3698 Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 

1Commission regulations referred to herein are 

found at 17 CFR Ch. 1 (2010). They are accessible 

on the Commission’s Web site at http:// 

www.cftc.gov. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 39 

RIN 3038–AC98 

Risk Management Requirements for 

Derivatives Clearing Organizations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission) is 

proposing regulations to implement 

Title VII and Title VIII of the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). 

Proposed regulations would establish 

the regulatory standards for compliance 

with derivatives clearing organization 

(DCO) Core Principles C (Participant 

and Product Eligibility), D (Risk 

Management), E (Settlement 

Procedures), F (Treatment of Funds), G 

(Default Rules and Procedures), and I 

(System Safeguards). For DCOs that are 

designated by the Financial Stability 

Oversight Council as systemically 

important DCOs (SIDCOs), the 

Commission is proposing heightened 

standards in the area of system 

safeguards supporting business 

continuity and disaster recovery and a 

provision that would implement the 

Commission’s special enforcement 

authority over SIDCOs. The Commission 

also is proposing certain additional 

amendments including replacement of 

the current part 39 appendix A, 

Application Guidance and Compliance 

With Core Principles, with an 

application form for entities seeking to 

register as DCOs, technical amendments 

to reorganize part 39 of the 

Commission’s regulations, and 

amendments to supplement reporting 

and public information requirements 

proposed in a previous rulemaking. 

DATES: Submit comments on or before 

March 21, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number, by any of the 

following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.Regulations.gov. Follow the 

instructions for submitting comments. 

Please submit comments by only one 

method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act 

(FOIA), a petition for confidential 

treatment of the exempt information 

may be submitted according to the 

procedures established in § 145.9 of the 

Commission’s regulations.1 The 

Commission reserves the right, but shall 

have no obligation, to review, prescreen, filter, redact, refuse, or remove 

any or all of your submission from 

http://www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under FOIA. 

FOR FURTHER INFORMATION CONTACT: John 

C. Lawton, Deputy Director, 202–418– 

5480, jlawton@cftc.gov; Phyllis P. Dietz, 

Associate Director, 202–418–5449, 

pdietz@cftc.gov, Robert B. Wasserman, 

Associate Director, 202–418–5092, 

rwasserman@cftc.gov (System 

Safeguards); and Jonathan Lave, Special 

Counsel, 202–418–5983, jlave@cftc.gov, 

Division of Clearing and Intermediary 

Oversight, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581; and Julie A. Mohr, Associate 

Director, 312–596–0568, 

jmohr@cftc.gov; and Anne C. Polaski, 

Special Counsel, 312–596–0575, 

apolaski@cftc.gov, Division of Clearing 

and Intermediary Oversight, Commodity 

Futures Trading Commission, 525 West 

Monroe Street, Chicago, Illinois 60661. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Title VII of the Dodd-Frank Act 

B. Title VIII of the Dodd-Frank Act 

C. Dodd-Frank Act rulemaking initiative 

II. Discussion 

A. Registration procedures 

B. Implementation of DCO core principles 

1. Participant and product eligibility 

(a) Participant eligibility 

(i) Fair and open access 

(ii) Financial resources 

(iii) Operational requirements 

(iv) Monitoring, reporting, and 

enforcement 

(b) Product eligibility 

2. Risk management 

(a) General 

(b) Risk management framework 

(c) Chief risk officer 

(d) Measurement of credit exposure 

(e) Limitation of exposure to potential 

losses from defaults 

(f) Margin requirements 

(i) General 

(ii) Methodology and coverage 

(iii) Independent validation 

(iv) Spread margins 

(v) Price data 

(vi) Daily review and back tests 

(vii) Customer margin 

(1) Gross margin for customer accounts 

(2) Customer initial margin requirements 

(3) Withdrawal of customer initial margin 

(viii) Time deadlines 

(g) Other risk control mechanisms 

(i) Risk limits 

(ii) Large trader reports 

(iii) Stress tests 

(iv) Portfolio compression 

(v) Clearing members’ risk management 

policies and procedures 

(vi) Additional authority 

3. Settlement procedures 

(a) Daily settlements 

(b) Settlement banks 

(c) Settlement finality 

(d) Recordkeeping 

(e) Netting arrangements 

(f) Physical delivery 

4. Treatment of funds 

(a) Required standards and procedures 

(b) Segregation of funds and assets 

(c) Holding of funds and assets 

(i) Types of assets 

(ii) Valuation 

(iii) Haircuts 

(iv) Concentration limits 

(v) Pledged assets 

(d) Permissible investments 

5. Default rules and procedures 

(a) General 

(b) Default management plan 

(c) Default procedures 

(d) Insolvency of a clearing member 

6. System safeguards 

(a) General 

(i) Definitions 

(ii) Program of risk analysis 

(iii) Elements of program 

(iv) Standards for program 

(v) Business continuity and disaster 

recovery 

(vi) Location of resources; outsourcing 

(vii) Notification of Commission staff; 

recordkeeping 

(viii) Testing 

(ix) Coordination of business continuity 

and disaster recovery plan 

(b) SIDCOs 

(i) Determining which DCOs will be subject 

to enhanced BC–DR obligations 


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Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 3699 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov/ 

LawRegulation/OTCDERIVATIVES/index.htm. 

3Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

4 7 U.S.C. 1 et seq. 

5See Commodity Futures Modernization Act of 

2000, Pub. L. 106–554, 114 Stat. 2763 (2000). 

6See 17 CFR part 39, app. A. 

7Section 8a(5) of the CEA authorizes the 

Commission to promulgate such regulations ‘‘as, in 

the judgment of the Commission, are reasonably 

necessary to effectuate any of the provisions or to 

accomplish any of the purposes of [the CEA].’’ 7 

U.S.C. 12a(5). 

8See Advance Notice of Proposed Rulemaking 

Regarding Authority to Designate Financial Market 

Utilities as Systemically Important, available at 

http://www.treasury.gov/initiatives/Pages/FSOCindex.aspx. 

9See e.g., 75 FR 78185 (Dec. 15, 2010) (Core 

Principles J, Reporting; K, Recordkeeping; L, Public 

Information; and M, Information Sharing); 75 FR 

77576 (Dec. 13, 2010) (Core Principles A, 

Compliance; H, Rule Enforcement; N, Antitrust 

Considerations; and R, Legal Risk); 75 FR 63732 

(Oct. 18, 2010) (Core Principle P, Conflicts of 

Interest); and 75 FR 63113 (Oct. 14, 2010) (Core 

Principle B, Financial Resources). 

10See 75 FR at 77586. Although the CEA does not 

require the Commission to review DCO applications 

within a prescribed time period or subject to any 

prescribed procedures, the Commission adopted a 

90-day expedited review period and, in the 

alternative, the 180-day time period and procedures 

specified in section 6(a) of the CEA for review of 

applications for designation of a contract market. 

(ii) Recovery time objective 

(iii) Geographic diversity 

(iv) Testing 

(v) Effective date 

7. Special enforcement authority over 

SIDCOs 

C. Additional amendments 

1. Technical amendments to reorganize 

part 39 

2. Supplemental provisions for proposed 

§ 39.19 

3. Technical amendments to proposed 

§ 39.21 

III. Effective Date 

IV. Section 4(c) 

V. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost-benefit analysis 

I. Background 

A. Title VII of the Dodd-Frank Act 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.2 Title VII of 

the Dodd-Frank Act 3 amended the 

Commodity Exchange Act (CEA) 4 to 

establish a comprehensive regulatory 

framework to reduce risk, increase 

transparency, and promote market 

integrity within the financial system by, 

among other things: (1) Providing for the 

registration and comprehensive 

regulation of swap dealers and major 

swap participants; (2) imposing clearing 

and trade execution requirements on 

standardized derivative products; (3) 

creating rigorous recordkeeping and 

real-time reporting regimes; and (4) 

enhancing the Commission’s 

rulemaking and enforcement authorities 

with respect to all registered entities 

and intermediaries subject to the 

Commission’s oversight. 

Section 725(c) of the Dodd-Frank Act 

amended Section 5b(c)(2) of the CEA, 

which sets forth core principles with 

which a DCO must comply to be 

registered and to maintain registration 

as a DCO. 

The core principles were added to the 

CEA by the Commodity Futures 

Modernization Act of 2000 (CFMA).5

The Commission did not adopt 

implementing rules and regulations, but 

instead promulgated guidance for DCOs 

on compliance with the core 

principles.6 Under section 5b(c)(2), as 

amended by the Dodd-Frank Act, 

Congress expressly confirmed that the 

Commission may adopt implementing 

rules and regulations pursuant to its 

rulemaking authority under section 

8a(5) of the CEA.7

The Commission continues to believe 

that each DCO should be afforded an 

appropriate level of discretion in 

determining how to operate its business 

within the statutory framework. At the 

same time, the Commission recognizes 

that specific, bright-line regulations may 

be necessary in order to facilitate DCO 

compliance with a given core principle 

and, ultimately, to protect the integrity 

of the U.S. clearing system. 

Accordingly, in developing the 

proposed regulations, the Commission 

has endeavored to strike an appropriate 

balance between establishing general 

prudential standards and prescriptive 

requirements. 

In this notice of proposed rulemaking, 

the Commission proposes to adopt 

regulations to implement six DCO core 

principles. Those core principles, all of 

which were amended by the DoddFrank Act, are C (Participant and 

Product Eligibility), D (Risk 

Management), E (Settlement 

Procedures), F (Treatment of Funds), G 

(Default Rules and Procedures), and I 

(System Safeguards). 

B. Title VIII of the Dodd-Frank Act 

Section 802(b) of the Dodd-Frank Act 

states that the purpose of Title VIII is to 

mitigate systemic risk in the financial 

system and promote financial stability. 

Section 804 authorizes the Financial 

Stability Oversight Council (Council) to 

designate entities involved in clearing 

and settlement as systemically 

important.8

Section 805(a) of the Dodd-Frank Act 

allows the Commission to prescribe 

regulations for those DCOs that the 

Council has determined are systemically 

important. The Commission is 

proposing to adopt enhanced 

requirements for SIDCOs regarding 

system safeguards for business 

continuity and disaster recovery in 

proposed § 39.30. 

Section 807(c) of the Dodd-Frank Act 

provides the Commission with special 

enforcement authority over SIDCOs, 

which the Commission is proposing to 

implement in proposed § 39.31. 

C. Dodd-Frank Act Rulemaking 

Initiative 

This proposed rulemaking is the last 

in a series of proposed rulemakings 

issued for the purpose of implementing 

the DCO core principles.9 Through the 

proposed regulations, the Commission 

seeks to enhance legal certainty for 

DCOs, clearing members, and market 

participants by providing a regulatory 

framework to support DCO risk 

management practices overall and, in 

turn, strengthen the financial integrity 

of the futures markets and swap markets 

subject to Commission oversight. 

With this in mind, the Commission 

also is proposing to establish greater 

uniformity and transparency in the DCO 

application process by adopting a 

registration application form that will 

facilitate greater efficiency and 

consistency in processing submissions. 

The Commission is further proposing 

certain technical amendments to update 

and conform provisions of part 39 to the 

CEA, as amended by the Dodd-Frank 

Act. 

The Commission requests comment 

on all aspects of the rules proposed 

herein, as well as comment on the 

specific provisions and issues 

highlighted in the discussion below. 

II. Discussion 

A. Registration Procedures 

As proposed in an earlier notice of 

proposed rulemaking, the Commission 

intends to continue to voluntarily apply 

a 180-day time frame for review of DCO 

registration applications, but eliminate 

the 90-day expedited review period for 

such applications.10 Related to this, the 

Commission is now proposing 

additional revisions to the requirements 

for DCO registration in order to clarify 

the application submission and review 

process and to achieve greater efficiency 

for both applicants and the Commission. 

The Commission is proposing to 

revise appendix A to part 39, 

‘‘Application Guidance and Compliance 

With Core Principles,’’ by removing the 

current content and substituting in its 


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3700 Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 

11 In separate rulemakings, the Commission is 

proposing applications for designation as a contract 

market and registration as a swap execution facility. 

This approach is similar to the SEC’s use of the 

Form CA for securities clearing agency applications, 

available at https://www.sec.gov. 

12Section 6(a) of the CEA, 7 U.S.C. 8(a), provides 

that the Commission must approve or deny an 

application for designation of a contract market 

within 180 days of the filing of the application. 

However, ‘‘[i]f the Commission notifies the person 

that its application is materially incomplete and 

specifies the deficiencies in the application, the 

running of the 180-day period shall be stayed from 

the time of such notification until the application 

is resubmitted in completed form.’’ 

13See 75 FR 67282 (Nov. 2, 2010) (provisions 

common to registered entities). 

14See 5 U.S.C. 552 and § 145.9 of the 

Commission’s regulations (regarding petitions for 

confidential treatment of information submitted to 

the Commission). 

15Section 5b(c)(2)(C) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(C) (Core Principle C). 

16Core Principle C, as well as the other core 

principles that are discussed herein, refer to 

‘‘members of, and participants in’’ a DCO. The 

Commission interprets this phrase to mean persons 

with clearing privileges, and has used the term 

‘‘clearing member’’ in describing the requirements of 

each core principle and in the text of the proposed 

regulations described herein. In a separate notice of 

proposed rulemaking, the Commission has 

proposed to amend the definition of ‘‘clearing 

member’’ in § 1.3(c) to mean ‘‘any person that has 

clearing privileges such that it can process, clear 

and settle trades through a derivatives clearing 

organization on behalf of itself or others. The 

derivatives clearing organization need not be 

organized as a membership organization.’’ See 75 FR 

at 77585. 

17Prior to amendment by the Dodd-Frank Act, 

Core Principle C provided that 

[t]he applicant shall establish— 

(i) appropriate admission and continuing 

eligibility standards (including appropriate 

minimum financial requirements) for members of 

and participants in the organization; and 

(ii) appropriate standards for determining 

eligibility of agreements, contracts, or transactions 

submitted to the applicant. 

place Form DCO, which would be 

comprised of two parts: (i) An 

application cover sheet for basic 

information about the DCO applicant, 

its ownership structure, officers, and 

application contact information, and (ii) 

instructions for a series of 

accompanying exhibits that would 

contain information demonstrating 

compliance with each of the DCO core 

principles. An application for DCO 

registration would consist of the 

completed Form DCO, including all 

applicable exhibits, and any 

supplemental information submitted to 

the Commission.11

The Commission’s objective in 

adopting an application form is to 

streamline the DCO registration process, 

having learned from experience that the 

general guidance contained in the 

current appendix A does not provide 

sufficiently specific instructions to 

applicants. As a result, the registration 

process has been prolonged in some 

cases because of the need for 

Commission staff to provide applicants 

with additional guidance about the 

nature of the information that is 

required in order for the Commission to 

conclude that the applicant has 

demonstrated its ability to comply with 

the core principles. 

The Commission proposes to amend 

§ 39.3(d), ‘‘Guidance for applicants and 

registrants,’’ and redesignate it as 

§ 39.3(a)(2). The amended provision 

would state that any person seeking to 

register as a DCO would be required to 

submit a completed Form DCO as 

provided in appendix A to part 39, 

including all applicable exhibits. Use of 

the Form DCO also would be required 

for amendments to a pending 

application or requests for an 

amendment to an existing DCO 

registration. Section 39.3(a)(2) would 

clarify that an applicant, upon its own 

initiative, could file additional 

information that might be necessary or 

helpful to the Commission in processing 

the application. The Commission 

strongly encourages prospective 

applicants to submit any additional 

information that could be useful to the 

Commission. 

The proposed appendix A containing 

the Form DCO is set forth in this notice 

of proposed rulemaking. The 

Commission requests comment on the 

potential benefits and disadvantages of 

requiring the use of a standardized 

application. In addition, the 

Commission requests comment on the 

content of the proposed application 

including specific exhibits. 

Proposed § 39.3(a)(3) would clarify 

that the filing of a completed Form DCO 

would be a minimum requirement and 

would not create a presumption that the 

application is materially complete 12 or 

that supplemental information will not 

be required by the Commission. At any 

time during the application review 

process, the Commission may request 

that the applicant submit supplemental 

information in order for the Commission 

to process the application. 

Under proposed § 39.3(a)(4), an 

applicant would be required to 

promptly amend its Form DCO if it 

discovered a material omission or error, 

or if there is a material change in any 

information already provided to the 

Commission. 

Proposed § 39.3(a)(5) would largely 

incorporate applicable language of 

§ 40.8(a), which identifies those parts of 

a DCO application that are available to 

the public.13 Those parts are: the first 

page of the cover sheet, proposed rules 

(Exhibit A–1), the applicant’s regulatory 

compliance chart (Exhibit A–2), a 

narrative summary of the applicant’s 

proposed clearing activities (Exhibit A– 

3), documents establishing the 

applicant’s legal status (Exhibit A–8), 

documents setting forth the applicant’s 

corporate and governance structure 

(Exhibits A–7 and Q), and any other part 

of the application not covered by a 

request for confidential treatment 

subject to FOIA and filed in accordance 

with the requirements of § 145.9 of the 

Commission’s regulations.14 The 

Commission notes that it expects to 

continue its practice of posting DCO 

applications on its Web site for a public 

comment period (typically 30 days). 

