higher
standards and to provide an ``opt-out'' mechanism for those registered
DCOs that are not SIDCOs that do not wish to attain QCCP status.\47\ In
addition, LCH and MGEX requested that, if the Commission elects to
finalize the proposed regulations with the opt-in regime, DCOs be
permitted to petition the Commission for additional time to comply with
all of the Subpart C regulations.\48\
---------------------------------------------------------------------------
\45\ LCH at 3.
\46\ MGEX at 2-3.
\47\ MGEX at 3.
\48\ LCH at 3-4; MGEX at 4.
---------------------------------------------------------------------------
The Commission has decided to adopt regulation 39.30 as proposed.
First, because of the potential benefits resulting from QCCP status, as
described above, the Commission believes that a DCO that has not been
designated to be systemically important should have the option to elect
to become subject to Subpart C.\49\ However, the Commission does not
believe that a DCO that is not a SIDCO should be required to be held to
Subpart C if it does not elect to because of the potential costs
associated with compliance with these standards. In addition, and as
discussed in more detail below, those DCOs that elect to be held to
Subpart C may choose the effective date of their election. Because a
Subpart C DCO is not required to comply with the regulations set forth
in Subpart C until the specified effective date, a Subpart C DCO has a
certain amount of control over the date on which it must comply with
the Subpart C regulations.
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\49\ As a technical matter, the Commission proposed to move
existing paragraph (c) of renumbered regulation 39.30 (requiring a
SIDCO to provide notice to the Commission in advance of any proposed
change to its rules, procedures, or operations that could materially
affect the nature or level of risks presented by the SIDCO, in
accordance with the requirements of regulation 40.10) to proposed
new regulation 39.42. Because the other provisions of proposed
regulation 39.30 would pertain exclusively to the scope of Subpart
C, it would be appropriate for existing paragraph (c) to be codified
in a separate regulation. See infra Section II.N. for further
detail.
---------------------------------------------------------------------------
Further, the Commission concludes that a SIDCO should be required
to comply with revised Subpart C in order to maintain risk management
standards that enhance the safety and efficiency of a SIDCO, reduce
systemic risks, foster transparency, and support the stability of the
broader financial system.\50\ In order to support financial stability,
a SIDCO must operate in a safe and sound manner. If it fails to
measure, monitor, and manage its risks effectively, a SIDCO could pose
significant risk to its participants and the financial system more
broadly.\51\ The Commission shares the stated objectives of the PFMIs,
namely to enhance the safety and efficiency of FMIs and, more broadly,
reduce systemic risk and foster transparency and financial
stability.\52\ As discussed in the Proposal, the PFMIs
[[Page 72481]]
have been adopted and implemented by numerous foreign
jurisdictions.\53\ The Commission notes that none of the commenters
opposed holding all SIDCOs to the Subpart C regulations. The Commission
believes that a global, unified set of international risk management
standards for systemically important CCPs can help support the
stability of the broader financial system. As such, for the reasons
described above and in the Proposal, the Commission believes that
SIDCOs should be required to comply with all of the requirements set
forth in part 39 of the Commission's regulations, including the
standards set forth in Subpart C, as revised herein.
---------------------------------------------------------------------------
\50\ See SIDCO Final Rule (Discussion of risk management
standards). See also Section 805(b) of the Dodd-Frank Act.
\51\ See supra Section I.E.
\52\ PFMIs ] 1.15.
\53\ See 78 FR 50260, 50268.
---------------------------------------------------------------------------
C. Regulation 39.31 (Election to become subject to the provisions of
Subpart C)
As discussed above and in the Proposal,\54\ the Basel CCP Capital
Requirements impose significantly higher capital charges on banks
(including their subsidiaries and affiliates) that clear financial
derivatives through CCPs that do not qualify as QCCPs (i.e., CCPs that
are licensed and supervised in a jurisdiction where the relevant
regulator applies to the CCP, on an ongoing basis, domestic rules and
regulations that are not consistent with the PFMIs).\55\ Because such
charges could create incentives for banks to migrate their business to
CCPs that are QCCPs or to avoid clearing,\56\ U.S. DCOs that operate
internationally, but are not QCCPs, may face a substantial competitive
disadvantage. The Subpart C requirements, as amended herein, address
any remaining gaps between the Commission's existing regulations and
the PFMI standards.\57\ Accordingly, a DCO that is subject to the
collective obligations contained in Subpart A, Subpart B and Subpart C
should be a QCCP for purposes of the Basel CCP Capital
Requirements.\58\
---------------------------------------------------------------------------
\54\ See discussion of the role of the PFMIs in international
banking standards supra Section I.F., 78 FR 50266-9.
\55\ See Basel CCP Capital Requirements at Section I.A.: General
Terms.
\56\ As noted above, banks alternatively may reduce or
discontinue their clearing business or pass through to their
customers any higher costs of transacting through a DCO that is not
a QCCP. See discussion of the role of the PFMIs in International
Banking Standards supra Section I.F; 78 FR 50267, 50269.
\57\ See discussion of the new regulations applicable to SIDCOs
and Subpart C DCOs supra Section I.G.
\58\ Id.
---------------------------------------------------------------------------
Regulation 39.31, as proposed, would provide a mechanism whereby a
DCO that has not been designated by the Council as systemically
important may elect to become subject to the provisions of Subpart C
(i.e., may ``opt'' to become subject to the regulations otherwise
applicable only to SIDCOs) and, thereby, attain QCCP status, should the
DCO individually determine that the benefits of achieving such status
outweigh the costs associated with implementing the Subpart C
regulations. The Commission also proposed procedures for withdrawing or
rescinding that election.
The Commission received five comment letters regarding proposed
regulation 39.31.\59\ These comments generally supported the adoption
of procedures that would provide non-SIDCO DCOs the opportunity to
become QCCPs through adherence to an enhanced regulatory regime.\60\
LCH, for example, ``strongly supported'' the adoption of ``heightened
regulatory standards that would allow both SIDCOs and non-SIDCOs to be
QCCPs.'' \61\ The European Commission similarly stated that central
counterparties ``that wish to operate under safer standards and compete
on the basis of the quality of their risk-management . . . should not
be prevented from doing so.'' \62\
---------------------------------------------------------------------------
\59\ Comments on proposed regulation 39.31 were received from
the European Commission, FIA, ISDA, LCH and MGEX.
\60\ See, e.g., European Commission at 1, LCH at 2, MGEX at 1-2.
\61\ LCH at 1. See also MGEX at 1 (``MGEX applauds the
Commission for attempting to establish an avenue by which DCOs not
designated as systemically important could qualify for [QCCP]
status.'').
\62\ European Commission at 1.
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MGX and LCH disagreed, however, with the proposed ``opt-in''
approach and suggested alternative means for achieving the Commission's
objectives.\63\ As mentioned above, both LCH and MGEX suggested that
the Commission require all currently registered DCOs to be held to the
enhanced regulatory requirements proposed to be applicable only to
SIDCOs and Subpart C DCOs.\64\ LCH asserted that ``it is important for
all CCPs which clear swaps and other derivatives . . . to adhere to the
higher standards.'' \65\ MGEX claimed that requiring DCOs that have not
been designated by the Council as systemically important to ``opt-in''
to Subpart C compliance is ``unnecessarily burdensome and
discriminatory'' in comparison to the regulatory treatment of
SIDCOs.\66\ In support of its position, MGEX noted that SIDCOs will be
held to the same standards as Subpart C DCOs, but will not be required
to submit a Subpart C Election Form, or to otherwise engage in the
Subpart C election process in order to become a QCCP.\67\ MGEX
contended that requiring all currently registered DCOs to be held to
the enhanced regulatory regime would negate the need for a Subpart C
Election Form and, therefore, would treat all DCOs identically in terms
of their registration status and requirements, which would enable DCOs
to spend the time that they would otherwise spend on preparing a
Subpart C Election Form on ensuring their compliance with the Subpart C
regulations.\68\
---------------------------------------------------------------------------
\63\ See LCH at 2-4, MGEX at 2-6.
\64\ See LCH at 3, MGEX at 3.
\65\ LCH at 2.
\66\ MGEX at 2.
\67\ Id.
\68\ MGEX at 3-4.
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MGEX recognized, however, ``a number of potential issues'' with
universal application of the Subpart C requirements.\69\ For example,
this proposed alternative, by itself, would not provide flexibility for
DCOs that do not wish to be held to the higher standards and could
require the Commission to expend ``considerable resources to verify
compliance for each currently registered DCO shortly after
implementation'' and to engage in the processes necessary to revoke the
Subpart C DCO status of those DCOs that fail to satisfy the proposed
regulations.\70\ Both MGEX and LCH suggested alternatives.
Specifically, these commenters recommended that the Commission replace
the proposed ``opt-in'' regime with a regime under which the Subpart C
standards would be applicable to all DCOs, but a DCO would be permitted
to ``opt-out'' of the heightened standards, if it believed that
attaining QCCP status was not important for its business.\71\ Both
entities recommended that the opt-out regime be accompanied by an
extension of the compliance deadline \72\ for all or some of the
substantive proposed Subpart C regulations.\73\ Specifically, LCH and
MGEX voiced concern that it would be difficult or unlikely for non-
SIDCO DCOs to satisfy the Subpart C election and implementation
requirements necessary to achieve QCCP status prior
[[Page 72482]]
to December 31, 2013.\74\ LCH specifically stated that additional time
is necessary to come into compliance with the regulations ``governing
financial resources, system safeguards, risk management, and recovery
and wind-down plans.'' \75\ Both MGEX and LCH commented on the
particular difficulty of developing a recovery and wind down plan
citing, respectively, the ``complexity and potential effects the
contents of such a plan would have on the operation of a DCO'' \76\ and
the fact that the Commission has not previously proposed any
requirements with respect to such plans.\77\
---------------------------------------------------------------------------
\69\ MGEX at 3.
\70\ Id.
\71\ See LCH at 2-4, MGEX at 3-4.
\72\ The Commission notes that, there is no general ``compliance
deadline'' for non-SIDCO DCOs. While a non-SIDCO that wishes to
become a Subpart C DCO must satisfy all of the Subpart C
requirements (except the specific obligations for which the DCO is
permitted to apply for additional time to comply) at the time it
elects to become subject to Subpart C, a DCO is not required to make
that election at any particular time or at all, unless it determines
that the cost of such compliance is usurped by the benefits it would
receive through Subpart C status.
\73\ LCH at 2-4, MGEX at 3-4.
\74\ LCH at 2, MGEX at 2. The Basel III Counterparty Credit Risk
and Exposures to Central Counterparties-Frequently Asked Questions
(``Basel III FAQs'') state that, if a CCP's primary regulator has
publicly stated that it is working towards implementing regulations
consistent with the PFMIs, then such CCP may be treated as a QCCP
until December 31, 2013. After December 31, 2013, the Basel III FAQs
state that the CCP's primary regulator must have implemented
regulations consistent with the PFMIs and these regulations must be
applied to the CCP on an ongoing basis in order for such CCP to be
eligible for QCCP status. See Basel III FAQs, Question 5.6,
available at: http://www.bis.org/publ/bcbs237.pdf.
\75\ See LCH at 3, 4.
\76\ MGEX at 4.
\77\ See LCH at 3, 4.
---------------------------------------------------------------------------
In support of their requests for additional time to comply with the
Subpart C requirements, LCH and MGEX cited the time needed to identify
gaps between their current rules and procedures and the Subpart C
regulations, to implement any necessary changes to comply with the
Subpart C regulations, and to prepare and submit their Subpart C
Election Forms.\78\ Both entities objected to the amount of time
between the publication of the Proposal and the time when compliance
will be required in order to qualify for QCCP status by the end of the
2013.\79\
---------------------------------------------------------------------------
\78\ See LCH at 3, MGEX at 3.
\79\ See LCH at 4, MGEX at 2.
---------------------------------------------------------------------------
MGEX also objected to the alleged disparate treatment afforded
SIDCOs which ``have been able to prepare for compliance with the
enhanced standards at least since the release of the PFMIs in April
2012.'' \80\ In addition, LCH asserted that, as proposed, the
Commission would be requiring Subpart C DCOs to come into compliance
with all aspects of the PFMIS ``prior to many non-US CCPs.'' \81\ LCH
suggested that adopting the final regulations, but permitting
compliance at a later date, would allow the Commission to adopt the
PFMIs prior to the end of 2013 while, at the same time, providing DCOs
with an ``ability to achieve QCCP status by the end of 2013.'' \82\
---------------------------------------------------------------------------
\80\ MGEX at 2.
\81\ LCH at 4. In support of this assertion, however, LCH cites
to just one aspect of the Subpart C requirements--the recovery and
wind-down plans--which may not be required of certain EU CCPs in
order to become and maintain QCCP status. Specifically, LCH asserts
that ``CCPs in the European Union will not be required to provide
recovery and wind-down plans to become and remain QCCPs as EMIR,
which implements the PFMIs in Europe, does not include such a
requirement. EU legislation implementing the recovery and wind
resolution aspects of the PMIs is not expected to be proposed by the
European Commission until early next year'' and ``implementation is
unlikely before 2016 at the earliest.'' Id. LCH also notes that laws
in some EU jurisdictions will require CCPs to have recovery plans
prior to implementation of EU legislation. LCH at 4, n. 4. As noted
below, the Commission will permit SIDCOs and Subpart C DCOs the
opportunity to request that the Commission grant the SIDCO or
Subpart C DCO an extension of the deadline with respect to recovery
and wind-down plans for up to one year. See infra Section II.K.
(Regulation 39.39 (Recovery and wind down for systemically important
derivatives clearing organizations and subpart C derivatives
clearing organizations)).
\82\ See LCH at 2, 4. LCH claims that requiring a Subpart C DCO
to comply with the Subpart C regulations by the end of 2013 would
``likely result in Subpart C DCO's not being able to achieve QCCP
status prior to that time'' and that the failure of a Subpart C DCO
to achieve QCCP status would put the Subpart C DCO at a completive
disadvantage to non-QCCPs that are ``grandfathered'' as QCCPs. LCH
at 2. As noted below, the Commission believes that permitting
Subpart C DCOs a broad-based opportunity to delay compliance with
the Subpart C regulations, as suggested by LCH, could put a DCO at
greater risk of failing to obtain QCCP status.
---------------------------------------------------------------------------
The Commission continues to believe that non-SIDCO DCOs that are
willing and able to satisfy the enhanced regulatory requirements
contained in Subpart C, should, when they are able to do so, be
afforded the opportunity to attain QCCP status and to reap the benefits
that may result from that designation \83\ and that the application of
Subpart C non-SIDCO DCOs that wish to become subject to regulations
that are consistent with the standards set forth in the PFMIs helps
promote the international consistency called for in Section 752 of the
Dodd-Frank Act.\84\ Commenters addressing proposed regulation 39.31
were unanimously supportive of this objective. Accordingly, the
Commission has determined to adopt a regulatory framework that permits
a DCO that has not been designated as systemically important by the
Council to elect to become subject to the heightened standards set
forth in Subpart C.
---------------------------------------------------------------------------
\83\ See 78 FR 50268-50269.
\84\ See discussion of existing standards for SIDCOs supra
Section I.C.
---------------------------------------------------------------------------
In response to the comments recommending that the'' Commission
apply the regulatory requirements to all DCOs or employ an ``opt-out''
regime in lieu of the proposed ``opt-out'' procedures, the Commission
notes that neither commenter advocating such alternatives provided any
quantitative data or qualitative analyses of the costs and benefits of
its suggested alternatives, particularly as compared to the
Commission's Proposal. The Commission believes it would be
inappropriate to adopt the proffered alternatives absent such analyses
and without sufficient opportunity for the public to review and comment
upon them.
The Commission also is concerned that an ``opt-out'' regime would
unfairly shift certain costs associated with the Subpart C regulations
to those non-SIDCO DCOs that do not intend to avail themselves of the
opportunity to become QCCPs. Specifically, regulation 39.31, as
proposed and finalized herein, would require only those non-SIDCO DCOs
that wish to become subject to the Subpart C regulations (and to attain
the benefits of QCCP status) to complete and file a Subpart C Election
Form. Non-SIDCO DCOs that do not wish to become subject to the Subpart
C regulations (nor to obtain the benefits of QCCP status) are not
obligated to take any further action. In contrast, an ``opt-out''
regime would impose an obligation to file an opt-out application on
those DCOs that do not intend to seek the benefit of QCCP status, while
removing the Subpart C Election Form obligation from those DCOs that
do.
In response to commenters' requests for additional time for Subpart
C DCOs to comply with the new Subpart C regulations, and as discussed
in more detail below, the Commission has determined that it would be
appropriate to permit SIDCOs and Subpart C DCOs to request extensions
of time to comply with the requirements for system safeguards, default
rules and procedures for uncovered credit losses or liquidity, and
recovery and wind-down plans contained in regulations 39.34, 39.35 and
39.39, respectively.\85\ The Commission is declining, however, to
permit requests from a DCO for, or to generally provide, a wholesale
extension of time to comply with the new Subpart C regulations. Thus, a
DCO seeking to become a Subpart C DCO will otherwise be required to be
in compliance with the Subpart C regulations at the time it makes its
[[Page 72483]]
Subpart C election. The new Subpart C regulations finalized herein seek
to provide DCOs that have not been designated by the Council as
systemically important the opportunity to qualify as QCCPs. Despite
LCH's assertion to the contrary,\86\ the Commission is concerned that a
broad-based extension of the compliance deadline (in contrast to
individually justified extensions with respect to particular
requirements) would be more likely to jeopardize the ability of a
Subpart C DCO to achieve QCCP status. As noted above, rules and
regulations that are consistent with the PFMIs must be implemented by
the end of 2013.\87\ Moreover, as noted above, a QCCP is defined, in
part, as a CCP that is prudentially supervised in a jurisdiction where
the relevant regulator applies to the CCP, on an ongoing basis,
domestic rules and regulations that are consistent with the PFMIs.\88\
---------------------------------------------------------------------------
\85\ See infra Section II.F. (Regulation 39.34 (System
safeguards for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations)),
Section G (Regulation 39.35 (Default rules or procedures for
uncovered credit losses or liquidity shortfalls (recovery) for
systemically important derivatives clearing organizations and
subpart C derivatives clearing organizations)), and Section II.K
(Regulation 39.35 (Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives
clearing organizations)).
\86\ Notwithstanding its timing concerns, LCH has indicated that
it intends to ``take advantage of the Subpart C election process.
LCH at 3.
\87\ See supra n 91.
\88\ See supra Section I.F. (The Role of the PFMIs in
International Banking Standards).
---------------------------------------------------------------------------
The Commission further notes that a non-SIDCO DCO is obligated to
comply with the Subpart C regulations only if--and when--the DCO
affirmatively elects to become subject to such regulations, based upon
its own examination of the benefits (including, but not limited to, the
opportunity to attain QCCP status) and burdens thereof. No non-SIDCO
DCO is obligated to elect to become a Subpart C DCO and thereby comply
with the Subpart C regulations by December 31, 2013 or any other date
unless it believes that it is prudent to do so in light of its
particular business. The Commission stands ready to review the
application of any DCO that is prepared to be held to the Subpart C
standards, whether the DCO is prepared to do so on December 31, 2013 or
any later date.
The Commission also disagrees with commenters' assertions that
potential Subpart C DCOs have only recently been advised of the nature
of the additional regulations to which they, if they choose, will be
subject. The final PFMIs were published in April of 2012. In the same
month, the Commission and other domestic financial regulators issued a
joint press release explicitly notifying the public of the publication
of the final PFMIs.\89\ At a minimum, therefore, DCOs have been on
notice of the specific requirements of the PFMIs since April 2012.
Moreover, the Basel CCP Capital Requirements were published in July of
2012, and as mentioned above, the Basel FAQs, which were published in
December of 2012, state that during 2013, if a CCP regulator has not
yet implemented the PFMIs but has publicly stated that it is working
towards implementing these principles, the CCPs that are regulated by
the CCP regulator may be treated as QCCPs.\90\ Thus, by December of
2012, DCOs were on notice of the preferential capital treatment that
would result from becoming subject to regulations that are consistent
with the PFMIs by the end of 2013.
---------------------------------------------------------------------------
\89\ Joint Press Release, Board of Governors of the Federal
Reserve System, the Commodity Futures Trading Commission and the
Securities and Exchange Commission, CPSS-IOSCO Issue Final Report on
Principles for Financial Market Infrastructures'' (April 16, 2012).
\90\ Basel III FAQs at 23. In the Final SIDCO Rule the
Commission explicitly advised the public of its intention toward
implementing regulations that are fully consistent with the PFMIs by
the end of 2013. See SIDCO Final Rule at 4966 (``Moreover, the
Commission, which is a member of the Board of IOSCO, is working
towards implementing rules and regulations that are fully consistent
with the PFMIs by the end of 2013'').
---------------------------------------------------------------------------
1. Regulation 39.31(a)--Eligibility Requirements
Regulation 39.31(a), as proposed, set forth the two categories of
entities that would be eligible to elect to become subject to the
provisions in Subpart C. As proposed: (1) A DCO that is not a SIDCO
could request such election using the procedures set forth in proposed
regulation 39.31(b) and (2) an entity applying for registration as a
DCO pursuant to regulation 39.3 (``DCO Applicant'') could request the
election in conjunction with its application for registration
(``Registration Application'') using the procedures set forth in
proposed regulation 39.31(c). The Commission did not receive any
comments specifically addressing proposed regulation 39.31(a).
Accordingly, for the reasons cited in the Proposal,\91\ the Commission
is adopting regulation 39.31(a) as proposed.
---------------------------------------------------------------------------
\91\ 78 FR 50298.
---------------------------------------------------------------------------
2. Regulation 39.31(b)--Subpart C Election and Withdrawal Procedures
for Registered DCOs
Regulation 39.31(b), as proposed, would establish the procedures by
which a DCO that is already registered could elect to become subject to
the provisions of Subpart C and the procedure by which the DCO could
withdraw that election.\92\ Comments generally addressing the Proposal
to adopt regulations that would permit a DCO to elect to become subject
to Subpart C (i.e., comments on the ``opt-in'' regime) are discussed
above.\93\ In addition, the Commission received one comment referencing
the Subpart C Election Form. MGEX asserted that the Commission should
``waive'' the Subpart C Election Form as ``it seems overly burdensome
and costly for a currently registered DCO to be required to complete an
entirely new application which calls for submission of the same or
similar information and analysis that the DCO previously provided [in
its DCO Application]''.\94\ In support of this request, MGEX cites to a
statement in the Proposal that the Commission ``anticipates
considerable overlap between the information and documentation
contained in the Registration Application files [sic] by a DCO
Applicant and the information and documentation that would be required
to be submitted to the Commission as part of the Subpart C Election
Form.'' \95\ This reference is misplaced. The cited statement was made
in the portion of the Proposal describing the proposed election and
withdrawal procedures for new DCO applicants.\96\ The ``overlap in
information and documentation'' to which the Commission was referring
is the overlap between the materials that would be submitted by new
applicants for DCO registration in their DCO applications and the
materials that a newly registered DCO would supply as part of a Subpart
C Election Form submitted shortly thereafter.\97\ In contrast, the
information supplied by a currently registered DCO as part of the Form
DCO that was filed when such DCO applied for registration is likely to
be stale and would need to be updated.\98\ Moreover, the Subpart C
Election Form simply calls for the electing DCO to demonstrate its
compliance with the requirements of Subpart C, with fairly minimal
formatting requirements. The form is intended to provide the
Commission, clearing members, and customers (and, significantly, the
regulators of such
[[Page 72484]]
clearing members and customers) with assurance that the electing DCO
will be held to and will be required to meet the standards set forth in
Subpart C.\99\ Thus, the Commission continues to believe that it is
necessary and appropriate to require DCOs electing to become subject to
Subpart C to submit such information to the Commission.
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\92\ 78 FR 50271, 50298-99.
\93\ See supra Section II.C. (Regulation 39.31 (Election to
become subject to the provisions of Subpart C)).
\94\ MGEX at 5.
\95\ MGEX at 5 (citing 78 FR 50271).
\96\ 78 FR 50271.
\97\ This distinction is even more important in the case of a
clearing organization, such as MGEX, that was ``grandfathered in''
to DCO status under the Commodity Futures Modernization Act of 2000
(Pub. L. No. 106-554, 114 Stat. 2763, sec. 112(f) (adding sec. 5a(b)
to the CEA) and thus never filed an application for registration as
a DCO.
\98\ See Subpart C Election Form, Exhibit Instructions at no 2,
(``If the [DCO] is an Applicant, in its Form DCO, the [DCO] may
summarize such information and provide a cross reference to the
Exhibit in this Subpart C Election Form that contains the required
information'' (emphasis added)).
\99\ See 78 FR 50269.
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MGEX further asserts that the Subpart C Election Form requirement
puts Subpart C DCOs at a risk of ``delayed regulatory approval'' not
borne by SIDCOs, which it claims are ``grandfathered in to Subpart C .
. . due to their SIDCO status.'' \100\ MGEX states that to ``ensure
equal treatment'' among all DCOs, any requirements to provide
information as part of the Subpart C election process should be imposed
upon SIDCOs as well.\101\ The Commission notes that SIDCOs, having been
designated as systemically important by the Council, are subject to
annual examinations under Title VIII and are, therefore, in a different
position than DCOs that have not been so designated, but wish to elect
to be held to the same international standards in an effort to attain
QCCP status. The Commission also notes that SIDCOs, as well as Subpart
C DCOs, are required by regulation 39.37, as finalized herein, to
complete and publically disclose their responses to the Disclosure
Framework.\102\ As such, and since SIDCOs are required to be subject to
the Subpart C regulations, the Commission does not feel it necessary to
require SIDCOs to complete a Subpart C Election Form. In addition,
because the Commission declines to require all DCOs to comply with the
regulations in Subpart C, the Subpart C Election Form is necessary to
provide a mechanism by which a registered DCO may elect to become
subject to Subpart C.
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\100\ MGEX at 5.
\101\ Id.
\102\ See supra Section II.I. (Regulation 39.37 (Additional
disclosure for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations)).
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In its comments on proposed regulation 39.37, MGEX also asserted
that, while requiring the submission of a Quantitative Disclosure
Document is ``consistent with the PFMIs,'' the Commission should delay
implementation of this requirement until the Quantitative Disclosure
Document is finalized in order to allow DCOs time to review and comment
upon it or to otherwise prepare for compliance.\103\ The Commission
confirms that, as noted in the Subpart C Election Form, as proposed and
finalized herein, completion and publication of the Quantitative
Information Disclosure will not be required until the criteria for such
disclosure has been finalized and published, which has not yet
occurred.
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\103\ MGEX at 8-9.
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Finally, MGEX responded to the Commission's request for
comment\104\ on whether or not the Commission should add a requirement
that the certifications contained in the Subpart C Election Form be
made under penalty of perjury. MGEX opposed the addition of this
requirement.\105\ The Commission notes that such a requirement would be
inconsistent with the current Form DCO, which does not include a
similar requirement. Therefore, the Commission has decided not to add a
perjury certification to the Subpart C Election Form.
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\104\ 78 FR 50272.
\105\ MGEX at 5.
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Accordingly, after careful review and consideration of the
comments, and for the reasons cited above and set forth in the
Proposal,\106\ the Commission is adopting regulation 39.31(b) as
proposed. The Commission has, however, altered the Subpart C Election
Form in two respects.
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\106\ 78 FR 50268-69.
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As discussed further below,\107\ DCOs that seek to become Subpart C
DCOs (as well as SIDCOs) will be permitted to request an extension of
up to one year to comply with any of the provisions of regulations
39.34, 39.35, or 39.39 pursuant to those regulations.\108\ The
Commission has determined that, to the extent that a DCO elects to
request any such extensions, it must do so prior to filing the Subpart
C Election Form and the General Instructions to the Subpart C Election
Form have been modified accordingly.\109\ The Commission also has made
technical modifications to the certifications contained in the Subpart
C Election Form to account for any extensions of time granted pursuant
to regulation 39.34(d) and/or 39.39(f).
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\107\ See infra at sections II.F. (Regulation 39.34--System
Safeguards), II.G. (Regulation 39.35--Default Rules and Procedures),
and II.K. (Regulation 39.39 (Recovery and Wind-Down).
\108\ Regulation 39.34(d), as finalized herein, provides that
the Commission may, upon request, grant a SIDCO or Subpart C DCO an
extension of up to one year to comply with any of the provisions of
regulation 39.34. Regulation 39.39(f), as finalized herein,
similarly provides that a SIDCO or Subpart C DCO, upon request, may
be granted an extension of up to one year to comply with the
provisions of regulations 39.35 and 39.39. Any such requests made by
a DCO seeking to become a Subpart C DCO will become part of that
DCO's Subpart C Election Form.
\109\ The Commission notes that it is not prescribing a
particular time period elapse between the filing of applications for
compliance extensions and the filing of the Subpart C Election Form.
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As noted in the Proposal,\110\ the Commission emphasizes that,
consistent with the certification required to be provided by a DCO as
part of its Subpart C Election Form, a DCO, as of the date that its
election to become subject to Subpart C becomes effective, would be
held to the requirements of Subpart C. As of that date, the DCO would
be subject to examination for compliance with Subpart C and to
potential enforcement action for non-compliance. This status would
continue until such time, if any, that the election is properly vacated
as set forth in regulation 39.31(e), as finalized.\111\ To the extent
that compliance with Subpart C would require the DCO to implement new
rules or rule amendments, all such rules or rule amendments must be
approved or permitted to take effect prior to the effective date of the
DCO's election.
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\110\ 78 FR 50269-50270.
\111\ See infra Section II.C.5. (Regulation 39.31(e)--
Rescission).
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3. Regulation 39.31(c)--Election and Withdrawal Procedures for DCO
Applicants
Regulation 39.31(c), as proposed, sets forth procedures through
which a DCO Applicant could request to become subject to the provisions
of Subpart C at the time the DCO Applicant files its Registration
Application. The Commission did not receive any comments specifically
addressing proposed regulation 39.31(c).\112\ Accordingly, for the
reasons cited in the Proposal,\113\ the Commission is adopting
regulation 39.31(c) as proposed. In the interest of administrative
economy, the Commission continues to encourage DCO Applicants to make
their election to become subject to Subpart C at the time that their
Registration Application is filed. Simultaneous filings would appear to
allow Commission resources to be used more efficiently and effectively.
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\112\ See supra Section II.C. (Regulation 39.31 (Election to
become Subject to Subpart C) for a discussion of comments regarding
the proposed opt-in regime and process generally and the Subpart C
Election Form.
\113\ 78 FR 50271.
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4. Regulation 39.31(d)--Public Information
Regulation 39.31(d), as proposed, would provide that certain
portions of the Subpart C Election Form will be considered public
documents that may routinely be made available for public inspection.
The Commission did not receive any comments with respect to proposed
regulation 39.31(d). Accordingly, for the reasons set forth in
[[Page 72485]]
the Proposal,\114\ the Commission is adopting regulation 39.31(d) as
proposed.
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\114\ Id.
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5. Regulations 39.31(e)--Rescission
Regulation 39.31(e), as proposed, would permit a Subpart C DCO to
rescind its election to comply with Subpart C by filing a notice of its
intent to rescind the election with the Commission. Such rescission
would, however, be subject to certain conditions. As proposed, the
rescission of a DCO's election to become subject to Subpart C would
become effective on the date specified by the Subpart C DCO in its
notice of intent to rescind the Subpart C election, except that the
rescission could not become effective any earlier than 90 days after
the date the notice of intent to rescind is filed with the Commission.
The Subpart C DCO would be required to comply with all of the
provisions of Subpart C until such rescission is effective and the
Commission would retain its authority concerning any activities or
events occurring during the time that the DCO maintained its status as
a Subpart C DCO.
Regulation 39.31(e), as proposed, also would require a Subpart C
DCO that files a notice of intent to rescind to (1) provide specified
notices to each of its clearing members, and to have rules in place
requiring each of its clearing members to provide such notices to each
of the clearing member's customers; (2) provide specified notices to
the general public; and (3) remove references to its Subpart C DCO (and
QCCP) status on its Web site and in other materials that it provides to
its clearing members and customers, other market participants, or
members of the public. In addition, the employees and representatives
of the Subpart C DCO would be prohibited from making any reference to
the organization as a Subpart C DCO (or QCCP) on and after the date
that the notice of its intent to rescind is filed.
The Commission received two comments addressing proposed regulation
39.31(e). ISDA recommended that the Commission modify the proposed
regulation to require, as a condition to a Subpart C DCO's rescission
of its Subpart C election, ``to certify that it has obtained approval
from clearing members (e.g., by member ballot) to rescind the
election.'' \115\ In response to ISDA's suggestion, the Commission
believes that this is a matter of corporate governance and the DCO
should follow its own policies and procedures with respect to internal
decisions regarding rescission. The Commission further notes that
existing regulation 39.3(e) does not require a DCO to certify that it
has obtained the approval of its clearing members to vacate its DCO
registration prior to filing with the Commission a request to do so
\116\ and, thus, requiring the certification suggested by ISDA would be
in tension with existing regulations. Accordingly, the Commission has
declined to accept ISDA's recommendation.
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\115\ ISDA at 3-4.
\116\ 17 CFR 39.3(e).