Proposed § 39.3(b)(1) would stay the 

running of the 180-day review period if 

an application was materially 

incomplete, consistent with the 

Commission’s authority with respect to 

the designation of a contract market 

under section 6(a) of the CEA. The 

delegation provision of current § 39.3(g) 

would be redesignated as paragraph 

(b)(2). This provision authorizes the 

Director of the Division of Clearing and 

Intermediary Oversight or the Director’s 

designee, with the concurrence of the 

General Counsel or the General 

Counsel’s designee, to notify an 

applicant that the application is 

materially incomplete and the running 

of the 180-day period is stayed. 

The Commission requests comment 

on all aspects of the proposed 

amendments to § 39.3, including the 

costs associated with the application 

process and possible means for 

streamlining the process further. 

B. Implementation of DCO Core 

Principles 

1. Participant and Product Eligibility 

Core Principle C, as amended by the 

Dodd-Frank Act,15 requires each DCO to 

establish appropriate admission and 

continuing eligibility standards for 

members of, and participants in, the 

DCO,16 including sufficient financial 

resources and operational capacity to 

meet the obligations arising from 

participation. Core Principle C further 

requires that such participation and 

membership requirements be objective, 

be publicly disclosed, and permit fair 

and open access. Core Principle C also 

requires that each DCO establish and 

implement procedures to verify 

compliance with each participation and 

membership requirement, on an ongoing 

basis. With respect to product 

eligibility, Core Principle C requires that 

each DCO establish appropriate 

standards for determining the eligibility 

of agreements, contracts, or transactions 

submitted to the DCO for clearing.17 The 

Commission is proposing to adopt 


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Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 3701 

18Section 5b(c)(2)(C)(iii) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(C)(iii) (Core Principle C). 

19 Id. 

20 Id. 

21 In November 2004, the Task Force on Securities 

Settlement Systems, jointly established by the 

Committee on Payment and Settlement Systems 

(CPSS) of the central banks of the Group of Ten 

countries and the Technical Committee of the 

International Organization of Securities 

Commissions (IOSCO), issued Recommendations 

for Central Counterparties. CPSS & Technical 

Comm. of IOSCO Recommendations for Central 

Counterparties, CPSS Publ’n No. 64 (Nov. 2004), 

available at http://www.bis.org/publ/cpss64.pdf 

(CPSS–IOSCO Recommendations). CPSS–IOSCO 

Recommendation 2 provides, in part, that ‘‘[a] CCP’s 

participation requirements should be objective, 

publicly disclosed, and permit fair and open 

access.’’ The CPSS–IOSCO Recommendations 

further state that 

[t]o avoid discriminating against classes of 

participants and introducing competitive 

distortions, participation requirements should be 

objective and avoid limiting competition through 

unnecessarily restrictive criteria, thereby permitting 

fair and open access within the scope of services 

offered by the CCP. [footnote omitted] Participation 

requirements that limit access on grounds other 

than risks should be avoided. 

(CPSS–IOSCO Recommendations, pg. 16). The 

Commission notes that CPSS and IOSCO are 

currently reviewing the CPSS–IOSCO 

Recommendations, which may be revised. 

22Section 5b(c)(2)(C)(i)(I) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(C)(i)(I). 

23Conversely, as discussed, infra, in section 

II.B.2.g.i, proposed § 39.13(h)(1)(i) would require a 

DCO to impose risk limits on a clearing member to 

prevent a clearing member from carrying positions 

where the risk exposure of those positions exceeded 

a threshold specified by the DCO relative to the 

financial resources of the clearing member, the 

DCO, or both. 

§ 39.12 to establish requirements that a 

DCO would have to meet in order to 

comply with Core Principle C. 

(a) Participant eligibility. 

As noted above, Core Principle C 

requires that a DCO’s admission and 

continuing eligibility standards for 

clearing members must be objective and 

publicly disclosed.18 Proposed 

§ 39.12(a) would codify these 

requirements, and would make clear 

that such requirements must be riskbased. 

(i) Fair and open access. 

Core Principle C mandates that 

participation requirements must ‘‘permit 

fair and open access.’’ 19 It also 

mandates that clearing members must 

have ‘‘sufficient financial resources and 

operational capacity to meet obligations 

arising from participation in the 

derivatives clearing organization.’’ 20

Although there is potential for tension 

between these goals, the Commission 

believes that they can be harmonized. 

Proposed § 39.12 is designed to ensure 

that participation requirements do not 

unreasonably restrict any entity from 

becoming a clearing member while, at 

the same time, limiting risk to the DCO 

and its clearing members. The 

Commission believes that more 

widespread participation could reduce 

the concentration of clearing member 

portfolios and diversify risk. It could 

also increase competition by allowing 

more entities to become clearing 

members. 

Proposed § 39.12(a)(1) would require 

a DCO to establish participation 

requirements that permit fair and open 

access. To achieve fair and open access, 

proposed § 39.12(a)(1)(i) would prohibit 

a DCO from adopting a particular 

restrictive participation requirement if it 

could adopt a less restrictive 

requirement that would not materially 

increase risk to the DCO or its clearing 

members. 

Proposed § 39.12(a)(1)(ii) would 

require a DCO to permit a market 

participant to become a clearing 

member if it met the DCO’s 

participation requirements. Proposed 

§ 39.12(a)(1)(iii) would prohibit 

participation requirements that have the 

effect of excluding or limiting clearing 

membership of certain types of market 

participants unless the DCO can 

demonstrate that the restriction is 

necessary to address credit risk or 

deficiencies in the participants’ 

operational capabilities that would 

prevent them from fulfilling their 

obligations as clearing members. Section 

39.12(a)(1)(iv) would prohibit a DCO 

from requiring that clearing members 

must be swap dealers. Section 

39.12(a)(1)(v) would prohibit a DCO 

from requiring that clearing members 

maintain a swap portfolio of any 

particular size, or that clearing members 

meet a swap transaction volume 

threshold. 

The access and participation 

requirements discussed above meet or 

exceed international 

recommendations.21

(ii) Financial resources. 

Core Principle C mandates that 

participation requirements must ensure 

that clearing members have ‘‘sufficient 

financial resources and operational 

capacity to meet obligations arising from 

participation in the [DCO].’’ 22 Proposed 

§ 39.12(a)(2)(i) would require a DCO to 

establish participation requirements that 

require clearing members to have access 

to sufficient financial resources to meet 

obligations arising from participation in 

the DCO in extreme but plausible 

market conditions. The financial 

resources could include a clearing 

member’s capital, a guarantee from a 

clearing member’s parent, or a credit 

facility funding arrangement. The 

proposed regulation would further 

specify that, for purposes of proposed 

§ 39.12(a)(2), ‘‘capital’’ would mean 

adjusted net capital as defined in § 1.17 

of the Commission’s regulations, for 

futures commission merchants (FCMs), 

and net capital as defined in SEC rule 

15c3–1, for broker-dealers, or any 

similar risk adjusted capital calculation 

for all other prospective clearing 

members. 

The Commission invites comment 

regarding whether a guarantee or a 

credit facility funding arrangement is 

sufficiently reliable and liquid such that 

it should be considered as a resource 

that would be available to meet 

obligations arising from participation in 

a DCO in extreme but plausible market 

conditions. 

Proposed § 39.12(a)(2)(ii) would 

require a DCO to establish capital 

requirements that are based on 

objective, transparent, and commonly 

accepted standards that appropriately 

match capital to risk. The proposed 

regulation would require capital 

requirements to be scalable so that they 

are proportional to the risks posed by 

clearing members. 

With respect to persons that seek 

clearing membership in order to clear 

swaps, proposed § 39.12(a)(2)(iii) would 

specify that a DCO is not permitted to 

set a minimum capital requirement of 

more than $50 million. 

If the capital requirement is satisfied 

by a prospective clearing member, the 

DCO is prohibited from making a 

determination that the prospective 

clearing member does not satisfy its 

scalable capital requirements. Proposed 

§§ 39.12(a)(2)(ii) and 39.12(a)(2)(iii), 

considered together, would require a 

DCO to admit any person to clearing 

membership for the purpose of clearing 

swaps, if the person had $50 million in 

capital, but would permit a DCO to 

require each clearing member to hold 

capital proportional to its risk 

exposure.23 Thus, if a clearing member’s 

risk exposure were to increase in a nonlinear manner, the DCO could increase 

the clearing member’s corresponding 

scalable capital requirement in a nonlinear manner. 

The Commission requests comment 

on whether establishing a capital 

threshold is an effective approach to 

promoting fair and open access. If it is, 

the Commission further requests views 

on whether the $50 million figure is an 

appropriate amount and, if not, what 

alternative amount might be more 

appropriate. 

(iii) Operational requirements. 

Proposed § 39.12(a)(3) would require 

a DCO to establish participation 

requirements that ensure that clearing 

members have adequate operational 


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3702 Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 

24See section 5b(c)(2)(C)(ii) of the CEA; 7 U.S.C. 

7a–1(c)(2)(C)(ii). Based on context, the Commission 

interprets the phrase ‘‘compliance of each 

participation and membership requirement’’ to 

mean compliance ‘‘with’’ each participation and 

membership requirement. 

25Section 5b(c)(2)(C)(i)(II) of the CEA; 7 U.S.C. 

7a–1(c)(2)(C)(i)(II). 26Portfolio compression is a mechanism by 

which superfluous transactions among two or more 

counterparties are compressed, terminated and 

replaced with a smaller number of transactions of 

decreased notional principal value in an effort to 

reduce the risk, cost, and inefficiency of 

maintaining unnecessary transactions on the 

counterparties’ books. 

capacity to meet obligations arising from 

participation in the DCO. The 

requirements would have to include, at 

a minimum, the ability to process 

expected volumes and values of 

transactions cleared by the clearing 

member within required time frames, 

including at peak times and on peak 

days; the ability to fulfill collateral, 

payment, and delivery obligations 

imposed by the DCO; and the ability to 

participate in default management 

activities under the rules of the DCO 

and in accordance with § 39.16 of the 

Commission’s regulations. 

(iv) Monitoring, reporting, and 

enforcement. 

Strong participation requirements will 

not limit risk if clearing members do not 

satisfy the requirements on an ongoing 

basis. Accordingly, Core Principle C 

requires each DCO to ‘‘establish and 

implement procedures to verify, on an 

ongoing basis, the compliance of each 

participation and membership 

requirement of the derivatives clearing 

organization.’’ 24 Proposed § 39.12(a)(4) 

would codify this requirement. 

A DCO cannot effectively monitor 

clearing members if it is not adequately 

informed about their financial status. 

Proposed § 39.12(a)(5) would address 

this concern. Specifically, proposed 

§ 39.12(a)(5)(i) would require a DCO to 

require all of its clearing members, 

including non-FCMs, to file periodic 

financial reports with the DCO that 

contain any financial information that 

the DCO determines is necessary to 

assess whether participation 

requirements are met on an ongoing 

basis. A DCO would have to require its 

clearing members that are FCMs to file 

the financial reports that are specified in 

§ 1.10 of the Commission’s regulations 

with the DCO. The proposed regulation 

also would require a DCO to review 

these financial reports for risk 

management purposes. Proposed 

§ 39.12(a)(5)(i) would further require a 

DCO to require its clearing members 

that are not FCMs to make the periodic 

financial reports that they file with the 

DCO available to the Commission upon 

the Commission’s request. Proposed 

§ 39.12(a)(5)(ii) would require a DCO to 

adopt rules that require a clearing 

member to provide to the DCO, in a 

timely manner, information that 

concerns any financial or business 

developments that could materially 

affect the clearing member’s ability to 

continue to comply with participation 

requirements. 

Finally, proposed § 39.12(a)(6) would 

require a DCO to have the ability to 

enforce compliance with its 

participation requirements. In 

particular, the DCO would be required 

to establish procedures for the 

suspension and orderly removal of 

clearing members that no longer meet 

the DCO’s participation requirements. 

(b) Product eligibility. 

Core Principle C requires each DCO to 

establish ‘‘appropriate standards for 

determining the eligibility of 

agreements, contracts, or transactions 

submitted to the [DCO] for clearing.’’ 25

Proposed § 39.12(b)(1) would require a 

DCO to establish appropriate 

requirements for determining the 

eligibility of agreements, contracts, or 

transactions submitted to the DCO for 

clearing, taking into account the DCO’s 

ability to manage the risks associated 

with such agreements, contracts, or 

transactions. Factors to be considered in 

determining product eligibility would 

include, but would not be limited to: (i) 

trading volume; (ii) liquidity; (iii) 

availability of reliable prices; (iv) ability 

of market participants to use portfolio 

compression 26 with respect to a 

particular swap product; (v) ability of 

the DCO and clearing members to gain 

access to the relevant market for 

purposes of creating and liquidating 

positions; (vi) ability of the DCO to 

measure risk for purposes of setting 

margin requirements; and (vii) 

operational capacity of the DCO and 

clearing members to address any unique 

risk characteristics of a product. 

Section 2(h)(1)(B) of the CEA requires 

a DCO to adopt rules providing that all 

swaps with the same terms and 

conditions submitted to the DCO for 

clearing are economically equivalent 

within the DCO and may be offset with 

each other within the DCO. Section 

2(h)(1)(B) further requires a DCO to 

provide for non-discriminatory clearing 

of a swap executed bilaterally or on or 

subject to the rules of an unaffiliated 

designated contract market (DCM) or 

swap execution facility (SEF). Proposed 

§ 39.12(b)(2) would codify these 

requirements in the Commission’s 

regulations. 

Proposed § 39.12(b)(3) would require 

a DCO to select contract unit sizes that 

maximize liquidity, open access, and 

risk management. To the extent 

appropriate to further these objectives, 

the proposed regulation would require a 

DCO to select contract units for clearing 

purposes that may be smaller than the 

contract units in which trades submitted 

for clearing were executed. The contract 

unit size of a particular swap executed 

bilaterally may reflect the immediate 

circumstances of the two parties to the 

transaction. Once submitted for 

clearing, it may be possible to split the 

trade into smaller units without 

compromising the interests of the two 

original parties. Smaller units can 

promote liquidity by permitting more 

parties to trade the product, facilitate 

open access by permitting more clearing 

members to clear the product, and aid 

risk management by enabling a DCO, in 

the event of a default, to have more 

potential counterparties for liquidation. 

Finally, proposed § 39.12(b)(4) would 

require each DCO that clears swaps to 

have rules stating that upon acceptance 

of a swap by the DCO for clearing, (i) the 

original swap is extinguished, (ii) it is 

replaced by equal and opposite swaps 

between clearing members and the DCO, 

(iii) all terms of the cleared swaps must 

conform to templates established under 

DCO rules, and (iv) if a swap is cleared 

by a clearing member on behalf of a 

customer, all terms of the swap, as 

carried in the customer account on the 

books of the clearing member, must 

conform to the terms of the cleared 

swap established under the DCO’s rules. 

The purpose of this provision is to 

encourage the standardization of swaps 

and to avoid any differences between 

the terms of a swap as carried at the 

DCO level and as carried at the clearing 

member level. Any such differences 

would raise both customer protection 

and systemic risk concerns. From a 

customer protection standpoint, if the 

terms of the swap at the customer level 

differ from those at the clearing level, 

then the customer position cannot really 

be said to have been cleared. If the 

customer position differs from the 

cleared position, the customer may not 

receive the full transparency and 

liquidity benefits of clearing. Similarly, 

from a systemic perspective, any 

differences could diminish overall price 

discovery and liquidity. Standardizing 

the terms of a swap upon clearing 

would facilitate trading and promote the 

mitigation of risk for all participants in 

the swap markets. Furthermore, 

standardization would support the 

requirement in section 2(h)(1)(B) of the 

CEA and proposed § 39.12(b)(2) that a 

DCO must adopt rules providing that all 

swaps with the same terms and 

conditions submitted to the DCO are 


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Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 3703 

27Section 5b(c)(2)(D) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(D) (Core Principle D). 

28Prior to amendment by the Dodd-Frank Act, 

Core Principle D provided that ‘‘[t]he applicant shall 

have the ability to manage the risks associated with 

discharging the responsibilities of a derivatives 

clearing organization through the use of appropriate 

tools and procedures.’’ 

29See 75 FR at 63750. In that proposed 

rulemaking, the provisions relating to the Risk 

Management Committee were designated as 

§ 39.13(g). In the final rulemaking, the provisions 

will be redesignated as § 39.13(d). 

30See section 5b(i) of the CEA; 7 U.S.C. 7a–1(i). 

31 75 FR at 77587. 

32See infra section II.B.3.a of this notice. 

economically equivalent within the 

DCO and may be offset with each other. 

2. Risk Management Requirements 

Core Principle D, as amended by the 

Dodd-Frank Act,27 requires each DCO to 

ensure that it possesses the ability to 

manage the risks associated with 

discharging the responsibilities of the 

DCO through the use of appropriate 

tools and procedures. It further requires 

each DCO to measure its credit 

exposures to each clearing member not 

less than once during each business day 

and to monitor each such exposure 

periodically during the business day. 

Core Principle D also requires each DCO 

to limit its exposure to potential losses 

from defaults by clearing members, 

through margin requirements and other 

risk control mechanisms, to ensure that 

its operations would not be disrupted 

and that nondefaulting clearing 

members would not be exposed to 

losses that nondefaulting clearing 

members cannot anticipate or control. 

Finally, Core Principle D requires that 

the margin that the DCO requires from 

each clearing member must be sufficient 

to cover potential exposures in normal 

market conditions and that each model 

and parameter used in setting such 

margin requirements must be risk-based 

and reviewed on a regular basis.28 The 

Commission is proposing to adopt 

§ 39.13 to establish requirements that a 

DCO would have to meet in order to 

comply with Core Principle D. 