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FIA recommended that the Commission extend the time period between
the date that a DCO files a notice of intent to rescind its election to
be subject to Subpart C and the date that such rescission could become
effective from 90 days to 180 days.\117\ In support of its
recommendation, the FIA agreed with the view voiced by the Commission
in the Proposal \118\ that a delay in the effective date of the
rescission is necessary to provide banks and other entities that wish
to limit their cleared transactions to clearing solely through a QCCP
sufficient time to transfer their business to another Subpart C DCO or
a SIDCO.\119\ The FIA expressed concern, however, that the 90 day delay
is insufficient ``to allow a clearing member to make a determination
whether to withdraw as a clearing member and, if it elects to do so,
notify its customers, find one or more clearing members prepared to
accept each customer and allow the new clearing member and each
customer to negotiate the terms of their agreement.'' \120\ The
Commission recognizes that the clearing members of a DCO that has filed
a notice of intent to rescind its election to become subject to Subpart
C may need additional time to determine and to effectuate the actions
they may wish to take in light of such filing and believes that a 180
day waiting period until such rescission may become effective is
reasonable. Accordingly, the Commission has decided to lengthen the
minimum time period between the date a notice of intent to rescind an
election to become subject to Subpart C is filed and the date that such
rescission may become effective to 180 days. For the reasons cited
above and set forth in the Proposal,\121\ the Commission is adopting
regulation 39.31(e) as proposed in all other respects.
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\117\ FIA at 5.
\118\ 78 FR 50272.
\119\ FIA at 4.
\120\ FIA at 4-5.
\121\ 78 FR 50271-72.
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6. Regulations 39.31(f)--Loss of SIDCO Designation
Regulation 39.31(f), as proposed, would provide that a SIDCO that
is registered with the Commission, but whose designation of systemic
importance is rescinded by the Council,\122\ would immediately be
deemed to be a Subpart C DCO. Such Subpart C DCO would be subject to
the Subpart C provisions unless and until it elects to rescind its
status as a Subpart C DCO. The Commission did not receive any comments
on proposed regulation 39.31(f). Accordingly, for the reasons set forth
in the Proposal,\123\ the Commission is adopting regulation 39.31(f) as
proposed.
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\122\ See 12 CFR 1320.13(b) (procedure for the Council to
rescind a designation of systemic importance for a systemically
important financial market utility).
\123\ 78 FR 50272.
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7. Regulation 39.31(g)
Regulation 39.31(g), as proposed, provides that all forms and
notices required by regulation 39.31 shall be filed electronically with
the Secretary of the Commission in the format and manner specified by
the Commission. The Commission did not receive any comments on proposed
regulation 39.31(g) and, thus, is adopting the regulation as proposed.
D. Regulation 39.32 (Governance for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations)
The Commission proposed adding regulation 39.32 in order to
implement DCO Core Principles O (Governance Fitness Standards), P
(Conflicts of Interest), and Q (Composition of Governing Boards) for
SIDCOs and Subpart C DCOs in a manner that would be consistent with
PFMI Principle 2 (Governance).\124\
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\124\ In 2010 and 2011, the Commission proposed regulations
concerning the governance of DCOs (the ``2010/2011 Proposals''). See
Requirements for Derivatives Clearing Organizations, Designated
Contract Markets, and Swap Execution Facilities Regarding the
Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010);
see also Governance Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities, 76 FR 722 (Jan. 8, 2011). The Commission notes that the
regulations contained in the 2010/2011 Proposals are the subject of
a separate rulemaking. The Commission is not addressing those
regulations in this rulemaking.
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As discussed above, DCO Core Principle O states that each DCO must
establish governance arrangements that are transparent to fulfill
public interest requirements and to permit the
[[Page 72486]]
consideration of the views of owners and participants.\125\ DCO Core
Principle O also requires each DCO to establish and enforce appropriate
fitness standards for (i) directors, (ii) members of any disciplinary
committee, (iii) members of the DCO, (iv) any other individual or
entity with direct access to the settlement or clearing activities of
the DCO, and (v) any party affiliated with any entity mentioned in (i)-
(v) above. In addition, DCO Core Principle P requires each DCO to
establish and enforce rules to minimize conflicts of interest in the
decision making process of the DCO, and DCO Core Principle Q states
that each DCO must ensure that the composition of the governing board
or committee of the DCO includes market participants. These core
principles are substantively similar to PFMI Principle 2, which states
that a CCP ``should have governance arrangements that are clear and
transparent, promote the safety and efficiency of [the CCP], and
support the stability of the broader financial system, other relevant
public interest considerations, and the objectives of relevant
stakeholders.'' Additionally, under PFMI Principle 2, a CCP should have
procedures for managing conflicts of interest among board members, and
board members and managers should be required to have ``appropriate
skills,'' ``incentives,'' and ``experience.'' \126\
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\125\ See supra Section I.D.
\126\ PFMIs at Principle 2, K.C. 4-5.
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As proposed, subsection (a) (General rules) would require a SIDCO
or Subpart C DCO to establish governance arrangements that: (1) Are
written, clear and transparent, place a high priority on the safety and
efficiency of the SIDCO or Subpart C DCO, and explicitly support the
stability of the broader financial system and other relevant public
interest considerations; (2) ensure that the design, rules, overall
strategy, and major decisions of the SIDCO or Subpart C DCO
appropriately reflect the legitimate interests of clearing members,
customers of clearing members, and other relevant stakeholders; and (3)
disclose, to an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure: (i) Major decisions of
the board of directors to clearing members, other relevant
stakeholders, and to the Commission, and (ii) Major decisions of the
board of directors having a broad market impact to the public.\127\
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\127\ The provisions concerning transparency describe which
information, including the identities of board members, should be
disclosed to the public and/or the Commission.
---------------------------------------------------------------------------
As proposed, subsection (b) (Governance arrangements) would require
the rules and procedures of a SIDCO or Subpart C DCO to: (1) Describe
the SIDCO's or Subpart C DCO's management structure; (2) clearly
specify the roles and responsibilities of the board of directors and
its committees, including the establishment of a clear and documented
risk management framework; (3) clearly specify the roles and
responsibilities of management; (4) establish procedures for managing
conflicts of interest among board members; and (5) assign
responsibility and accountability for risk decisions and for
implementing rules concerning default, recovery, and wind-down.
As proposed, subsection (c) (Fitness standards for the board of
directors and management) would require that board members and managers
have the appropriate experience, skills, incentives and integrity; risk
management and internal control personnel have sufficient independence,
authority, resources and access to the board of directors; and that the
board of directors include members who are not executives, officers or
employees of the SIDCO or Subpart C DCO or of their affiliates.
The Commission requested comment on proposed regulation 39.32 and
asked that commenters include a detailed description of any
alternatives to proposed regulation 39.32 and estimates of the costs
and benefits of such alternatives. LCH commented that a SIDCO or
Subpart C DCO should be permitted to petition the Commission for
additional time to comply with new regulation 39.32 and with all other
substantive regulations contained in this rulemaking. The Commission
does not believe that a SIDCO or Subpart C DCO should be permitted to
petition for additional time to comply with new regulation 39.32 for
the reasons stated above.\128\
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\128\ See supra Section II.C. (Regulation 39.31 (Election to
become subject to the provisions of Subpart C)).
---------------------------------------------------------------------------
LCH also requested clarification as to which major decisions of the
board of directors should be disclosed under new regulation
39.32(a)(3). LCH stated that a board may make a resolution that is not
determinative, for example to commence exploratory negotiations for
making an acquisition. LCH stated that it did not believe Principle 2
would require it to publish such a decision because Explanatory Note
3.2.18 to Principle 2 states that an FMI need not disclose a major
decision where doing so would endanger commercial confidentiality. The
Commission agrees with LCH that there is a distinction between
exploratory negotiations and a final decision. The Commission also
agrees with the suggestion made in Explanatory Note 3.2.18 that it is
reasonable for a DCO to focus on disclosing the ``outcome'' of
decisions made by the board rather than decisions that are not
determinative. It should also be noted that paragraph (a)(3) does not
require a disclosure that would compromise ``statutory and regulatory
requirements on confidentiality and disclosure.''
Similarly, MGEX requested clarification as to: what qualifies as a
``major decision'' under proposed paragraph (a)(3); which
``information'' the Commission was referring to in footnote 137 of the
Proposal; and whether the disclosure provision of paragraph (a) is
intended to be a ``reiteration of existing law[s] or regulation[s].''
MGEX also suggested that paragraph (a) be amended to include a
provision stating that a DCO may withhold disclosing a major decision
of the board of directors if disclosing it would ``stifle candid board
debate or endanger commercial confidentiality.'' The Commission agrees
with MGEX that regulation 39.32 affords a DCO reasonable discretion in
determining which decisions are ``major'' so as to warrant disclosure
under paragraph (a)(3) and which decisions should not be disclosed due
to concerns about confidentiality. Moreover, paragraph (a)(3) requires
disclosure of ``decisions,'' rather than the debate preceding them. The
Commission concludes that the language of proposed paragraph (a)(3)
suffices in these regards.
ISDA commented that regulation 39.32 should address decision-making
by a SIDCO or Subpart C DCO during a crisis or emergency. Specifically,
ISDA suggests that there should be a provision requiring a SIDCO or
Subpart C DCO to obtain the views and approval of member
representatives (e.g. through the DCO's risk committee or otherwise)
before taking any material action in response to an emergency. The
Commission has decided not to include this requested provision because
the Commission has decided not to impose requirements beyond those
required by Principle 2 as part of this rulemaking.
Accordingly, the Commission has decided to finalize regulation
39.32 as proposed. The governance requirements set forth in the
proposed regulation were designed to enhance risk management and
controls by promoting fitness standards for directors and managers,
promoting transparency of
[[Page 72487]]
governance arrangements, and making sure that the interests of a
SIDCO's or Subpart C DCO's clearing members and, where relevant,
customers are taken into account. Because of the potential impact that
a SIDCO's failure could have on the U.S. financial markets, the
Commission believes that that these requirements should be applicable
to SIDCOs. Moreover, it would be beneficial to Subpart C DCOs, their
members and customers, and the financial system generally, for
regulation 39.32 to apply to Subpart C DCOs.
E. Regulation 39.33 (Financial resources requirements for systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations)
In August of 2013, the Commission finalized Regulation 39.29, which
sets forth financial resource requirements for SIDCOs in a manner that
parallels the financial resources standard in Principle 4 of the
PFMIs.\129\ The Commission proposed to amend regulation 39.29 to
enhance financial resources requirements for SIDCOs and Subpart C DCOs
and to achieve consistency with the relevant provisions of the PFMIs,
in particular Principle 4 and Principle 7.
---------------------------------------------------------------------------
\129\ See SIDCO Final Rule 78 FR 49666.
---------------------------------------------------------------------------
The Commission first proposed to renumber existing regulation 39.29
to 39.33 and to apply the requirements set forth therein to Subpart C
DCOs. The Commission further proposed, for purposes of organization,
deleting from paragraph (a)(1) the requirement that, where a clearing
member controls another clearing member or is under common control with
another clearing member, a SIDCO treat affiliated clearing members as a
single clearing member (the ``Clearing Member Aggregation
Requirement''). The Commission proposed to include such language in new
paragraph (a)(4) to clarify that the Clearing Member Aggregation
Requirement applies when a SIDCO or Subpart C DCO calculates its
financial resources requirements under regulation 39.33(a) as well as
its liquidity resources requirements under regulation 39.33(c).
The Commission also proposed amending paragraph (a) to state that
the Commission shall, if it deems appropriate, determine whether a
SIDCO or Subpart C DCO is systemically important in multiple
jurisdictions. In making this determination, the Commission would, in
order to limit such determinations to appropriate cases, review whether
another jurisdiction had determined the SIDCO or Subpart C DCO to be
systemically important according to a designations process that
considers whether the foreseeable effects of a failure or disruption of
the derivatives clearing organization could threaten the stability of
each relevant jurisdiction's financial system. In addition, the
Commission proposed amending paragraph (a) to state that the Commission
shall also determine, if it deems appropriate, whether any of the
activities of a SIDCO or Subpart C DCO, in addition to clearing credit
default swaps, credit default futures, or any derivatives that
reference either, has a more complex risk profile and that in making
this determination, the Commission may take into consideration
characteristics such as non-linear and discrete jump-to-default price
changes.\130\ The Commission also proposed amending paragraph (b) to
clarify that the prohibition on including assessments as a financial
resource applies to calculating financial resources needed to cover the
default of the largest and, where applicable, second largest clearing
member, in extreme but plausible circumstances.\131\
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\130\ The Commission's amendment to regulation 140.94(a)
delegates the authority to make these determinations to the Director
of the Division of Clearing and Risk.
\131\ The preamble to the SIDCO Final Rule adopting release made
clear that paragraph (b) applied to both Cover One and Cover Two,
but the Commission has decided to add clarifying language to the
regulation text. See generally SIDCO Final Rule.
---------------------------------------------------------------------------
The PFMI Explanatory Notes explain that liquidity risk arises in an
FMI (such as a DCO) when settlement obligations are not completed when
due as part of its settlement process. Liquidity risk can arise in a
number of ways: between an FMI and its participants, between an FMI and
other entities (such as the FMI's settlement banks and liquidity
providers), or between an FMI's participants.\132\ The Commission
proposed adding paragraphs (c), (d), and (e) to address the liquidity
of SIDCOs' and Subpart C DCOs' financial resources. The liquidity
resources discussed in paragraphs (c), (d), and (e) should be
sufficient to address the different exposures to liquidity risk
applicable to that DCO.
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\132\ See PFMIs, E.N. 3.7.1.
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Under proposed paragraph (c)(1), a SIDCO or Subpart C DCO would be
required to maintain eligible liquidity resources that will enable the
SIDCO or Subpart C DCO to meet its intraday, same-day, and multiday
settlement obligations, as defined in regulation 39.14(a), with a high
degree of confidence under a wide range of stress scenarios, including
the default of the member creating the largest liquidity requirements
under extreme but plausible circumstances. Under proposed paragraph
(c)(2), a SIDCO or Subpart C DCO would be required to maintain
liquidity resources that are sufficient to satisfy the obligations
required by new paragraph (c)(1) in all relevant currencies for which
the SIDCO or Subpart C DCO has settlement obligations to its clearing
members.
Under proposed paragraph (c)(3), a SIDCO or Subpart C DCO would be
limited to using only certain types of liquidity resources to satisfy
the minimum liquidity requirement set forth in proposed paragraph
(c)(1).\133\ Among these ``qualifying liquidity resources'' are
``committed lines of credit,'' ``committed foreign exchange swaps,''
and ``committed repurchase agreements.'' ``Committed'' is intended to
connote a legally binding contract under which a liquidity provider
agrees to provide the relevant liquidity resource without delay or
further evaluation of the DCO's creditworthiness, e.g., a line of
credit that cannot be withdrawn at the election of the liquidity
provider during times of financial stress, or in the event of the
default of a member of the SIDCO or Subpart C DCO.\134\
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\133\ In determining whether the liquidity resources that are
eligible under paragraph (c)(3) are sufficient in amount to meet the
obligation specified under paragraph (c)(1) (resources that
``enable'' the DCO to meet its settlement obligations), it is
important to avoid double counting. For example, one may not count
both a committed repurchase arrangement and U.S. Treasury Bills that
would be used to collateralize that arrangement.
\134\ Times of financial stress and the event of the default of
a member of the DCO are, of course, the times when reliable
liquidity arrangements are most needed.
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Under proposed paragraph (c)(3)(ii), a SIDCO or Subpart C DCO would
be required to take appropriate steps to verify that its qualifying
liquidity arrangements do not include material adverse change
provisions and are enforceable, and will be highly reliable, even in
extreme but plausible market conditions.
Also consistent with Principle 7, under proposed paragraph (c)(4),
if a SIDCO or Subpart C DCO maintains liquid financial resources in
addition to those required to satisfy the Cover One requirement, then
those resources should be in the form of assets that are likely to be
saleable with proceeds available promptly or acceptable as collateral
for lines of credit, swaps, or repurchase agreements on an ad hoc
basis. In addition, Principle 7 provides and proposed paragraph
39.33(c)(4) requires that a SIDCO or Subpart C DCO should consider
maintaining collateral with low credit, liquidity, and market
[[Page 72488]]
risks that is typically accepted by a central bank of issue for any
currency in which it may have settlement obligations, but shall not
assume the availability of emergency central bank credit as a part of
its liquidity plan.\135\
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\135\ It should be noted that the requirement of proposed
paragraph (c)(4) that a SIDCO or Subpart C DCO consider maintaining
certain types of collateral, like the requirement of proposed
paragraph (c)(1)(ii), does not include a requirement as to the
decision to be made following such consideration.
---------------------------------------------------------------------------
Pursuant to proposed paragraphs (d)(1)-(2), a SIDCO or Subpart C
DCO would be required to monitor its liquidity providers in a manner
consistent with Principle 7. Proposed paragraph (d)(1) would define
``liquidity provider'' to mean any of the following: (i) A depository
institution, a U.S. branch or agency of a foreign banking organization,
a trust company, or a syndicate of depository institutions, U.S.
branches or agencies of foreign banking organizations, or a trust
companies providing a line of credit, foreign exchange swap facility or
repurchase facility to the SIDCO or Subpart C DCO; and (ii) Any other
counterparty relied upon by a SIDCO or Subpart C DCO to meet its
minimum liquidity resources requirement under paragraph (c) of this
section. In addition, proposed paragraph (d)(4) would require a SIDCO
or Subpart C DCO to regularly test its procedures for accessing its
liquidity resources. Finally, pursuant to proposed subsection (e) and
consistent with Principle 4, a SIDCO or Subpart C DCO would be required
to document its supporting rationale for, and have appropriate
governance arrangements relating to, the amount of total financial
resources it maintains pursuant to regulation 39.33(a) and the amount
of total liquidity resources it maintains pursuant to regulation
39.33(c).\136\
---------------------------------------------------------------------------
\136\ This provision is consistent with PFMI Principle 4, K.C.
4.
---------------------------------------------------------------------------
The Commission requested comment on all aspects of proposed
regulation 39.33. ISDA, MGEX and the European Commission each commented
on paragraph (a)(1). ISDA requested clarification of the term ``credit
exposure,'' which the Proposal used to replace the term ``financial
obligation,'' which currently appears in regulation 39.29 (renumbered
as regulation 39.33 as part of this rulemaking). In response to this
comment, the Commission will revert to the term financial obligation.
MGEX requested clarification that a Subpart C DCO that is neither
systemically important in multiple jurisdictions nor involved in
activities with a more complex risk profile would be required to meet
only the Cover One financial resources requirement,\137\ not the Cover
Two requirement.\138\ The Commission notes that MGEX understood
paragraph (a)(1) correctly, and the Commission believes that the
language in paragraph (a)(1) is sufficiently clear.
---------------------------------------------------------------------------
\137\ Regulation 39.11 requires DCOs to maintain financial
resources sufficient to cover a wide range of potential stress
scenarios, which include, but are not limited to, the default of the
participant and its affiliates that would potentially cause the
largest aggregate financial exposure to the CCP in extreme but
plausible market conditions, otherwise known as ``Cover One.''
\138\ The term ``Cover Two'' refers to the requirement that a
DCO maintain financial resources sufficient to enable it to meet its
financial obligations to its clearing members notwithstanding a
default by the two clearing members creating the largest combined
loss (which would include both proprietary and customer accounts)
for the SIDCO in extreme but plausible market conditions.
---------------------------------------------------------------------------
The European Commission disagreed with the Commission's decision to
require a SIDCO or Subpart C DCO to meet the Cover Two financial
resources requirement only if it is systemically important in multiple
jurisdictions or is involved in activities with a more complex risk
profile. The European Commission suggested that all SIDCOs should be
required to comply with the Cover Two requirement for the following
reasons. First, any DCO that serves non-US clearing members or non-US
trading venues is systemically important.\139\ In addition, any DCO
that is systemically important in the U.S. is systemically important
internationally.\140\ Second, requiring certain DCOs to meet the Cover
One requirement while requiring other DCOs to meet the Cover Two
requirement would be ``detrimental to the object of building equal
conditions of fair competition'' between U.S.-registered DCOs and DCOs
registered in other jurisdictions.\141\ Third, banking regulators
cannot deem various SIDCOs and Subpart C DCOs to all be QCCPs if some
are required to meet the Cover One requirement while others are
requirement to meet the Cover Two requirement.\142\ Fourth, differing
financial resources requirements would make the European Commission's
equivalence assessment of U.S.-registered DCOs more difficult.\143\
Fifth, it would be more prudent from a risk management perspective if
the Cover Two requirement applied to all products and not only those
``with a more complex risk profile.'' \144\
---------------------------------------------------------------------------
\139\ European Commission at 2.
\140\ Id.
\141\ Id.
\142\ Id.
\143\ European Commission at 2-3.
\144\ European Commission at 3.
---------------------------------------------------------------------------
The applicability of the Cover Two requirement in paragraph (a)(1)
is consistent with Principle 4 of the PFMIs. Further, while the
European Commission raises important points, further work would need to
be done to consider the costs versus the benefits of imposing a Cover
Two financial resources requirements on all DCOs regardless of whether
that DCO was affirmatively found to be systemically important by the
Council (or other jurisdictions) and regardless of the types of
products that DCO clears. Nonetheless, the Commission notes that the
two existing SIDCOs will, in fact, be subject to a Cover Two financial
resources requirement.\145\
---------------------------------------------------------------------------
\145\ As discussed in the final rule on Enhanced Risk Management
Standards for Systemically Important Derivatives Clearing
Organizations, ICE Clear Credit clears credit default swaps (which
is a product with a more complex risk profile) and currently meets a
Cover Two requirement. See 78 FR 49670. Further, CME Clearing
currently sizes its guaranty fund for interest rate swaps and its
guaranty fund for credit default swaps to a Cover Two standard, and
is required to meet a Cover Two standard for its base guaranty fund
pursuant to regulation 39.29(a) by the end of 2013 because its
clears credit default swaps. See 78 FR 49671.
---------------------------------------------------------------------------
Chris Barnard commented that he supported the language of paragraph
(a)(3) (determination of whether an activity has a more complex risk
profile) and that it will appropriately result in higher financial
resources requirements for such activities. Chris Barnard commented
further that this should improve the robustness of a DCO's clearing
system and help protect the financial system from contagion.\146\
---------------------------------------------------------------------------
\146\ Chris Barnard at 2.
---------------------------------------------------------------------------
With respect to proposed paragraph (c)(2)(satisfaction of
settlement in all relevant currencies), LCH commented that it seeks
confirmation that the provision is intended to pertain to ``material
currencies only, which are indeed the ones [for which a liquidity
shortfall would be] likely to disrupt the SIDCO's [or Subpart C DCO's]
services and impact financial stability.'' \147\
---------------------------------------------------------------------------
\147\ LCH at 5.
---------------------------------------------------------------------------
There is no support for the implied assertions that a DCO could
fail to meet its obligations in certain currencies on time without
disrupting its services or impacting financial stability, and that a
DCO could forgo arrangements to meet its obligations in certain
currencies consistent with Principle 7. Any default by a DCO to meet
its obligations on time would be likely to disrupt its services and
impact financial stability. Thus, in this context, new paragraph (c)(2)
covers those currencies for which the SIDCO or Subpart C DCO has
obligations to perform settlements, as defined in Sec. 39.14(a)(1), to
its clearing members.
[[Page 72489]]
The Commission believes that this interpretation is consistent with
Principle 7. To be sure, where an FMI's obligations in a particular
currency are relatively small, the depth and complexity of the
arrangements necessary to establish high reliability is likely
proportionately less demanding.
In addition, with respect to proposed paragraph (c)(2), CME
commented that it clears derivatives that settle in approximately 14
currencies and that it would be difficult to obtain committed credit
facilities for currencies other than G-7 currencies.\148\ For those
other currencies, CME claimed that it would be forced to require a
restrictive set of margin policies, including requiring a clearing
member to post margin in the same currency as the settlement
currency.\149\ This, CME argued, would require CME's bank affiliated
clearing members to face increased capital charges because it may be
difficult for cash collateral in such currencies to receive bankruptcy
remote treatment (and, therefore, a smaller capital requirement) unless
such cash is posted with a central bank.\150\
---------------------------------------------------------------------------
\148\ CME at 10.
\149\ Id.
\150\ Id.
---------------------------------------------------------------------------
As an initial matter, CME provided no support for the assertion
that cash collateral would not be bankruptcy remote in the case of a
DCO. To the contrary, section 761(10) of the Bankruptcy Code defines
customer property to include both cash and securities, and 761(16)
defines member property in terms of customer property. Section 766(i)
provides that, in the case of the insolvency of a clearing
organization, both customer and member property will be protected.\151\
A SIDCO or Subpart C DCO will have discretion to determine the most
efficient means of ensuring sufficient liquidity, which may include
requiring (or incentivizing) members to post all or a part of their
collateral in the settlement currency.
---------------------------------------------------------------------------
\151\ 11 USC 761(i).
---------------------------------------------------------------------------
With respect to proposed paragraph (c)(3)(i)(E), CME commented that
it is inconsistent with Principle 7 to require U.S. Treasury
securities, which are held by a SIDCO or Subpart C DCO for purposes of
meeting the minimum amount of liquidity resources required under
proposed paragraph (c)(1), to be subject to ``committed'' funding
arrangements.\152\ CME commented that it interprets Principle 7 to
require only ``investments'' to be subject to ``prearranged and highly
reliable funding arrangements'' and not ``highly marketable
collateral,'' of which U.S. Treasury securities are an example.\153\
---------------------------------------------------------------------------
\152\ CME at 10.
\153\ CME at 3-4.
---------------------------------------------------------------------------
CME stated further that the European Securities and Markets
Authority (ESMA), the Monetary Authority of Singapore (MAS), and the
Reserve Bank of Australia (RBA) have each taken a ``more flexible
approach'' than proposed paragraph (c)(3)(i)(E) in interpreting the
qualifying liquid resources provisions of Principle 7.\154\ According
to CME, these other regulators do not, in some cases, require highly
marketable collateral such as U.S. Treasury securities to be subject to
committed funding facilities.\155\ In addition, CME stated that other
regulators do not, in some cases, require highly marketable collateral
to be subject to prearranged and highly reliable funding
arrangements.\156\
---------------------------------------------------------------------------
\154\ CME at 4.
\155\ Id.
\156\ Id.
---------------------------------------------------------------------------
ISDA commented that it would be neither necessary nor appropriate
to require that U.S. Treasuries, used to satisfy the minimum liquid
resources requirement, be subject to prearranged and highly reliable
funding arrangements.\157\ According to ISDA, such a requirement has
the potential to exacerbate a liquidity crisis and pass on risk from
the DCO to its liquidity providers.\158\
---------------------------------------------------------------------------
\157\ ISDA at 4.
\158\ Id.
---------------------------------------------------------------------------
CME further argued that it would be unnecessary to require U.S.
Treasury securities to be subject to committed funding arrangements
because the U.S. Treasury market is the world's global standard for
reliable liquidity and that same-day settlement of U.S. Treasury
securities is reliably available in material sizes for a negligible
yield concession of 1-2 basis points per annum.\159\ CME noted that
banks are permitted to classify U.S. Treasury securities as ``High
Quality Liquid Assets'' (HQLA) under the Basel III capital rules. CME
also stated that due to their robust liquidity and eligibility to be
pledged at the Federal Reserve Bank discount window, U.S. Treasury
securities are extremely safe for banks to accept under uncommitted
repurchase agreements.\160\
---------------------------------------------------------------------------
\159\ CME at 7-8.
\160\ CME at 8.
---------------------------------------------------------------------------
CME also argued that there would be several negative consequences
if the Commission required a DCO to arrange for U.S. Treasury
securities to be subject to a committed funding arrangement.\161\
First, CME stated that this provision would necessitate CME to limit
the amount of U.S. Treasury securities a CME-clearing member could
deposit to meet initial margin and guaranty fund obligations.\162\ To
compensate, the clearing members would have to deposit additional cash.
CME argued that this would be detrimental to bank affiliated clearing
members because the Basel III capital rules may require banks to take
higher capital charges for cash collateral than for other types of
collateral, including U.S. Treasury securities because cash collateral
is not confirmed to be bankruptcy remote.\163\ CME also stated that
there would be difficulties establishing a committed liquidity facility
for U.S. Treasury securities. CME asserted that the banks that are
affiliated with CME clearing members are the best sources of such
liquidity resources, and such banks may be prevented from participating
in a large committed facility because of the risk that they would
breach their single counterparty exposure limits under proposed Basel
III capital rules. As a result, bank affiliated clearing members may
reduce their customer clearing business, which could, in turn, increase
costs to customers or prevent customers from taking advantage of the
risk mitigating benefits of central clearing.\164\
---------------------------------------------------------------------------
\161\ CME at 9-12.
\162\ CME at 10.
\163\ CME at 9. As noted above, this assertion is unsupported,
and is contradicted by Subchapter IV of Chapter 7 of the Bankruptcy
Code.
\164\ CME at 11.
---------------------------------------------------------------------------
Finally, CME suggested that the market for committed liquidity
facilities may not be large enough to offer a facility that would
enable CME to satisfy the proposed liquidity provisions of regulation
39.33(c). CME also discussed a cost estimate for establishing committed
facilities. This cost estimate is addressed in the cost benefit
considerations, below.\165\
---------------------------------------------------------------------------
\165\ CME at 12-13. See also section IV.C., infra.
---------------------------------------------------------------------------
FIA also commented that U.S. Treasury securities should be
considered a qualifying liquid resource under paragraph (c)(3), even if
they are not subject to funding arrangements in accordance with
proposed subparagraph (E)(2).\166\ FIA argued that, alternatively,
subparagraph (E)(2) should permit a DCO to arrange for U.S. Treasury
securities to be subject to uncommitted repurchase agreements. FIA
supports CME's comment that U.S. Treasury securities are ``high quality
liquid assets'' under BCBS standards and have remained highly liquid
during times of stress.\167\
---------------------------------------------------------------------------
\166\ FIA at 3-4.
\167\ Id.
---------------------------------------------------------------------------
However, in appealing to the standards established by other
jurisdictions, CME acknowledged that
[[Page 72490]]
the EMIR Regulatory Technical Standards limit CCPs to ``count[ing]
`highly marketable financial instruments . . . that the CCP can
demonstrate are readily available and convertible into cash on a same
day basis using prearranged and highly reliable funding arrangements,
including in stressed market conditions.' '' \168\ Similarly, CME
refers to United Kingdom requirements for a liquidity resource to be
qualifying that include that the CCP needs to ``demonstrate its ability
to liquidate the resource for same day cash.'' \169\ The Commission
agrees that the obligation of a SIDCO or Subpart C DCO with respect to
highly marketable collateral will be to demonstrate that, as stated in
subparagraph (E)(2), those assets are, in fact, readily available and
convertible into cash pursuant to prearranged and highly reliable
funding arrangements, even in extreme but plausible market conditions.
---------------------------------------------------------------------------
\168\ CME at 6, quoting European Market Infrastructure
Regulation Regulatory Technical Standards, Article 33 (emphasis
supplied here).
\169\ CME at 6 (emphasis supplied).
---------------------------------------------------------------------------
ISDA commented that proposed paragraph (c)(3)(ii), which requires a
SIDCO or Subpart C DCO to take steps to verify that the prearranged and
highly reliable funding arrangements for U.S. Treasury securities or
other sovereign bonds do not include material adverse change
provisions, is unnecessary because the PFMIs do not specifically
require this.\170\ ISDA also noted that credit arrangements generally
include such clauses in order to protect the financial institution
providing the credit, to protect that institution's shareholders, and
to prevent the spread of risk from a DCO to financial
institutions.\171\
---------------------------------------------------------------------------
\170\ ISDA at 4.
\171\ Id.
---------------------------------------------------------------------------
In light of these comments, the Commission has decided to make
minor revisions to the language in 39.33(c)(3)(E)(1) and (E)(2) to more
closely align with the language used in key consideration 5 to
Principle 7.
The purpose of the reference to the material adverse change clauses
is to ensure that a SIDCO or Subpart C DCO not rely on a credit or
liquidity arrangement that can be declined (i.e., would not be reliably
enforceable) at the very point in time when the DCO would, in fact,
need to use the arrangement. In other words, these funding arrangements
are intended to ensure that a SIDCO or Subpart C DCO will be able to
meet its obligations when they come due even after a default in extreme
but plausible conditions. If a funding arrangement includes a provision
that there be no material adverse changes as a condition to draw, then
such funding arrangement will not in fact serve its intended purpose.
By contrast, a representation that there have been no material adverse
changes for some period prior to execution of a liquidity arrangement,
where the truth of such representation is not a condition to
enforceability of the obligation to provide liquidity, would not be a
condition that defeats the purpose of the liquidity arrangement. The
Commission believes this interpretation is consistent with key
consideration 5 of Principle 7, which states in relevant part that
``For the purpose of meeting its minimum liquid resource requirement,
an FMI's qualifying liquid resources in each currency include . . .
highly marketable collateral held in custody and investments that are
readily available and convertible into cash with prearranged and highly
reliable funding arrangements, even in extreme but plausible market
conditions.''
Accordingly, the Commission has decided to modify paragraph
(c)(3)(ii) to replace the phrase ``material adverse change clause''
with ``material adverse change condition'' and to add the ``even in
extreme but plausible market conditions'' language from key
consideration 5 to clarify this issue and to ensure consistency with
Principle 7 with respect to this point.
With respect to proposed paragraph (c)(4), ISDA commented that if a
SIDCO or Subpart C DCO maintains financial resources in an amount
greater than the Cover One financial resources requirement, then the
SIDCO or Subpart C DCO should be required to maintain collateral with a
low credit risk to cover such greater amount.\172\ ISDA also commented
that the phrase ``with proceeds available promptly'' should be deleted
because it does not appear in the PFMIs and is not clearly
defined.\173\ The Commission notes that the financial resources at
issue in this paragraph are in excess of those required by Principle 7
and regulation 39.33(a). Therefore, the Commission believes it is
appropriate for attendant requirements to be less stringent than those
that apply to required financial resources. In addition, the
requirement in paragraph (c)(4) that a SIDCO or Subpart C DCO should
consider maintaining collateral with low credit risk for any excess
financial resources is consistent with Principle 7. Moreover, the
Commission disagrees with ISDA and believe that the concept of ``with
proceeds available promptly'' is covered by, and consistent with, the
PFMIs.