(a) General. 

Proposed § 39.13(a) would require a 

DCO to ensure that it possesses the 

ability to manage the risks associated 

with discharging its responsibilities 

through the use of appropriate tools and 

procedures. The specific requirements 

that are addressed in the remainder of 

proposed § 39.13, in addition to margin 

requirements, describe various tools and 

procedures that the Commission 

believes are necessary to ensure that 

DCOs are able to effectively manage the 

risks that are inherent in their roles as 

central counterparties. Many of those 

requirements reflect the current 

practices of most or all DCOs, and 

others may describe enhancements that 

would assist existing and new DCOs in 

mitigating their risks as they assume 

new responsibilities in connection with 

the clearing of swaps. 

(b) Risk management framework. 

Proposed § 39.13(b) would require a 

DCO to establish and maintain written 

policies, procedures, and controls, 

approved by its Board of Directors, 

which establish an appropriate risk 

management framework that, at a 

minimum, clearly identifies and 

documents the range of risks to which 

the DCO is exposed, addresses the 

monitoring and management of the 

entirety of those risks, and provides a 

mechanism for internal audit. Those 

risks may include, but are not limited 

to, legal risk, credit risk, liquidity risk, 

custody and investment risk, 

concentration risk, default risk, 

operational risk, market risk, and 

business risk. A DCO would be required 

to regularly review its risk management 

framework and update it as necessary. 

The Commission believes that a DCO 

should adopt a comprehensive and 

documented risk management 

framework that addresses all of the 

various types of risks to which it is 

exposed, including the manner in which 

they may relate to each other. A DCO’s 

risk management framework should be 

subject to the approval of its Board of 

Directors, as the Board is ultimately 

responsible for managing a DCO’s risks. 

The Commission is proposing to leave it 

to the discretion of each DCO to 

determine the frequency with which it 

reviews its risk management framework 

as long as it is reviewed on a regular 

basis. 

(c) Chief risk officer. 

Proposed § 39.13(c) would require a 

DCO to have a chief risk officer who 

would be responsible for the 

implementation of the risk management 

framework and for making appropriate 

recommendations regarding the DCO’s 

risk management functions to the DCO’s 

Risk Management Committee or Board 

of Directors, as applicable. In a separate 

rulemaking, the Commission has 

proposed to adopt § 39.13(d) to require 

DCOs to have a Risk Management 

Committee with defined composition 

requirements and specified minimum 

functions.29

DCOs generally have a chief risk 

officer or an individual who performs 

such a function, and the Commission 

believes this is a ‘‘best practice.’’ 

Although Core Principle D does not 

specifically require a DCO to have a 

chief risk officer, the Commission 

believes that given the importance of the 

risk management function, each DCO 

should have a member of senior 

management who is responsible for 

overseeing the implementation of the 

DCO’s comprehensive risk management 

framework and making appropriate 

recommendations regarding risk 

management issues to the DCO’s Risk 

Management Committee (for matters 

within its jurisdiction) or directly to the 

Board. 

The CEA, as amended by the DoddFrank Act, requires a DCO to have a 

chief compliance officer with defined 

responsibilities.30 These requirements 

have been addressed in a separate 

rulemaking.31 Given the importance of 

the risk management function and the 

comprehensive nature of the 

responsibilities of the chief compliance 

officer as defined in the statute, the 

Commission expects that the chief risk 

officer and the chief compliance officer 

would be two different individuals. 

(d) Measurement of credit exposure. 

Proposed § 39.13(e) would require a 

DCO to measure and monitor its credit 

exposures to its clearing members. The 

proposed regulation uses the term 

‘‘credit exposure’’ in order to be 

consistent with the statutory language of 

Core Principle D. In this context, ‘‘credit 

exposure’’ does not refer to an extension 

of credit by the DCO to a clearing 

member. Rather, it refers to any amounts 

that a clearing member would owe to a 

DCO if the clearing member were to 

default in its obligations to the DCO. It 

includes both current exposures and 

potential future exposures. 

Specifically, § 39.13(e) would require 

a DCO to: (1) Measure its credit 

exposure to each clearing member and 

mark to market such clearing member’s 

open positions at least once each 

business day; and (2) monitor its credit 

exposure to each clearing member 

periodically during each business day. 

Proposed § 39.13(e) goes hand in hand 

with proposed § 39.14(b), which 

addresses daily settlements based on a 

DCO’s measurement of its credit 

exposures to its clearing members.32

(e) Limitation of exposure to potential 

losses from defaults. 

Proposed § 39.13(f) would require a 

DCO, through margin requirements and 

other risk control mechanisms, to limit 

its exposure to potential losses from 

defaults by its clearing members to 

ensure that: (1) Its operations would not 

be disrupted; and (2) nondefaulting 

clearing members would not be exposed 

to losses that nondefaulting clearing 

members cannot anticipate or control. 

The language of proposed § 39.13(f) is 

virtually identical to the language in 


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3704 Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 

33The Commission has proposed to define ‘‘initial 

margin’’ as ‘‘money, securities, or property posted 

by a party to a futures, option, or swap as 

performance bond to cover potential future 

exposures arising from changes in the market value 

of the position.’’ See 75 FR at 77585 (proposing 

§ 1.3(lll)). 

34CPSS–IOSCO Recommendations, pg. 21. 

35 Jump-to-default risk refers to the possibility 

that a CDS portfolio with large net sales of 

protection on an underlying reference entity could 

experience significant losses over a very short 

period of time following an unexpected event of 

default by the reference entity. 

36The Commission has proposed to define 

‘‘variation margin’’ as ‘‘a payment made by a party 

to a futures, option, or swap to cover the current 

exposure arising from changes in the market value 

of the position since the trade was executed or the 

previous time the position was marked to market.’’ 

See 75 FR at 77585 (proposing § 1.3(ooo)). 

37See infra section II.B.4.b of this notice, 

discussing commingling of customer futures and 

cleared swaps positions. 

38Pursuant to section(s) 4(c) and/or 4d of the 

CEA, the Commission has previously issued several 

orders allowing funds margining cleared swaps to 

be commingled with funds margining futures and 

options on futures. In those orders, the Commission 

permitted such swaps to be margined using 

liquidation times that were less than five business 

days. See, e.g., 74 FR 12316 (Mar. 24, 2009) (corn, 

wheat and soybean swaps); 73 FR 77015 (Dec. 18, 

2008) (coffee, sugar and cocoa swaps); and Order of 

the Commodity Futures Trading Commission, dated 

Sep. 26, 2008, entitled ‘‘Treatment of Funds Held 

in Connection with the Clearing of Over-theCounter Products by The Chicago Mercantile 

Exchange,’’ available at http://www.cftc.gov/stellent/ 

groups/public/@requestsandactions/documents/ 

ifdocs/cbot4dorder9-26-08.pdf (ethanol swaps). The 

Commission intends to grandfather the swaps 

subject to previously issued orders, such that the 

relevant liquidation time periods for those swaps 

would continue to be governed by the terms of the 

orders. 

39For example, on September 15, 2010, the 

European Commission (EC) proposed the European 

Market Infrastructure Regulation (EMIR), available 

at http://ec.europa.eu/internal_market/financialmarkets/docs/derivatives/20100915_

proposal_en.pdf, ‘‘to ensure implementation of the 

G20 commitments to clear standardized derivatives 

[which can be accessed at http://www.g20.org/

Documents/pittsburgh_summit_leaders_statement_

250909.pdf], and that Central Counterparties (CCPs) 

comply with high prudential standards * * *,’’ 

among other things, and expressed its intent to be 

consistent with the Dodd-Frank Act. (EMIR, pg. 2– 

3). The EMIR requires that margins ‘‘* * * shall be 

sufficient to cover losses that result from at least 99 

per cent of the exposures movements over an 

appropriate time horizon . * * *’’ (EMIR, Article 

39, paragraph 1, pg. 46). 

40For example, the CPSS–IOSCO 

Recommendations state that ‘‘[m]argin requirements 

for new and low-volume products might be set at 

a lower coverage level [than the major products 

cleared by a CCP] if the potential losses resulting 

from such products are minimal.’’ (CPSS–IOSCO 

Recommendations, pg. 23). 

section 5b(c)(2)(D)(iii) of the CEA, as 

amended by the Dodd-Frank Act. 

(f) Margin requirements. 

(i) General. 

As specified in section 5b(c)(2)(D)(iv) 

of the CEA, proposed § 39.13(g)(1) 

would require that the initial margin 

that a DCO requires from each clearing 

member must be sufficient to cover 

potential exposures in normal market 

conditions and that each model and 

parameter used in setting initial margin 

requirements must be risk-based and 

reviewed on a regular basis.33 The 

Commission has not defined ‘‘normal 

market conditions’’ in the proposed 

regulation. Current international 

recommendations define ‘‘normal 

market conditions’’ as ‘‘price movements 

that produce changes in exposures that 

are expected to breach margin 

requirements or other risk control 

mechanisms only 1% of the time, that 

is, on average on only one trading day 

out of 100.’’ 34 The Commission invites 

comment regarding whether a definition 

of ‘‘normal market conditions’’ should be 

included in the proposed regulation 

and, if so, how normal market 

conditions should be defined. 

(ii) Methodology and coverage. 

Proposed § 39.13(g)(2) would set forth 

requirements regarding margin 

methodology and coverage. First, it 

would require a DCO to establish initial 

margin requirements that are 

commensurate with the risks of each 

product or portfolio, including any 

unique characteristics of, or risks 

associated with, particular products or 

portfolios. In particular, proposed 

39.13(g)(2)(i) would require a DCO that 

clears credit default swaps (CDS) to 

appropriately address jump-to-default 

risk in setting initial margins.35 With the 

exception of jump-to-default risk, the 

Commission has not defined specific 

risks that a DCO should consider in 

light of the fact that such risks would be 

product-specific and portfolio-specific. 

In addition, there may be risks that 

might apply to products or portfolios 

that are cleared in the future that cannot 

be anticipated at this time. The 

Commission invites comment regarding 

whether there are specific risks that 

should be identified and addressed in 

the proposed regulation in addition to 

jump-to-default risk. 

Proposed § 39.13(g)(2)(ii) would 

require a DCO to use margin models that 

generate initial margin requirements 

sufficient to cover the DCO’s potential 

future exposures to clearing members 

based on price movements in the 

interval between the last collection of 

variation margin 36 and the time within 

which the DCO estimates that it would 

be able to liquidate a defaulting clearing 

member’s positions (liquidation time). A 

DCO would be required to use a 

liquidation time that is a minimum of 

five business days for cleared swaps that 

are not executed on a DCM, whether the 

swaps are carried in a customer account 

subject to section 4d(a) or 4d(f) of the 

CEA, or a house account.37 A DCO 

would be required to use a liquidation 

time that is a minimum of one business 

day for all other products that it clears, 

although it would be required to use 

longer liquidation times, if appropriate, 

based on the unique characteristics of 

particular products or portfolios. 

A minimum of one business day is the 

current standard that DCOs generally 

apply to futures and options on futures 

contracts. The Commission believes that 

a minimum of five business days is 

appropriate for cleared swaps that are 

not executed on a DCM in that such a 

time period may be necessary to close 

out swap positions in a cost-effective 

manner.38 Several clearing 

organizations currently use a five-day 

liquidation time in determining margin 

requirements for certain cleared swaps. 

The Commission invites comment 

regarding whether the minimum 

liquidation times specified in proposed 

§ 39.13(g)(2)(ii) are appropriate, or 

whether there are minimum liquidation 

times that are more appropriate. 

Proposed § 39.13(g)(2)(iii) would 

require that the actual coverage of the 

initial margin requirements produced by 

a DCO’s margin models, along with 

projected measures of the models’ 

performance, would have to meet a 

confidence level of at least 99%, based 

on data from an appropriate historic 

time period with respect to: (A) Each 

product that is margined on a product 

basis; (B) each spread within or between 

products for which there is a defined 

spread margin rate, as described in 

proposed § 39.13(g)(3); (C) each account 

held by a clearing member at the DCO, 

by customer origin and house origin, 

and (D) each swap portfolio, by 

beneficial owner. These requirements 

meet or exceed international 

recommendations.39

The Commission recognizes that 

while some DCOs generally apply a 

99% confidence level to some or all 

products that they clear, other DCOs 

apply a confidence level of between 

95% and 99% with respect to certain 

products. In addition, certain DCOs may 

achieve an average confidence level of 

99% across all products that they clear, 

although not every product may meet 

the 99% confidence level. The 

Commission invites comment regarding 

whether a confidence level of 99% is 

appropriate with respect to all 

applicable products, spreads, accounts, 

and swap portfolios.40

Proposed § 39.13(g)(2)(iv) does not 

specify the historic time period that a 

DCO would have to use when 

calculating a 99% confidence level for 

any particular product, account, or 

portfolio. Rather, it would permit each 


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Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 3705 

41See 75 FR at 77585 (proposing definitions in 

§ 39.1(b), to be redesignated as § 39.2). 

DCO to exercise its discretion with 

respect to the appropriate time periods 

that should be used in each instance, 

based on the characteristics, including 

volatility patterns, as applicable, of the 

products, spreads, accounts, or 

portfolios. 

(iii) Independent validation. 

Historically, many U.S. DCOs have 

used Chicago Mercantile Exchange’s 

(CME) proprietary risk-based portfolio 

margining system, Standard Portfolio 

Analysis of Risk® (SPAN) as the basis 

for their margin models for futures and 

options. However, there is at least one 

other margin model that is currently 

being used for futures and options, and 

there are also multiple margin models 

that DCOs are using for swaps that are 

currently cleared. As DCOs begin to 

clear additional swaps it can be 

anticipated that they will develop new 

margin models to address the risks of 

particular products. 

Proposed § 39.13(g)(3) would require 

that, on a regular basis, a DCO’s systems 

for generating initial margin 

requirements, including the DCO’s 

theoretical models, would have to be 

reviewed and validated by a qualified 

and independent party. A validation 

should include a comprehensive 

analysis to ensure that such systems and 

models achieve their intended goals. 

Although the proposed regulation does 

not define the term ‘‘regular basis,’’ the 

Commission would expect that, at a 

minimum, a DCO would obtain such an 

independent validation prior to 

implementation of a new margin model 

and when making any significant 

change to a model that is in use by the 

DCO. Significant changes would be 

those that could materially affect the 

nature or level of risks to which a DCO 

would be exposed. The Commission 

would expect a DCO to obtain an 

independent validation prior to any 

significant change that would relax risk 

management standards. However, if a 

DCO needed to adopt a significant 

change in an expedited manner to 

enhance risk protections, the 

Commission would expect the DCO to 

obtain an independent validation 

promptly after the change was made. 

The Commission has not proposed a 

definition of the term ‘‘qualified and 

independent party.’’ The Commission 

invites comment regarding whether a 

qualified and independent party must 

be a third party or whether there may 

be circumstances under which an 

employee of the relevant DCO could be 

considered to be independent. 

(iv) Spread margins. 

Proposed § 39.13(g)(4)(i) would 

permit a DCO to allow reductions in 

initial margin requirements for related 

positions (spread margins), if the price 

risks with respect to such positions 

were significantly and reliably 

correlated. Under the proposed 

regulation, the price risks of different 

positions would only be considered to 

be reliably correlated if there was a 

theoretical basis for the correlation in 

addition to an exhibited statistical 

correlation. A non-exclusive list of 

possible theoretical bases includes the 

following: (A) The products on which 

the positions are based are complements 

of, or substitutes for, each other; (B) one 

product is a significant input into the 

other product(s); (C) the products share 

a significant common input; or (D) the 

prices of the products are influenced by 

common external factors. An example of 

such an external factor might be interest 

rates. An offset may not be based solely 

on the fact that the prices of certain 

products have exhibited a statistical 

correlation in the past. The DCO would 

be required to be able to articulate a 

theoretical explanation for such a 

correlation. The Commission requests 

comment regarding the appropriateness 

of requiring a theoretical basis for the 

correlation between related positions 

before reductions in initial margin 

requirements would be permitted. 

Proposed § 39.13(g)(4)(ii) would 

require a DCO to regularly review its 

spread margins and the correlations on 

which they are based. 

(v) Price data. 

Proposed § 39.13(g)(5) would require 

a DCO to have a reliable source of 

timely price data to measure its credit 

exposure accurately, and to have written 

procedures and sound valuation models 

for addressing circumstances where 

pricing data is not readily available or 

reliable. Both initial margin and 

variation margin calculations require 

timely and reliable price data to be 

effective. DCOs should rely on prices 

from continuous, transparent, and 

liquid markets, wherever possible. It 

may be difficult to determine current 

market prices for certain over-thecounter (OTC) products if there is no 

continuous liquid market or if bid-ask 

spreads are volatile. In these 

circumstances, DCOs would need to 

ensure that they would be able to 

measure their credit exposures 

accurately through the use of sound 

valuation models. The nature of such 

valuation models would necessarily 

depend on the particular products and 

the source of any relevant pricing data. 

(vi) Daily review and back tests. 

Daily review and periodic back testing 

are essential to enable a DCO to ensure 

that its margin models continue to 

provide adequate coverage of the DCO’s 

risk exposures to its clearing members. 