---------------------------------------------------------------------------
\172\ Id.
\173\ ISDA at 4-5.
---------------------------------------------------------------------------
In response to the Commission's question as to whether proposed
paragraph (d)(4) should specify the frequency with which a SIDCO or
Subpart C DCO must test its procedures for accessing liquidity
resources, MGEX commented that it believes the proposed language is
sufficient.\174\ MGEX commented that the proposed language
appropriately affords a DCO the discretion to determine the frequency
of testing its procedures for accessing liquidity resources.\175\ MGEX
stated that a DCO is in the best position to determine this frequency
and that unnecessary, redundant testing would cause a DCO to incur
unnecessary costs.\176\
---------------------------------------------------------------------------
\174\ MGEX at 7.
\175\ Id.
\176\ Id.
---------------------------------------------------------------------------
The Commission has decided to finalize regulation 39.33 as modified
above. New paragraphs (c), (d), and (e) are intended to address the
gaps between current part 39 requirements and standards set forth in
Principle 7.\177\ The Commission believes these new provisions are
appropriate and will reduce risk for SIDCOs and Subpart C DCOs, their
clearing members, and customers of clearing members. In particular, new
paragraph (c)(1) will help prevent a SIDCO or Subpart C DCO from
defaulting on its obligations to non-defaulting clearing members, which
is particularly important for a SIDCO because of the potential impact
that the failure of a SIDCO could have on the U.S. financial markets,
because
[[Page 72491]]
maintaining resources that enable the DCO to meet its intraday, same-
day, and multiday settlement obligations. New paragraph (c)(2) will
require a SIDCO to meet its obligations in each relevant currency in a
timely manner. This is important because if a SIDCO has sufficient
funds to meet an obligation, but the funds are not in the correct
currency, then the SIDCO cannot meet that obligation in a timely
manner, which could lead to a disruption of the SIDCO's services. Such
disruption could, in turn, have a significant impact on the financial
stability of the U.S. economy.
---------------------------------------------------------------------------
\177\ Principle 7, K.C. 2 requires a CCP to measure, monitor,
and manage liquidity risk effectively. This includes the CCP
maintaining sufficient liquid resources in all relevant currencies
in order to effect same-day and, where applicable, intraday and
multiday settlement of payment obligations in a wide range of
potential stress scenarios, including the default of the participant
that would create the largest aggregate payment obligations in
extreme but plausible market conditions. In addition, Principle 7,
K. C. 5 limits a CCP to counting only certain qualifying liquid
resources for the purpose of meeting its financial resources
requirement. These resources include: cash in the currency of the
requisite obligations, held either at the central bank of issue or
at a creditworthy commercial bank; committed lines of credit; or
high quality, liquid, general obligations of a sovereign nation. In
addition, Principle 7, K. C. 4 states that a CCP that is
systemically important in multiple jurisdictions or that is involved
in activities with a more complex risk profile should consider
maintaining sufficient qualifying liquid resources to meet the
default of the two participants that would create the largest
aggregate payment obligations in such circumstances. Principle 7, K.
C. 7 also requires a CCP to monitor its liquidity providers,
including clearing members, by undertaking due diligence to confirm
that they have sufficient information to understand and manage their
liquidity risks and have the capacity to perform as required under
their commitments to the CCP.
---------------------------------------------------------------------------
New paragraph (c)(1)(ii) will require a SIDCO or Subpart C DCO that
is systemically important in multiple jurisdictions, or that is
involved in activities with a more complex risk profile, to consider
maintaining certain eligible liquidity resources that, at a minimum,
will enable it to meet its intraday, same-day, and multiday settlement
obligations, stress scenarios that include a default of the two
clearing members creating the largest aggregate liquidity obligation
for the DCO in extreme but plausible market conditions. The proposed
list of these resources is consistent with those set forth in Principle
7. The financial integrity of a SIDCOs and or Subpart C DCOs might be
enhanced if it considers meeting this enhanced standard. The provisions
of new paragraph (c)(4) (pertaining to, among other issues, the
liquidity of financial resources held in addition to those financial
resources required by the Cover One standard) are designed to enhance
the financial condition of SIDCOs and Subpart C DCOs and help reinforce
stability.\178\
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\178\ See generally Financial Stability Oversight Council 2012
Annual Report, Appendix A at 163 (finding that ``the contagion
effect of a CME failure could impose material financial losses on
CME's clearing members and other market participants (such as
customers) and could lead to increased liquidity demands and credit
problems across financial institutions, especially those that are
active in the futures and options markets.'').
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F. Regulation 39.34 (System safeguards for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
In August of 2013, the Commission finalized regulation 39.30, which
enhanced system safeguards requirements for SIDCOs with respect to
business continuity and disaster recovery, and included a two-hour
recovery time objective (``RTO'').\179\ As discussed in the adopting
release, the two-hour RTO is consistent with Principle 17 of the PFMIs
and increases the soundness and operating resiliency of the SIDCO,
which in turn, increases the overall stability of the U.S. financial
markets.\180\ The Commission proposed renumbering regulation 39.30 as
regulation 39.34 and amending the regulation to cover Subpart C DCOs in
addition to SIDCOs. The Commission also made a technical correction to
paragraph (b) to make clear that subparagraphs (1), (2), and (3)
concern each activity necessary for the daily processing, clearing, and
settlement of existing and new contracts. Finally, the Commission
proposed amending the regulation to allow the Commission to, upon
request, grant newly designated SIDCOs and Subpart C DCOs up to one
year to comply with the provisions of regulation 39.34.\181\
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\179\ See SIDCO Final Rule 78 FR 49672-49674.
\180\ Id.
\181\ In response to comments received, regulation 39.39, as
finalized herein, will permit the Commission, upon request, to grant
newly designated SIDCOs and Subpart C DCOs up to one year to comply
with the provisions of regulation 39.35 and 39.39. To harmonize
regulation 39.34 with this revision, the Commission has determined
to make a technical correction to proposed regulation 39.34 that
replaces the phrase ``upon application'' with the phrase ``upon
request.''
---------------------------------------------------------------------------
MGEX commented that it ``appreciates the additional time granted
for complying'' with regulation 39.34.\182\ The Commission notes that
MGEX's statement implies an automatic compliance extension, which is
inaccurate because regulation 39.34(d) permits a SIDCO or Subpart C DCO
to request that the Commission grant it up to one year to comply with
regulation 39.34. In reviewing such requests, the Commission will be
attentive to whether the DCO has a well-developed plan to comply with
the requirement by the end of the requested extension, with reasonable
milestones that can be monitored by the Commission. MGEX also commented
that it would like flexibility in developing a business continuity and
disaster recovery plan.\183\ MGEX stated that the regulation would
require it to hire three or four new employees outside of Minneapolis,
which would be very costly.\184\ MGEX suggested it would be less costly
to comply with the regulation if it outsourced its business continuity
compliance, but it does not wish to do that because employees, rather
than contractors, are more likely to act in the best interests of
MGEX.\185\
---------------------------------------------------------------------------
\182\ MGEX at 7.
\183\ Id.
\184\ Id.
\185\ Id.
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First, the Commission notes that to facilitate the two-hour RTO,
regulation 39.34 specifically requires a SIDCO or Subpart C DCO to
maintain personnel, who live and work outside the relevant area of the
physical and technological resources the SIDCO or Subpart C DCO
normally relies upon to conduct its clearing activities. This
requirement might be met in a number of ways. As MGEX notes, one way is
to engage outsourced personnel. An alternative would be to base
employees at a geographically diverse location. In general, a SIDCO or
Subpart C DCO does have flexibility in designing its business
continuity and disaster recovery plan, although such plan must comply
with the requirements set forth in regulation 39.34 as well as any
other applicable Commission regulations. The Commission expects all
SIDCOs and Subpart C DCOs to fully comply with these, and all other
applicable, regulations, and anticipates that a registered DCO would
carefully weigh any costs associated with compliance with Subpart C
prior to electing to become subject to Subpart C. Second, the proposed
amendment to allow the Commission, upon request, to grant newly
designated SIDCOs and Subpart C DCOs up to one year to comply with the
provisions of regulation 39.34 was intended to provide flexibility to
address the time practically required to obtain the necessary physical
and technological resources, and to organize human resources, as
appropriate to implement a two-hour RTO. As such, the Commission has
decided to finalize regulation 39.34 as proposed.
G. Regulation 39.35 (Default rules and procedures for uncovered credit
losses or liquidity shortfalls (recovery) for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
The Commission proposed regulation 39.35 in order to add
requirements pursuant to DCO Core Principle G, to address certain
potential gaps between Commission regulations and Principles 4 and
7.\186\ Regulation 39.16 currently requires a DCO to adopt procedures
permitting it to take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
default on the obligations of a clearing member to the
[[Page 72492]]
DCO.\187\ Under proposed regulation 39.35, SIDCOs and Subpart C DCOs
would be required to adopt additional procedures to address certain
issues arising from extraordinary stress events, including the default
of one or more clearing members. Specifically, consistent with
Principle 4 of the PFMIs, proposed paragraph (a) would require a SIDCO
or Subpart C DCO to adopt rules and procedures addressing the
following:
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\186\ DCO Core Principle G requires a DCO to have rules and
procedures ``designed to allow for the efficient, fair, and safe
management of events during which [clearing] members or
participants--(I) become insolvent; or (II) otherwise default on the
obligations of the members or participants to the [DCO].'' Each DCO
``is required to (I) clearly state the default procedures on the
[DCO]; (II) make publicly available the default rules of the [DCO];
and (III) ensure that the [DCO] may take timely action--(aa) to
contain losses and liquidity pressures; and (bb) to continue meeting
each obligation of the DCO.'' See supra Section I.D. and 78 FR
50263.
\187\ 17 CFR 39.16(c).
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1. How the SIDCO or Subpart C DCO would allocate losses exceeding
the financial resources available to the SIDCO or Subpart C DCO;
2. How the SIDCO or Subpart C DCO would arrange for the repayment
of any funds the SIDCO or Subpart C DCO may borrow; and
3. How the SIDCO or Subpart C DCO would replenish any financial
resources it may employ during such a stress event, so that the SIDCO
or Subpart C DCO would be able to continue to operate in a safe and
sound manner.
Consistent with Principle 7 of the PFMIs, proposed paragraph (b) would
require a SIDCO or Subpart C DCO to establish rules and procedures
enabling it to promptly meet all of its settlement obligations, on a
same day and, where appropriate, on an intraday and multiday basis, in
the context of the occurrence of either or both of the following
scenarios: (i) Following an individual or combined default involving
one or more clearing members' obligations to the SIDCO or Subpart C DCO
or (ii) if there is an unforeseen liquidity shortfall exceeding the
financial resources of the SIDCO or Subpart C DCO. Such rules and
procedures should be established ex ante and may provide for the means
of: Increasing available assets (e.g. by using assessments) and/or
reducing the size of liabilities (e.g. by engaging in variation margin
haircuts or tear-ups); as well as obtaining liquidity from participants
(e.g. through rules-based repurchase arrangements); employing a
sequenced application of such tools; and replenishing any credit and
liquidity resources that may be employed during a stress event.
The Commission requested comment on all aspects of these proposals.
MGEX requested additional time to comply with regulation 39.35, along
the lines of proposed regulation 39.34(d), which permits a SIDCO or
Subpart C to request that the Commission grant the SIDCO or Subpart C
DCO additional time of up to one year to comply with regulation 39.34.
MGEX commented that it would be very difficult, if not impossible, to
perform the analyses required to satisfy regulation 39.35 by December
31, 2013. The Commission agrees and has decided to permit a SIDCO or
Subpart C DCO to request up to a one year extension to comply with
regulation 39.35.\188\
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\188\ The Commission has delegated authority to approve such
requests. See Section II.O. (discussion of regulation 140.94) infra.
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The Commission notes that regulation 39.35 was designed to protect
SIDCOs, Subpart C DCOs, their clearing members, customers of clearing
members, and the financial system more broadly by requiring SIDCOs and
Subpart C DCOs to have plans and procedures to address credit losses
and liquidity shortfalls beyond their prefunded resources, thus
promoting their ability to promptly fulfill their obligations and
continue to perform their critical functions. As proposed, regulation
39.35 addresses significant consequences that could result from a
clearing member's default. Specifically, a DCO might not have
sufficient financial resources following a clearing member's default
either to cover the default or to fulfill its settlement obligations.
Similarly, a DCO may be unable to fulfill its settlement obligations
due to a liquidity shortfall exceeding its financial resources. In
order to avoid the negative effect on its clearing members, their
customers, and on the financial system more broadly of a DCO's failure
promptly to meet its settlement obligations, it would be prudent for a
DCO to have a recovery plan that addresses these scenarios and, given
their importance to the U.S. financial system, it is critical for
SIDCOs to have such plans. In addition, because this plan would be
specified in the DCO's rules and/or procedures, it would be disclosed
to clearing members, their customers, and the broader public. Such
transparency would likely help clearing members, their customers, and
other market participants properly allocate capital and other resources
as well as facilitate the development of their own recovery plans.
For the reasons set forth above and in the Proposal, the Commission
has decided to finalize regulation 39.35 substantively as proposed but
will permit a SIDCO or Subpart C DCO to request that the Commission
grant up to a one year extension to comply with regulation 39.35 and
regulation 39.39, as discussed below.\189\
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\189\ See new paragraph (f) of regulation 39.39 and Section
II.K., infra (discussing regulation 39.39).
---------------------------------------------------------------------------
H. Regulation 39.36 (Risk management for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
As proposed, regulation 39.36 would establish additional risk
management requirements for SIDCOs and Subpart C DCOs. Current
regulation 39.13 establishes the risk management requirements that a
DCO must meet in order to comply with Core Principle D \190\ including,
among other things, specific criteria for stress tests that a DCO must
conduct.\191\
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\190\ See 78 FR 50262-50263. DCO Core Principle D requires each
DCO to possess the ability to manage the risks associated with
discharging the responsibilities of the DCO through the use of
appropriate tools and procedures. It further requires each DCO to
measure its exposure to loss from the default of each clearing
member not less than once during each business day and to monitor
each such exposure periodically during the business day. Core
Principle D also requires each DCO to limit its exposure to
potential losses from defaults by clearing members, through margin
requirements and other risk control mechanisms, to reduce the risk
that its operations would not be disrupted and that non-defaulting
clearing members would not be exposed to losses that non-defaulting
clearing members cannot anticipate or control. Finally, Core
Principle D requires that the margin that the DCO requires from each
clearing member be sufficient to cover potential exposures in normal
market conditions, and that each model and parameter used in setting
such margin requirements be risk-based and reviewed on a regular
basis.
\191\ See supra Section I.D. Moreover, such stress tests should
enable the SIDCO or Subpart C DCO to address procyclicality initial
margin requirements and collateral haircuts, consistent with
Principle 6, K.C. 3 and Principle 5, K.C. 3.
---------------------------------------------------------------------------
The Commission proposed regulation 39.36 in order to address
certain gaps between Commission regulations and Principles 4, 6, 7, and
9.\192\ In particular, proposed regulation 39.36 would require a SIDCO
or Subpart C DCO to enhance its stress testing procedures in ways that
will make it more likely that the SIDCO or Subpart C DCO will be able
to understand the risks posed by its members, so that it can ensure
that the relationship between its resources and obligations enables it
to meet its obligations promptly.
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\192\ See discussion of Principles 4 and 6 supra Section I.E.1.
---------------------------------------------------------------------------
The Commission requested comment on all aspects of proposed
regulation 39.36.
MGEX, the European Commission, and Chris Barnard commented on
proposed regulation 39.36(a)(stress tests of financial resources). MGEX
stated that the regulation should permit a SIDCO or Subpart C DCO to
have the flexibility to use stress test parameters that can be
justified by relevant data and to select relevant time periods to
review when conducting stress tests.\193\ DCOs do have such
flexibility, so long as the
[[Page 72493]]
meet the performance standards set forth in the regulation.
---------------------------------------------------------------------------
\193\ MGEX at 8.
---------------------------------------------------------------------------
The European Commission stated that regulation 39.36 should be more
detailed in order to set a meaningful benchmark for all SIDCOs and
Subpart C DCOs.\194\ For example, the European Commission suggests that
SIDCOs and Subpart C DCOs should be required to conduct an assessment
of the theoretical and empirical properties of the margin model and
that such requirement, should prescribe minimum liquidation periods for
each type of product.\195\ The European Commission noted that
explanatory note 3.6.7 to Principle 6 states that ``close-out periods
should be set on a product-specific basis'' because less liquid
products may require longer close-out periods.\196\ The European
Commission opined that there should be a minimum liquidation period of
two-days for ``listed derivatives'' (i.e., futures and options) rather
than the one-day minimum prescribed in current regulation
39.13(g)(2)(ii)(A).\197\ The European Commission also stated more
generally that its rules and this Commission's rules diverge in the
area of initial margin requirements and that this divergence ``is a
source of competitive distortion between the E.U.- and U.S.-listed
derivative markets as well as a threat to global financial stability.''
\198\ The European Commission also stressed that this Commission's risk
management rules should do more to ``mitigate the pro-cyclicality
inherent to initial margin.'' \199\
---------------------------------------------------------------------------
\194\ European Commission at 3.
\195\ Id.
\196\ Id.
\197\ European Commission at 3-4.
\198\ European Commission at 4.
\199\ Id.
---------------------------------------------------------------------------
Regulation 39.13(g)(2) already sets out minimum liquidation times
for swaps, futures, and swaps on agricultural commodities, energy
commodities, and metals. In addition, pursuant to regulation
39.13(g)(2), a DCO is already required to use ``[s]uch longer
liquidation time as is appropriate based on the specific
characteristics of a particular product or portfolio'' and the
Commission expressly reserved the right to establish, by order, shorter
or longer liquidation times for particular products or portfolios.
Moreover, under that regulation, all DCOs are obligated to consider the
appropriateness of liquidation times in light of the specific
characteristics of particular products or portfolios. Reg.
39.36(b)(2)(i) has been amended to clarify this point with respect to
SIDCOs and Subpart C DCOs.
Chris Barnard suggested that DCOs should be required to stress test
the liquidity of its financial resources in such a way that considers
market stress, idiosyncratic stress, combinations thereof.\200\ In
addition, Chris Barnard stated that assets used to offset projected
funding needs should be discounted to reflect their credit risk and
market volatility.\201\ In response, the Commission notes that
regulation 39.36(a), as proposed, would require a SIDCO or Subpart C
DCO to address these topics.
---------------------------------------------------------------------------
\200\ Chris Barnard at 2.
\201\ Id.
---------------------------------------------------------------------------
With regard to paragraph (c)(6) (reporting stress test results to
the risk management committee or board of directors), MGEX suggested
that this provision should be amended to permit the reporting of high-
level summaries, redacted versions, or subsets of stress test
results.\202\ Otherwise, MGEX stated that this provision would create
conflicts of interest because stress test results reveal confidential
information about MGEX clearing members, and members of the MGEX risk
management committee or board of directors may also be MGEX clearing
members.\203\ The Commission expects that stress-tests will be reported
to the board of directors at a summary level. In complying with new
paragraph (c)(6), a DCO should structure its reporting and governance
arrangements in such a way that balances effective governance and risk
management with confidentiality considerations.
---------------------------------------------------------------------------
\202\ MGEX at 8.
\203\ Id.
---------------------------------------------------------------------------
With respect to proposed regulation 39.36(e) (annual validation of
financial and liquidity risk management models), Chris Barnard
commented that persons responsible for the development, implementation,
or operation of the systems and models being tested not carry out the
annual validation.\204\ The Commission agrees that would be a prudent
aspect of an appropriately designed validation process.
---------------------------------------------------------------------------
\204\ Chris Barnard at 2.
---------------------------------------------------------------------------
The Commission has decided to finalize regulation 39.36 as amended
with the clarification discussed above for the reasons discussed above
and in the Proposal.
I. Regulation 39.37 (Additional disclosure for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
The Commission proposed regulation 39.37 to set forth additional
public disclosure requirements for SIDCOs and Subpart C DCOs.\205\
These requirements were intended to address differences between current
requirements and PFMI Principles 14 and 23. In particular, proposed
regulation 39.37 was designed to enable members of SIDCOs and Subpart C
DCOs, their customers, and the general public to understand the risk of
exposures to such DCOs, and to promote their ability to evaluate the
quality of such DCOs, thereby enhancing competition and market
discipline.
---------------------------------------------------------------------------
\205\ Public disclosure requirements for all registered DCOs are
set forth in Regulation 39.21, which implements DCO Core Principle L
(Public Information), and requires DCOs to provide to market
participants sufficient information to enable them to identify and
evaluate accurately the risks and costs associated with using the
services of the DCO.
---------------------------------------------------------------------------
Specifically, proposed regulation 39.37 would require SIDCOs and
Subpart C DCOs to disclose certain information to the public and to the
Commission. First, consistent with Principle 23, a SIDCO or Subpart C
DCO would be required to disclose its responses to the CPSS-IOSCO
Disclosure Framework.\206\ Further, to ensure the continued accuracy
and usefulness of a SIDCO or Subpart C DCO's responses, a SIDCO or
Subpart C DCO would be required to review and update them (a) at least
every two years and (b) following material changes to the SIDCO's or
Subpart C DCO's system or its environment.\207\ A material change to
the SIDCO's or Subpart C DCO's system or environment is a change that
would significantly change the accuracy and usefulness of the SIDCO's
or Subpart C DCO's existing responses. Under proposed regulation
39.37(c), a SIDCO or Subpart C DCO would also be required to disclose,
publicly and to the Commission, relevant basic data on transaction
volume and values. This requirement is intended to be consistent with
the Quantitative Information Disclosure that CPSS-IOSCO are in the
process of developing.\208\
---------------------------------------------------------------------------
\206\ See also section II.C.2, supra.
\207\ Available at: http://www.bis.org/publ/cpss106.pdf.
\208\ See supra section II.C.2. for a discussion of the
Quantitative Information Disclosure (referencing section 2.5 of the
CPSS-IOSCO Disclosure Framework).
---------------------------------------------------------------------------
Also under proposed regulation 39.37, a SIDCO or Subpart C DCO
would be required, consistent with Principle 14, to publish its rules,
policies, and procedures describing whether customer funds are
protected on an individual or omnibus basis and whether customer funds
are subject to any legal or operational constraints that may impair the
ability of the SIDCO or Subpart C DCO to segregate or port the
[[Page 72494]]
positions and related collateral of a clearing member's customers.
The Commission requested comment on all aspects of these proposals.
MGEX commented that it is premature for regulation 39.37(c) to require
a SIDCO or Subpart C DCO to complete the CPSS-IOSCO Quantitative
Disclosure Document because that document has not yet been made
available for public comment.\209\ It is for this reason that MGEX also
stated that it cannot comment on the potential costs of complying with
regulation 39.37(c).\210\ The Commission notes that regulation 39.37(c)
requires the disclosure of relevant basic data on transaction volume
and values, which requirement is consistent with key consideration 5 in
Principle 23. Further, given the Commission's goal of establishing
regulations that are consistent with the PFMIs,\211\ to the extent that
final international standards are established for the disclosure of
relevant basic data on transaction volume and values, SIDCOs and
Subpart C DCOs should look to such standards in complying with the
requirements set forth in regulation 39.37(c). Further, the Commission
notes that on October 15, 2013, CPSS-IOSCO published a consultative
document on public quantitative disclosure standards for central
counterparties.\212\ Moreover, CPSS-IOSCO states that these
quantitative disclosures, together with the PFMI Disclosure framework
also published by CPSS-IOSCO, would form the minimum disclosures
expected of CCPs under Principle 23, Key Consideration 5, of the
Principles.\213\ Thus, if and when such public quantitative disclosure
standards are finalized, the Commission would expect SIDCOs and Subpart
C DCOs to look to such standards in complying with the requirements set
forth in regulation 39.37(c). Moreover, the Commission notes that MGEX
is not obligated to comply with regulation 39.37(c) unless and until
MGEX elects to become subject to Subpart C. As discussed above, a DCO
that is not a SIDCO may submit a Subpart C Election Form any time on or
after the effective date of these final rules and may, should it so
choose, delay such submission until such time as the public
quantitative disclosure standards for central counterparties are
finalized.
---------------------------------------------------------------------------
\209\ MGEX at 8-9.
\210\ Id.
\211\ See Section II.L. discussing Regulation 39.40 (Consistency
with the Principles for Financial Market Infrastructures).
\212\ CPSS-IOSCO, Consultative Report, Public Quantitative
Disclosure Standards for Central Counterparties, October 15, 2013,
available at http://www.bis.org/publ/cpss114.pdf.
\213\ Id. at 1.
---------------------------------------------------------------------------
The new additional disclosures will help regulators and market
participants assess SIDCOs and Subpart C DCOs, particularly with
respect to a SIDCO's or Subpart C DCO's compliance with the PFMIs.
Because of a SIDCO's importance to the U.S. financial markets, such
public assessment should help provide confidence to market
participants, which could prove to be a stabilizing force in times of
severe market stress. For the reasons set forth herein, and in the
Proposal, the Commission has decided to adopt regulation 39.37 as
proposed.
J. Regulation 39.38 (Efficiency for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations)
Consistent with Principle 21, the Commission proposed regulation
39.38 in order to require a SIDCO or Subpart C DCO efficiently and
effectively to design its clearing and settlement arrangements,
operating structure and procedures, product scope, and use of
technology. Further, under proposed regulation 39.38, a SIDCO or
Subpart C DCO would be required to establish clearly defined goals and
objectives that are measurable and achievable, including goals with
regards to minimum service levels, risk management expectations, and
business priorities. Moreover, a SIDCO or Subpart C DCO would be
required to facilitate efficient payment, clearing, and settlement by
accommodating internationally accepted communication procedures and
standards. The explanatory notes to Principle 21 observe that an
efficient CCP has the required resources to perform its functions \214\
and the efficiency of the CCP depends on the choice of clearing and
settlement arrangement, operating structure, scope of products cleared
or settled, and integration of technology and procedures.\215\ In
addition, the explanatory notes state that an effective CCP reliably
meets its obligations in a timely manner and achieves the public policy
goals of safety and efficiency for participants and the markets it
serves.\216\ Finally, consistent with Principle 22, proposed regulation
39.38(d) would require each SIDCO and Subpart C DCO to facilitate
efficient payment, clearing, and settlement by accommodating
internationally accepted communication procedures and standards.
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\214\ See PFMIs at E.N. 3.21.1.
\215\ PFMIs at E.N. 3.21.2.
\216\ PFMIs at E.N. 3.21.5.
---------------------------------------------------------------------------
The Commission requested comment on all aspects of these proposals.
MGEX commented that regulation 39.38(d) should permit a SIDCO or
Subpart C DCO to make independent business decisions for establishing
communication methods that best serve its clearing members and market
participants.\217\ MGEX stated it is unclear as to whom or what
organization is responsible for establishing international
communication standards and would expect that there may be multiple
acceptable communication methods.\218\ MGEX suggested that the
Commission take a flexible approach in reviewing the efficiency of a
DCO's methods of communication.\219\ The Commission notes that
regulation 39.38(d) refers broadly to ``internationally accepted
communication procedures and standards.'' Therefore, the Commission
believes that there may be more than one way for a SIDCO or Subpart C
DCO to comply with regulation 39.38(d). The Commission appreciates MGEX
suggestion regarding flexibility, but as examinations are fact
specific, the Commission declines to discuss what approach it would or
would not take in a particular review in the abstract.
---------------------------------------------------------------------------
\217\ MGEX at 9.
\218\ Id.
\219\ Id.
---------------------------------------------------------------------------
It would appear to be prudent for SIDCOs and Subpart C DCOs to
comply with such international standards of efficiency and
effectiveness. A SIDCO or Subpart C DCO that is inefficient or
ineffective could distort financial activity and market structure,
increasing financial and other risks to the SIDCO's or Subpart C DCO's
participants.\220\ For the reasons set forth in the foregoing
discussion, and in the Proposal, the Commission has decided to finalize
regulation 39.38 as proposed.
---------------------------------------------------------------------------
\220\ PFMIs at E.N. 3.21.1.
---------------------------------------------------------------------------
K. Regulation 39.39 (Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
The Commission proposed regulation 39.39 to require a SIDCO or
Subpart C DCO to maintain viable plans for recovery and orderly wind-
down. In particular, regulation 39.39 was designed to protect the
members of such DCOs and their customers, as well as the financial
system more broadly from the consequences of a disorderly failure of
such a DCO.
[[Page 72495]]
As noted above, Principle 3 requires a CCP to have a sound risk
management framework for comprehensively managing legal, credit,
liquidity, operational, and other risks.\221\ Under Principle 3, such a
framework would include identifying scenarios that may prevent the CCP
from providing critical operations and services as a going concern and
would assess the effectiveness of a full range of options for recovery
or orderly wind-down. Similarly, Principle 15 requires a CCP to
identify, monitor, and manage its general business risk and hold
sufficient liquid net assets funded by equity to cover potential
general business losses so that the CCP can continue operations and
services as a going concern if those losses materialize.\222\ Further,
these liquid net assets should, at all times, be sufficient to allow
for recovery or orderly wind-down of critical operations and
services.\223\ Although there is no Core Principle that pertains
directly to the establishment of a recovery and wind-down plan,
proposed regulation 39.37 promotes concepts set forth in Core
Principles B (Financial Resources), D (Risk Management), G (Default
Rules and Procedures), and I (System Safeguards).\224\
---------------------------------------------------------------------------
\221\ See supra Section I.E.1.
\222\ See supra id.
\223\ See id.
\224\ See supra Section I.D.
---------------------------------------------------------------------------
Accordingly, under proposed regulation 39.39, a SIDCO or Subpart C
DCO would be required to develop additional plans that specifically
address ``recovery'' and ``wind-down.'' The Commission proposed
defining ``recovery'' as the actions of a SIDCO or Subpart C DCO,
consistent with its rules, procedures, and other ex-ante contractual
arrangements, to address any uncovered credit loss, liquidity
shortfall, capital inadequacy, or business, operational or other
structural weakness, including the replenishment of any depleted pre-
funded financial resources and liquidity arrangements, as necessary to
maintain the SIDCO's or Subpart C DCO's viability as a going concern so
that it can continue to provide its critical services without requiring
the commencement of an insolvency proceeding or the use of resolution
powers by the Federal Deposit Insurance Corporation or any other
relevant resolution authority. The Commission proposed defining ``wind-
down'' as the actions of a SIDCO or Subpart C DCO to effect the
permanent cessation or sale or transfer of one or more services. The
Commission also proposed adding a definition for ``general business
risk,'' which would mean any potential impairment of a SIDCO's or
Subpart C DCO's financial position, as a business concern, as a
consequence of a decline in its revenues or an increase in its
expenses, such that expenses exceed revenues and result in a loss that
the SIDCO or Subpart C DCO must charge against capital. In addition,
the Commission proposed defining ``operational risk'' to mean the risk
that deficiencies in information systems or internal processes, human
errors, management failures or disruptions from external events will
result in the reduction, deterioration, or breakdown of services
provided by a SIDCO or Subpart C DCO. Furthermore, the Commission
proposed defining ``unencumbered liquid financial assets'' to include
cash and highly liquid securities. These proposed definitions were
designed to be consistent with the meaning of such terms in the PFMIs.
The Commission requested comment as to whether these definitions were
appropriate. Specifically, the Commission requested comment on whether
the definition of ``recovery'' is appropriate in light of emerging
international consensus.
The Commission proposed requiring each SIDCO and Subpart C DCO to
maintain viable plans for: (i) Recovery or orderly wind-down,
necessitated by credit losses or liquidity shortfalls; and (ii)
recovery or orderly wind-down, necessitated by general business risk,
operational risk, or any other risk that threatens the SIDCO's or
Subpart C DCO's viability as a going concern. The Commission also
proposed requiring that the recovery and wind-down plans of SIDCOs and
Subpart C DCOs meet certain standards, set forth in proposed subsection
(c).\225\ Under proposed regulation 39.39(d), a SIDCO or Subpart C DCO
would be required to establish recovery and wind-down plans that are
supported by certain resources.
---------------------------------------------------------------------------
\225\ 78 FR 50282.
---------------------------------------------------------------------------
The Commission requested comment on all aspects of these proposals.
In their comment letters, LCH, MGEX, and NYPC suggested that the
Commission provide additional time to a SIDCO or Subpart C DCO for
developing recovery and wind-down plans in accordance with regulation
39.39.\226\ Further, NYPC suggested that a SIDCO or Subpart C not be
required to comply with regulation 39.39 until (1) CPSS-IOSCO and the
Financial Stability Board finalize their reports on CCP recovery and
resolution and (2) CCPs have been allowed a reasonable amount of time
to implement the guidance included in such reports.\227\ Because
reports on CCP recovery and resolution are still under consideration by
the relevant international bodies, and further work in these areas may
inform the Commission's views on a SIDCO's or Subpart C DCO's recovery
or wind-down plans, the Commission has decided to permit a SIDCO or
Subpart C DCO to request that the Commission grant the SIDCO or Subpart
C DCO up to one year to comply with regulation 39.39 and 39.35 (Default
rules and procedures), in a similar manner to the process by which a
SIDCO or Subpart DCO may request that the Commission grant the SIDCO or
Subpart C additional time for complying with regulations 39.34 (System
safeguards).\228\
---------------------------------------------------------------------------
\226\ LCH at 2-4, MGEX at 9, and NYPC at 2.
\227\ NYPC at 1-2.
\228\ See new paragraph (f) of regulation 39.39, new paragraph
(d) of regulation 39.34, footnote 108 supra, and Section II.G. supra
(discussing regulation 39.35).
---------------------------------------------------------------------------
ISDA suggested that regulation 39.39 include more details about the
required recovery and wind-down plans, such as the details provided in
CPSS-IOSCO's Consultative Report, ``Recovery of Financial Market
Infrastructures.'' \229\ The Commission notes that the Consultative
Report lists suggested tools, not mandatory standards.\230\ This
rulemaking, by contrast, is intended to address what the PFMIs require.
Therefore, it would be inappropriate for Subpart C to reflect the
Consultative Report.
---------------------------------------------------------------------------
\229\ ISDA at 1-2.
\230\ The Consultative Report notes that it ``is not intended to
create additional standards for FMIs, or authorities, beyond those
set out in the CPSS-IOSCO `Principles for financial market
infrastructures'.'' Id. at 1.
---------------------------------------------------------------------------
With respect to proposed regulation 39.39(b)(2), MGEX commented
that the Commission should delete the phrase ``or any other risk that
threatens the DCO's viability as a going concern.'' \231\ MGEX stated
that Principle 15 requires a DCO to establish recovery and orderly
wind-down plans necessitated only by general business risk or
operational risk.\232\ MGEX commented further that this phrase is
ambiguous.\233\ Although the phrase does not appear in Principle 15,
the Commission notes that key consideration 3 of Principle 3
specifically requires an FMI to ``identify scenarios that may
potentially prevent it from being able to provide its critical
operations and services as a going concern and assess the effectiveness
of a full range of options for recovery or orderly wind-down.'' Thus,
the inclusion of the phrase ``or any other risk that threatens the
DCO's viability as
[[Page 72496]]
a going concern'' is consistent with the PFMIs. Moreover, a SIDCO or
Subpart C DCO should be aware of, and have plans to address, the risks
that threaten their viability without being limited in their analysis
to pre-defined risks.
---------------------------------------------------------------------------
\231\ MGEX at 10.
\232\ MGEX at 9-10.
\233\ Id.
---------------------------------------------------------------------------
With respect to proposed regulation 39.39(d)(2), MGEX commented
that a SIDCO or Subpart C DCO that demonstrates adequate liquidity
capabilities should be permitted to use an established line of credit
for meeting potential business losses, particularly if the line of
credit is offered on the basis that the DCO meet ``certain equity
covenants.'' \234\ The Commission notes that, so long as the DCO has
sufficient assets funded by the equity of its owners, arrangements such
as this one may be effective in providing a DCO with a tool that would
be adequate for providing the related liquidity necessary to comply
with regulation 39.39(d)(2). A DCO would need to demonstrate that such
an arrangement would: (i) enable the DCO to have sufficient
unencumbered liquid financial assets to fund its recovery and wind-down
plans and (ii) make that liquidity available to the DCO even in a
scenario in which the DCO is facing recovery or wind-down. The
Commission notes that regulation 39.39(d)(2) uses the phrase ``funded
by equity . . .'' to connote financial resources that are part of the
SIDCO's or Subpart C DCO's owners' equity/shareholder capital.\235\
---------------------------------------------------------------------------
\234\ Id.
\235\ As mentioned earlier in this section, the phrase ``funded
by equity'' comes from Principle 15. See also supra Section I.E.1.
---------------------------------------------------------------------------
For the reasons set forth above and in the Proposal, the Commission
has decided to finalize regulation 39.39 substantively as proposed but,
as discussed above, will permit a SIDCO or Subpart C DCO to request
that the Commission grant the SIDCO or Subpart C DCO up to one year to
comply with regulation 39.39.\236\ This new regulation is intended to
address certain differences between existing Commission regulations and
the standards set forth in the PFMIs. In addition, it would appear to
be necessary for a SIDCO to maintain and (as part of such maintenance,
regularly update) a recovery and wind-down plan so as to reduce, or
attempt to control, the potential impact a failure or disruption of the
SIDCO's operations would have on the stability of the U.S. financial
markets.
---------------------------------------------------------------------------
\236\ See new paragraph (d) of regulation 39.39 and Section
II.G. supra (discussing regulation 39.35).
---------------------------------------------------------------------------
L. Regulation 39.40 (Consistency with the Principles for Financial
Market Infrastructures)
Proposed regulation 39.40 was intended to make clear that Subpart C
is intended to establish regulations that, together with Subpart A and
Subpart B, are consistent with the DCO Core Principles set forth in
Section 5b(c)(2) of the CEA and the PFMIs. Specifically, to the extent
of any ambiguity, the Commission intends to interpret the regulations
set forth in part 39 in a manner that is consistent with the standards
set forth in the PFMIs.
The Commission requested comment on all aspects of this proposal.
ISDA commented that regulation 39.40 should state that subpart C is
intended to be consistent with the PFMIs ``except to the extent
inconsistent with other regulations of the Commission.'' According to
ISDA, this would make clear that part 22, which pertains to the
protection of Cleared Swaps Customer Collateral by DCOs and FCMs, would
not be trumped by any future international standards, such as the CPSS-
IOSCO Consultative Report, ``Recovery of Financial Market
Infrastructures.'' The Commission notes that regulation 39.40 requires
consistency with both the CEA and with the PFMIs. Thus, ISDA's
suggested language is not necessary because an international standard
that is not consistent with the CEA would not trump a Commission
regulation that implements or derives from the CEA.
Consistency between part 39 and the PFMIs would appear to promote
international harmonization and is intended to allow the bank clearing
members and bank customers of SIDCOs and Subpart C DCOs to receive the
more favorable capital treatment under the Basel CCP Capital
Requirements. For the reasons set forth above and in the Proposal, the
Commission has decided to finalize regulation 39.40 as proposed.
M. Regulation 39.41 (Special enforcement authority for systemically
important derivatives clearing organizations)
In August of 2013, the Commission adopted regulation 39.31, which
implemented special enforcement authority over SIDCOs granted to the
Commission under section 807(c) of the Dodd-Frank Act.\237\ In the
Proposal, the Commission renumbered regulation 39.31 as regulation
39.41 and did not propose any other changes. The Commission did not
receive any comments on regulation 39.41 and thus, as part of this
final rulemaking, the Commission is adopting regulation 39.41 as
proposed.
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\237\ See SIDCO Final Rule.
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N. Regulation 39.42 (Advance notice of material risk-related rule
changes by systemically important derivatives clearing organizations)
The Commission proposed moving existing paragraph (c) of regulation
39.30 (Scope) to proposed regulation 39.42.\238\ This paragraph
instructs a SIDCO to provide advance notice to the Commission of any
proposed change to its rules, procedures, or operations that could
materially affect the nature or level of risks presented by the SIDCO,
in accordance with regulation 40.10.\239\ Because the other provisions
of proposed revised regulation 39.28 (renumbered as regulation 39.30)
pertain to the scope of Subpart C,\240\ it would be appropriate for
paragraph (d) to be codified in a separate regulation. The Proposal did
not suggest any substantive amendments to this provision. The
Commission did not receive any comments on regulation 39.41 and thus,
as part of this final rulemaking, the Commission is moving the
provision to regulation 39.42 as proposed.
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\238\ See supra Section II.B. and note 111.
\239\ The Commission promulgated this provision as part of the
SIDCO Final Rule.
\240\ See supra Section II.B. (discussing proposed revised
regulation 39.28, renumbered as regulation 39.30).
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O. Regulation 140.94 (Delegation of authority to the Director of the
Division of Clearing and Risk)
The Commission proposed amending regulation 140.94 so that certain
Commission functions contained in these proposed regulations would be
delegated to the Director of the Division of Clearing and Risk and to
such staff members as the Director may designate. Specifically, the
Commission proposed to delegate all functions reserved to the
Commission in proposed regulation 39.31 including, for example, the
authority to request that a DCO provide information supplementing a
Subpart C Election Form that it has filed with the Commission; to
determine whether an election to be subject to Subpart C should be
permitted to become effective, stayed or denied; and to provide any
notices regarding the foregoing. The Commission also proposed to
delegate to the Director of the Division of Clearing and Risk and to
his or her designees the decision described in regulation 39.34(d)
(whether to grant a SIDCO or a Subpart C DCO up to one year to comply
with any provision of regulation 39.34).
[[Page 72497]]
As discussed above, in response to comments from LCH, MGEX, and
NYPC, the Commission has decided to permit a SIDCO or Subpart C DCO to
request that the Commission grant the SIDCO or Subpart C DCO additional
time of up to one year to comply with the requirements to establish
default rules and procedures for uncovered losses or shortfalls
pursuant to new regulation 39.35 and to establish recovery and wind-
down plans pursuant to new regulation 39.39.\241\ In this connection,
just as proposed amended regulation 140.94 would delegate the
disposition of such a request concerning compliance with regulation
39.34 to the Director of the Division of Clearing and Risk, the
Commission has decided to delegate the disposition of a request for
delayed compliance with regulation 39.39 to the Director of the
Division of Clearing and Risk.\242\ Otherwise, the Commission believes
that the proposed amendments to regulation 140.94 provide appropriate
delegations to the Director of the Division of Clearing and Risk.
Therefore, the Commission has decided to finalize the other amendments
as proposed.
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\241\ See Sections II.G. and II.K, supra.
\242\ Regulation 140.94(c)(13), as finalized, replaces the term
``applications'' with ``requests'' to comport with the language used
in final regulations 39.34 and 39.39.
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P. Regulation 190.09 (Member property)
Certain of the proposed requirements for SIDCOs and Subpart C DCOs
necessitated certain clarifications to part 190 of the Commission's
regulations. Specifically, new regulation 39.35(a) requires a SIDCO or
Subpart C DCO to ``adopt explicit rules and procedures that address
fully any loss arising from any individual or combined default relating
to any clearing members' obligations to the SIDCO or Subpart C DCO.''
New regulation 39.39(b) requires a SIDCO or Subpart C DCO to maintain
viable plans for recovery and orderly wind-down. In addition, SIDCOs
and Subpart C DCOs must comply with Core Principle R, which require all
registered DCOs to ``have a well-founded, transparent, and enforceable
legal framework for each aspect of the activities of the DCO.''
Recognizing the diversity of financial safeguard arrangements among
DCOs, the Commission noted in the Proposal that it would appear to be
prudent to clarify certain language in part 190 to materially aid
compliance with Core Principle R and the proposed regulations specified
above.
The Commission proposed amending paragraph (b) of regulation 190.09
to clarify that the scope of member property will be determined based
on the by-laws and rules of the relevant DCO.
The Commission requested comment on all aspects of this proposal.
The Commission did not receive any comments on the proposed amendments
to regulation 190.09. The Commission believes that the proposed
amendments to regulation 190.09(b) make appropriate clarifications, as
described above. For the reasons set forth herein and in the Proposal,
the Commission has decided to finalize the amendments to regulation
190.09(b) as proposed.
III. Effective Date
A. Congressional Review Act
This final rulemaking is a major rule for purposes of the
Congressional Review Act (``CRA'').\243\ Generally, under the CRA, a
major rule takes effect 60 days after the date on which the rule is
published in the Federal Register.\244\ However, Section 808(2) of the
CRA provides that any rule which an agency for good cause finds that
notice and public procedure thereon are impracticable, unnecessary, or
contrary to the public interest (and incorporates the finding and a
brief statement of reasons therefore in the rule issued), shall take
effect at such time as the federal agency promulgating the rule
determines.\245\ For the regulations in this final rule, the Commission
has determined that good cause exists to waive the CRA effective date
requirement and make the regulations effective in less than 60 days.
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\243\ See 5 U.S.C. 804(2) (defining a ``major rule'' for
purposes of the Congressional Review Act).
\244\ Id. at 801(a)(3).
\245\ Id. at 808(2).
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For revised regulation 190.09, the Commission is making the
regulation effective upon publication. In accordance with section
808(2), the Commission finds good cause to make this provision
effective upon publication because the regulation does not impose any
new, substantive obligations on regulated entities and only serves to
clarify an existing regulation in order to aid DCOs in their compliance
with Commission regulations, including the final rules adopted herein.
Moreover, the final regulation is being adopted as proposed, including
the effective date. Market participants are thus familiar with the
clarification and the timing of its implementation. Furthermore, the
Commission received no comments on any aspect of revised regulation
190.09. Therefore, the Commission has determined that good cause exists
to make revised regulation 190.09 effective upon publication.
Regarding regulation 39.31, the Commission is making this
regulation effective as of December 13, 2013. In accordance with
section 808(2), the Commission finds that a 60 day effective date for
this regulation is contrary to the public interest because such delay
will cause public harm by significantly increasing (for the reasons
discussed below) the costs for market participants to clear OTC and
exchange-traded derivatives with DCOs. More broadly, the increase in
costs will have an adverse effect on competition and may lead to a
disruption in the financial markets. Regulation 39.31 does not impose
any requirements on regulated entities; rather it is a permissive
provision that gives DCOs that have not been designated as systemically
important by the Council the opportunity to opt-into and become subject
to the provisions of an enhanced regulatory scheme that is otherwise
only applicable to SIDCOs.\246\ Compliance with this enhanced
regulatory scheme as well as existing Commission regulations is
necessary for such DCOs to be subject to standards that are consistent
with the PFMIs, and thus enable them to gain QCCP status.\247\
Attaining QCCP status will increase a DCO's ability to compete in the
global financial markets by allowing such DCO to offer lower capital
charges to banks (including their subsidiaries and affiliates) that
clear derivative transactions with the DCO.\248\ Banks that transact
with U.S. DCOs that do not have QCCP status will be charged
substantially higher capital charges which they may pass along to their
bank customers.\249\ In order to benefit from QCCP status by December
31, 2013,\250\
[[Page 72498]]
the Commission must receive a DCO's election form, as set out in
regulation 39.31, by December 13, 2013. This date is necessary to allow
the Commission a review period to stay, deny or permit the election by
December 31, 2013. For those DCOs that wish to gain QCCP status, an
effective date beyond December 13, 2013, would delay the election
process and cause financial harm by adversely impacting the ability of
these DCOs to compete with CCPs that have attained QCCP status by the
end of 2013. Therefore the Commission has determined that good cause
exists to make regulation 39.31 effective as of December 13, 2013.
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\246\ See supra Sections I.B. and I.C.
\247\ See supra Section I.F.
\248\ Id.
\249\ Id. See also CME at 5, n. 18 (stating that the
``ramifications for failure to achieve QCCP status are onerous for
banks' CCP exposures and can result in capital charges on trade
exposures that are 10-20 times larger than capital charges for QCCP
trade exposures.'').
\250\ See CME at 5, n. 18 (stating that ``in order for banks to
achieve preferential QCCP capital treatment for their exposures to
given CCPs, the CCP's primary regulator, among other things, must
have implemented the PFMIs by January 1, 2014.'' See also ``Basel
III Counterparty Credit Risk and Exposures to Central
Counterparties-Frequently Asked Questions'' (December 2012)
available at http://www.bis.org/publ/bcbs237.pdf (stating that
during 2013, if a CCP's primary regulator has publicly stated that
it is working towards implementing regulations consistent with the
PFMIs, then such CCP may be treated as a QCCP until the December 31,
2013. After December 31, 2013, the CCP's primary regulator must have
implemented regulations consistent with the PFMIs and these
regulations must be applied to the CCP on an ongoing basis in order
for such CCP to be eligible for QCCP status).
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The Commission is also making regulation 140.94 effective as of
December 13, 2013. In accordance with section 804(3), the Commission
finds that this provision is not covered by the CRA as it concerns
agency management and procedures.\251\ Nevertheless, in accordance with
section 808(2), the Commission finds that a 60 day effective date for
this regulation is not necessary because regulation 140.94 imposes no
requirements on DCOs. Rather it amends the current regulation 140.94 to
allow certain functions set forth in regulation 39.31 to be delegated
to Commission staff, for which there is no need to provide for a
delayed effective date. Therefore the Commission has determined that
good cause exists to make regulation 140.94 effective as of December
13, 2013.
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\251\ See 5 U.S.C. 804(3) (defining the term ``rule'' for
purposes of the CRA not to include any rule relating to agency
management or personnel or any rule of agency organization,
procedure, or practice).
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The remaining regulations, adopted herein,\252\ require SIDCOs to
establish additional enhanced standards, which along with existing
Commission regulations, will enable SIDCOs to be compliant with the
PFMIs and thus, be able to attain QCCP status and offer the lower
capital charges to banks, their subsidiaries and/or affiliates. For
these regulations, the Commission is making the effective date as of
December 31, 2013. For SIDCOs, a delay in attaining QCCP status beyond
that date could create significant business and operational losses
which in turn, could constrain the availability of liquidity and
credit, thereby destabilizing the US financial markets. In accordance
with section 808(2), the Commission finds that a 60 day effective date
for these regulations is contrary to the public interest because such
delay in obtaining QCCP status will cause public harm by significantly
increasing the costs for market participants to clear OTC and exchange-
traded derivatives with SIDCOs and hindering the ability of SIDCOs to
compete with internationally similarly situated CCPs, which would be
contrary to public interest. Therefore the Commission has determined
that good cause exists to make the remaining regulations effective as
of December 31, 2013.
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\252\ These regulations set forth enhanced regulatory standards
relating to governance, financial resources, system safeguards, risk
management, special default rules and procedures for uncovered
losses or shortfalls, additional disclosure requirements,
efficiency, and recovery and wind-down procedures. Pursuant to Title
VIII of the Dodd-Frank Act, the Commission prescribed these
regulations in consultation with the Council and the Board. See
Section 805 of the Dodd-Frank Act.
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B. Administrative Procedure Act
The Administrative Procedure Act (``APA'') generally requires that
the rules promulgated by an agency not be made effective less than 30
days after publication in the Federal Register, except for, inter alia,
interpretative rules and statements of policy and as otherwise provided
by the agency for good cause found.\253\ For the same reasons cited
above, the Commission also finds that good cause exists under the APA
to make revised regulation 190.09, regulation 39.31 and regulation
140.94 effective on the dates set forth by the Commission.
---------------------------------------------------------------------------
\253\ See generally 5 U.S.C. 553(d).
---------------------------------------------------------------------------
Specifically, the Commission concludes that good cause exists to
waive the 30 day effective date for revised regulation 190.09 because
the regulation does not impose any new, substantive obligations on
regulated entities and only clarifies the scope of an existing
regulation. Thus, the Commission is of the view that this provision is
not subject to the 30-day effective date requirement. Furthermore,
because market participants are familiar with the regulation and no
comments were received on the proposed change to the regulation, the
Commission believes that a 30 day effective date is unnecessary and
that good cause exists to make regulation 190.09 effective upon
publication.
The Commission also concludes that good cause exists to waive the
30 day effective date for regulation 39.31 because a 30 day effective
date would cause public financial harm by constraining the ability of
certain DCOs to compete with other CCPs, particularly in global
markets, which in turn, may substantially increase costs for market
participants that transact in OTC and exchange traded derivatives.
Moreover, as discussed above, regulation 39.31 does not impose any
requirements on regulated entities or alter the status quo in any way;
rather it is a permissive provision that gives DCOs that have not been
designated as systemically important by the Council the opportunity to
opt-into and become subject to the provisions of an enhanced regulatory
scheme that is otherwise only applicable to SIDCOs. Compliance with
this enhanced regulatory scheme as well as existing Commission
regulations is necessary for such DCOs to be subject to standards that
are consistent with the PFMIs, and thus enable them to gain QCCP
status. Attaining QCCP status will increase a DCO's ability to compete
in the global financial markets by allowing such DCO to offer lower
capital charges to banks (including their subsidiaries and affiliates)
that clear derivative transactions with the DCO. Banks that transact
with U.S. DCOs that do not have QCCP status will be charged
substantially higher capital charges which they may pass along to their
bank customers. In order to benefit from QCCP status by December 31,
2013, the Commission must receive a DCO's election form, as set out in
regulation 39.31, by December 13, 2013. This date is necessary to allow
the Commission a review period to stay, deny or permit the election by
December 31, 2013. For those DCOs that wish to gain QCCP status by
December 31, 2013, an effective date beyond December 13, 2013, would
delay the election process and cause financial harm by adversely
impacting the ability of these DCOs to compete with CCPs that have
attained QCCP status by the end of 2013. Therefore, the Commission has
determined that good cause exists to make regulation 39.31 effective as
of December 13, 2013.
Lastly, the Commission concludes that good cause exists to waive
the 30 day effective date requirement for regulation 140.94 because the
regulation pertains to agency management and procedures and imposes no
duty on the Commission's regulated entities. Rather it amends the
current regulation 140.94 to allow certain functions set forth in
regulation 39.31 to be delegated to Commission staff, for which there
is no need to provide for a delayed effective date. Therefore, the
Commission has determined that good cause exists to make regulation
140.94 effective as of December 13, 2013. The effective date for the
remaining regulations is December 31, 2013 in accordance with the APA.
[[Page 72499]]
IV. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq.,
provides that an agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number from the Office of Management and Budget
(``OMB''). This rulemaking contains recordkeeping and reporting
requirements that are collections of information within the meaning of
the PRA. Although the Commission does not anticipate that more than ten
persons will respond initially to this collection of information, the
term ``ten or more persons,'' which triggers PRA compliance, has been
deemed to apply to ``[a]ny recordkeeping, reporting, or disclosure
requirement contained in a rule of general applicability.'' 5 C.F.R.
1320.3(c)(4). This rule amends existing OMB control number 3038-0081,
titled ``General Regulations and Derivatives Clearing Organizations.''
Therefore, the Commission has submitted this notice of final rulemaking
along with supporting documentation for OMB's review in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11.
This rulemaking contains many provisions that would qualify as
collections of information, for which the Commission has already sought
and obtained a control number from OMB. The burden hours associated
with those provisions are not replicated here because the Commission is
obligated to account for PRA burden once, and the PRA encourages
multiple applications of a single collection.\254\ Accordingly, the
burdens associated with the collections contained in this rulemaking,
and the information collection request that has been submitted to OMB,
have been estimated only to the extent that the rulemaking imposes
collections of information that OMB has not yet reviewed and approved.
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\254\ See 35 U.S.C. 3501(2) and (3).
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It should be noted that among the thirteen DCOs presently
registered with the Commission, only two are SIDCOs. Moreover, not all
remaining DCOs or all DCO Applicants are likely to elect to become
Subpart C DCOs (for example, DCOs that are based outside of the U.S.
may seek to obtain QCCP status through regulation by their home country
regulator). Thus, the burden calculations herein are based on an
estimate of how many DCOs are SIDCOs and how many DCOs and DCO
Applicants are likely to elect to become Subpart C DCOs. Additionally,
many of the collections herein, in particular those related to electing
Subpart C DCO status, are expected to be one-time events for a DCO. It
is anticipated that three DCOs will elect to become subject to Subpart
C in the year following the adoption of these final rules, with
possibly one or two additional elections thereafter.
Finally, it is not possible to precisely estimate the reporting and
recordkeeping burden for the SIDCOs and Subpart C DCOs that will be
affected by the collections contained in this rulemaking, as the actual
burden will be dependent on the operations and staffing of each
particular SIDCO and Subpart C DCO and the manner in which they choose
to implement compliance with certain requirements. Therefore, the
burden estimates below are meant to be a composite of the burdens that
will be absorbed across all SIDCOs and Subpart C DCOs, to the extent
that the provisions for which information collection burdens are
applicable.
1. Collections Only Applicable to Subpart C DCOs
Regulations 39.31(b) and 39.31(c), as proposed and adopted,
establish the process whereby DCO and DCO Applicants, respectively, may
elect to become Subpart C DCOs subject to the provisions of Subpart C.
The election involves filing the Subpart C Election Form that would be
contained in appendix B to part 39 of the Commission's regulations. The
Subpart C Election Form involves completing the certifications therein,
providing exhibits A through G, and drafting and publishing the DCO's
responses to the Disclosure Framework, and, when applicable, the DCO's
Quantitative Information Disclosure. Additionally, regulation
39.31(b)(2) and (c)(3), as proposed and adopted, provide for Commission
requests for supplemental information from those requesting Subpart C
DCO status; regulation 39.31(b)(3) and (c)(4), as proposed and adopted,
require amendments to the Subpart C Election Form in the event that a
DCO or DCO Applicant, respectively, discovers a material omission or
error in, or if there is a material change in, the information provided
in the Subpart C Election Form; regulation 39.31 (b)(7) and (c)(5), as
proposed and adopted, permit a DCO or DCO Applicant, respectively, to
submit a notice of withdrawal to the Commission in the event the DCO or
DCO Applicant determines not to seek Subpart C DCO status prior to such
status becoming effective; and regulation 39.31(e), as proposed and
adopted, establishes the procedures by which a Subpart C DCO may
rescind its Subpart C DCO status after it has been permitted to take
effect. Each of these requirements implies recordkeeping that would be
produced by a DCO to the Commission on an occasional basis to
demonstrate compliance with the rules. As noted above, the relevant
final regulations were adopted as proposed and did not include any
additional information collection requirements that would warrant a
revision of the burden hour estimates.
The Proposal noted that, while it was is likely that only three
DCOs will elect to become Subpart C DCOs, it was conservatively
estimated that, collectively, five DCOs or DCO Applicants may elect to
become Subpart C DCOs. The Proposal also noted that, while it is
unlikely that any DCO or DCO Applicant will withdraw its election to
become subject to Subpart C prior to such election becoming effective,
an estimate of compliance with the withdrawal procedures by one DCO was
included in the burden hours for the information collection. Finally,
the Proposal estimated that, while it is likely that none of the
Subpart C DCOs will elect to rescind its election, the Commission
conservatively estimated that one Subpart C DCO may rescind its
election.
The Commission received one comment that referenced the estimated
burden hours of the collection of information in this rulemaking.
Specifically, MGEX referenced the ``Commission's estimate'' of the
``1,020 hours'' that ``would be required to complete the Subpart C
Election Form'' and the ``1,125 hours estimated for responding to
requests for supplemental information.'' \255\ MGEX did not, however,
indicate that it disagreed with the burden hour assessments set forth
in the Proposal. Accordingly, the Commission has not altered its
calculations. The Commission did not receive any additional comments on
its original hour burden estimates and believes that those estimates,
as set forth below, remain appropriate for PRA purposes:
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\255\ MGEX at 2.
Reporting--Certifications--Subpart C Election Form
Estimated number of reporters: 5
Estimated number of reports per reporter: 1
Average number of hours per report: 25
Estimated gross annual reporting burden: 125
Reporting--Exhibits A through G--Subpart C Election Form
[[Page 72500]]
Estimated number of reporters: 5
Estimated number of reports per reporter: 1
Average number of hours per report: 155
Estimated gross annual reporting burden: 775
Reporting--Preparing and Publishing Disclosure Framework Responses
Estimated number of reporters: 5
Estimated number of reports per reporter: 1
Average number of hours per report: 200
Estimated gross annual reporting burden: 1,000
Reporting--Preparing Quantitative Information Disclosures
Estimated number of reporters: 5
Estimated number of reports per reporter: 1
Average number of hours per report: 80
Estimated gross annual reporting burden: 400
Reporting--Requests for Supplemental Information
Estimated number of reporters: 5
Estimated number of reports per reporter: 5
Average number of hours per report: 45
Estimated gross annual reporting burden: 1,125
Reporting--Amendments to Subpart C Election Form
Estimated number of reporters: 5
Estimated number of reports per reporter: 3
Average number of hours per report: 8
Estimated gross annual reporting burden: 120
Reporting--Withdrawal Notices
Estimated number of reporters: 1
Estimated number of reports per reporter: 1
Average number of hours per report: 2
Estimated gross annual reporting burden: 2
Reporting--Rescission Notices
Estimated number of reporters: 1
Estimated number of reports per reporter: 75
Average number of hours per report: 3
Estimated gross annual reporting burden: 225
Recordkeeping
Estimated number of recordkeepers: 5
Estimated number of records per recordkeeper: 82
Average number of hours per record: 1
Estimated gross annual recordkeeping burden: 410
2. Collections Applicable Both to SIDCOs and Subpart C DCOs
Regulations 39.32(a) and (b), as proposed and adopted, establish
governance requirements applicable to each SIDCO and Subpart C DCO,
including specific provisions requiring written and disclosed
governance arrangements and the disclosure of certain decisions on
particular, not regularly scheduled, occasions, to the Commission, the
SIDCO or Subpart C DCO's clearing members, other relevant stakeholders
and/or the public. Regulation 39.33(d), as proposed and adopted,
requires a SIDCO or Subpart C DCO to conduct due diligence on its
liquidity providers and to conduct periodic testing with respect to its
access to liquidity resources. Regulation 39.33(e), as proposed and
adopted, establishes documentation requirements with respect to the
supporting rationale for the financial and liquidity resources it
maintains pursuant to regulations 39.33(a) and 39.33(c), respectively.
Regulation 39.36(c)(6), as proposed and adopted, requires each
SIDCO and Subpart C DCO to report stress test results to its risk
management committee or board of directors. Regulation 39.37(a), as
proposed and adopted, requires each SIDCO and Subpart C DCO to complete
and to publicly disclose its responses to the Disclosure Framework and,
when applicable, to complete and disclose a Quantitative Information
Disclosure. As described above and as accounted for in the previous
portion of this PRA burden estimate, these tasks will be conducted by
Subpart C DCOs as part of their election to become subject to Subpart
C. SIDCOs and DCOs also are required to update their Disclosure
Framework responses and Quantitative Information Disclosure every two
years. Regulations 39.37(c) and (d), as proposed and adopted, require
each SIDCO or Subpart C DCO to disclose, publicly and to the
Commission, certain data on transaction volume and values and their
rules, policies, and procedures related to the segregation and the
portability of customers' positions and funds.
Regulation 39.38, as proposed and adopted, requires each SIDCO or
Subpart C DCO to establish a process to review the efficiency and
effectiveness of its clearing and settlement arrangements, operating
structure and procedures, scope of products cleared and use of
technology. Finally, regulations 39.39(b) and (c), as proposed and
adopted, require each SIDCO and Subpart C DCO to develop and maintain
viable plans for the recovery or wind-down of the SIDCO or Subpart C
DCO necessitated by certain circumstances. Each of these requirements
implies recordkeeping that would be produced by the SIDCO or Subpart C
DCO to the Commission on an occasional basis to demonstrate compliance
with the proposed rules.
It is not possible to estimate with precision how many DCOs may, in
the future, be determined to be SIDCOs and how many may elect to become
Subpart C DCOs, but it was conservatively estimated in the Proposal
that, collectively, a total of seven DCOs may be determined to be
SIDCOs or may opt to become Subpart C DCOs. Presently, there are two
SIDCOs and it has been estimated that five DCOs will elect to become
Subpart C DCOs.
The Commission did not receive any comments on the estimated costs
or burden hours of this collection of information and the Commission
believes that its original estimates, as set forth below and in the
Proposal,\256\ remain appropriate for PRA purposes:
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\256\ 78 FR 50285-86.
Reporting--Governance Requirements--Written Governance Arrangements
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 200
Estimated gross annual reporting burden: 1,400
Reporting--Governance Requirements--Required Disclosures
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 6
Average number of hours per report: 3
Estimated gross annual reporting burden: 126
Reporting--Financial and Liquidity Resource Documentation
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 120
Estimated gross annual reporting burden: 840
Reporting--Stress Test Results
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 16
Average number of hours per report: 14
Estimated gross annual reporting burden: 1,568
Reporting--Preparing and Publishing Disclosure Framework Responses
(SIDCOs only)
Estimated number of reporters: 2
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 200
Estimated gross annual reporting burden: 400
Reporting--Updating and Republishing Disclosure Framework Responses
(SIDCOs and Subpart C DCOs)
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 80 Estimated gross annual
reporting burden: 560
Reporting--Preparing and Publishing Quantitative Information
Disclosures (SIDCOs only)
Estimated number of reporters: 2
Estimated number of reports per reporter: 1
Average number of hours per report: 80
Estimated gross annual reporting burden: 160
Reporting--Updating and Republishing Quantitative Information
Disclosures (SIDCOs and Subpart C DCOs)
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
[[Page 72501]]
Average number of hours per report: 35
Estimated gross annual reporting burden: 245
Reporting--Transaction, Segregation, Portability Disclosures
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 2
Average number of hours per report: 35
Estimated gross annual reporting burden: 490
Reporting--Efficiency and Effectiveness Review
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 3
Estimated gross annual reporting burden: 21
Reporting--Recovery and Wind-Down Plan
Estimated number of reporters: 7
Estimated number of reports per recordkeeper: 1
Average number of hours per report: 480
Estimated gross annual reporting burden: 3,360
Recordkeeping--Liquidity Resource Due Diligence and Testing
Estimated number of recordkeepers: 7
Estimated number of records per recordkeeper: 4
Average number of hours per record: 10
Estimated gross annual recordkeeping burden: 280
Recordkeeping--Financial and Liquidity Resources, Excluding Due
Diligence and Testing
Estimated number of recordkeepers: 7
Estimated number of records per recordkeeper: 4
Average number of hours per record: 10
Estimated gross annual recordkeeping burden: 280
Recordkeeping--Generally
Estimated number of recordkeepers: 7
Estimated number of records per recordkeeper: 28
Average number of hours per record: 10
Estimated gross annual recordkeeping burden: 1960
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\257\
The rules adopted herein will only affect DCOs. The Commission has
previously established certain definitions of ``small entities'' to be
used by the Commission in evaluating the impact of its regulations on
small entities in accordance with the RFA.\258\ The Commission has
previously determined that DCOs are not small entities for the purpose
of the RFA.\259\ Accordingly, the Chairman, on behalf of the
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rules
adopted herein will not have a significant economic impact on a
substantial number of small entities. The Chairman made the same
certification in the proposed rulemaking, and the Commission did not
receive any comments on the RFA.
---------------------------------------------------------------------------
\257\ 5 U.S.C 601 et seq.
\258\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618 (Apr. 30, 1982).
\259\ See 66 FR 45609.