Proposed § 39.13(g)(6) would require a 

DCO to determine the adequacy of its 

initial margin requirements for each 

product, on a daily basis, with respect 

to those products that are margined on 

a product basis. Proposed § 39.13(g)(7) 

would require a DCO to conduct certain 

back tests. The Commission has 

proposed to define ‘‘back test’’ in a 

separate rulemaking, as ‘‘a test that 

compares a derivatives clearing 

organization’s initial margin 

requirements with historical price 

changes to determine the extent of 

actual margin coverage.’’ 41 Thus, the 

back tests required by proposed 

§ 39.13(g)(7), which would require a 

comparison of initial margin 

requirements with historical price 

changes, are distinguished from the 

daily review required by proposed 

§ 39.13(g)(6), which would require a 

determination of whether a margin 

breach had occurred on the particular 

day under review. For purposes of 

proposed § 39.13(g)(7)(i) and (ii), 

proposed § 39.13(g)(7) specifies that, in 

conducting back tests, a DCO would be 

required to use historical price change 

data based on a time period that is 

equivalent in length to the historic time 

period used by the applicable margin 

model for establishing the minimum 

99% confidence level or a longer time 

period. The applicable time period is 

separately specified for the back tests 

required by proposed § 39.13(g)(7)(iii), 

as discussed below. 

Proposed § 39.13(g)(7)(i) would 

require a DCO, on a daily basis, to 

conduct back tests with respect to 

products that are experiencing 

significant market volatility. 

Specifically, a DCO would be required 

to test the adequacy of its initial margin 

requirements and its spread margin 

requirements for such products that are 

margined on a product basis. 

Proposed § 39.13(g)(7)(ii) would 

require a DCO, on at least a monthly 

basis, to conduct back tests to test the 

adequacy of its initial margin 

requirements and spread margin 

requirements for each product that is 

margined on a product basis. The 

Commission requests comment 

regarding whether initial margin 

requirements for all products should be 

subject to back tests on a monthly basis 

or whether some other time period, such 

as quarterly, would be sufficient to meet 

prudent risk management standards. 

Proposed § 39.13(g)(7)(iii) would 

require a DCO, on at least a monthly 

basis, to conduct back tests to test the 

adequacy of its initial margin 


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3706 Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 

42The Commission has proposed to define 

‘‘customer initial margin’’ as ‘‘initial margin posted 

by a customer with a futures commission merchant, 

or by a non-clearing futures commission merchant 

with a clearing member.’’ See 75 FR at 77585 

(proposing § 1.3(kkk)). 

43See 75 FR at 78195. 

44 ‘‘Maintenance margin’’ refers to an amount that 

must be maintained on deposit at all times. If the 

equity in a customer’s account drops below the 

level of maintenance margin because of adverse 

price movement, the FCM must issue a margin call 

to restore the customer’s equity to the customer 

initial margin level. 

45See http;//www.nfa.futures.org/NFAcompliance/publication-library/marginshandbook.pdf. 

requirements for each clearing member’s 

accounts, by customer origin and house 

origin, and each swap portfolio, by 

beneficial owner, over at least the 

previous 30 days. The Commission has 

proposed that the initial margin 

requirements for such clearing member 

accounts and swap portfolios must be 

compared to 30 days of historical data 

since the composition of such accounts 

and swap portfolios may change on a 

daily basis. The Commission anticipates 

that back tests with respect to such 

accounts and portfolios would involve a 

review of the initial margin 

requirements for each account and 

portfolio as it existed on each day 

during the 30-day period. The 

Commission requests comment 

regarding whether initial margin 

requirements for all clearing members’ 

accounts, by origin, and swap portfolios, 

by beneficial owner, should be subject 

to back tests on a monthly basis or 

whether some other time period, such as 

quarterly (based on the previous 

quarter’s historical data), would be 

sufficient to meet prudent risk 

management standards. 

(vii) Customer margin. 

Proposed § 39.13(g)(8) addresses three 

different proposed requirements 

regarding customer margin, including 

the collection of gross margin for 

customer accounts, customer initial 

margin levels, and withdrawals of 

customer initial margin.42

(1) Gross margin for customer 

accounts. 

Proposed § 39.13(g)(8)(i) would 

require a DCO to collect initial margin 

on a gross basis for each clearing 

member’s customer account equal to the 

sum of the initial margin amounts that 

would be required by the DCO for each 

individual customer within that account 

if each individual customer were a 

clearing member. A DCO would not be 

permitted to net positions of different 

customers against one another, but it 

could collect initial margin for its 

clearing members’ house accounts on a 

net basis. 

The Commission recognizes that gross 

margining of customer accounts would 

be a change from current margin 

practices at certain DCOs. However, the 

Commission believes that gross 

margining of customer accounts would 

more appropriately address the risks 

posed to a DCO by its clearing members’ 

customers than margining all of a 

particular clearing member’s customer 

accounts on a net basis. Gross margining 

would increase the financial resources 

available to a DCO in the event of a 

customer default. Moreover, with 

respect to cleared swaps, the 

requirement for gross margining of 

customers’ portfolios supports the 

requirement in proposed 

§ 39.13(g)(2)(iii) that a DCO would have 

to margin each swap portfolio at a 

minimum 99% confidence level. 

The Commission recently proposed a 

new § 39.19(c)(1)(iv) under which a 

DCO would be required, on a daily 

basis, to report the end-of-day positions 

for each clearing member, by origin.43 In 

connection with the proposed 

§ 39.13(g)(8)(i) requirement for DCOs to 

collect initial margin for customer 

accounts on a gross basis, the 

Commission is proposing to amend 

proposed § 39.19(c)(1)(iv) to 

additionally require a DCO, for the 

customer origin, to report the gross 

positions of each beneficial owner. 

(2) Customer initial margin 

requirements. 

Proposed § 39.13(g)(8)(ii) would 

require a DCO to require its clearing 

members to collect customer initial 

margin from their customers for nonhedge positions at a level that is greater 

than 100% of the DCO’s initial margin 

requirements with respect to each 

product and swap portfolio. Such a 

cushion would enable clearing members 

to deposit additional margin with a DCO 

on behalf of their customers, as 

necessitated by adverse market 

movements, without the need for the 

clearing members to make frequent 

margin calls to their customers. 

Historically, DCMs have mandated 

the amounts of customer initial margin 

and maintenance margin that their FCM 

members must collect from their 

customers.44 DCMs typically impose 

customer initial margin requirements 

that are higher, by a specified 

percentage, than the initial margin 

requirements imposed upon clearing 

FCMs by the relevant DCO, and 

maintenance margin requirements that 

are equivalent to the DCO’s initial 

margin requirements. Customer initial 

margin requirements have typically 

been between 125% and 140% of a 

DCO’s initial margin requirements. 

The Commission believes that DCOs 

should determine how much margin 

their FCM clearing members must 

collect from their customers because a 

DCO must ensure that its clearing 

members are able to meet their 

obligations to the DCO. Moreover, 

although it may be appropriate for a 

DCM to determine the customer initial 

margin requirements for non-clearing 

FCM members of the DCM, with respect 

to products traded on the DCM, a DCO 

may be the only entity in a position to 

assume any responsibility for setting 

customer initial margin requirements for 

cleared swaps that may be traded on 

SEFs or executed bilaterally. 

Proposed § 39.13(g)(8)(ii) would 

permit a DCO to have reasonable 

discretion in determining the percentage 

by which customer initial margins 

would have to exceed the DCO’s initial 

margin requirements with respect to 

particular products or swap portfolios. 

A DCO would be familiar with the risk 

characteristics of particular products 

and swap portfolios that it clears, which 

should enable it to determine the extent 

of the cushion that a clearing member 

should have with respect to customer 

initial margins. However, under the 

proposed regulation, the Commission 

may review such percentage levels and 

require different percentage levels, but 

not specific margin amounts, if the 

Commission deems the levels 

insufficient to protect the financial 

integrity of the clearing members or the 

DCO. 

The customer initial margin 

requirement set forth in proposed 

§ 39.13(g)(8)(ii) would only apply with 

respect to customers’ non-hedge 

positions. Hedge margins are typically 

equal to maintenance margins. 

(3) Withdrawal of customer initial 

margin. 

Proposed § 39.13(g)(8)(iii) would 

require a DCO to require its clearing 

members to prohibit their customers 

from withdrawing funds from their 

accounts with such clearing members 

unless the net liquidating value plus the 

margin deposits remaining in the 

customer’s account after the withdrawal 

would be sufficient to meet the 

customer initial margin requirements 

with respect to the products or 

portfolios in the customer’s account, 

which were cleared by the DCO. This is 

consistent with the definition of 

‘‘Margin Funds Available for 

Disbursement’’ in the Margins Handbook 

prepared by the Joint Audit 

Committee 45 and, therefore, codifies 

current practices. 

(viii) Time deadlines. 


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Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 3707 

46See 75 FR at 77585–86 (proposing definitions 

in § 39.1(b), to be redesignated as § 39.2). 

Proposed § 39.13(g)(9) would require 

a DCO to establish and enforce time 

deadlines for initial and variation 

margin payments. If margin payments 

are not made on time, DCOs and 

clearing members face uncollateralized 

risk. 

(g) Other Risk Control Mechanisms 

(i) Risk limits. 

Proposed § 39.13(h)(1)(i) would 

require a DCO to impose risk limits on 

each clearing member, by customer 

origin and house origin, in order to 

prevent a clearing member from 

carrying positions where the risk 

exposure of those positions exceeds a 

threshold set by the DCO relative to the 

clearing member’s financial resources, 

the DCO’s financial resources, or both. 

The DCO would have reasonable 

discretion in determining: (A) the 

method of computing risk exposure; (B) 

the applicable threshold(s); and (C) the 

applicable financial resources, provided 

however, that the ratio of exposure to 

capital would have to remain the same 

across all capital levels. The 

Commission could review any of these 

determinations and require different 

methods, thresholds, or financial 

resources, as appropriate. 

Proposed § 39.13(h)(1)(ii) would allow 

a DCO to permit a clearing member to 

exceed the threshold(s) applied 

pursuant to paragraph (h)(1)(i) provided 

that the DCO required the clearing 

member to post additional initial margin 

that the DCO deemed sufficient to 

appropriately eliminate excessive risk 

exposure at the clearing member. The 

Commission could review the amount of 

additional initial margin and require a 

different amount, as appropriate. 

(ii) Large trader reports. 

Proposed § 39.13(h)(2) would require 

a DCO to obtain from its clearing 

members, copies of all reports that such 

clearing members were required to file 

with the Commission pursuant to part 

17 of the Commission’s regulations, i.e., 

large trader reports. A DCO would be 

required to obtain such reports directly 

from the relevant reporting market if the 

reporting market exclusively listed selfcleared contracts, and were therefore 

required to file such reports on behalf of 

clearing members, pursuant to 

§ 17.00(i). 

Proposed § 39.13(h)(2) would require 

a DCO to review the large trader reports 

that it received from its clearing 

members, or reporting markets, as 

applicable, on a daily basis to ascertain 

the risk of the overall portfolio of each 

large trader. A DCO would be required 

to review large trader positions for each 

large trader, across all clearing members 

carrying an account for the large trader. 

A DCO would also be required to take 

additional actions with respect to such 

clearing members in order to address 

any risks posed by a large trader, when 

appropriate. Such actions would 

include actions specified in proposed 

§ 39.13(h)(6), as discussed in section 

II.B.2(g)(vi) below. 

(iii) Stress tests. 

Proposed § 39.13(h)(3) would require 

a DCO to conduct certain daily and 

weekly stress tests. The Commission has 

proposed to define ‘‘stress test’’ in a 

separate rulemaking, as ‘‘a test that 

compares the impact of a potential price 

move, change in option volatility, or 

change in other inputs that affect the 

value of a position, to the financial 

resources of a derivatives clearing 

organization, clearing member, or large 

trader, to determine the adequacy of 

such financial resources.’’ 46 The 

Commission has not proposed a 

definition of financial resources in this 

context, although it would be expected 

to include, at a minimum, margin on 

deposit, and with respect to a clearing 

member, its capital. 

Proposed § 39.13(h)(3) would require 

a DCO to conduct certain types of stress 

tests with respect to certain large traders 

on a daily basis and with respect to all 

clearing member accounts and swap 

portfolios on at least a weekly basis. 

Proposed § 39.13(h)(3)(i) would 

require a DCO to conduct daily stress 

tests with respect to each large trader 

who poses significant risk to a clearing 

member or the DCO in the event of 

default, including positions at all 

clearing members carrying accounts for 

the large trader. The DCO would have 

reasonable discretion in determining 

which traders to test and the 

methodology used to conduct the stress 

tests. However, the Commission could 

review the selection of accounts and the 

methodology and require changes, as 

appropriate. 

Proposed § 39.13(h)(3)(ii) would 

require a DCO to conduct stress tests, at 

least once a week with respect to each 

account held by a clearing member at 

the DCO, by customer origin and house 

origin, and each swap portfolio, by 

beneficial owner, under extreme but 

plausible market conditions. The DCO 

would have reasonable discretion in 

determining the methodology used to 

conduct these stress tests. However, the 

Commission may review the 

methodology and require any 

appropriate changes. The Commission 

requests comment regarding whether all 

clearing member accounts, by origin, 

and all swap portfolios should be 

subject to such stress tests on a weekly 

basis or whether some other time 

period, such as monthly, would be 

sufficient to meet prudent risk 

management standards. 

(iv) Portfolio compression. 

Proposed § 39.13(h)(4)(i) would 

require a DCO to offer multilateral 

portfolio compression exercises, on a 

regular basis, for its clearing members 

that clear swaps, to the extent that such 

exercises are appropriate for those 

swaps that it clears. The Commission 

has not specified the frequency with 

which DCOs must offer multilateral 

portfolio compression exercises in 

proposed § 39.13(h)(4)(i), other than to 

state that they would have to be offered 

on a regular basis. The Commission 

requests comment regarding whether 

such exercises should be offered 

monthly, quarterly, or another 

frequency. In addition, the Commission 

requests comment regarding whether 

the frequency of such exercises should 

vary for different categories of swaps. 

Under proposed § 39.13(h)(4)(ii), a 

DCO must require its clearing members 

to participate in all multilateral 

portfolio compression exercises offered 

by the DCO, to the extent that any swap 

in the applicable portfolio is eligible for 

inclusion in the exercise, unless 

including the swap would be reasonably 

likely to significantly increase the risk 

exposure of the clearing member. 

Proposed § 39.13(h)(4)(iii) would permit 

a DCO to allow clearing members 

participating in such exercises to set 

risk tolerance limits for their portfolios, 

provided that the clearing member 

could not set such risk tolerances at an 

unreasonable level or use such risk 

tolerances to evade the requirements of 

proposed § 39.13(h)(4). 

(v) Clearing members’ risk 

management policies and procedures. 

The Commission believes that in 

order for a DCO to adequately manage 

its own risks, it must ensure that its 

clearing members also have adequate 

risk management policies and 

procedures. In order to do this, a DCO 

must have the authority to obtain 

documents and information from its 

clearing members regarding such 

policies and procedures, and must 

review their implementation on a 

periodic basis. 

Proposed § 39.13(h)(5) would impose 

several requirements upon DCOs 

relating to their clearing members’ risk 

management policies and procedures. 

Specifically, a DCO must adopt rules 

that: (a) Require its clearing members to 

maintain current written risk 

management policies and procedures; 

(b) ensure that the DCO has the 

authority to request and obtain 

information and documents from its 


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3708 Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 

47Section 5b(c)(2)(E) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(E) (Core Principle E). 

48Prior to amendment by the Dodd-Frank Act, 

Core Principle E provided that [t]he applicant shall 

have the ability to— 

(i) complete settlements on a timely basis under 

varying circumstances; 

(ii) maintain an adequate record of the flow of 

funds associated with each transaction that the 

applicant clears; and 

(iii) comply with the terms and conditions of any 

permitted netting or offset arrangements with other 

clearing organizations. 

49See CPSS–IOSCO Recommendations, pg. 21; 

EMIR, Article 39, paragraph 3, pg. 46. 

clearing members regarding their risk 

management policies, procedures, and 

practices, including, but not limited to, 

information and documents relating to 

the liquidity of their financial resources 

and their settlement procedures; and (c) 

require its clearing members to make 

information and documents regarding 

their risk management policies, 

procedures, and practices available to 

the Commission upon the Commission’s 

request. In addition, a DCO would be 

required to review the risk management 

policies, procedures, and practices of 

each of its clearing members on a 

periodic basis and document such 

reviews. 

Proposed § 39.13(h)(5) does not define 

how DCOs would have to conduct 

clearing member risk management 

reviews, and has not specified a 

required frequency of such reviews 

except to state that they would have to 

be conducted on a periodic basis. The 

Commission invites comment regarding 

whether it should require that a DCO 

must conduct risk reviews of its clearing 

members on an annual basis or within 

some other time frame. The Commission 

also requests comment regarding 

whether the Commission should require 

that such reviews be conducted in a 

particular manner, e.g., whether there 

must be an on-site visit or whether any 

particular testing should be required. In 

addition, the Commission invites 

comment regarding whether, and to 

what extent, a DCO should be permitted 

to vary the method and depth of such 

reviews based upon the nature, risk 

profiles, or other regulatory supervision 

of particular clearing members. 

The risk management reviews 

contemplated by proposed § 39.13(h)(5) 

would also support DCOs’ compliance 

with Core Principle C and proposed 

§ 39.12, by providing a means for the 

DCO and the Commission to ensure that 

clearing members continue to meet 

participation requirements relating to 

risk management. 