---------------------------------------------------------------------------
C. Consideration of Costs and Benefits
1. Introduction
Section 15(a) requires the Commission to consider the costs and
benefits of its actions before promulgating a regulation under the CEA
or issuing certain orders.\260\ Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of five broad areas
of market and public concern: (1) protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The
Commission's cost and benefit considerations in accordance with Section
15(a) are discussed below.
---------------------------------------------------------------------------
\260\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
2. Background
In this final rulemaking, the Commission is adopting regulations to
(1) address gaps between part 39 of the Commission's regulations and
the standards set forth in the PFMIs, (2) provide a mechanism for DCOs
to elect to opt-in the SIDCO enhanced regulatory framework set out in
the provisions of Subpart C; and (3) make related technical amendments
to regulations 140.94 and 190.09. As finalized herein, revised Subpart
C, together with Subpart A and Subpart B, will establish regulations
that are consistent with the PFMIs \261\ and provide SIDCOs and Subpart
C DCOs with the opportunity to become QCCPs for purposes of the Basel
CCP Capital Requirements.\262\
---------------------------------------------------------------------------
\261\ See supra Section I.G.
\262\ See supra Section I.F. (discussion of the Basel CCP
Capital Requirements).
---------------------------------------------------------------------------
In promulgating the final rule, the Commission considered the
following alternatives: (1) not to adopt any of the proposed additional
standards for SIDCOs, (2) to adopt the proposed additional standards
for SIDCOs only, (3) to adopt the proposed additional standards for
SIDCOs and also for DCOs that have not been designated as systemically
important by the Council but that seek adherence to the enhanced
regulatory framework for purposes of gaining QCCP status, or (4) to
adopt the proposed additional standards for all DCOs. As detailed
above, the Commission has concluded it is necessary and appropriate to
adopt regulations which set forth enhanced regulatory standards for
SIDCOs and also to extend this framework to DCOs that have not been
designated systemically important in order to provide the opportunity
to for all DCOs to become QCCPs.
The Commission invited public comment on all aspects of the
proposed rulemaking, including (1) the competitive impact, the costs as
well as benefits, resulting from, or arising out of, requiring SIDCOs
to comply with the provisions set forth in Subpart C, while permitting
other registered DCOs to elect to become subject to these requirements
(or to forego such election), (2) the potential costs and benefits to a
SIDCO or Subpart C DCO to comply with all aspects of the proposed rule,
(3) alternative means to establish, for Subpart C DCOs, requirements
consistent with the PFMIs and the costs (or cost savings) and benefits
associated with such alternatives, and (4) any costs that would be
imposed on and any benefits that would be conferred on other market
participants or the financial system more broadly. As discussed above
in more detail, the Commission received comment letters which generally
supported the proposed rule and the Commission's objective to harmonize
U.S. regulations with the international standards set forth by the
PFMIs.\263\ However, the Commission received only one comment that
provided quantitative data from which the Commission could calculate
the costs and benefits of the proposed regulations.\264\ The remainder
of the comment letters provided qualitative comments on the
Commission's proposed consideration of costs and benefits, generally,
as well as specifically with regard to certain proposed regulations.
These comments are summarized below in connection with the Commission's
consideration of costs and benefits on the final rules being
promulgated herein pursuant to section 15(a) of the CEA.
---------------------------------------------------------------------------
\263\ See generally Chris Barnard, NYPC, FIA, ICE, ISDA,
European Commission, CME, LCH and MGEX comment letters.
\264\ See generally CME comment letter.
---------------------------------------------------------------------------
3. Costs and Benefits of the Final Rule
a. Costs
The Commission requested quantitative data or specific cost
[[Page 72502]]
estimates associated with the proposed regulations but commenters,
other than CME, did not provide this information. Commenters did
address the costs and benefits of the proposed rule in qualitative
terms, as described below.\265\
---------------------------------------------------------------------------
\265\ See generally MGEX and LCH comment letters.
---------------------------------------------------------------------------
As noted in the cost-benefit discussion in the Proposal,\266\ the
Commission recognizes that the regulations in this final rulemaking are
comprehensive and that, compared against the status quo (the DCO
regulatory framework set forth in Subpart A and B of part 39 of the
Commission's regulations), these regulations may impose important costs
on SIDCOs and Subpart C DCOs depending, in particular, on the SIDCO's
or Subpart C DCO's current financial and liquid resources, and risk
management framework. In particular, these regulations may require
SIDCOs and Subpart C DCOs to undertake a comprehensive review and
analysis of their current policies, procedures, and systems in order to
determine where it may be necessary to design and implement additional
or alternative policies, procedures, and systems. Such costs are likely
to increase operational, administrative, and compliance costs for
SIDCOs or Subpart C DCOs.
---------------------------------------------------------------------------
\266\ 78 FR 50287.
---------------------------------------------------------------------------
In addition to the costs for SIDCOs and Subpart C DCOs, the
Commission has considered the costs these regulations may impose upon
market participants and the public. To the extent costs increase, the
Commission notes that higher trading prices for market participants
(i.e., increased clearing fees, guaranty fund contributions, margin
fees, etc.) may discourage market participation and result in decreased
liquidity and reduced price discovery. However, the Commission has also
considered the costs to market participants and the public if the
regulations in this final rulemaking are not adopted. Significantly,
without these regulations to ensure that SIDCOs operate under certain
enhanced risk management standards, in a manner consistent with
internationally accepted standards, the security of the U.S. financial
markets would be at a greater risk relative to international markets.
This could affect the attractiveness of the U.S. financial markets
subject to the Commission's jurisdiction as compared to foreign
competitors. Moreover, SIDCOS and DCOs that wish to opt-into the
enhanced regulatory framework would not have the opportunity to gain
QCCP status, thereby putting them at a significant competitive
disadvantage in the global financial markets which, again, would be to
the detriment of their clearing members and their customers.
i. Regulation 39.31 (Election to become subject to the provisions of
subpart C)
Regulation 39.31 sets forth the procedures a DCO will be required
to follow to elect to become subject to the provisions of Subpart
C.\267\ Specifically, paragraph (b) requires a registered DCO to file a
completed Subpart C Election Form with the Commission. The form appears
in Appendix B to Subpart C and is modeled after Form DCO, which the
Commission promulgated in 2011 as part of the DCO General Provisions
and Core Principles final rule.\268\ Paragraph (c) requires the same of
a DCO that applies for registration with the Commission and that wants
to be subject to the provisions of Subpart C as of the date the DCO is
registered with the Commission. The Subpart C Election Form includes
disclosures and exhibits wherein the DCO is required to provide the
following: a regulatory compliance chart; citations to the relevant
rules, policies, and procedures of the DCO that addresses each Subpart
C regulation; and a summary of the manner in which the DCO will comply
with each regulation. In addition, the DCO is required to provide, in
separate exhibits, all documents that demonstrate the DCO's compliance
with regulations 39.32 through 39.36 and regulation 39.39, as finalized
herein. A DCO is also required to complete responses to the Disclosure
Framework and publish a copy of its responses on its Web site.
---------------------------------------------------------------------------
\267\ See supra Section II.C. (discussing regulation 39.31).
\268\ See 76 FR 69448.
---------------------------------------------------------------------------
The Commission notes that regulation 39.31 only applies to a DCO
that the Council has not designated to be systemically important and
that elects to become subject to the provisions of Subpart C. By
providing an opt-in procedure and a procedure to rescind such election,
regulation 39.31, as adopted, offers the benefit of permitting a DCO
that is not systemically important to compare the benefit of attaining
QCCP status with the costs of preparing a comprehensive and complete
Subpart C Election Form (in accordance with the requirements set forth
in regulation 39.31) and complying with the requirements set forth in
Subpart C and, thus, to decide for itself whether to become subject to
Subpart C.
As discussed above in more detail, the Commission received 4
comment letters addressing the costs associated with specific
regulations in the proposed rule.\269\ All of the commenters expressed
support for the Commission's efforts to provide DCOs with the
opportunity to become eligible for QCCP status by adhering to an
enhanced regulatory scheme.\270\ However, MGEX referred to the
application process set forth in proposed regulation 39.31 as
``burdensome'' and ``discriminatory'' towards DCOs that have not been
designated as systemically important.\271\ In addition, MGEX suggested
to the Commission two alternatives methods to more efficiently
implement regulations that are consistent with the PFMIs: (1) require
all DCOs to be subject to the enhanced regulatory requirements in
Subpart C and grant an extended compliance schedule beyond December 31,
2013 or (2) provide an ``opt-out'' process for those DCOs that do not
wish to be held to the higher regulatory standards and grant compliance
extensions for those regulations that would be difficult for DCOs to
implement by December 31, 2013.\272\ LCH suggested that the Commission
consider requiring the enhanced regulatory standards to apply to all
DCOs and allow DCOs to petition the Commission for extended compliance
with ``more complex rules.''\273\ LCH also suggested an opt-out process
for those DCOs that believe QCCP status is not important for their
business.\274\ As MGEX itself pointed out in its comment letter,
requiring all DCOs to adhere to the enhanced requirements in Subpart C
would impose considerable costs on DCOs that may not seek QCCP
status.\275\ The Commission believes a DCO should have the flexibility
to determine what level of regulatory standard is appropriate for its
particular business model. Regarding the suggested alternative opt-out
provision, as stated previously, the Commission does not have
quantitative data on the costs associated with implementing the
regulations in this final rule but it is aware that costs may be
significant. Further, the Commission is aware that imposing an enhanced
regulatory framework on all DCOs even with an opt-out provision,
without the necessary quantitative analysis, would be inappropriate and
could result in financial harm to certain DCOs. Moreover, without a
detailed quantitative analysis comparing the
[[Page 72503]]
costs for each DCO that elects to opt-in (under the proposed rule) with
the costs of each DCO that elects to opt-out of Subpart C compliance
(under MGEX's alternative), the Commission cannot determine whether
establishing an opt-out regime would be a more efficient means of
implementing the PFMIs than the Commission's proposed opt-in regime.
Hence, at this time, the Commission cannot justify the cost burden that
would result for DCOs if every DCO were required to comply with the
Subpart C regulations.
---------------------------------------------------------------------------
\269\ See generally MGEX, CME, LCH and European Commission
comment letters.
\270\ MGEX at 1-2; CME at 1, LCH at 2, and European Commission
at 1.
\271\ MGEX at 2.
\272\ Id. at 3.
\273\ LCH at 3.
\274\ Id.
\275\ MGEX at 3.
---------------------------------------------------------------------------
MGEX and LCH also both suggested that to alleviate the compressed
timeline for compliance, the Commission should allow compliance
extensions. Specifically, LCH requested that ``more complex rules, such
as those governing financial resources, system safeguards, risk
management, and recovery and wind-down plans'' be given additional time
for compliance.\276\ Similarly, MGEX suggested ``granting compliance
extensions for those regulations that may be particularly difficult to
implement by the December 31, 2013 deadline.'' \277\ As highlighted by
both MGEX and LCH, the Commission has already proposed an extended
deadline for regulation 39.34 regarding system safeguards. The
Commission is also extending the deadline for compliance with
regulation 39.35 regarding default rules and procedures and regulation
39.39 regarding recovery and wind-down by permitting a SIDCO or Subpart
C DCO to request that the Commission grant the SIDCO or Subpart C DCO
up to a one year extension to comply with these regulations. However,
because the very purpose of this final rule is to align the
Commission's regulations with the PFMIs and to provide DCOs the
opportunity to become QCCPs, inherently a DCO must comply with all of
the regulations. An extended compliance date for all the regulations or
a large subset of the regulations, would call into the question whether
the Commission has rules and regulations in place consistent with the
PFMIs and is applying these rules to the DCO on an ongoing basis as of
December 31, 2013. Extending the compliance date could delay the
ability of a Subpart C DCO or SIDCO to gain QCCP status and thus,
increase costs for the DCO's clearing member banks and the customers of
these banks. While the Commission recognizes the concerns expressed by
the commenters regarding the compliance deadline for purposes of
achieving QCCP status, the Commission notes that for DCOs that are not
SIDCOs, it is ultimately the decision of the DCO as to whether to elect
to become a Subpart C DCO and if so, when to make such an election.
Thus, the compliance dates proposed in this regulation are permissive
and not mandatory for such DCOs.
---------------------------------------------------------------------------
\276\ LCH at 3.
\277\ MGEX at 3.
---------------------------------------------------------------------------
The Commission requested comments regarding the costs associated
with the actual opt-in process. However, although MGEX stated that the
Subpart C Election Form would be overly burdensome, neither MGEX nor
any other commenter provided comments quantifying the cost of opting-
in, the costs associated with rescinding an opt-in (including the
notices required), or the costs associated with the completion and
publication of responses to the Disclosure Framework.
The Commission notes that pursuant to paragraph (e), a Subpart C
DCO is permitted, subject to a 180 day notice period, to rescind its
election to become subject to the provisions of Subpart C. As a result
of the rescission, the DCO would no longer be considered a QCCP, which
would likely create important costs for bank clearing members and the
bank customers of the DCO's clearing members due to the higher capital
costs that they would incur as a result of clearing transactions
through the DCO that is no longer a QCCP.\278\ Alternatively, clearing
members and their customers may choose to end their clearing activities
and transact through another DCO that is a QCCP. Either choice would
impose costs on those clearing members and their customers.
---------------------------------------------------------------------------
\278\ See supra Section I.F. (discussing the treatment for non-
QCCP clearing members under the Basel CCP Capital Requirements).
---------------------------------------------------------------------------
As the Commission has previously noted, a Subpart C DCO's
compliance with the provisions of Subpart C will cause the Subpart C
DCO to incur certain costs. Some of these costs may then be incurred,
indirectly, by the Subpart C DCO's clearing members and their
customers. The Commission requested but did not receive any comments
concerning how these costs may be mitigated. Nor did the Commission
receive any comments about the extent to which a DCO's analysis of the
costs and benefits of being a Subpart C DCO could be affected by the
possibility that some of the costs may be incurred indirectly by
clearing members and their customers.
In the absence of input from market participants, the Commission
lacks critical information necessary to make a reasonable assessment or
quantify dollar costs associated with regulation 39.31. Each DCO has
its own internal cost structure, management system, and existing
regulatory compliance framework. Thus, the way in which regulation
39.31 impacts each Subpart C DCO with respect to costs likely will
vary. Accordingly, the Commission is unable to provide a reliable
quantification of the costs associated with regulation 39.31, because,
among other things, such a determination would require information
concerning the business model and strategies of individual DCOs, about
which the Commission did not receive information during the comment
period. The Commission has no reason to believe, however, that the
costs associated with the regulation would be unreasonable or
inappropriate to achieve the regulatory objective of providing an
opportunity for DCOs to opt-in to Subpart C. In addition, the
Commission believes that the costs the regulation imposes would not, to
any unnecessary extent, impede a DCO from electing to be subject to
Subpart C.
ii. Regulation 39.32 (Governance for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations)
Regulation 39.32 establishes governance requirements for SIDCOs and
Subpart C DCOs that are consistent with the PFMIs and establish rules
and procedures concerning conflicts of interest, compensation policies,
organizational structure, and fitness standards for directors and
officers.\279\ Specifically, SIDCOs and Subpart C DCOs are required to
have written governance arrangements that are clear and transparent,
that place a high priority on the safety and efficiency of SIDCOs or
Subpart C DCOs, and that explicitly support the stability of the
broader financial system and other relevant public interest
considerations of clearing members, customers of clearing members, and
other relevant stakeholders. In addition, these governance arrangements
are required to reflect the legitimate interests of clearing members,
customers of clearing members, and other relevant stakeholders. To an
extent consistent with other statutory and regulatory requirements on
confidentiality and disclosure, SIDCOs and Subpart C DCOs are also
required to disclose major decisions of the board.\280\ Regulation
39.32 requires the rules and procedures of SIDCOs and Subpart C DCOs
to: (1) Describe the SIDCO's or Subpart C DCO's management structure;
(2) clearly specify the roles and responsibilities of
[[Page 72504]]
the board of directors and its committees, including the establishment
of a clear and documented risk management framework; (3) clearly
specify the roles and responsibilities of management; (4) establish
appropriate compensation policies; (5) establish procedures for
managing conflicts of interest among board members; and (6) assign
responsibility and accountability for risk decisions and for
implementing rules concerning default, recovery, and wind-down.
Finally, regulation 39.32 requires that the board members and managers
of SIDCOs and Subpart C DCOs have the appropriate experience, skills,
incentives and integrity; risk management and internal control
personnel have sufficient independence, authority, resources and access
to the board of directors; and that the board of directors include
members who are not executives, officers or employees of the SIDCO or
Subpart C DCO or of their affiliates.
---------------------------------------------------------------------------
\279\ See supra Section II.D. (discussing regulation 39.32).
\280\ Id.
---------------------------------------------------------------------------
As noted in the cost benefit section of the Proposal,\281\ to the
extent these requirements affect the behavior of a DCO, costs could
arise from additional hours a DCO's employees might need to spend
analyzing the compliance of the DCO's rules and procedures with these
requirements, designing and drafting new or amended rules and
procedures where the analysis indicates that these are necessary, and
implementing these new or amended rules and procedures. The Commission
continues to believe that these categories accurately summarize the
sources of material costs that may be incurred in complying with
regulation 39.32.
---------------------------------------------------------------------------
\281\ 78 FR 50287.
---------------------------------------------------------------------------
In the Proposal, the Commission requested comment on the potential
costs to a SIDCO or Subpart C DCO to comply with all aspects of
proposed regulation 39.32, and any costs that would be imposed on other
market participants or the financial system more broadly. The
Commission specifically requested comment on any alternative means to
satisfy the requirements of regulation 39.32 in a manner consistent
with the PFMIs and for costs or cost savings associated with such
alternatives.\282\ The Commission did not receive any comments in
response to these requests.
---------------------------------------------------------------------------
\282\ Id. at 50288.
---------------------------------------------------------------------------
In the absence of input from market participants, the Commission
lacks critical information necessary to make a reasonable assessment or
quantify dollar costs associated with regulation 39.32. The Commission
notes that regulation 39.32 grants a DCO a certain amount of discretion
in determining the specifics of the rules and procedures that should be
adopted to comply with the regulation. Moreover, each DCO has its own
internal cost structure, management system, and existing regulatory
compliance framework. Thus, the way in which regulation 39.32 impacts
each DCO with respect to initial and ongoing costs likely will vary.
For example, some DCOs may already have rules and processes that comply
with the regulation, in whole or in part, while other DCOs may not.
Accordingly, the Commission is unable to provide a reliable
quantification of the costs associated with regulation 39.32, because,
among other things, such a determination would require information
concerning the business model and strategies of individual DCOs, about
which the Commission did not receive information during the comment
period. The Commission has no reason to believe, however, that the
costs associated with the regulation would be unreasonable or
inappropriate to achieve the regulatory objective of implementing the
PFMI standards for SIDCOs and Subpart C DCOs. In addition, the
Commission believes that the costs the regulation imposes would not, to
any unnecessary extent, impede a DCO from electing to be subject to
Subpart C.
iii. Regulation 39.33 (Financial resources for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
a.) Regulation 39.33(a): Cover Two
As discussed above, regulation 39.33(a), as revised, requires a
Subpart C DCO to comply with the Cover Two minimum financial resource
standard for all of its activities if the Subpart C DCO: (1) is
involved in activities with a more complex risk profile or (2) is
systemically important in multiple jurisdictions. This regulation
currently applies to SIDCOs.\283\
---------------------------------------------------------------------------
\283\ See supra Section II.E. (discussing revised regulation
39.33).
---------------------------------------------------------------------------
The cost of the Cover Two requirement for a Subpart C DCO that
meets either or both of the two criteria described above \284\ includes
the opportunity cost \285\ of the additional financial resources needed
to satisfy the guaranty fund requirements for the risk of loss
resulting from the default of the clearing member creating the second
largest financial exposure.\286\ In addition, the possibility exists
that some market participants will transfer their positions from a
Subpart C DCO that either (1) is deemed systemically important in
multiple jurisdictions or (2) clears products of a more complex risk
profile to another DCO for which neither (1) nor (2) applies, because
the value of the Cover Two protection to these market participants is
less than the price at which that protection is being offered. These
market participants will transact with SIDCOs or Subpart C DCOs that
operate under Cover One, which is a lower financial resources
requirement, and thus, get the benefit of lower transactional fees and
forego the enhanced protections associated with the SIDCOs and Subpart
C DCOs that operate under Cover Two. However, the potential cost to a
SIDCO or a Subpart C DCO subject to the Cover Two requirement and to
the goal of systemic risk reduction would likely be mitigated because:
(a) not every product offered by a SIDCO or Subpart C DCO would be
available at other DCOs and (b) a SIDCO or Subpart C DCO may offer
benefits not available to a DCO that operates under Cover One because
it does not elect to become subject to the provisions of Subpart C, and
is not designated as systemically important, and/or does not clear
products with a more complex risk profile. This would therefore reduce
the likelihood that market participants would transfer their positions
to other DCOs.
---------------------------------------------------------------------------
\284\ All Subpart C DCOs would bear the administrative cost of
determining whether they meet either of the criteria.
\285\ For Subpart C DCOs that are not deemed systemically
important in multiple jurisdictions or that do not clear products
with a more complex risk profile, the Cover One financial resources
requirement would continue to apply, and therefore, these Subpart C
DCOs would not face increased opportunity costs associated with the
regulation.
\286\ In the event that these additional resources would need to
be raised by the Subpart C DCO, as opposed to reallocated, this cost
would be the funding cost for raising these additional resources.
---------------------------------------------------------------------------
b.) Regulation 39.33(b): Valuation of Financial Resources
As discussed above, regulation 39.33(b) prohibits SIDCOs and
Subpart C DCOs from including assessments as part of their calculation
of the financial resources available to cover the default of the
clearing member creating the largest financial exposure and, where
applicable, the default of the two clearing members creating the
largest aggregate financial exposure, in extreme but plausible
circumstances, i.e., Cover One or Cover Two.\287\ This prohibition
currently applies to SIDCOs and would be expanded to include Subpart C
DCOs. The costs associated with the prohibition on the use of
assessments by a Subpart C DCO in calculating its obligations under
regulation 39.33(a)
[[Page 72505]]
would include the opportunity cost of the additional pre-funded
financial resources needed to replace the value of such assessments,
which may require an infusion of additional capital. In addition, as
with the Cover Two requirement, market participant demand may shift
from a SIDCO or a Subpart C DCO subject to the Cover Two requirement to
a DCO with a lower capitalization requirement.
---------------------------------------------------------------------------
\287\ See supra Section II.E. (discussing revised regulation
39.33).
---------------------------------------------------------------------------
c.) Regulation 39.33(c), (d) and (e): Liquidity
As discussed above, regulation 39.33(c) requires a SIDCO and a
Subpart C DCO to maintain eligible liquidity resources that will enable
it to meet its intraday, same-day and multiday settlement obligations,
in all relevant currencies, with a high degree of confidence under a
wide range of stress scenarios notwithstanding a default by the
clearing member creating the largest aggregate liquidity obligation.
Eligible resources are limited to cash in the currency of the requisite
obligation, held at the central bank of issue or a creditworthy
commercial bank, certain highly marketable collateral, including high
quality, liquid, general obligations of a sovereign nation (subject to
certain prearranged and highly reliable funding arrangements), and
various committed liquidity arrangements. These arrangements must be
reliable and enforceable in extreme but plausible market conditions,
and must not contain material adverse change clauses.
In addition, a SIDCO or Subpart C DCO that is systemically
important in multiple jurisdictions or that is involved in activities
with a more complex risk profile is required to consider maintaining
liquidity resources that would enable it to meet the default of the two
clearing members creating the largest aggregate payment obligation. If
a SIDCO or Subpart C DCO maintains liquid financial resources in
addition to those required to satisfy the minimum financial resources
requirement set forth in regulation 39.11(a)(1) and proposed regulation
39.33(a), then those resources should be in the form of assets that are
likely to be saleable or acceptable as collateral for lines of credit,
swaps, or repurchase agreements on an ad hoc basis.\288\
---------------------------------------------------------------------------
\288\ Id.
---------------------------------------------------------------------------
Regulation 39.33(d) imposes a duty on SIDCOs and Subpart C DCOs to
perform due diligence on their liquidity providers in order to
determine their ability to perform reliably their commitments to
provide liquidity. Finally, regulation 39.33(e) requires SIDCOs and
Subpart C DCOs to document their supporting rationale for the amount of
financial resources they maintain pursuant to regulation 39.33(a) and
the amount of liquidity resources they maintain pursuant to regulation
39.33(c).\289\
---------------------------------------------------------------------------
\289\ Id.
---------------------------------------------------------------------------
Regulations 39.33(c)-(e) may result in additional costs for a SIDCO
or Subpart C DCO with respect to analyzing and measuring intra-day,
same-day, and multiday liquidity requirements in all relevant
currencies, developing plans to meet those requirements, obtaining
eligible liquidity resources and making eligible liquidity
arrangements, reviewing and monitoring each liquidity provider's risks
and reliability (including through periodic testing of access to
liquidity), and documenting the DCO's basis for conclusions with
respect to its financial resources and liquidity resources
requirements. These regulations also will require stress testing and
other analysis of such resources as compared with the DCO's liquidity
needs. Specifically, with regards to regulation 39.33(c), there may be
costs involved in obtaining cash in the relevant currencies or
arranging for qualifying liquidity commitments, such as a committed
line of credit, to satisfy the minimum financial resources requirement
set forth in regulation 39.11(a)(1) (i.e. Cover One). Obtaining these
committed financial resources may involve administrative expenses such
as the negotiation and drafting of committed arrangements, as well as
costs arising from the payment of fees to liquidity providers. In
addition, there may be operational costs involved in calculating the
liquidity resources requirements at the Cover One level on an intraday,
same-day, and multiday basis over the course of a default. This
calculation may require undertaking a complex analysis of the SIDCO's
or Subpart C DCO's exposures and processes, including various models.
Where appropriate, this calculation may also require designing and
implementing changes to either create or modify existing internal
processes. The Commission notes that while this analysis may involve
costs, it will improve the SIDCO's or Subpart C DCO's financial
condition, as described below in section 2.b.iii. of the benefits
section.
CME estimated that if it had to obtain committed funding
arrangements to comply with regulation 39.33(c), its liquidity costs
would approximately double.\290\ This increase is based on their
``assumption that the cost of committed liquidity or committed
repurchase facilities is approximately $3 million for every $1 billion
of required committed facilities'' or 30 basis points.\291\
Additionally, CME commented that given the global clearing mandate
slated to take effect over the next two years, liquidity requirements
will significantly increase, which could potentially result in CME's
liquidity costs increasing to $120 to $160 million per year.\292\
---------------------------------------------------------------------------
\290\ CME at 13.
\291\ Id. Current and historic returns available on high quality
sovereign bonds suggest that the actual costs of liquidity service
may be less than the 30 basis points that CME estimates and
therefore, CME's total liquidity costs would be lower than $120 to
$160 million.
\292\ CME at 13.
---------------------------------------------------------------------------
Based on CME's 30 basis point estimate, their increase in liquidity
costs would translate into a liquidity exposure from the default of a
single participant, including affiliates, (i.e., Cover One) of $40
billion to $53 billion. The size of this potential exposure highlights
the systemic importance of SIDCOs, such as CME, and how critical it is
for a SIDCO to meet all of its obligations promptly even in extreme but
plausible conditions. Consequently, while there may be costs associated
with obtaining prearranged, highly reliable funding, these costs must
be weighed against the potential disruptions and damage to the U.S.
financial system if, during extreme but plausible market conditions, a
SIDCO does not maintain sufficient liquidity to meet its financial
obligations to its non-defaulting members promptly.
Moreover, as discussed above in more detail, the standard SIDCOs
and Subpart C DCOs must meet under regulation 39.33(c) is to
demonstrate the reliability of the requisite liquidity arrangements,
even in extreme but plausible conditions. To the extent that a DCO is
able to meet this burden through tools other than the use of a
committed funding arrangement, and chooses to so, then the DCO would
bear the cost of such an alternative arrangement, which may be lower
than the costs of a committed funding arrangement.
Regulation 39.33(d) may increase administrative costs to the extent
that a SIDCO or a Subpart C DCO is required to review and monitor its
liquidity provider's capacity and reliability to perform its liquidity
obligations to the DCO. In addition, regulation 39.33(e) may impose an
administrative cost to document the SIDCO or Subpart C DCO's rationale
for the financial resources it maintains.
[[Page 72506]]
iv. Regulation 39.34 (System safeguards for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
As discussed above regulation 39.34, as revised, expands the
enhanced system safeguards requirements already applicable to SIDCOs to
include Subpart C DCOs.\293\ As noted in the cost benefit section of
the Proposal,\294\ the regulation may increase operational costs for
Subpart C DCOs by requiring additional resources, including, technology
(e.g., hardware and software) and the purchase or rental of premises in
order to achieve geographic dispersal of resources. Moreover, business
continuity planning inherently requires that personnel be trained in
their roles and responsibilities under the plan, and this training
consumes time and related resources.
---------------------------------------------------------------------------
\293\ See supra Section II.F. (discussing regulation 39.34).
\294\ 78 FR 50290.
---------------------------------------------------------------------------
The costs of moving from a next-day RTO, the minimum standard
established by the DCO core principles and current regulation 39.18, to
a two-hour RTO as required by proposed regulation 39.34, may be
significant. Additionally, the implementation of a two-hour RTO may
impose one-time costs to establish the enhanced resources and recurring
costs to operate the additional resources. The Commission continues to
believe that these categories accurately summarize the sources of
material costs that may be incurred in complying with regulation 39.34.
In the Proposal, the Commission requested comment on the potential
costs to a Subpart C DCO to comply with all aspects of proposed
regulation 39.34 and any costs that would be imposed on other market
participants or the financial system more broadly. The Commission
specifically requested comment on any alternative means to satisfy the
requirements of regulation 39.34 in a manner consistent with the PFMIs
and for costs or cost savings associated with such alternatives.\295\
The Commission received one comment in response. MGEX stated that it
would require three or four additional employees to comply with the
geographic diversity requirements of this rule, unless MGEX were to
engage outsourced personnel.
---------------------------------------------------------------------------
\295\ Id.
---------------------------------------------------------------------------
The Commission notes that MGEX could, alternatively, relocate
existing positions (rather than increase its headcount). This would
require MGEX to incur either relocation or hiring costs, as well as
office space for the geographically diverse employees. MGEX provided no
estimates of the costs it might incur.
In the absence of input from market participants, the Commission
lacks critical information necessary to make a reasonable assessment or
quantify dollar costs associated with regulation 39.34. The Commission
notes that regulation 39.34 grants a DCO a significant amount of
discretion in determining how to comply with the regulation. Moreover,
it is possible that each DCO has its own internal cost structure,
management system, and existing regulatory compliance framework. Thus,
the way in which regulation 39.34 impacts each DCO with respect to
initial and ongoing costs likely will vary. For example, some DCOs may
already have resources in place that comply with the regulation, in
whole or in part, while other DCOs may not.
Accordingly, the Commission is unable to provide a reliable
quantification of the costs associated with regulation 39.34, because,
among other things, such a determination would require information
concerning the business model and strategies of individual DCOs, about
which the Commission did not receive information during the comment
period. The Commission has no reason to believe, however, that the
costs associated with the regulation would be unreasonable or
inappropriate to achieve the regulatory objective of implementing the
PFMI standards for Subpart C DCOs. In addition, the Commission believes
that the costs the regulation imposes would not, to any unnecessary
extent, impede a DCO from electing to be subject to Subpart C.
v. Regulation 39.35 (Default rules and procedures for uncovered losses
or shortfalls (recovery) for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations)
As discussed above, regulation 39.35 requires SIDCOs and Subpart C
DCOs to adopt rules and procedures to address certain issues arising
from extraordinary stress events, including the default of one or more
clearing members.\296\ Such default rules and procedures must
sufficiently (1) allocate uncovered credit losses and (2) enable a
SIDCO or Subpart C DCO promptly to meet all of its obligations in the
event of a default by one or more clearing members or an unforeseen
liquidity shortfall exceeding the financial resources of the SIDCO or
Subpart C DCO. As noted in the cost benefit section of the
Proposal,\297\ the costs associated with these default rules and
procedures may include administrative costs to: review and analyze
current policies and procedures; design and draft new or amended
policies and procedures; and implement the new or amended policies and
procedures. The tools that a SIDCO or Subpart C DCO chooses to include
in its default rules and procedures may involve capital costs. The
Commission continues to believe that these categories accurately
summarize the sources of material costs that may be incurred in
complying with regulation 39.35.
---------------------------------------------------------------------------
\296\ See supra Section II.G. (discussing regulation 39.35).
\297\ 78 FR 50290.
---------------------------------------------------------------------------
In the Proposal, the Commission requested comment on the potential
costs to a SIDCO or Subpart C DCO to comply with all aspects of
proposed regulation 39.35, and any costs that would be imposed on other
market participants or the financial system more broadly. The
Commission specifically requested comment on any alternative means to
satisfy the requirements of regulation 39.35 in a manner consistent
with the PFMIs and for costs or cost savings associated with such
alternatives.\298\ The Commission did not receive any comments in
response to these requests.
---------------------------------------------------------------------------
\298\ Id.
---------------------------------------------------------------------------
In the absence of input from market participants, the Commission
lacks critical information necessary to make a reasonable assessment or
quantify dollar costs associated with regulation 39.35. The Commission
notes that regulation 39.35 grants a DCO a certain amount of discretion
in determining the specifics of the rules and procedures that should be
adopted to comply with the regulation. Moreover, each DCO has its own
internal cost structure, management system, and existing regulatory
compliance framework. Thus, the way in which regulation 39.35 impacts
each DCO with respect to initial and ongoing costs likely will vary.
For example, some DCOs may already have rules and procedures that
comply with the regulation, in whole or in part, while other DCOs may
not.
Accordingly, the Commission is unable to provide a reliable
quantification of the costs associated with regulation 39.35, because,
among other things, such a determination would require information
concerning the business model and strategies of individual DCOs, about
which the Commission did not receive information during the comment
period. The Commission has no reason to believe, however, that the
costs associated with
[[Page 72507]]
the regulation would be unreasonable or inappropriate to achieve the
regulatory objective of implementing the PFMI standards for SIDCOs and
Subpart C DCOs. In addition, the Commission believes that the costs the
regulation imposes would not, to any unnecessary extent, impede a DCO
from electing to be subject to Subpart C.
vi. Regulation 39.36 (Risk management for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
Regulation 39.36 sets forth enhanced risk management requirements
for a SIDCO or Subpart C DCO, including, but not limited to, specific
criteria for stress tests of financial resources, specific criteria for
sensitivity analysis of margin models, specific criteria for stress
tests of liquidity resources, requirements surrounding the monitoring
and management of credit and liquidity risks arising out of settlement
banks, and requirements surrounding the custody and investment of a
SIDCO's or Subpart C DCO's own funds and assets.\299\ As noted in the
Proposal,\300\ complying with this regulation may involve operational
costs to perform the required testing, monitoring and analyses, which
may include: a comprehensive analysis of existing stress testing
scenarios; the design of new and/or alternative stress testing
scenarios; and the design of a sensitivity analysis; the creation of a
system for comprehensively monitoring, managing and limiting credit and
liquidity risks arising out of settlement banks; and the implementation
of controls surrounding the custody and investment of a SIDCO's or
Subpart C DCO's own funds and assets. In addition, there may be costs
associated with the modification and/or creation of processes necessary
to support the enhanced risk management requirements in the proposed
regulation. There will also be ongoing costs to conduct such risk
management, analyze the results, and take action based on such results.
In particular, to the extent that the analyses and monitoring reveal
the need for additional financial or liquidity resources, there would
be costs associated with obtaining such resources. In addition, there
may be administrative and other costs associated with the management of
a SIDCO's or Subpart C DCO's settlement bank exposure. The Commission
continues to believe that these categories accurately summarize the
sources of material costs that may be incurred in complying with
regulation 39.36.
---------------------------------------------------------------------------
\299\ See supra Section II.H. (discussing regulation 39.36).
\300\ 78 FR 50290.
---------------------------------------------------------------------------
In the Proposal, the Commission requested comment on the potential
costs to a SIDCO or Subpart C DCO to comply with all aspects of
proposed regulation 39.36, and any costs that would be imposed on other
market participants or the financial system more broadly. The
Commission specifically requested comment on any alternative means to
satisfy the requirements of regulation 39.36 in a manner consistent
with the PFMIs and for costs or cost savings associated with such
alternatives.\301\ The Commission did not receive any comments in
response to these requests.
---------------------------------------------------------------------------
\301\ Id.
---------------------------------------------------------------------------
In the absence of input from market participants, the Commission
lacks critical information necessary to make a reasonable assessment or
quantify dollar costs associated with regulation 39.36. The Commission
notes that regulation 39.36 grants a DCO a certain amount of discretion
in determining the specifics of the processes that should be adopted to
comply with the regulation. Moreover, each DCO has its own internal
cost structure, management system, and existing regulatory compliance
framework. Thus, the way in which regulation 39.36 impacts each DCO
with respect to initial and ongoing costs likely will vary. For
example, some DCOs may already have processes that comply with
regulation 39.36, in whole or in part, while other DCOs may not.
Accordingly, the Commission is unable to provide a reliable
quantification of the costs associated with regulation 39.36, because,
among other things, such a determination would require information
concerning the operations of individual DCOs, about which the
Commission did not receive information during the comment period. The
Commission has no reason to believe, however, that the costs associated
with the regulation would be unreasonable or inappropriate to achieve
the regulatory objective of implementing the PFMI standards for SIDCOs
and Subpart C DCOs. In addition, the Commission believes that the costs
the regulation imposes would not, to any unnecessary extent, impede a
DCO from electing to be subject to Subpart C.
vii. Regulation 39.37 (Additional disclosure for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
As discussed above, regulation 39.37 sets forth additional public
disclosure requirements for a SIDCO and Subpart C DCO, including the
disclosure of, and updates to, the DCO's responses to the Disclosure
Framework for FMIs.\302\ As noted in the Proposal,\303\ complying with
this regulation may impose administrative costs to conduct a
comprehensive analysis of the SIDCO or Subpart C DCO's policies,
procedures and systems as well as the costs associated with the design,
drafting and implementation of any new or modified policies, procedures
and systems that would be necessary to comply with the proposed
regulation. The Commission continues to believe that these categories
accurately summarize the sources of material costs that may be incurred
in complying with regulation 39.37.
---------------------------------------------------------------------------
\302\ See supra Section II.I. (discussing regulation 39.37).
\303\ 78 FR 50290-50291.
---------------------------------------------------------------------------
In the Proposal, the Commission requested comment on the potential
costs to a SIDCO or Subpart C to comply with all aspects of proposed
regulation 39.37, and any costs that would be imposed on other market
participants or the financial system more broadly. The Commission
specifically requested comment on any alternative means to satisfy the
requirements of regulation 39.37 in a manner consistent with the PFMIs
and for costs or cost savings associated with such alternatives.\304\
The Commission did not receive any comments in response to these
requests.
---------------------------------------------------------------------------
\304\ Id.
---------------------------------------------------------------------------
In the absence of input from market participants, the Commission
lacks critical information necessary to make a reasonable assessment or
quantify dollar costs associated with regulation 39.37. The Commission
notes that regulation 39.37 grants a DCO a certain amount of discretion
in determining the specifics of the procedures that should be adopted
to comply with the regulation. Moreover, each DCO has its own internal
cost structure, management system, and existing regulatory compliance
framework. Thus, the way in which regulation 39.37 impacts each DCO
with respect to initial and ongoing costs likely will vary. For
example, some DCOs may already have rules and processes that comply
with the regulation, in whole or in part, while other DCOs may not.
[[Page 72508]]
Accordingly, the Commission is unable to provide a reliable
quantification of the costs associated with regulation 39.37, because,
among other things, such a determination would require information
concerning the business model and strategies of individual DCOs, about
which the Commission did not receive information during the comment
period. The Commission has no reason to believe, however, that the
costs associated with the regulation would be unreasonable or
inappropriate to achieve the regulatory objective of implementing the
PFMI standards for SIDCOs and Subpart C DCOs. In addition, the
Commission believes that the costs the regulation imposes would not, to
any unnecessary extent, impede a DCO from electing to be subject to
Subpart C.
viii. Regulation 39.38 (Efficiency for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
As discussed above, regulation 39.38 requires a SIDCO or a Subpart
C DCO to comply with certain efficiency standards regarding its
clearing and settlement arrangements, operating structure and
procedures, product scope, and use of technology. In addition, a SIDCO
or Subpart C DCO is required to establish clearly defined goals and
objectives that are measureable and achievable, including minimum
service levels, risk management expectations, and business
priorities.\305\ SIDCOs and Subpart C DCOs are also required to
facilitate efficient payment, clearing and settlement by accommodating
internationally accepted communication procedures and standards. As
outlined in the cost benefit section of the Proposal,\306\ the costs
associated with the regulation may include the administrative costs of
conducting a comprehensive review and analysis of the SIDCO's or
Subpart C DCO's policies, procedures and systems, and where
appropriate, the design, drafting and implementation of new or modified
policies, procedures and systems to establish the goals and objectives
necessary to comply with this regulation. There may also be
administrative costs associated with establishing a mechanism to review
the DCO's compliance with the regulation, as well as operational costs
associated with designing and implementing processes to accommodate
internationally accepted communications standards. The Commission
continues to believe that these categories accurately summarize the
sources of material costs that may be incurred in complying with
regulation 39.38.
---------------------------------------------------------------------------
\305\ See supra Section II.J. (discussing regulation 39.38).
\306\ 78 FR 50291.
---------------------------------------------------------------------------
In the Proposal, the Commission requested comment on the potential
costs to a SIDCO or Subpart C DCO to comply with all aspects of
proposed regulation 39.38, and any costs that would be imposed on other
market participants or the financial system more broadly. The
Commission specifically requested comment on any alternative means to
satisfy the requirements of regulation 39.38 in a manner consistent
with the PFMIs and for costs or cost savings associated with such
alternatives.\307\ The Commission did not receive any comments in
response to those requests.
---------------------------------------------------------------------------
\307\ Id.
---------------------------------------------------------------------------
In the absence of input from market participants, the Commission
lacks critical information necessary to make a reasonable assessment or
quantify dollar costs associated with regulation 39.38. The Commission
notes that efficiency is inherently difficult to measure.
The Commission also notes that regulation 39.38 grants a DCO a
certain amount of discretion in determining the specifics of the
processes that should be adopted to comply with the regulation.
Moreover, each DCO has its own internal cost structure and management
system. Thus, the way in which regulation 39.38 impacts each DCO with
respect to initial and ongoing costs likely will vary.
Accordingly, the Commission is unable to provide a reliable
quantification of the costs associated with regulation 39.38, because,
among other things, such a determination would require information
concerning the business model and strategies of individual DCOs, about
which the Commission did not receive information during the comment
period. The Commission has no reason to believe, however, that the
costs associated with the regulation would be unreasonable or
inappropriate to achieve the regulatory objective of implementing the
PFMI standards for SIDCOs and Subpart C DCOs. In addition, the
Commission believes that the costs the regulation imposes would not, to
any unnecessary extent, impede a DCO from electing to be subject to
Subpart C.
ix. Regulation 39.39 (Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
As discussed above, regulation 39.39 requires a SIDCO or Subpart C
DCO to maintain viable plans for recovery and orderly wind-down, in
cases necessitated by (1) credit losses or liquidity shortfalls and (2)
general business risk, operational risk, or any other risk that
threatens the DCO's viability as a going concern. This requires the DCO
to identify scenarios that may prevent a SIDCO or Subpart C DCO from
being able to provide its critical operations and services as a going
concern and to assess the effectiveness of a full range of options for
recovery or orderly wind-down. The regulation also requires a SIDCO or
Subpart C DCO to evaluate the resources available to meet the plan to
cover credit losses and liquidity shortfalls, and to maintain
sufficient unencumbered liquid financial assets to implement the plan
to cover other risks. The latter point requires a SIDCO or Subpart C
DCO to analyze whether its particular circumstances and risks require
it to maintain liquid net assets to fund the plan that are in addition
to those resources currently required by regulation 39.11(a)(2).
As noted in the Proposal,\308\ regulation 39.39 may impose costs on
a SIDCO or Subpart C DCO to the extent it will be necessary to
undertake a comprehensive qualitative and quantitative analysis of the
credit, liquidity, general business, operational and other risks that
may threaten the DCO's ability to provide its critical operations and
services as a going concern, to design and draft plans to mitigate and
address those risks, to analyze whether the DCO's resources allocated
to recovery and/or wind-down are sufficient to implement those plans.
This analysis may lead to the design of alternative and/or additional
scenarios to be included in stress testing, the drafting of new or
revised policies for a recovery and/or wind-down plan, and potentially
the necessity of maintaining additional resources or procedures to
obtain such resources in the event they are needed. Moreover, the
regulation prohibits the double counting of available resources--that
is, resources considered as available to meet the recovery and orderly
wind-down plan for credit losses and liquidity shortfalls cannot be
considered as available to meet the recovery and orderly wind-
[[Page 72509]]
down plan for general business risk, operational risk, and other risks
(or vice-versa). This may result in the need to maintain a larger
quantum of total resources to meet both plans which, depending on the
resources maintained, may involve costs arising from factors such as
greater use of capital by the DCO, or greater capital charges for
clearing members arising out of their commitments to contribute default
resources. The Commission continues to believe that these categories
accurately summarize the sources of material costs that may be incurred
in complying with regulation 39.39.
---------------------------------------------------------------------------
\308\ 78 FR 50291.
---------------------------------------------------------------------------
In the Proposal, the Commission requested comment on the potential
costs to a SIDCO or Subpart C DCO to comply with all aspects of
proposed regulation 39.39, and any costs that would be imposed on other
market participants or the financial system more broadly. The
Commission specifically requested comment on any alternative means to
satisfy the requirements of regulation 39.39 in a manner consistent
with the PFMIs and for costs or cost savings associated with such
alternatives.\309\ The Commission did not receive any comments in
response to these requests.
---------------------------------------------------------------------------
\309\ Id.
---------------------------------------------------------------------------
In the absence of input from market participants, the Commission
lacks critical information necessary to make a reasonable assessment or
quantify dollar costs associated with regulation 39.39. The Commission
notes that regulation 39.39 grants a DCO a certain amount of discretion
in determining the specifics of the rules, procedures, and arrangements
that should be adopted to comply with the regulation. Moreover, each
DCO has its own internal cost structure, management system, and
existing regulatory compliance framework. Thus, the way in which
regulation 39.39 impacts each DCO with respect to initial and ongoing
costs likely will vary. For example, some DCOs may already have rules,
processes, and arrangements that comply with the regulation, in whole
or in part, while other DCOs may not.
Accordingly, the Commission is unable to provide a reliable
quantification of the costs associated with regulation 39.39, because,
among other things, such a determination would require information
concerning the business model and strategies of individual DCOs, about
which the Commission did not receive information during the comment
period. The Commission has no reason to believe, however, that the
costs associated with the regulation would be unreasonable or
inappropriate to achieve the regulatory objective of implementing the
PFMI standards for SIDCOs and Subpart C DCOs. In addition, the
Commission believes that the costs the regulation imposes would not, to
any unnecessary extent, impede a DCO from electing to be subject to
Subpart C.
b. Benefits
As explained in the subsections that follow, this final rule holds
SIDCOs and Subpart C DCOs to enhanced regulatory standards, which are
designed to promote the financial strength, operational integrity,
security, and reliability of these organizations and to reduce the
likelihood of their disruption or failure. This, in turn, increases the
overall stability of the U.S. financial markets. As the PFMIs note,
FMIs, including CCPs (i.e. DCOs), play a critical role in fostering
financial stability.\310\ This is particularly the case with respect to
SIDCOs. The Council has determined that the failure of or a disruption
to the functioning of a SIDCO could create or increase the risk of
significant liquidity or credit problems spreading among financial
institutions or markets and thereby threaten the stability of the U.S.
financial system.\311\ Thus, the final rule offers a substantial
benefit vis-[agrave]-vis the status quo.
---------------------------------------------------------------------------
\310\ PFMIs, E.N. 1.1.
\311\ See http://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx (describing the designations of CME and ICE Clear
Credit to be systemically important financial market utilities) and
see supra Section I.C.
---------------------------------------------------------------------------
In addition, the regulations adopted in this final rulemaking are
consistent with the international standards set forth in the PFMIs and
address the remaining divergences between part 39 of the Commission's
regulations and the PFMIs. These regulations will help ensure that
SIDCOs and Subpart C DCOs are held to international standards in order
to provide them with the opportunity to gain QCCP status. As discussed
above, attaining QCCP status will provide clearing members that are
banks, as well as banks that are customers of clearing members, with
the benefit of complying with less onerous capital requirements,
pursuant to the Basel CCP Capital Requirements, than if the SIDCO or
Subpart C DCO were not a QCCP.\312\ In turn, this may increase a SIDCO
or Subpart C DCO's competitiveness vis-[agrave]-vis non-US clearing
organizations that demonstrate compliance with international standards
and are QCCPs.
---------------------------------------------------------------------------
\312\ See supra Section I.F.
---------------------------------------------------------------------------
i. Regulation 39.31 (Election To Become Subject to the Provisions of
Subpart C)
The procedures set forth in regulation 39.31, together with the
Subpart C Election Form, are intended to promote the protection of
market participants and the public. These procedures require the
Commission's staff to conduct a review of a DCO that elects to become
subject to the provisions of Subpart C. The Subpart C Election Form
provides the Commission, clearing members, and customers (and,
significantly, the regulators of such clearing members and customers)
with assurance that the electing DCO will be held to and will be
required to meet the standards set forth in Subpart C.\313\ Without
regulation 39.31, a DCO that is not designated by the Council as being
systemically important will not have the opportunity to gain QCCP
status, thereby potentially putting such a DCO at a significant
competitive disadvantage compared to SIDCOs and non-U.S. clearing
organizations. This would ultimately be to the detriment of such a
DCO's clearing members and their customers.\314\ The Commission also
notes that by clearing through a Subpart C DCO, a clearing member and
its customers will be afforded the benefits of clearing through a DCO
subject to enhanced risk management, operational, and other standards.
---------------------------------------------------------------------------
\313\ See 78 FR 50269.
\314\ See supra Section I.F. (discussing QCCP status and the
Basel CCP Capital Requirements); see also supra Section II.C.
(discussing regulation 39.31).
---------------------------------------------------------------------------
Regulation 39.31, as adopted herein, provides a benefit to a
Subpart C DCO by allowing the Subpart C DCO the opportunity to weigh
for itself the costs and benefits and to determine whether to maintain
QCCP status. The notice requirements set forth in the regulation
provide important benefits to clearing members of the rescinding
Subpart C DCO (and their customers), particularly those that are banks
or bank affiliates, by providing them with advance notice to permit
them to assess their options and take any actions they deem appropriate
with respect to clearing at a DCO that has acted to rescind its
election to be held to the standards of Subpart C (and thus to renounce
status as a QCCP).
ii. Regulation 39.32 (Governance for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations)
The requirements set forth in regulation 39.32 are beneficial to
the extent that they cause a SIDCO or Subpart C DCO to internalize and/
or more appropriately allocate certain costs
[[Page 72510]]
that would otherwise be borne by clearing members, customers of
clearing members, and other relevant stakeholders. Such requirements
also promote market stability because the governance arrangements of
SIDCOs and Subpart C DCOs are required to explicitly support the
stability of the financial system and other relevant public interest
considerations of clearing members, customers of clearing members, and
other relevant stakeholders,\315\ and reflect the legitimate interests
of clearing members, customers of clearing members, and other relevant
stakeholders. Finally, the governance arrangements required by
regulation 39.32 promote a more efficient, effective, and reliable DCO
risk management and operating structure.
---------------------------------------------------------------------------
\315\ See supra Section II.D. (discussing regulation 39.32).
---------------------------------------------------------------------------
As noted above, the Commission did not receive any comments focused
specifically on the cost and benefit considerations relevant to
regulation 39.32.
iii. Regulation 39.33 (Financial resources for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
As described above, regulation 39.33(a), as revised, expands the
Cover Two minimum financial resources requirement to include Subpart C
DCOs that engage in an activity with a more complex risk profile (e.g.,
clearing credit default swaps or credit default futures), or that are
systemically important in multiple jurisdictions.\316\ This proposed
regulation currently applies to SIDCOs. Regulation 39.33(a), as
finalized herein, increases the financial stability of Subpart C DCOs
subject to this regulation by requiring compliance with enhanced
minimum financial resource requirements. Compliance with such
standards, in turn, increases the overall stability of the U.S.
financial markets because enhancing a Subpart C DCO's financial
resources requirements from the minimum of Cover One to a more
stringent Cover Two standard helps to ensure the affected Subpart C DCO
will have greater financial resources to meet its obligations to market
participants, including in the case of defaults by multiple clearing
members. These added financial resources lessen the likelihood of the
Subpart C DCO's failure which, in times of market turmoil, could
increase the risk to the stability of the U.S. financial system.\317\
By bolstering certain Subpart C DCO's resources, regulation 39.33(a)
contributes to the financial integrity of the financial markets and
reduces the likelihood of systemic risk from spreading through the
financial markets due to the Subpart C DCO's failure or disruption. In
addition, the approach of obtaining resources in such low-stress
periods avoids the need to call for additional resources from clearing
members during less stable, more volatile times, which would have pro-
cyclical effects on the U.S. financial markets.
---------------------------------------------------------------------------
\316\ See supra Section II.E. (discussing revised regulation
39.33).
\317\ See supra Section I.B.
---------------------------------------------------------------------------
As discussed above, regulation 39.33(a)(2) provides the Commission
with the ability to determine whether a SIDCO or a Subpart C DCO is
systemically important in multiple jurisdictions. In making such a
determination, the Commission will consider whether the DCO is a SIDCO
and whether the DCO has been determined to be systemically important by
one or more foreign jurisdictions pursuant to a designation process
that considers whether the foreseeable effects of a failure or
disruption of the SIDCO or Subpart C DCO could threaten the stability
of each relevant jurisdiction's financial system. Moreover, regulation
39.33(a)(3) also provides the Commission with the ability to expand the
definition of ``activity with a more complex risk profile'' beyond
clearing credit default swaps or credit default futures. These
provisions give the Commission the flexibility to determine, under
appropriate circumstances, what particular SIDCOs or Subpart C DCOs (or
DCOs that engage in certain activities) would need to maintain Cover
Two default resources. Such a decision would help to ensure that the
affected SIDCO or Subpart C DCO would have greater financial resources
to meet its obligations to market participants, including in the case
of defaults by multiple clearing members. These added financial
resources would decrease the likelihood that the SIDCO or Subpart C DCO
would fail, thus contributing to the integrity and stability of the
financial markets.
Regulation 39.33(b) prohibits a Subpart C DCO from using
assessments to meets its default resource obligations, i.e., those
under regulations 39.11(a)(1) and 39.33(a). This prohibition currently
applies to SIDCOs. Prohibiting the use of assessments by a Subpart C
DCO in meeting its default resource requirement increases the financial
stability of the Subpart C DCO, which in turn, will increase the
overall stability of the U.S. financial markets.
Assessment powers are more likely to be exercised during periods of
financial market stress. If, during such a period, a clearing member
defaults and the loss to the Subpart C DCO is sufficiently large to
deplete (1) the collateral posted by the defaulting clearing member,
(2) the defaulting clearing member's guaranty fund contribution, and
(3) the remaining pre-funded default fund contributions, a Subpart C
DCO's exercise of assessment powers over the non-defaulting clearing
members may exacerbate a presumably already weakened financial market.
The demand by a Subpart C DCO for more capital from its clearing
members could force one or more additional clearing members into
default because they cannot meet the assessment. The inability to meet
the assessment could lead clearing members and/or their customers to
de-leverage (i.e., sell off their positions) in falling asset markets,
which further drives down asset prices and may result in clearing
members and/or their customers defaulting on their obligations to each
other and/or to the Subpart C DCO. In such extreme circumstances,
assessments could trigger a downward spiral and lead to the
destabilization of the financial markets. Prohibiting the use of
assessments by a Subpart C DCO in meeting default resources
requirements is intended to require the Subpart C DCO to retain more
financial resources upfront, i.e., to prefund its financial resources
requirement to cover its potential exposure.
The increase in prefunding of financial resources by a Subpart C
DCO may increase costs to clearing members of that Subpart C DCO (e.g.,
requiring clearing members to post additional funds with the Subpart C
DCO), but it also reduces the likelihood that the Subpart C DCO will
require additional capital infusions during a time of financial stress
when raising such additional capital is expensive relative to market
norms. By increasing prefunded financial resources, a Subpart C DCO
becomes less reliant on the ability of its clearing members to pay an
assessment, more secure in its ability to meets its obligations, and
more viable in any given situation, even in the case of multiple
defaults of clearing members. Accordingly, regulation 39.33(b)
increases the financial security and reliability of the Subpart C DCO,
which will, therefore, further increase the overall stability of the
U.S. financial markets.
As described above, regulations 39.33(c), (d) and (e) increase the
likelihood that a SIDCO or Subpart C DCO will promptly meet its
settlement
[[Page 72511]]
obligations in a variety of market conditions. Liquidity arrangements
that are highly reliable in stressed market conditions are important to
enable the SIDCO or Subpart C DCO to promptly meet its cash obligations
to its members. Ensuring that the SIDCO or Subpart C DCO can meet those
obligations promptly, particularly in stressed market conditions, is an
important firebreak to avoid loss of market confidence and cascading
defaults.
Specifically, regulation 39.33(c) requires a SIDCO or Subpart C DCO
to maintain a minimum level of eligible liquidity resources that would
permit the DCO to satisfy its intraday, same-day, and multi-day
settlement obligations in all relevant currencies. Regulation 39.33(d)
requires a SIDCO or Subpart C DCO to undertake due diligence to confirm
that each liquidity provider upon which the DCO relies has the capacity
to perform its commitments to provide liquidity (and to regularly test
its own procedures for accessing its liquidity resources). Proposed
regulation 39.33(e) requires a SIDCO or Subpart C DCO to document its
supporting rationale for, and to have adequate governance arrangements
relating to, the amount of total financial resources it maintains and
the amount of total liquidity resources it maintains.
In determining the resources that would be necessary to meet the
qualifying liquid resources requirements, a SIDCO or Subpart C DCO may
need to undertake a complex analysis of the SIDCO's or Subpart C DCO's
exposures and processes, including various models, and, where
appropriate, designing and implementing changes to either create or
modify existing internal processes and documenting the rationale for
the amount of total financial and total liquidity resources the SIDCO
or Subpart C DCO maintains. These efforts are likely to contribute to a
better ex ante understanding by the SIDCO's or Subpart C DCO's
management of the liquidity risks the DCO is likely to face in a stress
scenario, resources that are calculated to enable the DCO to completely
meets its settlement obligations on a prompt basis despite the default
of a clearing member, and better assurance of its ability to rely on
the commitments of its liquidity providers. The result of this analysis
and these enhanced resources is likely to be better preparation to meet
liquidity challenges promptly, and a greater likelihood that the DCO
would efficiently and effectively meet its obligations promptly in a
default scenario. This improved preparation and enhanced likelihood of
the SIDCO or Subpart C DCO's prompt meeting of its own obligations will
benefit the DCO's clearing members and their customers by avoiding an
inability to meet settlement obligations that might cause cascading
liquidity problems to such clearing members and their customers. The
harm to clearing members and customers from a failure of a SIDCO or
Subpart C DCO to meet its obligations promptly would be especially
serious in a time of general financial stress. The assurance of the DCO
meeting its settlement obligations promptly would also redound to the
benefit of the larger financial system by mitigating systemic risk.
iv. Regulation 39.34 (System safeguards for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
As discussed above, regulation 39.34, as revised, requires SIDCOs
and Subpart C DCOs to comply with enhanced system safeguards
requirements, including a two-hour RTO.\318\ While SIDCOs are already
subject to these requirements, the Commission expanded this regulation
to include Subpart C DCOs. A two-hour RTO in a Subpart C DCO's BC-DR
plan will increase the soundness and operating resiliency of the
Subpart C DCO. The two-hour RTO ensures that even in the event of a
wide-scale disruption, the potential negative effects upon U.S.
financial markets would be minimized because the affected Subpart C DCO
would recover rapidly and resume its critical market functions. This
would allow other market participants to process their transactions,
including those participants in locations not directly affected by the
disruption. The two-hour RTO would increase a Subpart C DCO's
resiliency by requiring the Subpart C DCO to have the resources and
technology necessary to resume operations promptly. This resiliency, in
turn, will increase the overall stability of the U.S. financial
markets.
---------------------------------------------------------------------------
\318\ See supra Section II.F. (discussing regulation 39.34).
---------------------------------------------------------------------------
v. Regulation 39.35 (Default rules and procedures for uncovered losses
or shortfalls (recovery) for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations)
Regulation 39.35, as detailed above, requires SIDCOs and Subpart C
DCOs to adopt explicit rules and procedures for: i) allocating
uncovered credit losses and ii) meeting all settlement obligations in a
variety of market conditions. \319\ The analysis SIDCOs and Subpart C
DCOs will need to perform to create these rules and procedures are
likely to contribute to a better ex ante understanding by the SIDCO or
Subpart C DCO of the scenarios that would lead to uncovered credit
losses or liquidity shortfalls. This analysis will also enable the
SIDCO or Subpart C DCO to more effectively and efficiently meet its
obligations promptly, thereby avoiding harm to clearing members and
their customers from a default. In addition, requiring SIDCOs and
Subpart C DCOs to have clear rules and procedures addressing such
scenarios will be beneficial for clearing members and their customers
in that these rules and procedures will provide clearing members with a
better understanding of the members' own obligations, and the extent to
which the SIDCO or Subpart C DCO would perform its obligations to its
clearing members during periods of market stress. This understanding
will, in turn, contribute to the ability of clearing members and their
customers to tailor their own contingency plans to address those
circumstances. Improved preparation by SIDCOs, Subpart C DCOs, and
their clearing members will also redound to the benefit of the larger
financial system by mitigating systemic risk.
---------------------------------------------------------------------------
\319\ See supra Section II.G. (discussing regulation 39.35).
---------------------------------------------------------------------------
vi. Regulation 39.36 (Risk management for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
As discussed above, Regulation 39.36 establishes enhanced risk
management requirements designed to help SIDCOs and Subpart C DCOs
manage their risk exposure.\320\ These requirements include the stress
testing of their financial resources, the stress testing of their
liquidity resources, and conducting regular sensitivity analyses of
their margin methodologies. The analyses performed to comply with this
regulation will increase the DCO's ability to mitigate and address
credit risks, and to create proper incentives for members with respect
to the exposures they create to the SIDCO or Subpart C DCO by enabling
the DCO to tie risk exposures to margin requirements. In addition,
regulation 39.36 requires a SIDCO or Subpart C DCO to monitor, manage
and limit its credit and liquidity risks arising from its settlement
banks, as well invest its own funds and assets
[[Page 72512]]
in instruments with minimal credit, market, and liquidity risks.
---------------------------------------------------------------------------
\320\ See supra Section II.H. (discussing regulation 39.36).
---------------------------------------------------------------------------
Regulation 39.36, as adopted herein, increases the SIDCO's or
Subpart C DCO's ability to mitigate and address the probability of
being exposed to a settlement bank's failure and the potential losses
and liquidity pressures to which the SIDCO or Subpart C DCO would be
exposed in the event of such a failure. This, in turn, will benefit
members of such DCOs and their customers, as discussed above. By
enhancing the reliability and stability of SIDCOs and Subpart C DCOs,
regulation 39.36 strengthens the overall stability of the U.S.
financial markets.
vii. Regulation 39.37 (Additional disclosure for systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations)
The disclosure requirements set forth in regulation 39.37 \321\
benefit clearing members of SIDCOs and Subpart C DCOs, as well as
customers of clearing members, because they provide transparency and
certainty concerning the processes, operations and exposures of these
DCOs. In particular, paragraph (d) requires a SIDCO or Subpart C DCO to
publicly disclose its policies and procedures concerning the
segregation and portability of customers' positions and funds. These
disclosures will enable clearing members and their customers to better
understand their respective exposures to the SIDCO or Subpart C DCO, to
better choose a DCO that fits their needs, and, in turn, to create
incentives for safe and effective operations of SIDCOs and Subpart C
DCOs.
---------------------------------------------------------------------------
\321\ See supra Section II.I. (discussing regulation 39.37).
---------------------------------------------------------------------------
viii. Regulation 39.38 (Efficiency for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
The efficiency requirements set forth in regulation 39.38 will be
beneficial to clearing members of SIDCOs and Subpart C DCOs, as well as
to customers of clearing members, because they will require these DCOs
to regularly endeavor to improve their clearing and settlement
arrangements, operating structures and procedures, product offerings,
and use of technology. In addition, under this regulation, SIDCOs and
Subpart C DCOs are required to facilitate efficient payment, clearing
and settlement by accommodating internationally accepted communication
procedures and standards, which may result in operational efficiency
for market participants. Accordingly, members of such DCOs and their
customers, as well as the marketplace more broadly, may be offered more
efficient clearing services that may be easier to access at an
operational level.
ix. Regulation 39.39 (Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations)
Regulation 39.39, as described in detail above, requires a SIDCO
and Subpart C DCO to maintain viable plans for recovery and orderly
wind-down, in cases necessitated by (1) credit losses or liquidity
shortfalls and (2) general business risk, operational risk, or any
other risk that threatens the derivatives clearing organization's
viability as a going concern. This requires the DCO to identify
scenarios that may prevent a SIDCO or Subpart C DCO from being able to
provide its critical operations and services as a going concern and to
assess the effectiveness of a full range of options for recovery or
orderly wind-down.
Regulation 39.39 also requires a SIDCO or Subpart C DCO to evaluate
the resources available to meet the plan to cover credit losses and
liquidity shortfalls, and to maintain sufficient unencumbered liquid
financial assets to implement the plan to cover other risks. The latter
point requires a SIDCO or Subpart C DCO to analyze whether its
particular circumstances and risks require it to maintain liquid net
assets to fund the plan that are in addition to those resources
currently required by regulation 39.11(a)(2).\322\
---------------------------------------------------------------------------
\322\ See supra Section II.K. (discussing regulation 39.39).
---------------------------------------------------------------------------
The complex analysis and plan preparation that a SIDCO or Subpart C
DCO will undertake to comply with this regulation, including designing
and implementing changes to existing plans, are likely to contribute to
a better ex ante understanding by the SIDCO's or Subpart C DCO's
management of the challenges the DCO would face in a recovery or wind-
down scenario, and thus better preparation to meet those challenges.
This improved preparation will help reduce the possibility of market
disruptions and financial losses to clearing members and their
customers. By maintaining and regularly updating recovery and wind-down
plans, and maintaining resources and arrangements designed to meet the
requirements of such plans, the DCO will better be able to mitigate the
impact that a threat to, or a disruption of, a SIDCO's or Subpart C
DCO's operations would have on customers, clearing members, and, more
broadly, the stability of the U.S. financial markets. By reducing the
possibility that a DCO would default in a disorganized fashion,
regulation 39.39, as adopted herein, also helps to reduce the
likelihood of a failure by the DCO to meet its obligations to its
members, thereby enhancing protection for members of such a DCO and
their customers, as well as helping to avoid the systemic effects of
DCO failure.