(vi) Additional authority. 

Proposed § 39.13(h)(6) would require 

a DCO to take additional actions with 

respect to particular clearing members, 

when appropriate, based on the 

application of objective and prudent 

risk management standards. Such 

actions would include, but would not be 

limited to: (i) Imposing enhanced 

capital requirements; (ii) imposing 

enhanced margin requirements; (iii) 

imposing position limits; (iv) 

prohibiting an increase in positions; (v) 

requiring a reduction of positions; (vi) 

liquidating or transferring positions; and 

(vii) suspending or revoking clearing 

membership. The Commission believes 

that a DCO should have the authority to 

take any of the specified actions or other 

appropriate actions, and should take 

such actions, when necessary to address 

risks posed to the DCO by particular 

clearing members or their customers. 

However, a DCO would have the 

discretion to determine when to take 

additional actions, and what actions to 

take, based on its exercise of objective 

and prudent risk management 

standards. 

3. Settlement Procedures 

Core Principle E, as amended by the 

Dodd-Frank Act,47 requires a DCO to: (a) 

Complete money settlements on a 

timely basis, but not less frequently than 

once each business day; (b) employ 

money settlement arrangements to 

eliminate or strictly limit its exposure to 

settlement bank risks (including credit 

and liquidity risks from the use of banks 

to effect money settlements); (c) ensure 

that money settlements are final when 

effected; (d) maintain an accurate record 

of the flow of funds associated with 

money settlements; (e) possess the 

ability to comply with the terms and 

conditions of any permitted netting or 

offset arrangement with another clearing 

organization; (f) establish rules that 

clearly state each obligation of the DCO 

with respect to physical deliveries; and 

(g) ensure that it identifies and manages 

each risk arising from any of its 

obligations with respect to physical 

deliveries.48 The Commission is 

proposing to adopt § 39.14 to establish 

requirements that a DCO would have to 

meet in order to comply with Core 

Principle E. 

Proposed § 39.14(a) would define 

‘‘settlement’’ and ‘‘settlement bank’’ for 

purposes of § 39.14. In particular, 

‘‘settlement’’ is defined in proposed 

§ 39.14(a)(1) to include: (i) Payment and 

receipt of variation margin for futures, 

options and swap positions; (ii) 

payment and receipt of option 

premiums; (iii) deposit and withdrawal 

of initial margin for futures, options and 

swap positions; (iv) all payments due in 

final settlement of futures, options and 

swap positions on the final settlement 

date with respect to such positions; and 

(v) all other cash flows collected from or 

paid to each clearing member, including 

but not limited to, payments related to 

swaps such as coupon amounts. 

‘‘Settlement bank’’ is defined in 

proposed § 39.14(a)(2) as ‘‘a bank that 

maintains an account either for the 

[DCO] or for any of its clearing 

members, which is used for the purpose 

of transferring funds and receiving 

transfers of funds in connection with 

settlements with the [DCO].’’ 

(a) Daily settlements. 

The daily settlement of financial 

obligations arising from the addition of 

new positions and price changes with 

respect to all open positions is an 

essential element of the clearing process 

at a DCO. Proposed § 39.14(b) would 

require a DCO to effect a settlement with 

each clearing member at least once each 

business day, and to have the authority 

and operational capacity to effect a 

settlement with each clearing member, 

on an intraday basis, either routinely, 

when thresholds specified by the DCO 

were breached, or in times of extreme 

market volatility. 

Proposed § 39.14(b) would permit 

DCOs to exercise their discretion 

regarding whether they would effect 

routine intraday settlements or whether 

they would settle positions on an 

intraday basis only when certain 

thresholds were breached or in times of 

extreme market volatility. Moreover, a 

DCO would have the discretion to 

establish any relevant thresholds and to 

define extreme market volatility in the 

context of the products and portfolios 

that it clears. These provisions are 

consistent with international 

recommendations.49

(b) Settlement banks. 

A DCO generally requires its clearing 

members to effect settlement through 

one of a specified set of settlement 

banks. In addition, a DCO itself often 

has a lead, concentration, or central 

settlement bank. 

Proposed § 39.14(c) would set forth 

three specific requirements in 

furtherance of the general requirement 

that DCOs must employ settlement 

arrangements to eliminate or strictly 

limit their exposure to settlement bank 

risks. First, proposed § 39.14(c)(1) 

would require a DCO to have 

documented criteria for those banks that 

it would use, and that it would permit 

its clearing members to use, as 

settlement banks, including criteria 

addressing the capitalization, 

creditworthiness, access to liquidity, 

operational reliability, and regulation or 

supervision of such banks. Second, 

proposed § 39.14(c)(2) would require a 

DCO to monitor each approved 


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Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 3709 

50A DCO may have multiple exposures to a 

settlement bank, e.g., if the bank is also a clearing 

member or extends a credit facility funding 

arrangement to the DCO. 

51Section 5b(c)(2)(E)(iv) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(E)(iv). 

52Section 5b(c)(2)(E)(v) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(E)(v). 

53Section 5b(c)(2)(F) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(F) (Core Principle F). 

54Prior to amendment by the Dodd-Frank Act, 

Core Principle F provided that ‘‘[t]he applicant shall 

have standards and procedures designed to protect 

and ensure the safety of member and participant 

funds.’’ 

55Such ‘‘assets’’ would include any securities or 

property that clearing members deposit with a DCO 

in order to satisfy initial margin obligations, which 

are also sometimes referred to as ‘‘collateral.’’ 

Proposed § 39.15 uses the term ‘‘assets’’ rather than 

‘‘securities or property’’ or ‘‘collateral’’ in order to be 

consistent with the statutory language. 

settlement bank on an ongoing basis to 

ensure that it continues to meet the 

documented criteria. Finally, proposed 

§ 39.14(c)(3) would require a DCO to 

monitor the full range and concentration 

of its exposures to its own and its 

clearing members’ settlement banks 50

and assess its own and its clearing 

members’ potential losses and liquidity 

pressures in the event that the 

settlement bank with the largest share of 

settlement activity were to fail. If action 

were reasonably necessary in order to 

eliminate or strictly limit exposures to 

settlement banks, a DCO would be 

required to: (i) Maintain settlement 

accounts at additional settlement banks; 

(ii) approve additional settlement banks 

for use by its clearing members; (iii) 

impose concentration limits with 

respect to its own or its clearing 

members’ settlement banks; and/or (iv) 

take any other appropriate actions. The 

determination of whether any such 

actions were necessary would be left to 

the discretion of the DCO in the first 

instance, but such determination would 

have to be reasonable. 

(c) Settlement finality. 

Proposed § 39.14(d) would require 

that a DCO must ensure that settlement 

fund transfers are irrevocable and 

unconditional when the DCO’s accounts 

are debited or credited. In addition, the 

proposed regulation would require that 

a DCO’s legal agreements with its 

settlement banks would have to state 

clearly when settlement fund transfers 

would occur and a DCO would have to 

routinely confirm that its settlement 

banks were effecting fund transfers as 

and when required by those legal 

agreements. 

(d) Recordkeeping. 

Proposed § 39.14(e) would 

incorporate Core Principle E’s 

requirement that a DCO must maintain 

an accurate record of the flow of funds 

associated with each settlement.51

(e) Netting arrangements. 

Proposed § 39.14(f) would incorporate 

Core Principle E’s requirement that a 

DCO must possess the ability to comply 

with each term and condition of any 

permitted netting or offset arrangement 

with any other clearing organization.52

(f) Physical delivery. 

Proposed § 39.14(g) would set forth 

requirements with respect to contracts, 

agreements, and transactions that are 

settled by physical transfers of the 

underlying instruments or commodities. 

In particular, the proposed regulation 

would require a DCO to establish rules 

clearly stating each obligation that the 

DCO has assumed with respect to 

physical deliveries, including whether it 

has an obligation to make or receive 

delivery of a physical instrument or 

commodity, or whether it indemnifies 

clearing members for losses incurred in 

the delivery process, and to ensure that 

the risks of each such obligation are 

identified and managed. Proposed 

§ 39.14(g) would not require DCOs to 

assume any particular obligations in 

connection with physical deliveries, in 

recognition of the fact that DCOs would 

need to determine what, if any, 

obligations to assume on a productspecific basis, in the exercise of prudent 

risk management standards. 

4. Treatment of Funds 

Core Principle F, as amended by the 

Dodd-Frank Act,53 requires a DCO to:(a) 

Establish standards and procedures that 

are designed to protect and ensure the 

safety of its clearing members’ funds 

and assets; (b) hold such funds and 

assets in a manner by which to 

minimize the risk of loss or of delay in 

the DCO’s access to the assets and 

funds; and (c) only invest such funds 

and assets in instruments with minimal 

credit, market, and liquidity risks.54 The 

Commission is proposing to adopt 

§ 39.15 to establish requirements that a 

DCO would have to meet in order to 

comply with Core Principle F. 

(a) Required standards and 

procedures. 

Proposed § 39.15(a) would require a 

DCO to establish standards and 

procedures that are designed to protect 

and ensure the safety of funds and 

assets belonging to clearing members 

and their customers.55

(b) Segregation of funds and assets. 

Proposed § 39.15(b)(1) would require 

a DCO to comply with the segregation 

requirements of section 4d of the CEA 

and Commission regulations 

thereunder, or any other applicable 

Commission regulation or order 

requiring that customer funds and assets 

be segregated, set aside, or held in a 

separate account. The Commission has 

included this language because it is an 

essential element of the standards and 

procedures described in proposed 

§ 39.15(a). However, proposed 

§ 39.15(b)(1) would not impose any new 

requirements on DCOs that are in 

addition to those required by section 4d 

of the CEA and those that are currently 

required, or may in the future be 

required, by applicable Commission 

regulations or orders. 

Proposed § 39.15(b)(2)(i) would 

permit a DCO to commingle, and a DCO 

to permit clearing member FCMs to 

commingle, customer positions in 

futures, options on futures, and swaps, 

and any money, securities, or property 

received to margin, guarantee, or secure 

such positions, in an account subject to 

the requirements of section 4d(f) of the 

CEA (cleared swap account), pursuant 

to DCO rules that have been approved 

by the Commission under § 40.5 of the 

Commission’s regulations. The 

proposed regulation would establish 

minimum informational requirements 

for such rule submissions, consistent 

with the informational requirements the 

Commission has previously imposed 

upon petitioners requesting orders 

under section 4d of the CEA. 

The rule filing would have to be 

submitted electronically to the 

Commission, in the form and manner 

required by the Commission, and would 

have to include, at a minimum, the 

following: (A) An identification of the 

futures, options on futures, and swaps 

that would be commingled, including 

contract specifications or the criteria 

that would be used to define eligible 

futures, options on futures, and swaps; 

(B) an analysis of the risk characteristics 

of the eligible products; (C) a 

description of whether the swaps would 

be executed bilaterally and/or executed 

on a DCM and/or a SEF; (D) an analysis 

of the liquidity of the respective markets 

for the futures, options on futures, and 

swaps that would be commingled, the 

ability of clearing members and the DCO 

to offset or mitigate the risks of such 

products in a timely manner, without 

compromising the financial integrity of 

the account, and, as appropriate, 

proposed means for addressing 

insufficient liquidity; (E) an analysis of 

the availability of reliable prices for 

each of the eligible products; (F) a 

description of the financial, operational, 

and managerial standards or 

requirements for clearing members that 

would be permitted to commingle the 

eligible products; (G) a description of 

the systems and procedures that would 

be used by the DCO to oversee such 

clearing members’ risk management of 

the commingled positions; (H) a 


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56See supra section II.B.2.f.ii of this notice, 

discussing the minimum liquidation time of five 

business days for margining cleared swaps that are 

not executed on a DCM. 

57See supra n.38. 

58Rules submitted for prior approval would be 

approved unless the rule is inconsistent with the 

CEA or the Commission’s regulations. See section 

5c(c)(5) of the CEA; 7 U.S.C. 7a–2(c)(5); and 75 FR 

at 67295. 

59 7 U.S.C. 6(c). See infra section IV. (further 

discussing the 4(c) exemption and requesting 

comment). 

60While changes in collateral values tend to be 

procyclical, collateral arrangements can increase 

procyclicality if haircut levels fall during periods of 

low-market stress and increase during periods of 

high-market stress. For example, in a stressed 

market, if a DCO required the posting of additional 

collateral due to both the decline of asset prices and 

an increase in haircut levels, it could exacerbate 

market stress and drive down asset prices further, 

resulting in additional collateral requirements. This 

cycle could exert further downward pressure on 

asset prices in already stressed markets. To limit the 

effects of this procyclicality, a DCO should establish 

stable and conservative haircuts that are calibrated 

to include periods of stressed market conditions. 

description of the financial resources of 

the DCO, including the composition and 

availability of a guaranty fund with 

respect to the commingled products; (I) 

a description and analysis of the margin 

methodology that would be applied to 

the commingled products, including 

any margin reduction applied to 

correlated positions, and any applicable 

margin rules with respect to both 

clearing members and customers; 56 (J) 

an analysis of the ability of the DCO to 

manage a potential default with respect 

to any of the commingled products; (K) 

a discussion of the procedures that the 

DCO would follow if a clearing member 

defaulted, and the procedures that a 

clearing member would follow if a 

customer defaulted, with respect to any 

of the commingled products; and (L) a 

description of the arrangements for 

obtaining daily position data from each 

beneficial owner of the commingled 

products. 

Proposed § 39.15(b)(2)(ii) addresses 

situations where customer positions in 

futures, options on futures, and cleared 

swaps could be carried in a futures 

account subject to section 4d(a) of the 

CEA. In recent years, the Commission, 

in its discretion, has issued orders 

permitting cleared swaps to be carried 

in a futures account, on a case-by-case 

basis.57 Proposed § 39.15(b)(2)(ii) would 

incorporate the informational 

requirements of proposed 

§ 39.15(b)(2)(i), but would still require 

that the Commission issue an order 

granting permission to commingle 

customer positions in futures, options 

on futures, and swaps in a futures 

account. 

Proposed § 39.15(b)(2)(iii)(A) would 

provide that the Commission may 

request additional information in 

support of a rule submission and it may 

approve the rules in accordance with 

§ 40.5.58 Proposed § 39.15(b)(2)(iii)(B) 

would provide that the Commission 

may request additional information in 

support of a petition and it may issue an 

order under section 4d of the CEA in its 

discretion. 

In the case of a rule approval under 

§ 39.15(b)(2)(i), as well as the issuance 

of an order under § 39.15(b)(2)(ii), the 

Commission would take action pursuant 

to section 4d of the CEA (permitting 

commingling) and section 4(c) of the 

CEA (exempting the DCO and clearing 

members from the requirement to hold 

customer positions in a particular 

account, as applicable, 4d(a) or 4d(f)).59

The Commission requests comment 

on whether it should take the same 

approach (rule submission or petition 

for an order) with respect to the futures 

account and the cleared swap account 

and, if so, what that approach should 

be. In addition, the Commission 

requests comment on whether the 

enumerated informational requirements 

fully capture the relevant considerations 

for making a determination on either 

rule approval or the granting of an 

order, and whether the Commission’s 

analysis should take into consideration 

the type of account in which the 

positions would be carried, the 

particular type of products that would 

be involved, or the financial resources 

of the clearing members that would hold 

such accounts. The Commission further 

requests comment on what, if any, 

additional or heightened requirements 

should be imposed to manage the 

increased risks introduced to a futures 

account that also holds cleared swaps. 

(c) Holding of funds and assets. 

Proposed § 39.15(c) would require 

that a DCO must hold funds and assets 

belonging to clearing members and their 

customers in a manner that minimizes 

the risk of loss or of delay in the DCO’s 

access to those funds and assets. In 

furtherance of this objective, the 

Commission has proposed certain 

requirements addressing types of assets 

that a DCO may accept, the valuation of 

such assets, applicable haircuts, 

concentration limits, and requirements 

that would apply if assets were pledged 

to a DCO but were held in the name of 

a clearing member, as described below. 

(i) Types of assets. 

Proposed § 39.15(c)(1) would require 

a DCO to limit the assets it accepts as 

initial margin to those that have 

minimal credit, market, and liquidity 

risks. The proposed regulation would 

also state that a DCO may not accept 

letters of credit as initial margin. The 

Commission has not specified the assets 

that a DCO may accept, and with the 

exception of letters of credit, it has not 

specified the assets that a DCO may not 

accept. In general, proposed 

§ 39.15(c)(1) would set forth the criteria 

of minimal credit, market, and liquidity 

risks and would leave it to the 

discretion of each DCO to determine 

which assets the DCO would accept, 

subject to their meeting those criteria. 

The Commission has proposed to 

prohibit the acceptance of letters of 

credit because they are unfunded 

financial resources with respect to 

which funds might be unavailable when 

most needed. The Commission expects 

that DCOs would continue their current 

practice of re-evaluating the types of 

assets that they would accept as initial 

margin as necessitated by changes in 

market conditions that could affect the 

credit, market, and liquidity risks of 

those assets. 

(ii) Valuation. 

Proposed § 39.15(c)(2) would require 

a DCO to use prudent valuation 

practices to value assets posted as initial 

margin on a daily basis. The 

Commission has not specified what 

such valuation practices should entail, 

as the nature of the valuations would 

depend on the nature of the particular 

assets. However, whatever method 

would be used to determine the value of 

margin assets, it is crucial that such 

assets be valued daily, because a DCO 

cannot evaluate the adequacy of margin 

coverage on a daily basis without 

knowing the value of the assets that are 

components of the margin on deposit. 