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
The regulations finalized herein create additional standards for
compliance with the CEA, which include governance standards, enhanced
financial resources and liquidity resource requirements, system
safeguard requirements, special default rules and procedures for
uncovered losses or shortfalls, enhanced risk management requirements,
additional disclosure requirements, efficiency standards, and standards
for recovery and wind-down procedures. They also include procedures for
Subpart C DCOs to elect to be held to such additional standards, and
procedures to rescind such election. These standards and procedures
will further the protection of members of SIDCOs and Subpart C DCOs,
customers of such members, as well as other market participants and the
public by increasing the financial stability and operational security
of SIDCOs and Subpart C DCOs. Additionally, these regulations may, more
broadly, increase the stability of the U.S. financial markets. A
designation of systemic importance under Title VIII means the failure
of a SIDCO or the disruption of its clearing and settlement activities
could create or increase the risk of significant liquidity or credit
problems spreading among financial institutions or markets, thereby
threatening the stability of the U.S. financial markets. The
regulations contained in this final rule are designed to help ensure
that SIDCOs continue to function even in extreme circumstances,
including multiple defaults by clearing members and wide-scale
disruptions. While there may be increased costs associated with the
implementation of these regulations, the increased costs associated
with the implementation of the final rule for Subpart C DCOs would be
borne only by those DCOs that have not been designated systemically
important under Title VIII and that elect to become subject to the
provisions of Subpart C. Some of those costs would ultimately be borne
by clearing
[[Page 72513]]
members of such Subpart C DCOs, and by customers of such clearing
members.
The costs of this final rulemaking will likely be mitigated by the
countervailing benefits of stronger resources, improved design, more
efficient and effective processes, and enhanced planning that would
lead to increased safety and soundness of SIDCOs and the reduction of
systemic risk, which protect market participants and the public from
the adverse consequences, including loss of market confidence or
potentially cascading defaults, that would result from a SIDCO's
failure to promptly meet its obligations to its members, or a
disruption in its functioning. Similarly, the regulations will increase
the safety and soundness of Subpart C DCOs so that they may continue to
operate even in extreme circumstances, which would, in turn, better
protect members of such DCOs, their customers, and also market
participants and the public, particularly during time of severe market
stress.
b. Efficiency, Competitiveness, and Financial Integrity
The regulations set forth in this final rulemaking promote the
financial strength and stability of SIDCOs and Subpart C DCOs, as well
as, more broadly, efficiency and greater competition in the global
markets. Regulation 39.38, as finalized herein, expressly promotes
efficiency in the design of a SIDCO's or Subpart C DCO's settlement and
clearing arrangements, operating structure and procedures, scope of
products cleared, and use of technology. The regulation also requires
SIDCOs and Subpart C DCOs to accommodate internationally accepted
communication procedures and standards to facilitate efficient payment,
clearing, and settlement. In addition, the regulations finalized herein
promote efficiency insofar as SIDCOs and Subpart C DCOs that operate
with enhanced financial and liquidity resources, enhanced risk
management requirements, increased system safeguards, and wind-down or
recovery plans are more secure and are less likely to fail.
These regulations also promote competition because they are
consistent with the international standards set forth in the PFMIs and
will help to ensure that SIDCOs are held to international standards and
thus are enabled to gain QCCP status and accordingly avoid an important
competitive disadvantage relative to similarly situated foreign CCPs
that meet international standards and are QCCPs. Moreover, by allowing
other DCOs to elect to become subject to the provisions of Subpart C
and thus the opportunity to meet international standards and to gain
QCCP status, these regulations promote competition among registered
DCOs, and between registered DCOs and foreign CCPs that meet
international standards and are QCCPs. Conversely, the Commission notes
that these enhanced financial resources and risk management standards
are also associated with additional costs and to the extent that SIDCOs
and Subpart C DCOs pass along the additional costs to their clearing
members and, indirectly, those clearing members' customers,
participation in the affected markets may decrease and have a negative
impact on price discovery. However, it would appear that such higher
transactional costs should (at least in the case of clearing members
and customers that are banks or bank affiliates) be offset by the lower
capital charges granted to bank or bank affiliated clearing members and
customers for exposures resulting from transactions that are cleared
through SIDCOs and Subpart C DCOs that are also QCCPs.
Additionally, enhanced risk management and operational standards
promote financial integrity by leading to SIDCOs and Subpart C DCOs to
be more secure and less likely to fail. By increasing the stability and
strength of the SIDCOs and Subpart C DCOs, the regulations in this
final rulemaking will would help SIDCOs and Subpart C DCOs to meet
their obligations in extreme circumstances and be able to resume
operations even in the face of wide-scale disruption, which contributes
to the financial integrity of the financial markets. Moreover, in
requiring (1) more financial resources to be pre-funded by expanding
the potential losses those resources are intended to cover and
restricting the means for satisfying those resource requirements, and
(2) requiring greater liquidity resources, the requirements of these
regulations seek to lessen the incidence of pro-cyclical demands for
additional resources and, in so doing, promote both financial integrity
and market stability. By promoting the ability of SIDCOs and Subpart C
DCOs to promptly meet their obligations to members, including in times
of extreme market stress, they will mitigate the potential loss of
market confidence, and the potential for cascading defaults. These
efforts will redound to the benefit of clearing members and their
customers, as well as the financial system more broadly.
c. Price Discovery
The regulations in this final rulemaking will enhance financial
resources, liquidity resources, risk management standards, disclosure
standards, and recovery planning for SIDCOs and Subpart C DCOs which
may result in increased public confidence, which, in turn, might lead
to expanded participation in the affected markets (including markets
with products with a more complex risk profile). The expanded
participation in these markets (i.e., greater transactional volume) may
have a positive impact on price discovery. Conversely, the Commission
notes that these regulations are also associated with additional costs
and to the extent that SIDCOs and Subpart C DCOs pass along the
additional costs to their clearing members and, indirectly, to their
clearing members' customers, participation in the affected markets may
decrease and have a negative impact on price discovery. However, it is
the Commission's belief that such higher transactional costs should be
offset by the lower capital charges granted to clearing members and
customers with exposures resulting from transactions cleared through
SIDCOs and Subpart C DCOs that are deemed QCCPs.
d. Sound Risk Management Practices
The regulations in this final rulemaking contribute to the sound
risk management practices of SIDCOs and Subpart C DCOs because the
requirements promote the safety and soundness of SIDCOs and Subpart C
DCOs by: (1) Enhancing the financial resources requirements and
liquidity resource requirements; (2) enhancing understanding of credit
and liquidity risks and related governance arrangements; (3) enhancing
system safeguards to facilitate the continuous operation and rapid
recovery of activities; \323\ (4) enhancing risk management standards
by creating new stress testing and sensitivity analysis requirements;
(5) promoting the active management of credit and liquidity risks
arising from settlement banks; \324\ and (6) enhancing risk management
by establishing rules and procedures addressing uncovered credit losses
or liquidity shortfalls, and recovery and wind-down planning for credit
risks and for business continuity and operational risks.\325\ In
addition, by strengthening
[[Page 72514]]
financial and liquidity resource requirements, enhancing risk
management standards, and enhancing disclosure and recovery planning
requirements, the regulations in this final rule provide greater
certainty for clearing members of such DCOs, their customers, and other
market participants that obligations of the SIDCOs and Subpart C DCOs
will be honored promptly (thereby facilitating market participants own
management of risks, including mitigating the risk that participants
will be faced, at a time of market stress, with a failure by the SIDCO
or Subpart C DCO to promptly meet its obligations to them), and provide
certainty and security to market participants that potential
disruptions will be reduced and, by extension, the risk of loss of
capital and liquidity will be reduced.
---------------------------------------------------------------------------
\323\ As mentioned above, this rulemaking would extend to
Subpart C DCOs the system safeguards requirements currently
applicable to SIDCOs. See supra Section II.F. (discussing revised
regulation 39.34 (system safeguards)).
\324\ See supra Section II.H. (discussing regulation 39.36).
\325\ See supra Section II.G. (discussing regulation 39.35); see
also supra Section II.K. (discussing regulation 39.39).
---------------------------------------------------------------------------
e. Other Public Interest Considerations
The Commission notes the strong public interest for jurisdictions
to either adopt the PFMIs or establish standards consistent with the
PFMIs in order to allow CCPs licensed in the relevant jurisdiction to
gain QCCP status. As emphasized throughout this final rulemaking,
SIDCOs and Subpart C DCOs that are held to international standards and
that gain QCCP status might hold a competitive advantage in the
financial markets by, inter alia, helping bank clearing members and
bank customers avoid the much higher capital charges imposed by the
Basel CCP Capital Requirements on exposures to non-QCCPs. Moreover,
because ``enhancements to the regulation and supervision of
systemically important financial market utilities * * * are necessary *
* * to support the stability of the broader financial system,'' \326\
adopting the regulations in this final rule will promote the public
interest in a more stable broader financial system.
---------------------------------------------------------------------------
\326\ See Section 802(a)(4) of the Dodd-Frank Act (Congressional
findings).
---------------------------------------------------------------------------
List of Subjects
17 CFR Part 39
Commodity futures, Consumer protection, Default rules and
procedures, Reporting and recordkeeping requirements, Risk management,
Settlement procedures, System safeguards.
17 CFR Part 140
Authority delegations (Government agencies), Conflict of interests,
Organization and functions (Government agencies).
17 CFR Part 190
Bankruptcy, Brokers, Commodity futures, Reporting and recordkeeping
requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR parts 39, 140, and 190 as follows:
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
1. The authority citation for part 39 is revised to read as follows:
Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.
8325.
0
2. Revise Sec. 39.2 to read as follows:
Sec. 39.2 Definitions.
For the purposes of this part:
Activity with a more complex risk profile includes:
(1) Clearing credit default swaps, credit default futures, or
derivatives that reference either credit default swaps or credit
default futures and
(2) Any other activity designated as such by the Commission
pursuant to Sec. 39.33(a)(3).
Back test means a test that compares a derivatives clearing
organization's initial margin requirements with historical price
changes to determine the extent of actual margin coverage.
Customer means a person trading in any commodity named in the
definition of commodity in section 1a(9) of the Act or in Sec. 1.3 of
this chapter, or in any swap as defined in section 1a(47) of the Act or
in Sec. 1.3 of this chapter; Provided, however, an owner or holder of
a house account as defined in this section shall not be deemed to be a
customer within the meaning of section 4d of the Act, the regulations
that implement sections 4d and 4f of the Act and Sec. 1.35 of this
chapter, and such an owner or holder of such a house account shall
otherwise be deemed to be a customer within the meaning of the Act and
Sec. Sec. 1.37 and 1.46 of this chapter and all other sections of
these rules, regulations, and orders which do not implement sections 4d
and 4f of the Act.
Customer account or customer origin means a clearing member account
held on behalf of customers, as that term is defined in this section,
and which is subject to section 4d(a) or section 4d(f) of the Act.
Depository institution has the meaning set forth in section
19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).
House account or house origin means a clearing member account which
is not subject to section 4d(a) or 4d(f) of the Act.
Key personnel means derivatives clearing organization personnel who
play a significant role in the operations of the derivatives clearing
organization, the provision of clearing and settlement services, risk
management, or oversight of compliance with the Act and Commission
regulations and orders. Key personnel include, but are not limited to,
those persons who are or perform the functions of any of the following:
chief executive officer; president; chief compliance officer; chief
operating officer; chief risk officer; chief financial officer; chief
technology officer; and emergency contacts or persons who are
responsible for business continuity or disaster recovery planning or
program execution.
Stress test means a test that compares the impact of potential
extreme price moves, changes in option volatility, and/or changes in
other inputs that affect the value of a position, to the financial
resources of a derivatives clearing organization, clearing member, or
large trader, to determine the adequacy of the financial resources of
such entities.
Subpart C derivatives clearing organization means any derivatives
clearing organization, as defined in section 1a(15) of the Act and
Sec. 1.3(d) of this chapter, which:
(1) Is registered as a derivatives clearing organization under
section 5b of the Act;
(2) Is not a systemically important derivatives clearing
organization; and
(3) Has become subject to the provisions of subpart C of this part,
pursuant to Sec. 39.31.
Systemically important derivatives clearing organization means a
financial market utility that is a derivatives clearing organization
registered under section 5b of the Act, which is currently designated
by the Financial Stability Oversight Council to be systemically
important and for which the Commission acts as the Supervisory Agency
pursuant to 12 U.S.C. 5462(8).
U.S. branch or agency of a foreign banking organization means the
U.S. branch or agency of a foreign banking organization as defined in
section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
Trust company means a trust company that is a member of the Federal
Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C.
221), but that does not meet the definition of depository institution.
0
3. Revise subpart C to read as follows:
[[Page 72515]]
Subpart C--Provisions Applicable to Systemically Important
Derivatives Clearing Organizations and Derivatives Clearing
Organizations That Elect To Be Subject to the Provisions of This
Subpart
Sec.
39.30 Scope.
39.31 Election to become subject to the provisions of this subpart.
39.32 Governance for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations.
39.33 Financial resources for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.34 System safeguards for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.35 Default rules and procedures for uncovered credit losses or
liquidity shortfalls (recovery) for systemically important
derivatives clearing organizations and subpart C derivatives
clearing organizations.
39.36 Risk management for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.37 Additional disclosure for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.38 Efficiency for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations.
39.39 Recovery and wind-down for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
39.40 Consistency with the Principles for Financial Market
Infrastructures.
39.41 Special enforcement authority for systemically important
derivatives clearing organizations.
39.42 Advance notice of material risk-related rule changes by
systemically important derivatives clearing organizations.
Appendix A to Part 39--Form DCO Derivatives Clearing Organization
Application for Registration
Appendix B to Part 39--Subpart C Election Form
Sec. 39.30 Scope.
(a) The provisions of this subpart apply to each of the following:
a subpart C derivatives clearing organization, a systemically important
derivatives clearing organization, and any derivatives clearing
organization, as defined under section 1a(15) of the Act and Sec.
1.3(d) of this chapter, seeking to become a subpart C derivatives
clearing organization pursuant to Sec. 39.31.
(b) A systemically important derivatives clearing organization is
subject to the provisions of subparts A and B of this part in addition
to the provisions of this subpart.
(c) A subpart C derivatives clearing organization is subject to the
provisions of subparts A and B of this part in addition to the
provisions of this subpart except for Sec. Sec. 39.41 and 39.42.
Sec. 39.31 Election to become subject to the provisions of this
subpart.
(a) Election eligibility. (1) A derivatives clearing organization
that is registered with the Commission and that is not a systemically
important derivatives clearing organization may elect to become a
subpart C derivatives clearing organization subject to the provisions
of this subpart, using the procedures set forth in paragraph (b) of
this section.
(2) An applicant for registration as a derivatives clearing
organization pursuant to Sec. 39.3 may elect to become a subpart C
derivatives clearing organization subject to the provisions of this
subpart as part of its application for registration using the
procedures set forth in paragraph (c) of this section.
(b) Election and withdrawal procedures applicable to registered
derivatives clearing organizations--(1) Election. A derivatives
clearing organization that is registered with the Commission and that
is not a systemically important derivatives clearing organization may
request that the Commission accept its election to become a subpart C
derivatives clearing organization by filing with the Commission a
completed Subpart C Election Form. The Subpart C Election Form shall
include the election and all certifications, disclosures and exhibits,
as provided in appendix B to this part and any amendments or
supplements thereto filed with the Commission pursuant to paragraphs
(b)(2) and (3) of this section.
(2) Submission of supplemental information. The filing of a Subpart
C Election Form does not create a presumption that the Subpart C
Election Form is materially complete or that supplemental information
will not be required. The Commission, at any time prior to the
effective date, as provided in paragraph (b)(4) of this section, may
request that the derivatives clearing organization submit supplemental
information in order for the Commission to process the Subpart C
Election Form, and the derivatives clearing organization shall file
such supplemental information with the Commission.
(3) Amendments. A derivatives clearing organization shall promptly
amend its Subpart C Election Form if it discovers a material omission
or error in, or if there is a material change in, the information
provided to the Commission in the Subpart C Election Form or other
information provided in connection with the Subpart C Election Form.
(4) Effective date. A derivatives clearing organization's election
to become a subpart C derivatives clearing organization shall become
effective:
(i) Upon the later of the following, provided the Commission has
neither stayed nor denied such election as set forth in paragraph
(b)(5) of this section.
(A) The effective date specified by the derivatives clearing
organization in its Subpart C Election Form; or
(B) Ten business days after the derivatives clearing organization
files its Subpart C Election Form with the Commission;
(ii) Or upon the effective date set forth in written notification
from the Commission that it shall permit the election to take effect
after a stay issued pursuant to paragraph (b)(5) of this section.
(5) Stay or denial of election. Prior to the effective date set
forth in paragraph (b)(4)(i) of this section, the Commission may stay
or deny a derivatives clearing organization's election to become a
subpart C derivatives clearing organization by issuing a written
notification thereof to the derivatives clearing organization.
(6) Commission acknowledgement. The Commission may acknowledge, in
writing, that it has received a Subpart C Election Form filed by a
derivatives clearing organization and that it has permitted the
derivatives clearing organization's election to become subject to the
provisions of this subpart to take effect, and the effective date of
such election.
(7) Withdrawal of election. A derivatives clearing organization
that has filed a Subpart C Election Form may withdraw an election to
become subject to the provisions of this subpart at any time prior to
the date that the election is permitted to take effect by filing with
the Commission a notice of the withdrawal of election.
(c) Election and withdrawal procedures applicable to applicants for
registration as derivatives clearing organization--(1) Election. An
applicant for registration as a derivatives clearing organization that
requests an election to become subject to the provisions of this
subpart may make that request by attaching a completed Subpart C
Election Form to the Form DCO that it files pursuant to Sec. 39.3. The
Subpart C Election Form shall include the election and all
certifications, disclosures and exhibits, as provided in appendix B of
[[Page 72516]]
this part, and any amendments or supplements thereto filed with the
Commission pursuant to paragraphs (c)(3) or (4) of this section.
(2) Election review and effective date. The Commission shall review
the applicant's Subpart C Election Form as part of the Commission's
review of its application for registration pursuant to Sec. 39.3(a).
The Commission may permit the applicant's election to take effect at
the time it approves the applicant's application for registration by
providing written notice thereof to the applicant. The Commission shall
not approve any application for registration filed pursuant to Sec.
39.3(a) for which a Subpart C Election Form is pending, if the
Commission determines that the applicant's election to become subject
to this subpart should not become effective because the applicant has
not demonstrated its ability to comply with the applicable provisions
of this subpart.
(3) Submission of supplemental information. The filing of a Subpart
C Election Form does not create a presumption that the Subpart C
Election Form is materially complete or that supplemental information
will not be required. At any time during the Commission's review of the
Subpart C Election Form, the Commission may request that the applicant
submit supplemental information in order for the Commission to process
the Subpart C Election Form and the applicant shall file such
supplemental information with the Commission.
(4) Amendments. An applicant for registration as a derivatives
clearing organization shall promptly amend its Subpart C Election Form
if it discovers a material omission or error in, or if there is a
material change in, the information provided to the Commission in the
Subpart C Election Form or other information provided in connection
with the Subpart C Election Form.
(5) Withdrawal of election. An applicant for registration as a
derivatives clearing organization may withdraw an election to become
subject to the provisions of this subpart by filing with the Commission
a notice of the withdrawal of its Subpart C Election Form at any time
prior to the date that the Commission approves its application for
registration as a derivatives clearing organization. The applicant may
withdraw its Subpart C Election Form without withdrawing its Form DCO.
(d) Public information. The following portions of the Subpart C
Election Form will be public: The Elections and Certifications and
Disclosures in the Subpart C Election Form, the rules of the
derivatives clearing organization, the regulatory compliance chart, and
any other portion of the Subpart C Election Form not covered by a
request for confidential treatment complying with the requirements of
Sec. 145.9 of this chapter.
(e) Rescission of election. (1) Notice of intent to rescind. A
subpart C derivatives clearing organization may rescind its election to
be subject to the provisions of this subpart and terminate its status
as a subpart C derivatives clearing organization by filing with the
Commission a notice of its intent to rescind such election. The notice
of intent to rescind the election shall include:
(i) The effective date of the rescission; and
(ii) A certification signed by the relevant duly authorized
representative of the subpart C derivatives clearing organization, as
specified in paragraph three of the General Instructions to the Subpart
C Election Form, stating that the subpart C derivatives clearing
organization:
(A) Has provided the notice to its clearing members required by
paragraph (e)(3)(i)(A) of this section;
(B) Will provide the notice to its clearing members required by
paragraph (e)(3)(i)(B) of this section;
(C) Has provided the notice to the general public required by
paragraph (e)(3)(ii)(A) of this section;
(D) Will provide notice to the general public required by paragraph
(e)(3)(ii)(B) of this section; and
(E) Has removed all references to the organization as a subpart C
derivatives clearing organization and a qualifying central counterparty
on its Web site and in all other material that it provides to its
clearing members and customers, other market participants or members of
the public, as required by paragraph (e)(3)(ii)(C) of this section.
(2) Effective date. The rescission of the election to be subject to
the provisions of this subpart shall become effective on the date set
forth in the notice of intent to rescind the election filed by the
subpart C derivatives clearing organization pursuant to paragraph
(e)(1) of this section, provided that the rescission may become
effective no earlier than 180 days after the notice of intent to
rescind the election is filed with the Commission. The subpart C
derivatives clearing organization shall continue to comply with all of
the provisions of this subpart until such effective date.
(3) Additional notice requirements. (i) A subpart C derivatives
clearing organization shall provide the following notices, at the
following times, to each of its clearing members and shall have rules
in place requiring each of its clearing members to provide the
following notices to each of the clearing member's customers:
(A) No later than the filing of a notice of its intent to rescind
its election to be subject to the provisions of this subpart, written
notice that it intends to file such notice with the Commission and the
effective date thereof; and
(B) On the effective date of the rescission of its election to be
subject to the provisions of this subpart, written notice that the
rescission has become effective.
(ii) A subpart C derivatives clearing organization shall:
(A) No later than the filing of a notice of its intent to rescind
its election to be subject to the provisions of this subpart, provide
notice to the general public, displayed prominently on its Web site, of
its intent to rescind its election to be subject to the provisions of
this subpart;
(B) On and after the effective date of the rescission of its
election to be subject to the provisions of this subpart, provide
notice to the general public, displayed prominently on its Web site,
that the rescission has become effective; and
(C) Prior to the filing of a notice of its intent to rescind its
election to become subject to the provisions of this subpart, remove
all references to the derivatives clearing organization's status as a
subpart C derivatives clearing organization and a qualifying central
counterparty on its Web site and in all other materials that it
provides to its clearing members and customers, other market
participants, or the general public.
(iii) The employees and representatives of a derivatives clearing
organization that has filed a notice of its intent to rescind its
election to be subject to the provisions of this subpart shall refrain
from referring to the organization as a subpart C derivatives clearing
organization and a qualifying central counterparty on and after the
date that the notice of intent to rescind the election is filed.
(4) Effect of rescission. The rescission of a subpart C derivatives
clearing organization's election to be subject to the provisions of
this subpart shall not affect the authority of the Commission
concerning any activities or events occurring during the time that the
derivatives clearing organization maintained its status as a subpart C
derivatives clearing organization.
(f) Loss of designation as a systemically important derivatives
clearing organization. A systemically
[[Page 72517]]
important derivatives clearing organization whose designation of
systemic importance is rescinded by the Financial Stability Oversight
Council, shall immediately be deemed to be a subpart C derivatives
clearing organization and shall continue to comply with the provisions
of this subpart unless such derivatives clearing organization elects to
rescind its status as a subpart C derivatives clearing organization in
accordance with the requirements of paragraph (e) of this section.
(g) All forms and notices required by this section shall be filed
electronically with the Secretary of the Commission in the format and
manner specified by the Commission.
Sec. 39.32 Governance for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations.
(a) General rules. (1) Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
shall have governance arrangements that:
(i) Are written;
(ii) Are clear and transparent;
(iii) Place a high priority on the safety and efficiency of the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization; and
(iv) Explicitly support the stability of the broader financial
system and other relevant public interest considerations of clearing
members, customers of clearing members, and other relevant
stakeholders.
(2) The board of directors shall make certain that the systemically
important derivatives clearing organization's or subpart C derivatives
clearing organization's design, rules, overall strategy, and major
decisions appropriately reflect the legitimate interests of clearing
members, customers of clearing members, and other relevant
stakeholders.
(3) To an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure:
(i) Major decisions of the board of directors should be clearly
disclosed to clearing members, other relevant stakeholders, and to the
Commission; and
(ii) Major decisions of the board of directors having a broad
market impact should be clearly disclosed to the public;
(b) Governance arrangements. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall have governance arrangements that:
(1) Are clear and documented;
(2) To an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure, are disclosed, as
appropriate, to the Commission and to other relevant authorities, to
clearing members and to customers of clearing members, to the owners of
the systemically important derivatives clearing organization or subpart
C derivatives clearing organization, and to the public;
(3) Describe the structure pursuant to which the board of
directors, committees, and management operate;
(4) Include clear and direct lines of responsibility and
accountability;
(5) Clearly specify the roles and responsibilities of the board of
directors and its committees, including the establishment of a clear
and documented risk management framework;
(6) Clearly specify the roles and responsibilities of management;
(7) Describe procedures for identifying, addressing, and managing
conflicts of interest involving members of the board of directors;
(8) Describe procedures pursuant to which the board of directors
oversees the chief risk officer, risk management committee, and
material risk decisions;
(9) Assign responsibility and accountability for risk decisions,
including in crises and emergencies; and
(10) Assign responsibility for implementing the:
(i) Default rules and procedures required by Sec. Sec. 39.16 and
39.35;
(ii) System safeguard rules and procedures required by Sec. Sec.
39.18 and 39.34; and
(iii) Recovery and wind-down plans required by Sec. 39.39.
(c) Fitness standards for board of directors and management. Each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain policies to make
certain that:
(1) The board of directors consists of suitable individuals having
appropriate skills and incentives;
(2) The board of directors includes individuals who are not
executives, officers or employees of the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization or an affiliate thereof;
(3) The performance of the board of directors and the performance
of individual directors are reviewed on a regular basis;
(4) Managers have the appropriate experience, skills, and integrity
necessary to discharge operational and risk management
responsibilities; and
(5) Risk management and internal control personnel have sufficient
independence, authority, resources, and access to the board of
directors so that the operations of the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization are consistent with the risk management framework
established by the board of directors.
Sec. 39.33 Financial resources requirements for systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations.
(a) General rule. (1) Notwithstanding the requirements of Sec.
39.11(a)(1), each systemically important derivatives clearing
organization and subpart C derivatives clearing organization that, in
either case, is systemically important in multiple jurisdictions or is
involved in activities with a more complex risk profile shall maintain
financial resources sufficient to enable it to meet its financial
obligations to its clearing members notwithstanding a default by the
two clearing members creating the largest combined loss to the
derivatives clearing organization in extreme but plausible market
conditions.
(2) The Commission shall, if it deems appropriate, determine
whether a systemically important derivatives clearing organization or
subpart C derivatives clearing organization is systemically important
in multiple jurisdictions. In determining whether a systemically
important derivatives clearing organization or subpart C derivatives
clearing organization is systemically important in multiple
jurisdictions, the Commission shall consider whether the derivatives
clearing organization:
(i) Is a systemically important derivatives clearing organization,
as defined by Sec. 39.2; or
(ii) Has been determined to be systemically important by one or
more jurisdictions other than the United States pursuant to a
designation process that considers whether the foreseeable effects of a
failure or disruption of the derivatives clearing organization could
threaten the stability of each relevant jurisdiction's financial
system.
(3) The Commission shall, if it deems appropriate, determine
whether any of the activities of a systemically important derivatives
clearing organization or a subpart C derivatives clearing organization,
in addition to clearing credit default swaps, credit default futures,
and any derivatives that reference either credit default swaps or
credit default futures, has a more complex risk profile. In determining
whether an activity has a more complex
[[Page 72518]]
risk profile, the Commission will consider characteristics such as
discrete jump-to-default price changes or high correlations with
potential participant defaults as factors supporting (though not
necessary for) a finding of a more complex risk profile.
(4) For purposes of this section, if a clearing member controls
another clearing member or is under common control with another
clearing member, such affiliated clearing members shall be deemed to be
a single clearing member.
(b) Valuation of financial resources. Notwithstanding the
provisions of Sec. 39.11(d)(2), assessments for additional guaranty
fund contributions (i.e., guaranty fund contributions that are not pre-
funded) shall not be included in calculating the financial resources
available to meet a systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's
obligations under paragraph (a) of this section or Sec. 39.11(a)(1).
(c) Liquidity resources. (1) Minimum amount of liquidity resources.
(i) Notwithstanding the provisions of Sec. 39.11(e)(1)(ii), each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain eligible liquidity
resources that, at a minimum, will enable it to meet its intraday,
same-day, and multiday obligations to perform settlements, as defined
in Sec. 39.14(a)(1), with a high degree of confidence under a wide
range of stress scenarios that should include, but not be limited to, a
default by the clearing member creating the largest aggregate liquidity
obligation for the systemically important derivatives clearing
organization or subpart C derivatives clearing organization in extreme
but plausible market conditions.
(ii) A systemically important derivatives clearing organization and
subpart C derivatives clearing organization that is subject to Sec.
39.33(a)(1) shall consider maintaining eligible liquidity resources
that, at a minimum, will enable it to meet its intraday, same-day, and
multiday obligations to perform settlements, as defined in Sec.
39.14(a)(1), with a high degree of confidence under a wide range of
stress scenarios that should include, but not be limited to, a default
of the two clearing members creating the largest aggregate liquidity
obligation for the systemically important derivatives clearing
organization or subpart C derivatives clearing organization in extreme
but plausible market conditions.
(2) Satisfaction of settlement in all relevant currencies. Each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain liquidity resources
that are sufficient to satisfy the obligations required by paragraph
(c)(1) of this section in all relevant currencies for which the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization has obligations to perform
settlements, as defined in Sec. 39.14(a)(1), to its clearing members.
(3) Qualifying liquidity resources. (i) Only the following
liquidity resources are eligible for the purpose of meeting the
requirement of paragraph (c)(1) of this section:
(A) Cash in the currency of the requisite obligations, held either
at the central bank of issue or at a creditworthy commercial bank;
(B) Committed lines of credit;
(C) Committed foreign exchange swaps;
(D) Committed repurchase agreements; or
(E) (1) Highly marketable collateral, including high quality,
liquid, general obligations of a sovereign nation.
(2) The assets described in paragraph (c)(3)(i)(E)(1) of this
section must be readily available and convertible into cash pursuant to
prearranged and highly reliable funding arrangements, even in extreme
but plausible market conditions.
(ii) With respect to the arrangements described in paragraph
(c)(3)(i) of this section, the systemically important derivatives
clearing organization or subpart C derivatives clearing organization
must take appropriate steps to verify that such arrangements do not
include material adverse change conditions and are enforceable, and
will be highly reliable, in extreme but plausible market conditions.
(4) Additional liquidity resources. If a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization maintains financial resources in addition to those
required to satisfy paragraph (c)(1) of this section, then those
resources should be in the form of assets that are likely to be
saleable with proceeds available promptly or acceptable as collateral
for lines of credit, swaps, or repurchase agreements on an ad hoc
basis. A systemically important derivatives clearing organization or
subpart C derivatives clearing organization should consider maintaining
collateral with low credit, liquidity, and market risks that is
typically accepted by a central bank of issue for any currency in which
it may have settlement obligations, but shall not assume the
availability of emergency central bank credit as a part of its
liquidity plan.
(d) Liquidity providers. (1) For the purposes of this paragraph, a
liquidity provider means:
(i) A depository institution, a U.S. branch or agency of a foreign
banking organization, a trust company, or a syndicate of depository
institutions, U.S. branches or agencies of foreign banking
organizations, or trust companies providing a line of credit, foreign
exchange swap facility or repurchase facility to a systemically
important derivatives clearing organization or subpart C derivatives
clearing organization;
(ii) Any other counterparty relied upon by a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to meet its minimum liquidity resources requirement under
paragraph (c) of this section.
(2) In fulfilling its obligations under paragraph (c) of this
section, each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall undertake due
diligence to confirm that each of its liquidity providers, whether or
not such liquidity provider is a clearing member, has:
(i) Sufficient information to understand and manage the liquidity
provider's liquidity risks; and
(ii) The capacity to perform as required under its commitments to
provide liquidity to the systemically important derivatives clearing
organization or subpart C derivatives clearing organization.
(3) Where relevant to a liquidity provider's ability reliably to
perform its commitments with respect to a particular currency, the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization may take into account the liquidity
provider's access to the central bank of issue of that currency.
(4) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall regularly test
its procedures for accessing its liquidity resources under paragraph
(c)(3)(i) of this section, including testing its arrangements under
paragraph (c)(3)(ii) and its relevant liquidity provider(s) under
paragraph (d)(1) of this section.
(e) Documentation of financial resources and liquidity resources.
Each systemically important derivatives clearing organization and
subpart C
[[Page 72519]]
derivatives clearing organization shall document its supporting
rationale for, and have appropriate governance arrangements relating
to, the amount of total financial resources it maintains pursuant to
paragraph (a) of this section and the amount of total liquidity
resources it maintains pursuant to paragraph (c) of this section.
Sec. 39.34 System safeguards for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
(a) Notwithstanding Sec. 39.18(e)(3), the business continuity and
disaster recovery plan described in Sec. 39.18(e)(1) for each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall have the objective of enabling,
and the physical, technological, and personnel resources described in
Sec. 39.18(e)(1) shall be sufficient to enable, the systemically
important derivatives clearing organization or subpart C derivatives
clearing organization to recover its operations and resume daily
processing, clearing, and settlement no later than two hours following
the disruption, for any disruption including a wide-scale disruption.