Such daily valuation of margin assets is 

currently the standard practice of DCOs. 

(iii) Haircuts. 

Proposed § 39.15(c)(3) would require 

a DCO to apply appropriate reductions 

in value to reflect the market and credit 

risk of the assets that it accepts in 

satisfaction of initial margin obligations. 

Such reductions are known as haircuts, 

and DCOs currently apply haircuts to 

the margin assets that they accept as 

initial margin. Haircuts are designed to 

mitigate the potential future exposure 

that could result from potential changes 

in the value of particular assets. 

Haircut levels would be dependent on 

the nature of the particular assets. DCOs 

would be required to calculate their 

haircuts taking into account stressed 

market conditions. Incorporating 

stressed market conditions into the 

calculation of haircuts can limit the 

effects of procyclicality, which refers to 

changes that are positively correlated 

with business or credit cycle 

fluctuations and that may cause or 

exacerbate financial instability.60 In 


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61 IOSCO Recommendation 7 (custody and 

investment risks) also states, in part, that ‘‘[a]ssets 

invested by a CCP should be held in instruments 

with minimal credit, market, and liquidity risks.’’ 

(CPSS–IOSCO Recommendations, pg. 31). 

62Section 5b(c)(2)(G) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(G) (Core Principle G). 63Prior to amendment by the Dodd-Frank Act, 

Core Principle G provided that ‘‘[t]he applicant shall 

have rules and procedures designed to allow for 

efficient, fair, and safe management of events when 

members or participants become insolvent or 

otherwise default on their obligations to the 

derivatives clearing organization.’’ 

64Core Principle G specifically refers to events 

during which clearing members ‘‘(I) become 

insolvent; or (II) otherwise default * * *.’’ 

However, it is possible that a clearing member 

could become insolvent and not default on its 

obligations to the DCO. For example, the insolvency 

could be a consequence of a clearing member’s 

meeting all such obligations. Nevertheless, the 

Commission believes that a clearing member should 

be required to follow certain procedures, beginning 

with notifying the DCO, if it becomes subject to a 

bankruptcy petition, receivership proceeding, or the 

equivalent, and such proposed requirements are 

contained in proposed § 39.16(d), discussed infra in 

section II.B.5.d. 

65Similarly, IOSCO Recommendation 6 (Default 

procedures) states that ‘‘[a] CCP’s default procedures 

should be clearly stated, and they should ensure 

that the CCP can take timely action to contain losses 

and liquidity pressures and to continue meeting its 

obligations.’’ (CPSS–IOSCO Recommendations, pg. 

27). 

addition, the proposed regulation would 

require a DCO to evaluate the 

appropriateness of its haircuts on at 

least a quarterly basis. 

(iv) Concentration limits. 

Proposed § 39.15(c)(4) would require 

a DCO to apply appropriate limitations 

on the concentration of assets posted as 

initial margin, as necessary, in order to 

ensure the DCO’s ability to liquidate 

those assets quickly with minimal 

adverse price effects. Any concentration 

limits would be set by the DCO, in its 

discretion, depending on the nature of 

the assets. The proposed regulation 

would require a DCO to evaluate the 

appropriateness of its concentration 

limits, on at least a monthly basis. 

(v) Pledged assets. 

Some DCOs permit their clearing 

members to pledge assets for initial 

margin while retaining those assets in 

accounts in the names of the pledging 

clearing members. Proposed 

§ 39.15(c)(5) would require that if such 

pledged assets were held in an account 

in the name of a clearing member, the 

DCO would have to ensure that the 

assets were unencumbered and that the 

pledge had been validly created and 

validly perfected in the relevant 

jurisdiction, in order to ensure that the 

DCO had immediate access to those 

assets. 

(d) Permissible investments. 

Proposed § 39.15(d) would require 

that clearing members’ funds and assets 

that are invested by a DCO must be held 

in instruments with minimal credit, 

market, and liquidity risks.61 The 

proposed regulation further adds that 

any investment of customer funds or 

assets by a DCO would have to comply 

with § 1.25 of the Commission’s 

regulations, which itself is designed to 

ensure that such investments would be 

subject to minimal credit, market, and 

liquidity risks. Moreover, the proposed 

regulation would apply the limitations 

contained in § 1.25 to all customer 

funds and assets, whether they were the 

funds and assets of futures and options 

customers subject to the segregation 

requirements of section 4d(a) of the 

CEA, or the funds and assets of swaps 

customers subject to the segregation 

requirements of section 4d(f) of the 

CEA. 

The proposed regulation does not 

enumerate the specific instruments in 

which DCOs may invest clearing 

members’ own funds and assets, leaving 

it to the discretion of each DCO to 

determine which instruments have 

minimal credit, market, and liquidity 

risks. As regards those assets that DCOs 

would accept as initial margin, the 

Commission expects that DCOs would 

continue their current practice of reevaluating the instruments in which 

they would invest clearing members’ 

own funds and assets, as necessitated by 

changes in market conditions that could 

affect the credit, market, and liquidity 

risks of those instruments. 

5. Default Rules and Procedures 

Core Principle G, as amended by the 

Dodd-Frank Act,62 requires each DCO to 

have rules and procedures designed to 

allow for the efficient, fair, and safe 

management of events during which 

clearing members become insolvent or 

otherwise default on their obligations to 

the DCO. In addition, Core Principle G 

requires each DCO to clearly state its 

default procedures, make its default 

rules publicly available, and ensure that 

it may take timely action to contain 

losses and liquidity pressures and to 

continue meeting its obligations.63 The 

Commission is proposing to adopt 

§ 39.16 to establish requirements that a 

DCO would have to meet in order to 

comply with Core Principle G. 

(a) General. 

It is essential that DCOs have clearly 

defined and effective default 

management rules and procedures in 

order to protect the defaulting clearing 

members’ customers, non-defaulting 

clearing members, and the DCO, to the 

extent possible. Proposed § 39.16(a) 

would require DCOs to adopt rules and 

procedures designed to allow for the 

efficient, fair, and safe management of 

events during which clearing members 

become insolvent or default on the 

obligations of such clearing members to 

the DCO.64 Existing DCOs have rules 

and procedures to address possible 

defaults. 

(b) Default management plan. 

Proposed § 39.16(b) would require a 

DCO to maintain a current written 

default management plan that delineates 

the roles and responsibilities of its 

Board of Directors, its Risk Management 

Committee, any other committee that 

has responsibilities for default 

management, and the DCO’s 

management, in addressing a default, 

including any necessary coordination 

with, or notification of, other entities 

and regulators. The proposed regulation 

would also require the default 

management plan to address any 

differences in procedures with respect 

to highly liquid contracts (such as 

certain futures) and less liquid contracts 

(such as certain swaps). In addition, 

proposed § 39.16(b) would require a 

DCO to conduct and document a test of 

its default management plan on at least 

an annual basis. 

(c) Default procedures. 

Proposed § 39.16(c)(1) would require 

a DCO to adopt procedures that would 

permit the DCO to take timely action to 

contain losses and liquidity pressures 

and to continue meeting its obligations 

in the event of a default on the 

obligations of a clearing member to the 

DCO.65

Proposed § 39.16(c)(2) would require 

a DCO to include certain identified 

procedures in its default rules. In 

particular, proposed § 39.16(c)(2)(i) 

would require a DCO to set forth its 

definition of a default. Proposed 

§ 39.16(c)(2)(ii) would require a DCO to 

set forth the actions that it is able to take 

upon a default, which must include the 

prompt transfer, liquidation, or hedging 

of the customer or proprietary positions 

of the defaulting clearing member, as 

applicable. Proposed § 39.16(c)(2)(ii) 

would further state that such procedures 

could also include, in the DCO’s 

discretion, the auctioning or allocation 

of such positions to other clearing 

members. Proposed § 39.16(c)(2)(iii) 

would require a DCO to include in its 

default rules any obligations that the 

DCO imposed on its clearing members 

to participate in auctions, or to accept 

allocations, of a defaulting clearing 

member’s positions, and specifically 

would provide that any allocation 

would have to be proportional to the 

size of the participating or accepting 

clearing member’s positions at the DCO. 

For example, certain DCO rules 

currently address the DCO’s authority to 

auction a defaulting clearing member’s 


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66See section 5b(c)(2)(G)(ii)(II) of the CEA; 7 

U.S.C. 7a–1(c)(2)(G)(ii)(II). 

67See 75 FR at 78197. 

68Section 5b(c)(2)(I) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(I) (Core Principle I). 

69Prior to amendment by the Dodd-Frank Act, 

Core Principle I provided that 

[t]he applicant shall demonstrate that the 

applicant (i) has established and will maintain a 

program of oversight and risk analysis to ensure 

that the automated systems of the applicant 

function properly and have adequate capacity and 

security; and (ii) has established and will maintain 

emergency procedures, and a plan for disaster 

recovery, and will periodically test backup facilities 

sufficient to ensure daily processing, clearing, and 

settlement of transactions. 

70See 75 FR 42633 (July 22, 2010) (July Proposal). 

71The Commission may consider, in a future 

rulemaking, placing an expanded version of these 

definitions (to include, e.g., recovery time 

objectives with respect to DCMs and other 

registered entities) in part 1, and, as appropriate, 

incorporating those definitions by reference in part 

39 of its regulations. 

swaps to other clearing members that 

participate in the market for that 

category of swaps. 

Proposed § 39.16(c)(2)(iv) would 

require that a DCO’s default rules 

address the sequence in which the 

funds and assets of the defaulting 

clearing member and the financial 

resources maintained by the DCO would 

be applied in the event of a default. The 

proposed regulation would not specify 

the sequence in which a DCO would be 

required to apply its own resources or 

those of the defaulting clearing member, 

but it would set forth two related 

requirements. 

First, proposed § 39.16(c)(2)(v) would 

require that a DCO’s default rules 

contain a provision that customer 

margin posted by a defaulting clearing 

member could not be applied in the 

event of a proprietary default. This is 

consistent with the segregation 

requirements of section 4d of the CEA 

and § 1.20 of the Commission’s 

regulations. 

Second, proposed § 39.16(c)(2)(vi) 

would require that a DCO’s default rules 

contain a provision that proprietary 

margins posted by a defaulting clearing 

member would have to be applied in the 

event of a customer default, if the 

relevant customer margin were 

insufficient to cover the shortfall. This 

is consistent with § 190.08(a)(ii)(J), 

which defines customer property to 

include the trading accounts of an FCM, 

to the extent that other enumerated 

customer property is insufficient to 

satisfy all claims of public customers in 

the bankruptcy of the FCM. 

Proposed § 39.16(c)(3) would 

incorporate the Core Principle G 

requirement that a DCO must make its 

default rules publicly available,66 and it 

cross-references proposed § 39.21, 

which has been proposed in a separate 

rulemaking and which also addresses 

this requirement.67

(d) Insolvency of a clearing member. 

Proposed § 39.16(d) would set forth 

specific procedures that a DCO would 

have to require its clearing members to 

follow, and that a DCO itself would 

have to follow, if a clearing member 

became the subject of a bankruptcy 

petition (either voluntary or 

involuntary), a receivership proceeding, 

or an equivalent proceeding, e.g., a 

foreign liquidation proceeding. The 

Commission believes that such 

procedures would be necessary in order 

to provide for ‘‘the efficient, fair, and 

safe management of events’’ when a 

clearing member becomes insolvent, as 

required by Core Principle G. 

Proposed § 39.16(d)(1) would require 

a DCO to adopt rules that would require 

a clearing member to provide prompt 

notice to the DCO of such a petition or 

proceeding. Proposed § 39.13(d)(2) 

would require a DCO to review the 

clearing member’s continuing eligibility 

for clearing membership upon receiving 

such notice. Proposed § 39.16(d)(3) 

would require a DCO to take any 

appropriate action, in its discretion, 

with respect to the clearing member or 

its positions, including but not limited 

to liquidation or transfer of positions, 

and suspension or revocation of clearing 

membership. Proposed § 39.16(d)(2) 

does not outline specific review 

procedures, and § 39.16(d)(3) would 

leave it to the discretion of the DCO to 

determine whether any particular action 

were appropriate with respect to the 

clearing member. 

6. System Safeguards 

Core Principle I, as amended by the 

Dodd-Frank Act,68 requires each DCO to 

establish and maintain a program of risk 

analysis and oversight to identify and 

minimize sources of operational risk 

through the development of appropriate 

controls and procedures, and automated 

systems that are reliable, secure, and 

have adequate scalable capacity. Core 

Principle I also requires each DCO to 

establish and maintain emergency 

procedures, backup facilities, and a plan 

for disaster recovery that allows for the 

timely recovery and resumption of 

operations of, and the fulfillment of 

each obligation and responsibility of, 

the DCO. Finally, Core Principle I 

requires each DCO to periodically 

conduct tests to verify that its backup 

resources are sufficient to ensure daily 

processing, clearing, and settlement.69

The Commission is proposing to adopt 

§ 39.18 to establish requirements that a 

DCO would have to meet in order to 

comply with Core Principle I. 

(a) General. 

Proposed § 39.18 would codify the 

requirements of Core Principle I and 

would establish additional standards for 

a DCO’s business continuity and 

disaster recovery procedures. On July 

14, 2010,70 the Commission published 

proposed regulations regarding business 

continuity and disaster recovery 

applicable to DCOs and DCMs. After 

consideration of the provisions of the 

Dodd-Frank Act, the Commission has 

determined to re-propose the provisions 

concerning DCOs. The Commission 

appreciates the comments made with 

respect to those earlier proposed 

regulations, and has taken them into 

account in developing the proposed 

regulations described below. 

(i) Definitions. 

Proposed § 39.18(a) would set forth 

relevant definitions for the system 

safeguards provisions applicable to 

DCOs set forth in § 39.18 and the 

modified system safeguards provisions 

applicable to SIDCOs set forth in 

§ 39.30, including ‘‘recovery time 

objective’’ (the time period, after 

disruption, within which a DCO should 

be able to achieve recovery and 

resumption of clearing activities) (RTO), 

‘‘relevant area’’ (the geographic area 

within which a DCO has necessary 

resources, as well as adjacent 

communities), and ‘‘wide-scale 

disruption’’ (an event that causes severe 

disruption of critical infrastructure, or 

an evacuation or unavailability of the 

population, in a relevant area).71

(ii) Program of risk analysis. 

Because automated systems play a 

central and critical role in today’s 

electronic financial market 

environment, oversight of core principle 

compliance by DCOs with respect to 

automated systems is an essential part 

of effective clearing oversight. 

Sophisticated computer systems are 

crucial to a DCO’s ability to meet its 

obligations and responsibilities. 

Safeguarding the reliability, security, 

and capacity of such systems is also 

essential to mitigation of systemic risk 

for the nation’s financial sector as a 

whole. 

Proposed § 39.18(b) would require 

that a DCO maintain a program of risk 

analysis and oversight with respect to 

its operations and automated systems to 

identify and minimize sources of 

operational risk, establish and maintain 

resources that allow for the fulfillment 

of the DCO’s obligations and 

responsibilities in light of those risks, 

and verify that those resources are 


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72See id. at 42639 (proposed appendix E to part 

40—Guidance on Critical Financial Market and 

Core Clearing and Settlement Organization 

Determination). 

73See Interagency Paper on Sound Practices To 

Strengthen the Resilience of the U.S. Financial 

System, 68 FR 17809, 17812 (Apr. 11, 2003) (White 

Paper) which states 

‘‘core clearing and settlement organizations are 

necessary to the completion of most transactions in 

critical markets; accordingly, they must recover and 

resume their critical functions in order for other 

market participants to process pending transactions 

and complete large-value payments. It also is 

reasonable to assume that there will be firms that 

play significant roles and other market participants 

in locations not affected by a particular disruption 

Continued 

adequate to ensure daily processing, 

clearing, and settlement. 

(iii) Elements of program. 

Proposed § 39.18(c) would require 

that the program of risk analysis and 

oversight address each of six categories: 

information security, business 

continuity and disaster recovery (BC– 

DR), capacity and performance 

planning, systems operations, systems 

development and quality assurance, and 

physical security and environmental 

controls. 

(iv) Standards for program. 

DCO compliance with generally 

accepted standards and best practices 

with respect to the development, 

operation, reliability, security, and 

capacity of automated systems can 

reduce the frequency and severity of 

automated system security breaches or 

functional failures, thereby augmenting 

efforts to mitigate systemic risk. 

Accordingly, proposed § 39.18(d) would 

require that a DCO follow generally 

accepted standards and industry best 

practices with respect to the 

development, operation, reliability, 

security, and capacity of automated 

systems. 

(v) Business continuity and disaster 

recovery. 

Proposed § 39.18 (e) would require 

that a DCO maintain a BC–DR plan, 

procedures, and physical (e.g., 

buildings, generators, and related 

physical infrastructure), technological 

(e.g., computers, replacement parts, and 

software), and personnel resources (e.g., 

trained employees or other committed 

human resources) sufficient to enable 

timely recovery and resumption of 

operations, and fulfillment of 

responsibilities (e.g., daily processing, 

clearing and settlement of transactions 

cleared) of the DCO following a 

disruption. The required recovery time 

objective would be no later than the 

next business day. As noted below, 

proposed § 39.30 would set a more 

stringent RTO for SIDCOs. 

(vi) Location of resources; 

outsourcing. 

Proposed § 39.18(f) would clarify that 

a DCO could maintain the resources 

required pursuant to § 39.18(e) on its 

own or through an outsourcing 

arrangement with another DCO or other 

service provider. Proposed § 39.18(f)(i) 

would provide that an outsourcing DCO 

would retain complete liability for any 

failure to meet the specified 

responsibilities, and must employ 

personnel with the expertise necessary 

to enable the DCO to supervise the 

service provider. Proposed § 39.18(f)(ii) 

would require that testing include all of 

the DCO’s own and outsourced 

resources, and verify that such resources 

will work effectively together. 

In response to the July Proposal, a 

number of commenters expressed 

concern that it was impractical for DCOs 

to have all key job functions fully 

duplicated. The proposed regulation 

clarifies that a DCO may maintain such 

functions on its own (including, e.g., 

through cross-training) or through 

written outsourcing arrangements, 

including with another DCO. 

The Commission seeks comment on 

whether these provisions governing 

outsourcing are appropriate, and 

whether the clarifications concerning 

the retention of responsibility and the 

necessity for integrated testing should 

be expanded to cover all functions of a 

DCO. 

(vii) Notification of Commission staff; 

recordkeeping. 

Proposed § 39.18(g) would require 

each DCO to notify Commission staff of 

various exceptional events, such as 

technology malfunctions, system 

security-related incidents, or targeted 

threats. The proposed regulation 

attempts to achieve a reasonable 

balance, requiring notification only of 

such events that materially impair, or 

create a significant likelihood of 

material impairment, of automated 

system operation, reliability, security, or 

capacity. The proposed regulation 

would also require notification of any 

activation of the DCO’s BC–DR plan. 

Proposed § 39.18(h) would require a 

DCO to give Commission staff timely 

advance notice of planned changes, 

either changes to automated systems 

that are likely to have a significant 

impact on such systems, or changes to 

the DCO’s program of risk analysis and 

oversight. 

Proposed § 39.18(i) would require a 

DCO to maintain current copies of its 

business continuity plan and other 

emergency procedures, its assessments 

of its operational risks, and records of 

testing protocols and results; to provide 

copies of such records to Commission 

staff pursuant to § 1.31; and to provide 

other documents requested by 

Commission staff for the purpose of 

maintaining a current profile of the 

DCO’s automated systems. 

(viii) Testing. 

Proposed § 39.18(j) would require a 

DCO to conduct regular, periodic, 

objective testing and review of its 

automated systems to ensure that they 

are reliable, secure, and have adequate 

scalable capacity, and of its BC–DR 

capabilities, using testing protocols 

adequate to ensure that the DCO’s 

backup resources are sufficient to meet 

the RTO specified in § 39.18(e). The 

testing would be required to be 

conducted by qualified, independent 

professionals. While such professionals 

could include employees of the DCO, 

they could not be persons responsible 

for development or operation of the 

systems or capabilities being tested. 

Reports setting forth the protocols for, 

and results of, such tests would be 

required to be communicated to, and 

reviewed by, senior management of the 

DCO. Because tests that result in few or 

no exceptions raise the possibility of an 

insufficiently rigorous protocol, such 

results would be required to be subject 

to more searching review. 

(ix) Coordination of business 

continuity and disaster recovery plans. 

Proposed § 39.18(k) would require 

each DCO, to the extent practicable, to 

coordinate its BC–DR plan with those of 

its clearing members, to initiate 

coordinated testing of such plans, and to 

take into account in its own BC–DR plan 

the BC–DR plans of its providers of 

essential services, including 

telecommunications, power, and water. 

(b) SIDCOs. 

(i) Determining which DCOs will be 

subject to enhanced BC–DR obligations. 

As DCOs, SIDCOs would remain 

subject to the requirements of Title VII 

and the regulations thereunder, except 

to the extent the Commission 

promulgates higher standards pursuant 

to Title VIII of the Dodd-Frank Act. 

Unlike the July Proposal,72 these 

proposed regulations do not provide a 

means for the Commission to determine 

which DCOs are ‘‘core clearing and 

settlement organizations.’’ In light of the 

provisions of section 804 of the DoddFrank Act for designation of 

systemically important clearing or 

settlement activities, the Commission 

proposes to avoid duplication by 

applying the enhanced BC–DR 

obligations described below to SIDCOs. 

(ii) Recovery time objective. 

Proposed § 39.30(a) would set an RTO 

for SIDCOs of recovery no later than two 

hours following the disruption, for any 

disruption including a wide-scale 

disruption,73 in light of the important 


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that will need to clear and settle pending 

transactions in critical markets. Therefore, core 

clearing and settlement organizations should plan 

both to recover and resume their processing and 

other activities that support critical markets. In light 

of the large volume and value of transactions/ 

payments that are cleared and settled on a daily 

basis, failure to complete the clearing and 

settlement of pending transactions within the 

business day could create systemic liquidity 

dislocations, as well as exacerbate credit and 

market risk for critical markets. Therefore, core 

clearing and settlement organizations should 

develop the capacity to recover and resume clearing 

and settlement activities within the business day on 

which the disruption occurs with the overall goal 

of achieving recovery and resumption within two 

hours after an event’’ 74 12 U.S.C. 1818. 

75See proposed subpart A, § 39.1; proposed 

subpart B, § 39.9; and proposed subpart C, § 39.28. 

76Section 39.2 provides, in relevant part, as 

follows: 

A derivatives clearing organization and the 

clearing of agreements, contracts and transactions 

on a derivatives clearing organization are exempt 

from all Commission regulations except for the 

requirements of this part 39, §§ 1.3, 1.12(f)(1), 1.20, 

1.24, 1.25, 1.26, 1.27, 1.29, 1.31, 1.36, 1.38(b), part 

40 and part 190 of this chapter, and as applicable 

to the agreement, contract, or transaction cleared, 

parts 15 through 18 of this chapter. 

77The other provisions relate to governance and 

conflicts of interest issues, and may be superseded 

by pending rules. See § 1.59 (activities of selfregulatory organization employees, governing board 

members, committee members, and consultants); 

§ 1.63 (service on self-regulatory organization 

governing boards or committees by persons with 

disciplinary histories); and § 1.69 (voting by 

interested members of self-regulatory organization 

governing boards and various committees). 

role that SIDCOs play in the financial 

system. The term ‘‘wide-scale 

disruption’’ is defined in proposed 

§ 39.18(a). 

(iii) Geographic diversity. 

Because of the importance of SIDCOs 

to the financial system, and the fact that 

a wide-scale disruption may cause the 

physical or technological resources that 

are located within the relevant area, or 

personnel who live or work within the 

relevant area, to be temporarily or 

permanently unavailable, proposed 

§ 39.30(b) would require each SIDCO to 

maintain geographic dispersal of 

physical and technological resources 

and personnel. 

Physical and technological resources 

must, pursuant to proposed 

§ 39.30(b)(1), be located outside the 

relevant area of the infrastructure the 

entity normally relies upon to conduct 

activities necessary to the clearance and 

settlement of existing and new 

contracts, and the SIDCO could not rely 

on the same critical transportation, 

telecommunications, power, water, or 

other critical infrastructure components 

the entity normally relies upon for such 

activities. Moreover, proposed 

§ 39.30(b)(2) would require personnel, 

sufficient to enable the SIDCO to meet 

the recovery time objective after 

interruption of normal clearing by a 

wide-scale disruption affecting the 

relevant area, who live and work 

outside that relevant area. 

While these proposed requirements 

would likely lead to a considerable 

expense, the Commission believes that 

the systemic importance of SIDCOs 

carries with it a responsibility to be 

reliably available on a near-continuous 

basis, to fulfill their obligations. 

Moreover, to provide an opportunity to 

meet this responsibility in a flexible 

manner, proposed § 39.30(b)(3) would 

make it explicit that the outsourcing 

provisions of proposed § 39.18(f) would 

apply to these resource requirements. 

(iv) Testing. 

Proposed § 39.30(c) would require 

each SIDCO to 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, and would state 

that the provisions of proposed 

§ 39.18(j), concerning testing by DCOs, 

would apply. Moreover, with respect to 

outsourcing, proposed § 39.18(f)(2)(ii) 

would provide that the testing 

referenced in proposed § 39.30(c) ‘‘shall 

include all [of the DCO’s] own and 

outsourced resources, and shall verify 

that all such resources will work 

effectively together.’’ 

(v) Effective date. 

A number of commenters on the July 

Proposal suggested that the 

establishment of geographically diverse 

capabilities would require an extended 

implementation period, such as 24 

months. The Commission observes with 

approval, however, that a number of 

potential SIDCOs already have 

geographic dispersal of certain 

resources, and/or are already working to 

achieving such dispersal. Accordingly, 

the Commission proposes an effective 

date for the SIDCO requirements of the 

later of one year from the effective date 

of these regulations, or July 30, 2012. 

Moreover, § 39.30(d) provides that 

proposed § 39.30 will apply to a DCO no 

earlier than one year after such DCO is 

designated as systemically important. 

7. Special Enforcement Authority Over 

SIDCOs 

Under section 807(c) of the DoddFrank Act, for purposes of enforcing the 

provisions of Title VIII, a SIDCO is 

subject to, and the Commission has 

authority under the provisions of 

subsections (b) through (n) of section 8 

of, the Federal Deposit Insurance Act 74

in the same manner and to the same 

extent as if the SIDCO were an insured 

depository institution and the 

Commission were the appropriate 

Federal banking agency for such insured 

depository institution. This special 

authority is codified in proposed 

§ 39.31. 

C. Additional Amendments 

1. Technical Amendments To 

Reorganize Part 39 

The Commission is proposing to 

reorganize part 39 into three subparts. 

Subpart A would contain general 

provisions applicable to all DCOs 

including definitions, procedures for 

DCO registration, and procedures for 

implementation of DCO rules and 

clearing new products. Subpart B would 

contain the regulations that codify and 

implement the DCO core principles. The 

regulations in subpart B would apply to 

all DCOs except to the extent that a DCO 

is a SIDCO and there are superseding 

provisions in subpart C. Subpart C 

would contain regulations that apply 

only to SIDCOs. As proposed, for 

purposes of clarity, each subpart would 

have an introductory section stating the 

scope of the subpart.75

The Commission is proposing to 

amend § 39.1 to update the citation to 

the definition of the term ‘‘derivatives 

clearing organization’’ and to restate the 

scope of part 39 to reflect the 

reorganization of part 39 into subparts 

A, B, and C. 

The Commission is additionally 

proposing to remove § 39.2, which 

exempts DCOs from all Commission 

regulations except those explicitly 

enumerated in the exemption.76 The 

Commission believes that this 

exemption is inconsistent with the 

regulatory approach established by the 

Dodd-Frank Act. Moreover, a 

preliminary review indicates that by 

eliminating the exemption, DCOs would 

be subject to only one additional 

regulation of significance, § 1.49 

(denomination of customer funds and 

location of depositories).77 Section 1.49 

was promulgated after § 39.2 was 

adopted. It is noteworthy that, 

notwithstanding § 39.2, the Commission 

and the industry have proceeded as if 

the requirements of § 1.49 applied to 

DCOs. The absence of a reference in 

§ 39.2 to § 1.49 in the exemption was an 

oversight. This situation points out the 

unintended consequences of attempting 

to carve out ‘‘reverse’’ exemptions in this 

manner, and the Commission believes it 

is a better regulatory policy to amend 

the terms of inapplicable regulations or 

rescind them, as appropriate, rather 

than attempt to maintain an up-to-date 

list of applicable regulations. 


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78See 75 FR at 77585–86. 

79 Id. 

80See 75 FR at 78194. 

81See 76 FR 722, 736 (Jan. 6, 2011). 

82The Commission is proposing to redesignate 

what is currently proposed as § 39.19(c)(3)(iii) as 

§ 39.19(c)(3)(iv). This proposed regulation currently 

states: 

The reports required by this paragraph (c)(3) shall 

be submitted concurrently to the Commission not 

more than 90 days after the end of the derivatives 

clearing organization’s fiscal year; provided that, a 

derivatives clearing organization may request from 

the Commission an extension of time to submit 

either report, provided the derivatives clearing 

organization’s failure to submit the report in a 

timely manner could not be avoided without 

unreasonable effort or expense. Extensions of the 

deadline will be granted at the discretion of the 

Commission. 

83See supra n.81. 

84 Id. 

85See supra, section II.B.6.a.vii. 

86See 76 FR at 735. 

87 Id. at 736. 

88See 75 FR at 78197. 

In place of the exemption, the 

Commission proposes to insert the 

definitions proposed as § 39.1(b) in an 

earlier proposed rulemaking.78 Section 

39.1(a), as proposed in the earlier 

rulemaking, would be redesignated as 

§ 39.1.79

2. Supplemental Provisions for 

Proposed § 39.19 

The Commission recently proposed a 

new § 39.19(c) which would require 

certain reports to be made by a DCO to 

the Commission.80 Where the primary 

reporting requirement would be 

specified elsewhere in the 

Commission’s regulations, the 

Commission intends to cross-reference 

these requirements in § 39.19. The 

following are recently proposed 

reporting requirements for which the 

Commission proposes to add a crossreference in proposed § 39.19: 

(1) The Commission recently 

proposed a new § 39.24(b)(4) which 

would require each DCO to collect and 

verify certain information related to 

governance fitness standards and 

provide that information to the 

Commission on an annual basis.81 By 

this notice, the Commission is 

proposing a new § 39.19(c)(3)(iii) 82

under which a DCO would be required 

to satisfy the annual reporting 

requirements of § 39.24(b)(4). The 

Commission also is proposing to amend 

proposed § 39.24(b)(4) to require the 

report to be submitted in accordance 

with the requirements of proposed 

§ 39.19(c)(3)(iv) (which would require 

the report to be filed not more than 90 

days after the end of the DCO’s fiscal 

year). 

(2) The Commission recently 

proposed a new § 39.25(b) under which 

a DCO would be required to submit a 

report to the Commission in the event 

that the Board of Directors of a DCO 

rejects a recommendation or supersedes 

an action of the Risk Management 

Committee, or the Risk Management 

Committee rejects a recommendation or 

supersedes an action of its 

subcommittee.83 The report would have 

to include the following details: (i) The 

recommendation or action of the Risk 

Management Committee (or 

subcommittee thereof); (ii) the rationale 

for such recommendation or action; (iii) 

the rationale of the Board of Directors 

(or the Risk Management Committee, if 

applicable) for rejecting such 

recommendation or superseding such 

action; and (iv) the course of action that 

the Board of Directors (or the Risk 

Management Committee, if applicable) 

decided to take contrary to such 

recommendation or action. By this 

notice, the Commission is proposing a 

new § 39.19(c)(4)(xvi) under which a 

DCO would be required to report to the 

Commission as required by § 39.25(b). 

The Commission also is proposing to 

amend proposed § 39.25(b) to require 

the report to be submitted to the 

Commission within 30 days of such a 

rejection or supersession. 

(3) The Commission also recently 

proposed a new § 40.9(b)(1)(iii) under 

which a DCO (as well as other registered 

entities) would have to submit to the 

Commission, within 30 days after the 

election of its Board of Directors, certain 

information regarding the Board of 

Directors.84 By this notice, the 

Commission is proposing a new 

§ 39.19(c)(4)(xvii) under which a DCO 

would have to submit to the 

Commission a report in accordance with 

the requirements of proposed 

§ 40.9(b)(1)(iii). 

(4) In this notice, the Commission is 

proposing that a DCO notify staff of the 

Division of Clearing and Intermediary 

Oversight of certain exceptional events 

and certain planned changes related to 

system safeguards (Core Principle I).85

The Commission is proposing a new 

§ 39.19(c)(4)(xviii) under which a DCO 

would be required to notify staff of the 

Division of Clearing and Intermediary 

Oversight of exceptional events related 

to system safeguards in accordance with 

proposed § 39.18(g) and of planned 

changes related to system safeguards in 

accordance with proposed § 39.18(h). 

3. Technical Amendments to Proposed 

§ 39.21 

The Commission recently proposed a 

new § 39.24(a)(2) which would require 

each DCO to make available to the 

public and to the relevant authorities, 

including the Commission, a 

description of the manner in which its 

governance arrangements permit the 

consideration of the views of its owners, 

whether voting or non-voting, and its 

participants, including, without 

limitation, clearing members and 

customers.86 The Commission also 

recently proposed § 40.9(d) which 

would require a DCO (as well as other 

registered entities) to, at a minimum, 

make certain information available to 

the public and relevant authorities, 

including the Commission.87

The Commission also recently 

proposed a new § 39.21(c) which lists 

certain information a DCO would be 

required to disclose publicly and to the 

Commission.88 By this notice, the 

Commission is proposing to amend 

proposed § 39.21(c) to cross-reference 

the transparency requirements of 

proposed §§ 39.24(a)(2) and 40.9(d). 

III. Effective Date 

The Commission is proposing that the 

requirements proposed in this notice 

become effective 180 days from the date 

the final rules are published in the 

Federal Register, with the exception of 

(1) the system safeguard requirements 

that would be applicable to SIDCOs, set 

forth in proposed § 39.30, for which the 

proposed effective date is discussed in 

section II.B.6(b)(v) above, and (2) the 

provisions of § 39.15(b)(2) relating to the 

commingling of customer futures, 

options on futures, and swaps positions, 

which would become effective 30 days 

after the date of publication of the final 

rules. The provisions relating to 

commingling of customer funds do not 

require additional time for planning and 

implementation because they relate to a 

voluntary action on the part of a DCO. 