(b) To facilitate its ability to achieve the recovery time
objective specified in paragraph (a) of this section in the event of a
wide-scale disruption, each systemically important derivatives clearing
organization and subpart C derivatives clearing organization must
maintain a degree of geographic dispersal of physical, technological
and personnel resources consistent with the following for each activity
necessary for the daily processing, clearing, and settlement of
existing and new contracts:
(1) Physical and technological resources (including a secondary
site), sufficient to enable the entity to meet the recovery time
objective after interruption of normal clearing by a wide-scale
disruption, must be located outside the relevant area of the physical
and technological resources the systemically important derivatives
clearing organization or subpart C derivatives clearing organization
normally relies upon to conduct that activity, and must not rely on the
same critical transportation, telecommunications, power, water, or
other critical infrastructure components the entity normally relies
upon for such activities;
(2) Personnel, who live and work outside that relevant area,
sufficient to enable the entity to meet the recovery time objective
after interruption of normal clearing by a wide-scale disruption
affecting the relevant area in which the personnel the entity normally
relies upon to engage in such activities are located;
(3) The provisions of Sec. 39.18(f) shall apply to these resource
requirements.
(c) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization must conduct regular,
periodic tests of its business continuity and disaster recovery plans
and resources and its capacity to achieve the required recovery time
objective in the event of a wide-scale disruption. The provisions of
Sec. 39.18(j) apply to such testing.
(d) The Commission may, upon request, grant an entity, which has
been designated as a systemically important derivatives clearing
organization or that has elected to become subject to subpart C, up to
one year to comply with any provision of this section.
Sec. 39.35 Default rules and procedures for uncovered credit losses
or liquidity shortfalls (recovery) for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
(a) Allocation of uncovered credit losses. Each systemically
important derivatives clearing organization and subpart C derivatives
clearing organization shall adopt explicit rules and procedures that
address fully any loss arising from any individual or combined default
relating to any clearing members' obligations to the systemically
important derivatives clearing organization or subpart C derivatives
clearing organization. Such rules and procedures shall address how the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization would:
(1) Allocate losses exceeding the financial resources available to
the systemically important derivatives clearing organization or subpart
C derivatives clearing organization;
(2) Repay any funds it may borrow; and
(3) Replenish any financial resources it may employ during such a
stress event, so that the systemically important derivatives clearing
organization or subpart C derivatives clearing organization can
continue to operate in a safe and sound manner.
(b) Allocation of uncovered liquidity shortfalls. (1) Each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall establish rules and/or
procedures that enable it promptly to meet all of its settlement
obligations, on a same day and, as appropriate, intraday and multiday
basis, in the context of the occurrence of either or both of the
following scenarios:
(i) An individual or combined default involving one or more
clearing members' obligations to the systemically important derivatives
clearing organization or subpart C derivatives clearing organization;
or
(ii) A liquidity shortfall exceeding the financial resources of the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization.
(2) The rules and procedures described in paragraph (b)(1) of this
section shall:
(i) Enable the systemically important derivatives clearing
organization or subpart C derivatives clearing organization promptly to
meet its payment obligations in all relevant currencies;
(ii) Be designed to enable the systemically important derivatives
clearing organization or subpart C derivatives clearing organization to
avoid unwinding, revoking, or delaying the same-day settlement of
payment obligations; and
(iii) Address the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's process
to replenish any liquidity resources it may employ during a stress
event so that it can continue to operate in a safe and sound manner.
Sec. 39.36 Risk management for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
(a) Stress tests of financial resources. In addition to conducting
stress tests pursuant to Sec. 39.13(h)(3), each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall conduct stress tests of its financial resources in
accordance with the following standards and practices:
(1) Perform, on a daily basis, stress testing of its financial
resources using predetermined parameters and assumptions;
(2) Perform comprehensive analyses of stress testing scenarios and
underlying parameters to ascertain their appropriateness for
determining the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's
required level of financial resources in current and evolving market
conditions;
(3) Perform the analyses required by paragraph (a)(2) of this
section at least
[[Page 72520]]
monthly and when products cleared or markets served display high
volatility or become less liquid, when the size or concentration of
positions held by clearing members increases significantly, or as
otherwise appropriate, evaluate the stress testing scenarios, models,
and underlying parameters more frequently than once a month;
(4) For the analyses required by paragraphs (a)(1) and (2) of this
section, include a range of relevant stress scenarios, in terms of both
defaulting clearing members' positions and possible price changes in
liquidation periods. The scenarios considered shall include, but are
not limited to, the following:
(i) Relevant peak historic price volatilities;
(ii) Shifts in other market factors including, as appropriate,
price determinants and yield curves;
(iii) Multiple defaults over various time horizons;
(iv) Simultaneous pressures in funding and asset markets; and
(v) A range of forward-looking stress scenarios in a variety of
extreme but plausible market conditions.
(5) Establish procedures for:
(i) Reporting stress test results to its risk management committee
or board of directors, as applicable; and
(ii) Using the results to assess the adequacy of, and to adjust,
its total amount of financial resources; and
(6) Use the results of stress tests to support compliance with the
minimum financial resources requirement set forth in Sec. 39.33(a).
(b) Sensitivity analysis of margin model. (1) Each systemically
important derivatives clearing organization and subpart C derivatives
clearing organization shall, at least monthly and more frequently as
appropriate, conduct a sensitivity analysis of its margin models to
analyze and monitor model performance and overall margin coverage.
Sensitivity analysis shall be conducted on both actual and hypothetical
positions.
(2) For the purposes of this paragraph (b), a sensitivity analysis
of a margin model includes:
(i) Reviewing a wide range of parameter settings and assumptions
that reflect possible market conditions in order to understand how the
level of margin coverage might be affected by highly stressed market
conditions. The range of parameters and assumptions should capture a
variety of historical and hypothetical conditions, including the most
volatile periods that have been experienced by the markets served by
the systemically important derivatives clearing organization or subpart
C derivatives clearing organization and extreme changes in the
correlations between prices. The parameters and assumptions should be
appropriate in light of the specific characteristics, considered on a
current basis, of particular products and portfolios cleared.
(ii) Testing of the ability of the models or model components to
produce accurate results using actual or hypothetical datasets and
assessing the impact of different model parameter settings.
(iii) Evaluating potential losses in clearing members' proprietary
positions and, where appropriate, customer positions.
(3) A systemically important derivatives clearing organization or
subpart C derivatives clearing organization involved in activities with
a more complex risk profile shall take into consideration parameter
settings that reflect the potential impact of the simultaneous default
of clearing members and, where applicable, the underlying credit
instruments.
(c) Stress tests of liquidity resources. Each systemically
important derivatives clearing organization and subpart C derivatives
clearing organization shall conduct stress tests of its liquidity
resources in accordance with the following standards and practices:
(1) Perform, on a daily basis, stress testing of its liquidity
resources using predetermined parameters and assumptions;
(2) Perform comprehensive analyses of stress testing scenarios and
underlying parameters to ascertain their appropriateness for
determining the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's
required level of liquidity resources in current and evolving market
conditions;
(3) Perform the analyses required by paragraph (c)(2) of this
section at least monthly and when products cleared or markets served
display high volatility or become less liquid, when the size or
concentration of positions held by clearing members increases
significantly, or as otherwise appropriate, evaluate its stress testing
scenarios, models, and underlying parameters more frequently than once
a month;
(4) For the analyses required by paragraphs (c)(1) and (2) of this
section, include a range of relevant stress scenarios, in terms of both
defaulting clearing members' positions and possible price changes in
liquidation periods. The scenarios considered shall include, but are
not limited to, the following:
(i) Relevant peak historic price volatilities;
(ii) Shifts in other market factors including, as appropriate,
price determinants and yield curves;
(iii) Multiple defaults over various time horizons;
(iv) Simultaneous pressures in funding and asset markets; and
(v) A range of forward-looking stress scenarios in a variety of
extreme but plausible market conditions.
(5) For the scenarios enumerated in paragraph (c)(4) of this
section, consider the following:
(i) All entities that might pose material liquidity risks to the
systemically important derivatives clearing organization or subpart C
derivatives clearing organization, including settlement banks,
permitted depositories, liquidity providers, and other entities,
(ii) Multiday scenarios as appropriate,
(iii) Inter-linkages between its clearing members and the multiple
roles that they may play in the systemically important derivatives
clearing organization's or subpart C derivatives clearing
organization's risk management; and
(iv) The probability of multiple failures and contagion effect
among clearing members.
(6) Establish procedures for:
(i) Reporting stress test results to its risk management committee
or board of directors, as applicable; and
(ii) Using the results to assess the adequacy of, and to adjust its
total amount of liquidity resources.
(7) Use the results of stress tests to support compliance with the
liquidity resources requirement set forth in Sec. 39.33(c).
(d) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall regularly conduct
an assessment of the theoretical and empirical properties of its margin
model for all products it clears.
(e) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall perform, on an
annual basis, a full validation of its financial risk management model
and its liquidity risk management model.
(f) Custody and investment risk. Custody and investment
arrangements of a systemically important derivatives clearing
organization's and subpart C derivatives clearing organization's own
funds and assets shall be subject to the same requirements as those
specified in Sec. 39.15 for the funds and assets of
[[Page 72521]]
clearing members, and shall apply to the derivatives clearing
organization's own funds and assets to the same extent as if such funds
and assets belonged to clearing members.
(g) Settlement banks. Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
shall:
(1) Monitor, manage, and limit its credit and liquidity risks
arising from its settlement banks;
(2) Establish, and monitor adherence to, strict criteria for its
settlement banks that take account of, among other things, their
regulation and supervision, creditworthiness, capitalization, access to
liquidity, and operational reliability; and
(3) Monitor and manage the concentration of credit and liquidity
exposures to its settlement banks.
Sec. 39.37 Additional disclosure for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
In addition to the requirements of Sec. 39.21, each systemically
important derivatives clearing organization and subpart C derivatives
clearing organization shall:
(a) Complete and publicly disclose its responses to the Disclosure
Framework for Financial Market Infrastructures published by the
Committee on Payment and Settlement Systems and the Board of the
International Organization of Securities Commissions;
(b) Review and update its responses disclosed as required by
paragraph (a) of this section at least every two years and following
material changes to the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's system
or the environment in which it operates. A material change to the
systemically important derivatives clearing organization's or subpart C
derivatives clearing organization's system or the environment in which
it operates is a change that would significantly change the accuracy
and usefulness of the existing responses;
(c) Disclose, publicly and to the Commission, relevant basic data
on transaction volume and values; and
(d) Disclose, publicly and to the Commission, rules, policies, and
procedures concerning segregation and portability of customers'
positions and funds, including whether each of:
(1) Futures customer funds, as defined in Sec. 1.3(jjjj) of this
chapter;
(2) Cleared Swaps Customer Collateral, as defined in Sec. 22.1 of
this chapter; or
(3) Foreign futures or foreign options secured amount, as defined
in Sec. 1.3(rr) of this chapter is:
(i) Protected on an individual or omnibus basis or
(ii) Subject to any constraints, including any legal or operational
constraints that may impair the ability of the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to segregate or transfer the positions and related
collateral of a clearing member's customers.
Sec. 39.38 Efficiency for systemically important derivatives clearing
organizations and subpart C derivatives clearing organizations.
(a) General rule. In order to meet the needs of clearing members
and markets, each systemically important derivatives clearing
organization and subpart C derivatives clearing organization should
efficiently and effectively design its:
(1) Clearing and settlement arrangements;
(2) Operating structure and procedures;
(3) Scope of products cleared; and
(4) Use of technology.
(b) Review of efficiency. Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
should establish a mechanism to review, on a regular basis, its
compliance with paragraph (a) of this section.
(c) Clear goals and objectives. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization should have clearly defined goals and objectives that are
measurable and achievable, including in the areas of minimum service
levels, risk management expectations, and business priorities.
(d) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall facilitate
efficient payment, clearing and settlement by accommodating
internationally accepted communication procedures and standards.
Sec. 39.39 Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
(a) Definitions. For purposes of this section:
(1) General business risk means any potential impairment of a
systemically important derivatives clearing organization's or subpart C
derivatives clearing organization's financial position, as a business
concern, as a consequence of a decline in its revenues or an increase
in its expenses, such that expenses exceed revenues and result in a
loss that the derivatives clearing organization must charge against
capital.
(2) Wind-down means the actions of a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to effect the permanent cessation or sale or transfer or
one or more services.
(3) Recovery means the actions of a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization, consistent with its rules, procedures, and other ex-ante
contractual arrangements, to address any uncovered credit loss,
liquidity shortfall, capital inadequacy, or business, operational or
other structural weakness, including the replenishment of any depleted
pre-funded financial resources and liquidity arrangements, as necessary
to maintain the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's
viability as a going concern.
(4) Operational risk means the risk that deficiencies in
information systems or internal processes, human errors, management
failures or disruptions from external events will result in the
reduction, deterioration, or breakdown of services provided by a
systemically important derivatives clearing organization or subpart C
derivatives clearing organization.
(5) Unencumbered liquid financial assets include cash and highly
liquid securities.
(b) Recovery and wind-down plan. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall maintain viable plans for:
(1) Recovery or orderly wind-down, necessitated by uncovered credit
losses or liquidity shortfalls; and, separately,
(2) Recovery or orderly wind-down necessitated by general business
risk, operational risk, or any other risk that threatens the
derivatives clearing organization's viability as a going concern.
(c)(1) In developing the plans specified in paragraph (b) of this
section, the systemically important derivatives clearing organization
or subpart C derivatives clearing organization shall identify scenarios
that may potentially prevent it from being able to meet its
obligations, provide its critical operations and services as a going
concern and assess the effectiveness of a full range of options for
recovery or orderly wind-down. The plans shall include procedures for
informing the
[[Page 72522]]
Commission, as soon as practicable, when the recovery plan is initiated
or wind-down is pending.
(2) A systemically important derivatives clearing organization or
subpart C derivatives clearing organization shall have procedures for
providing the Commission and the Federal Deposit Insurance Corporation
with information needed for purposes of resolution planning.
(d) Financial resources to support the recovery and wind-down plan.
(1) In evaluating the resources available to cover an uncovered
credit loss or liquidity shortfall as part of its recovery plans
pursuant to paragraph (b)(1) of this section, a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization may consider, among other things, assessments of
additional resources provided for under its rules that it reasonably
expects to collect from non-defaulting clearing members.
(2) Each systemically important derivatives clearing organization
and subpart C derivatives clearing organization shall maintain
sufficient unencumbered liquid financial assets, funded by the equity
of its owners, to implement its recovery or wind-down plans pursuant to
paragraph (b)(2) of this section. In general, the financial resources
required by Sec. 39.11(a)(2) may be sufficient, but the systemically
important derivatives clearing organization or subpart C derivatives
clearing organization shall analyze its particular circumstances and
risks and maintain any additional resources that may be necessary to
implement the plans. In allocating sufficient financial resources to
implement the plans, the systemically important derivatives clearing
organization or subpart C derivatives clearing organization shall
comply with Sec. 39.11(e)(2). The plan shall include evidence and
analysis to support the conclusion that the amount considered necessary
is, in fact, sufficient to implement the plans.
(3) Resources counted in meeting the requirements of Sec. Sec.
39.11(a)(1) and 39.33 may not be allocated, in whole or in part, to the
recovery plans required by paragraph (b)(2) of this section. Other
resources may be allocated, in whole or in part, to the recovery plans
required by either paragraphs (b)(1) or (2) of this section, but not
both paragraphs, and only to the extent the use of such resources is
not otherwise limited by the Act, Commission regulations, the
systemically important derivatives clearing organization's or subpart C
derivatives clearing organization's rules, or any contractual
arrangements to which the systemically important derivatives clearing
organization or subpart C derivatives clearing organization is a party.
(e) Plan for raising additional financial resources. All
systemically important derivatives clearing organizations and subpart C
derivatives clearing organizations shall maintain viable plans for
raising additional financial resources, including, where appropriate,
capital, in a scenario in which the systemically important derivatives
clearing organization or subpart C derivatives clearing organization is
unable, or virtually unable, to comply with any financial resources
requirements set forth in this part. This plan shall be approved by the
board of directors and be updated regularly.
(f) The Commission may, upon request, grant an entity, which has
been designated as a systemically important derivatives clearing
organization or that has elected to become subject to subpart C, up to
one year to comply with any provision of this section or of Sec.
39.35.
Sec. 39.40 Consistency with the Principles for Financial Market
Infrastructures.
This subpart C is intended to establish standards which, together
with subparts A and B of this part, are consistent with section 5b(c)
of the Act and the Principles for Financial Market Infrastructures
published by the Committee on Payment and Settlement Systems and the
Board of the International Organization of Securities Commissions and
should be interpreted in that context.
Sec. 39.41 Special enforcement authority for systemically important
derivatives clearing organizations.
For purposes of enforcing the provisions of Title VIII of the Dodd-
Frank Act, a systemically important derivatives clearing organization
shall be subject to, and the Commission has authority under the
provisions of subsections (b) through (n) of section 8 of the Federal
Deposit Insurance Act (12 U.S.C. 1818) in the same manner and to the
same extent as if the systemically important derivatives clearing
organization were an insured depository institution and the Commission
were the appropriate Federal banking agency for such insured depository
institution.
Sec. 39.42 Advance notice of material risk-related rule changes by
systemically important derivatives clearing organizations.
A systemically important derivatives clearing organization shall
provide notice to the Commission in advance of any proposed change to
its rules, procedures, or operations that could materially affect the
nature or level of risks presented by the systemically important
derivatives clearing organization, in accordance with the requirements
of Sec. 40.10 of this chapter.
Sec. Sec. 39.28 and 39.29 [Added and Reserved]
0
4. In subpart B, add reserved Sec. Sec. 39.28 and 39.29.
Appendix to Part 39 [Redesignated as Appendix A to Part 39]
0
5. Redesignate the Appendix to Part 39--Form DCO Derivatives Clearing
Organization Application for Registrations as Appendix A to Part 39--
Form DCO Derivatives Clearing Organization Application for
Registrations.
0
6. Add appendix B to part 39 to read as follows:
Appendix B to Part 39--Subpart C Election Form
COMMODITY FUTURES TRADING COMMISSION
SUBPART C ELECTION FORM
GENERAL INSTRUCTIONS
GENERAL INSTRUCTIONS: Intentional misstatements or omissions of fact
may constitute federal criminal violations (7 U.S.C. 13 and 18
U.S.C. 1001).
DEFINITIONS
Unless the context requires otherwise, all terms used in this
Subpart C Election Form have the same meaning as in the Commodity
Exchange Act (``Act''), and in the General Rules and Regulations of
the Commodity Futures Trading Commission (``Commission'')
thereunder. All references to Commission regulations are found at 17
CFR Ch. 1.
For purposes of this Subpart C Election Form, the term
``Applicant'' shall mean a derivatives clearing organization that is
filing this Subpart C Election Form with a Form DCO as part of an
application for registration as a derivatives clearing organization
pursuant to Section 5b of the Act and 17 CFR 39.3(a).
GENERAL INSTRUCTIONS
1. Any derivatives clearing organization requesting an election
to become subject to subpart C of part 39 of the Commission's
regulations must file this Subpart C Election Form. The Subpart C
Election Form includes the election to be subject to the provisions
of subpart C of part 39 of the Commission's regulations, certain
required certifications, disclosures, and exhibits, and any
supplements or amendments thereto filed pursuant to 17 CFR 39.31(b)
or (c) (collectively, the ``Subpart C Election Form'').
2. Any derivatives clearing organization wishing to request an
extension of up to one year to comply with any of the provisions of
17 CFR 39.34, 17 CFR 39.35 or 17 CFR 39.39, pursuant to 17 CFR
39.34(d) or 17 CFR 39.39(f) must do so prior to filing this
[[Page 72523]]
Subpart C Election Form. Such requests shall become part of this
Subpart C Election Form.
3. Individuals' names, except the executing signature, shall be
given in full (Last Name, First Name, Middle Name).
4. The signatures required in this Subpart C Election Form shall
be the manual signatures of: a duly authorized representative of the
derivatives clearing organization as follows: If the Subpart C
Election Form is filed by a corporation, it must be signed in the
name of the corporation by a principal officer duly authorized; if
filed by a limited liability company, it must be signed in the name
of the limited liability company by a manager or member duly
authorized to sign on the limited liability company's behalf; if
filed by a partnership, it must be signed in the name of the
partnership by a general partner duly authorized; if filed by an
unincorporated organization or association which is not a
partnership, it must be signed in the name of such organization or
association by the managing agent, i.e., a duly authorized person
who directs or manages or who participates in the directing or
managing of its affairs.
5. All applicable items must be answered in full.
6. Under Section 5b of the Act and the Commission's regulations
thereunder, the Commission is authorized to solicit the information
required to be supplied by this Subpart C Election Form from any
Applicant seeking registration as a derivatives clearing
organization and from any registered derivatives clearing
organization.
7. Disclosure of the information specified in this Subpart C
Election Form is mandatory prior to the processing of the election
to become a derivatives clearing organization subject to the
provisions of subpart C of part 39 of the Commission's regulations.
The Commission may determine that additional information is required
in order to process such election.
8. A Subpart C Election Form that is not prepared and executed
in compliance with applicable requirements and instructions may be
returned as not acceptable for filing. Acceptance of this Subpart C
Election Form, however, shall not constitute a finding that the
Subpart C Election Form is acceptable as filed or that the
information is true, current or complete.
9. Except as provided in 17 CFR 39.31(d), in cases where a
derivatives clearing organization submits a request for confidential
treatment with the Secretary of the Commission pursuant to the
Freedom of Information Act and 17 CFR 145.9, information supplied in
this Subpart C Election Form will be included routinely in the
public files of the Commission and will be made available for
inspection by any interested person.
APPLICATION AMENDMENTS
17 CFR 39.31(b)(3) and (c)(4) require a derivatives clearing
organization that has submitted a Subpart C Election Form to
promptly amend its Subpart C Election Form if it discovers a
material omission or error in, or if there is a material change in,
the information provided to the Commission in the Subpart C Election
Form or other information provided in connection with the Subpart C
Election Form. When amending a Subpart C Election Form, a
derivatives clearing organization must re-file the Election and
Certifications page, amended if necessary, and including all
required executing signatures, and attach thereto revised exhibits
or other materials marked to show changes, as applicable.
WHERE TO FILE
This Subpart C Election Form must be filed electronically with
the Secretary of the Commission in the format and manner specified
by the Commission.
COMMODITY FUTURES TRADING COMMISSION
SUBPART C ELECTION FORM
ELECTION AND CERTIFICATIONS
-----------------------------------------------------------------------
Exact Name of the Derivatives Clearing Organization (as set forth in
its charter, if an Applicant, or as set forth in its most recent order
of registration, if registered with the Commission)
[square] Check here and complete sections 1 and 3 below, if the
organization is an Applicant.
[square] Check here and complete sections 2 and 3 below, if the
organization currently is registered with the Commission as a
derivatives clearing organization.
1. The derivatives clearing organization named above hereby elects
to become subject to the provisions of subpart C of part 39 of the
Commission's regulations in the event that the Commission approves its
application for registration as a derivatives clearing organization.
The derivatives clearing organization and the undersigned each
certify that, in the event that the Commission approves the derivatives
clearing organization's application for registration and permits its
election to become subject to subpart C of part 39 of the Commission's
regulations:
a. The derivatives clearing organization will be in compliance with
such regulations as of the date set forth in the notice thereof
provided by the Commission pursuant to 17 CFR 39.31(c)(2), except to
the limited extent that the Commission has granted the derivatives
clearing organization an extension of time to comply with: (1)
specified provisions of 17 CFR 39.34, pursuant to 17 CFR 39.34(d) and/
or (2) specified provisions of 17 CFR 39.35 and/or 17 CFR 39.39,
pursuant to 17 CFR 39.39(f);
b. The derivatives clearing organization will be in compliance with
all provisions of 17 CFR 39.34, 39.35 and/or 39.39 for which the
Commission, pursuant to 17 CFR 39.34(d) and/or 17 CFR 39.39(f), has
granted an extension of time to comply in accordance with the terms of
such extensions; and
c. The derivatives clearing organization will remain in compliance
with the provisions contained in subpart C of part 39 of the
Commission's regulations until this election is rescinded pursuant to
17 CFR 39.31(e).
-----------------------------------------------------------------------
Name of Derivatives Clearing Organization
-----------------------------------------------------------------------
Manual Signature of Duly Authorized Person
-----------------------------------------------------------------------
Print Name and Title of Signatory
2. The derivatives clearing organization named above hereby elects
to become subject to the provisions of subpart C of part 39 of the
Commission's regulations as of:
-------------------- (``Effective Date'') [insert date, which must
be at least 10 business days after the date this Subpart C Election
Form is filed with the Commission].
The derivatives clearing organization and the undersigned each
certify that:
a. As of the Effective Date set forth above, the derivatives
clearing organization shall be in compliance with subpart C of part 39
of the Commission's regulations, except to the limited extent that the
Commission has granted the derivatives clearing organization an
extension of time to comply with: (1) specified provisions of 17 CFR
39.34, pursuant to 17 CFR 39.34(d) and/or (2) specified provisions of
17 CFR 39.35 and/or 17 CFR 39.39, pursuant to 17 CFR 39.39(f);
b. The derivatives clearing organization will be in compliance with
all provisions of 17 CFR 39.34, 39.35 and/or 39.39 for which the
Commission, pursuant to 17 CFR 39.34(d) and/or 17 CFR 39.39(f), has
granted an extension of time to comply in accordance with the terms of
such extensions; and
c. The derivatives clearing organization will remain in compliance
with provisions contained in subpart C of part 39 of the Commission's
regulations until this election is rescinded pursuant to 17 CFR
39.31(e).
-----------------------------------------------------------------------
Name of Derivatives Clearing Organization
-----------------------------------------------------------------------
Manual Signature of Duly Authorized Person
-----------------------------------------------------------------------
Print Name and Title of Signatory
3. The derivatives clearing organization named above has duly
caused this Subpart C Election Form (which includes, as an integral
part thereof, the Election and Certifications and all Disclosures and
Exhibits) to be signed on its behalf by its duly authorized
representative as of the ------ day of ----------, 20----. The
[[Page 72524]]
derivatives clearing organization and the undersigned each represent
hereby that, to the best of their knowledge, all information contained
in this Subpart C Election Form is true, current and complete in all
material respects. It is understood that all required items including,
without limitation, the Election and Certifications and Disclosures and
Exhibits, are considered integral parts of this Subpart C Election
Form.
-----------------------------------------------------------------------
Name of Derivatives Clearing Organization
-----------------------------------------------------------------------
Manual Signature of Duly Authorized Person
-----------------------------------------------------------------------
Print Name and Title of Signatory
COMMODITY FUTURES TRADING COMMISSION
PART 39, SUBPART C ELECTION FORM
DISCLOSURES AND EXHIBITS
Each derivatives clearing organization that requests an election
to become subject to the provisions set forth in subpart C of part
39 of the Commission's regulations shall provide the Disclosures and
Exhibits set forth below:
DISCLOSURES:
The derivatives clearing organization shall:
1. Publish on its Web site in a readily identifiable location
the derivatives clearing organization's responses to the Disclosure
Framework for Financial Market Infrastructures (``Disclosure
Framework''), published by the Committee on Payment and Settlement
Systems (``CPSS'') and the Board of International Organization of
Securities Commissions (``IOSCO'') that are required to be completed
pursuant to 17 CFR 39.37. The derivatives clearing organization's
responses must be completed in accordance with section 2.0 and Annex
A of the Disclosure Framework and must fully explain how the
derivatives clearing organization observes the Principles for
Financial Market Infrastructures (``PFMIs'') published by CPSS and
IOSCO.
Provide the URL to the specific page on the derivatives clearing
organization's Web site where its responses to the Disclosure
Framework may be found:
--------------------
2. In the event that CPSS and IOSCO publish final criteria for
the disclosure by a Financial Market Infrastructure (``FMI'') of
quantitative information to enable stakeholders to evaluate FMIs and
to make cross comparisons referenced in section 2.5 of the
Disclosure Framework (``Quantitative Information Disclosure''),
publish such Quantitative Information Disclosure in a readily
identifiable location on the derivatives clearing organization's Web
site.
If applicable, provide the URL to the specific page on the
derivatives clearing organization's Web site where its Quantitative
Information Disclosure may be found:
EXHIBITS:
EXHIBIT INSTRUCTIONS:
1. The derivatives clearing organization must include a Table of
Contents listing each Exhibit required by this Subpart C Election
Form.
2. If the derivatives clearing organization is an Applicant, in
its Form DCO, the derivatives clearing organization may summarize
such information and provide a cross-reference to the Exhibit in
this Subpart C Election Form that contains the required information.
The derivatives clearing organization shall provide the
following Exhibits to this Subpart C Election Form:
EXHIBIT A--COMPLIANCE WITH SUBPART C
Attach, as Exhibit A, a regulatory compliance chart that
separately sets forth for Sec. Sec. 39.32-39.39 of the Commission's
regulations, citations to the relevant rules, policies, and
procedures of the derivatives clearing organization that address
each such regulation and a summary of the manner in which the
derivatives clearing organization will comply with each regulation.
All citations and compliance summaries shall be separated by
individual regulation and shall be clearly labeled with the
corresponding regulation.
EXHBIT B--GOVERNANCE
Attach, as Exhibit B, documents that demonstrate compliance with
the governance requirements set forth in Sec. 39.32 of the
Commission's regulations.
EXHIBIT C--FINANCIAL RESOURCES
Attach, as Exhibit C, documents that demonstrate compliance with
the financial resource requirements set forth in Sec. 39.33 of the
Commission's regulations.
EXHIBIT D--SYSTEM SAFEGUARDS
Attach, as Exhibit D, documents that demonstrate compliance with
the system safeguard requirements set forth in Sec. 39.34 of the
Commission's regulations.
EXHIBIT E--DEFAULT RULES AND PROCEDURES FOR UNCOVERED LOSSES OR
SHORTFALLS
Attach, as Exhibit E, documents that demonstrate compliance with
the requirements for default rules and procedures for uncovered
losses or shortfalls set forth in Sec. 39.35 of the Commission's
regulations.
EXHIBIT F--RISK MANAGEMENT
Attach, as Exhibit F, documents that demonstrate compliance with
the risk management requirements set forth in Sec. 39.36 of the
Commission's regulations.
EXHIBIT G--RECOVERY AND WIND-DOWN
Attach, as Exhibit G, documents that demonstrate compliance with
the recovery and wind-down requirements set forth in Sec. 39.39 of
the Commission's regulations.
PART 140--ORGANIZATION, FUNCTIONS AND PROCEDURES OF THE COMMISSION
0
7. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and
16(b).
0
8. Amend Sec. 140.94 to add new paragraphs (c)(12) and (c)(13) to read
as follows:
Sec. 140.94 Delegation of authority to the Director of the Division
of Swap Dealer and Intermediary Oversight and the Director of the
Division of Clearing and Risk.
* * * * *
(c) * * *
(12) All functions reserved to the Commission in Sec. 39.31 of
this chapter; and
(13) The authority to approve the requests described in Sec. Sec.
39.34(d) and 39.39(f) of this chapter.
* * * * *
PART 190--BANKRUPTCY
0
9. The authority citation for part 190 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise
noted.
0
10. In Sec. 190.09, revise paragraph (b) to read as follows:
Sec. 190.09 Member property.
* * * * *
(b) Scope of member property. Member property shall include all
money, securities and property received, acquired, or held by a
clearing organization to margin, guarantee or secure, on behalf of a
clearing member, the proprietary account, as defined in Sec. 1.3 of
this chapter, any account not belonging to a foreign futures or foreign
options customer pursuant to the proviso in Sec. 30.1(c) of this
chapter, and any Cleared Swaps Proprietary Account, as defined in Sec.
22.1 of this chapter: Provided, however, that any guaranty deposit or
similar payment or deposit made by such member and any capital stock,
or membership of such member in the clearing organization shall also be
included in member property after payment in full, in each case in
accordance with the by-laws or rules of the clearing organization, of
that portion of:
(1) The net equity claim of the member based on its customer
account; and
(2) Any obligations due to the clearing organization which may be
paid therefrom, including any obligations due from the clearing
organization to the customers of other members.
[[Page 72525]]
Issued in Washington, DC, on November 15, 2013, by the
Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Derivatives Clearing Organizations and International
Standards--Commission Voting Summary and Statement of Chairman
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton,
O'Malia, and Wetjen voted in the affirmative; no Commissioner voted
in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rule to complete the process of bringing
clearinghouse risk management rules in line with international
standards.
In the fall of 2011, the Commission adopted a comprehensive set
of rules for the risk management of clearinghouses. These final
rules were consistent with international standards, as evidenced by
the Principles for Financial Market Infrastructures (PFMIs)
consultative document that had been published by the Committee on
Payment and Settlement Systems and the International Organization of
Securities Commissions (CPSS-IOSCO).
In April of 2012, CPSS-IOSCO issued final principles. Based upon
these final principles, it was appropriate to augment our rules in
certain areas to meet those standards, particularly relating to
systemically important clearinghouses.
These final rules will implement the remaining items from the
PFMIs in our clearinghouse rules. They will enable clearinghouses
designated by the Financial Stability Oversight Council as
systemically important (SIDCOs) to be qualifying central
counterparties for the purposes of international bank capital
standards. This permits banks and bank affiliates that are members
(or customers of members) of the SIDCOs to benefit from favorable
capital treatment for their exposures to these SIDCOs. The final
rules also implement an opt-in mechanism to permit other
clearinghouses to elect to be held to these additional standards,
and thus benefit from the same capital treatment.
[FR Doc. 2013-27849 Filed 11-29-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 2, 2013