The Commission believes that a 

period of 180 days would give DCOs 

adequate time to implement any 

additional technology and enhanced 

procedures that may be necessary to 

fulfill the proposed requirements related 

to participant and product eligibility, 

risk management, settlement 

procedures, treatment of funds, default 

rules and procedures, and system 

safeguards (insofar as they would apply 

to all DCOs). The Commission requests 

comment on whether 180 days is an 

appropriate time frame for compliance 

with these proposed rules. The 

Commission further requests comment 

on possible alternative effective dates 

and the basis for any such alternative 

dates. 

IV. Section 4(c) 

Section 4(c) of the CEA provides that, 

in order to promote responsible 


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89 7 U.S.C. 6(c). 

90Section 5b(c)(2)(F) of the CEA; 7 U.S.C. 7a1(c)(2)(F). 

91 5 U.S.C. 601 et seq. 

92 47 FR 18618 (Apr. 30, 1982). 

93See 66 FR 45605, 45609 (Aug. 29, 2001). 94 44 U.S.C. 3501 et seq. 

economic or financial innovation and 

fair competition, the Commission, by 

rule, regulation or order, after notice 

and opportunity for hearing, may 

exempt any agreement, contract, or 

transaction, or class thereof, including 

any person or class of persons offering, 

entering into, rendering advice or 

rendering other services with respect to, 

the agreement, contract, or transaction, 

from the contract market designation 

requirement of section 4(a) of the CEA, 

or any other provision of the CEA other 

than certain enumerated provisions, if 

the Commission determines that the 

exemption would be consistent with the 

public interest.89

Proposed §§ 39.15(b)(2)(i) and 

39.15(b)(2)(ii) would be promulgated 

under Core Principle F, which sets forth 

requirements for treatment of funds by 

a DCO.90 Proper treatment of customer 

funds requires, among other things, 

segregation of customer money, 

securities and property received to 

margin, guarantee, or secure positions in 

futures or options on futures, in an 

account subject to section 4d(a) of the 

CEA (i.e., a futures account), and 

segregation of customer money, 

securities and property received to 

margin, guarantee, or secure positions in 

cleared swaps, in an account subject to 

section 4d(f) of the CEA (i.e., a cleared 

swap account). Customer funds required 

to be held in a futures account cannot 

be commingled with non-customer 

funds and cannot be held in an account 

other than an account subject to section 

4d(a), absent Commission approval in 

the form of a rule, regulation or order. 

Section 4d(f) of the CEA mirrors these 

limitations as applied to customer 

positions in cleared swaps. 

In proposing a regulation that would 

permit futures and options on futures to 

be carried in a cleared swap account if 

the Commission approves DCO rules 

providing for such treatment of funds, 

and in proposing a regulation that 

would permit cleared swap positions to 

be carried in a futures account if the 

Commission issues an order permitting 

such treatment of funds, the 

Commission is exercising its authority 

to grant an exemption under section 4(c) 

of the CEA. In this regard, the DCO and 

its clearing members would be exempt 

from complying with the segregation 

requirements of section 4d(a) when 

holding customer segregated funds in a 

cleared swap account subject to section 

4d(f) of the CEA, instead of a futures 

account; and similarly, the DCO and its 

clearing members would be exempt 

from complying with the segregation 

requirements of section 4d(f) when 

holding customer funds related to 

cleared swap positions in a futures 

account subject to section 4d(a) of the 

CEA, instead of a cleared swap account. 

While this rule-based exemption 

would streamline the approval process 

for commingling customer positions in 

futures, options on futures, and cleared 

swaps, the Commission would still 

conduct a case-by case analysis when 

permitting cleared swaps to be carried 

in a futures account, in keeping with its 

past practice in issuing orders under 

section 4d. The Commission believes 

that there can be benefits to 

commingling customer positions in 

futures, options on futures, and cleared 

swaps, primarily in the area of greater 

capital efficiency due to margin 

reductions for correlated positions. The 

Commission views this form of portfolio 

margining as a positive step toward 

financial innovation within a framework 

of responsible oversight, and it believes 

that the public can benefit from such 

innovation. 

In light of the foregoing, the 

Commission believes that the adoption 

of proposed §§ 39.15(b)(2)(i) and 

39.15(b)(2)(ii) would promote 

responsible economic and financial 

innovation and fair competition, and 

would be consistent with the ‘‘public 

interest,’’ as that term is used in section 

4(c) of the CEA. 

The Commission solicits public 

comment on whether the proposed 

regulation satisfies the requirements for 

exemption under section 4(c) of the 

CEA. 

V. Related Matters 

A. 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.91 The rules proposed by the 

Commission will affect only DCOs 

(some of which will be designated as 

SIDCOs). 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.92

The Commission has previously 

determined that DCOs are not small 

entities for the purpose of the RFA.93

Accordingly, the Chairman, on behalf of 

the Commission, hereby certifies 

pursuant to 5 U.S.C. 605(b) that the 

proposed rules will not have a 

significant economic impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(‘‘PRA’’) 94 imposes certain requirements 

on Federal agencies in connection with 

their conducting or sponsoring any 

collection of information as defined by 

the PRA. An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a currently valid 

control number. OMB has not yet 

assigned a control number to the new 

collection. 

This proposed rulemaking would 

result in new collection of information 

requirements within the meaning of the 

PRA. The Commission therefore is 

submitting this proposal to the Office of 

Management and Budget (‘‘OMB’’) for 

review. If adopted, responses to this 

collection of information would be 

mandatory. 

The Commission will protect 

proprietary information according to 

FOIA and 17 CFR part 145, 

‘‘Commission Records and Information.’’ 

In addition, section 8(a)(1) of the CEA 

strictly prohibits the Commission, 

unless specifically authorized by the 

CEA, from making public ‘‘data and 

information that would separately 

disclose the business transactions or 

market positions of any person and 

trade secrets or names of customers.’’ 

The Commission also is required to 

protect certain information contained in 

a government system of records 

according to the Privacy Act of 1974, 5 

U.S.C. 552a. 

1. Information Provided by Reporting 

Entities/Persons 

The proposed regulations would 

require each respondent to maintain 

records of all activities related to its 

business as a DCO, including all 

information required to be created, 

generated, or reported under part 39, 

including but not limited to the results 

of and methodology used for all tests, 

reviews, and calculations. 

The Commission staff estimates this 

would result in a total of one response 

per respondent on an annual basis and 

that respondents could expend up to 

$500 annually, based on an hourly rate 

of $10, to comply with the proposed 

regulations. This would result in an 

aggregated cost of $6,000 per annum (12 

respondents × $500). 


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The proposed regulations also would 

require the submission of an application 

form by entities seeking to register as 

DCOs. The applicant burden is 

estimated to take, on average, 

approximately 400 hours, with an 

hourly rate ranging from $75–$400, for 

a total estimated cost of $100,000 per 

application. These estimates include the 

time needed to review instructions and 

to develop, acquire, install, and utilize 

technology and systems for the purposes 

of collecting, validating, and verifying 

information. Staff estimates that three 

entities will seek to register as a DCO on 

an annual basis. 

2. Information Collection Comments 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the reporting and 

recordkeeping burdens discussed above. 

Pursuant to 44 U.S.C. 3506(c)(2)(B), the 

Commission solicits comment in order 

to: (i) Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed collection 

of information; (iii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (iv) minimize the 

burden of the collection of information 

on those who are to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

Comments may be submitted directly 

to the Office of Information and 

Regulatory Affairs, by fax at (202) 395– 

6566 or by e-mail at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted comments so that all 

comments can be summarized and 

addressed in the final rule preamble. 

Refer to the ADDRESSES section of this 

notice of proposed rulemaking for 

comment submission instructions to the 

Commission. A copy of the supporting 

statements for the collections of 

information discussed above may be 

obtained by visiting RegInfo.gov. OMB 

is required to make a decision 

concerning the collection of information 

between 30 and 60 days after 

publication of this document in the 

Federal Register. Therefore, a comment 

is best assured of having its full effect 

if OMB receives it within 30 days of 

publication. 

C. Cost-Benefit Analysis 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before issuing a 

rulemaking under the CEA. By its terms, 

section 15(a) does not require the 

Commission to quantify the costs and 

benefits of a rule or to determine 

whether the benefits of the rulemaking 

outweigh its costs; rather, it requires 

that the Commission ‘‘consider’’ the 

costs and benefits of its action. 

Section 15(a) further specifies that the 

costs and benefits shall be evaluated in 

light of five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

regulation is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or to 

accomplish any of the purposes of the 

CEA. 

Summary of proposed requirements. 

The proposed regulations would 

implement the participant and product 

eligibility, risk management, settlement 

procedures, treatment of funds, default 

procedures and system safeguards core 

principles for DCOs and would adopt an 

application form for DCO registration 

under the CEA, as amended by the 

Dodd-Frank Act. 

Costs. With respect to costs, the 

Commission has determined that the 

costs to market participants and the 

public if these regulations are not 

adopted are substantial. Significantly, 

without these regulations to ensure that 

DCOs fully comply with the core 

principles of participant and product 

eligibility, risk management, settlement 

procedures, treatment of funds, default 

procedures and system safeguards, 

sound risk management and the 

financial integrity of the futures and 

swap markets would not be enhanced, 

to the detriment of market participants 

and the public. 

The Commission has also determined 

that the costs of the new reporting 

requirements imposed on DCOs will 

consist primarily of recordkeeping 

requirements, which the Commission 

estimates will cost DCOs $500 annually. 

For purposes of this rulemaking, the 

estimated reporting and recordkeeping 

costs do not include other costs 

addressed by other rulemakings. 

However, the costs do take into account 

the costs of implementing certain 

reporting requirements which many 

DCOs already have in place, and thus, 

the actual costs to many DCOs may be 

far less than the Commission’s 

estimates. 

Benefits. With respect to benefits, the 

Commission has determined that the 

benefits of the proposed rules are many 

and substantial. DCO registration 

applications will be processed 

transparently and efficiently, making 

clearing services available to the futures 

and swap markets in order to protect the 

integrity of these markets through the 

sound risk management practices 

associated with clearing and the 

efficiency that competition between 

clearinghouses will foster. The 

protection of market participants, 

financial integrity of the markets, and 

sound risk management will further be 

promoted by the compliance of each 

DCO with the rules and standards that 

are being adopted to implement the core 

principles, notably those associated 

with participant and product eligibility, 

risk management, settlement 

procedures, treatment of funds, default 

procedures and system safeguards. 

The Commission has also determined 

that the recordkeeping requirements 

allow for making certain records 

available for Commission inspection, 

which helps further the goals of the 

reporting requirements and is necessary 

for the Commission to effectively 

monitor a DCO’s financial integrity and 

compliance with the CEA and 

Commission regulations. 

Public Comment. The Commission 

invites public comment on its costbenefit considerations. Commenters are 

also invited to submit any data or other 

information that they may have 

quantifying or qualifying the costs and 

benefits of the proposal with their 

comment letters. 

List of Subjects in 17 CFR Part 39 

Commodity futures, Participant and 

product eligibility, Risk management, 

Settlement procedures, Treatment of 

funds, Default rules and procedures, 

System safeguards, Enforcement 

authority application form. 

In light of the foregoing, the 

Commission hereby proposes to amend 

part 39 of Title 17 of the Code of Federal 

Regulations as follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

1. Revise the authority citation for 

part 39 to read as follows: 

Authority: 7 USC 2, 5, 6, 6d, 7a–1, 7a–2, 

and 7b as amended by the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, 

Pub. L. 111–203, 124 Stat. 1376. 


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3718 Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 

Subpart A—General Provisions 

Applicable to Derivatives Clearing 

Organizations 

2. Designate existing §§ 39.1 through 

39.7 as subpart A and add a subpart 

heading to read as set forth above. 

3. Revise § 39.1 to read as follows: 

§ 39.1 Scope. 

The provisions of this subpart A 

apply to any derivatives clearing 

organization, as defined under section 

1a(15) of the Act and § 1.3(d) of this 

chapter, which is registered or deemed 

to be registered with the Commission as 

a derivatives clearing organization, is 

required to register as such with the 

Commission pursuant to section 5b(a) of 

the Act, or which voluntarily registers 

as such with the Commission pursuant 

to section 5b(b) or otherwise. 

4. Revise § 39.2 to read as follows: 

§ 39.2 Definitions. 

For the purposes of this part, 

Back test means a test that compares 

a derivatives clearing organization’s 

initial margin requirements with 

historical price changes to determine 

the extent of actual margin coverage. 

Compliance policies and procedures 

means all policies, procedures, codes, 

including a code of ethics, safeguards, 

rules, programs, and internal controls 

that are required to be adopted or 

established by a derivatives clearing 

organization pursuant to the Act, 

Commission regulations, or orders, or 

that otherwise facilitate compliance 

with the Act and Commission 

regulations. 

Customer account or customer origin 

means a clearing member’s account held 

on behalf of customers, as defined in 

§ 1.3(k) of this chapter. A customer 

account is also a futures account, as that 

term is defined by § 1.3(vv) of this 

chapter. 

House account or house origin means 

a clearing member’s combined 

proprietary accounts, as defined in 

§ 1.3(y) of this chapter. 

Key personnel means derivatives 

clearing organization personnel who 

play a significant role in the operations 

of the derivatives clearing organization, 

the provision of clearing and settlement 

services, risk management, or oversight 

of compliance with the Act and 

Commission regulations and orders. Key 

personnel include, but are not limited 

to, those persons who are or perform the 

functions of any of the following: chief 

executive officer; president; Chief 

compliance officer; chief operating 

officer; Chief risk officer; chief financial 

officer; chief technology officer; and 

emergency contacts or persons who are 

responsible for business continuity or 

disaster recovery planning or program 

execution. 

Stress test means a test that compares 

the impact of a potential price move, 

change in option volatility, or change in 

other inputs that affect the value of a 

position, to the financial resources of a 

derivatives clearing organization, 

clearing member, or large trader, to 

determine the adequacy of such 

financial resources. 

Systemically important derivatives 

clearing organization means a financial 

market utility that is a derivatives 

clearing organization registered under 

section 5b of the Act (7 U.S.C. 7a–1), 

which has been designated by the 

Financial Stability Oversight Council to 

be systemically important. 

5. Amend § 39.3 by revising 

paragraphs (a)(2), (a)(3), (b), (c), (d) and 

(e) and by adding paragraphs (a)(4) and 

(a)(5) to read as follows: 

§ 39.3 Procedures for registration. 

(a) * * * 

(2) Application. Any person seeking 

to register as a derivatives clearing 

organization, any applicant amending 

its pending application, or any 

registered derivatives clearing 

organization seeking to amend its order 

of registration (applicant), shall submit 

to the Commission a completed Form 

DCO, which shall include a cover sheet, 

all applicable exhibits, and any 

supplemental materials, including 

amendments thereto, as provided in 

appendix A to this part 39 (application). 

The Commission will not commence 

processing an application unless the 

applicant has filed the application as 

required by this section. Failure to file 

a completed application will preclude 

the Commission from determining that 

an application is materially complete, as 

provided in section 6(a) of the Act. 

Upon its own initiative, an applicant 

may file with its completed application 

additional information that may be 

necessary or helpful to the Commission 

in processing the application. 

(3) Submission of supplemental 

information. The filing of a completed 

application is a minimum requirement 

and does not create a presumption that 

the application is materially complete or 

that supplemental information will not 

be required. At any time during the 

application review process, the 

Commission may request that the 

applicant submit supplemental 

information in order for the Commission 

to process the application. The 

applicant shall file electronically such 

supplemental information with the 

Secretary of the Commission in the form 

and manner provided by the 

Commission. 

(4) Application amendments. An 

applicant shall promptly amend its 

application if it discovers a material 

omission or error, or if there is a 

material change in the information 

provided to the Commission in the 

application or other information 

provided in connection with the 

application. 

(5) Public information. The following 

sections of all applications to become a 

registered derivatives clearing 

organization will be public: first page of 

the Form DCO cover sheet, proposed 

rules, regulatory compliance chart, 

narrative summary of proposed clearing 

activities, documents establishing the 

applicant’s legal status, documents 

setting forth the applicant’s corporate 

and governance structure, and any other 

part of the application not covered by a 

request for confidential treatment, 

subject to § 145.9 of this chapter. 

(b) Stay of application review. (1) The 

Commission may stay the running of the 

180-day review period if an application 

is materially incomplete, in accordance 

with section 6(a) of the Act. 

(2) Delegation of authority. (i) The 

Commission hereby delegates, until it 

orders otherwise, to the Director of the 

Division of Clearing and Intermediary 

Oversight or the Director’s designee, 

with the concurrence of the General 

Counsel or the General Counsel’s 

designee, the authority to notify an 

applicant seeking registration under 

section 6(a) of the Act that the 

application is materially incomplete and 

the running of the 180-day period is 

stayed. 

(ii) The Director of the Division of 

Clearing and Intermediary Oversight 

may submit to the Commission for its 

consideration any matter which has 

been delegated in this paragraph. 

(iii) Nothing in this paragraph 

prohibits the Commission, at its 

election, from exercising the authority 

delegated in paragraph (b)(2)(i) of this 

section. 

(c) Withdrawal of application for 

registration. An applicant for 

registration may withdraw its 

application submitted pursuant to 

paragraph (a) of this section by filing 

electronically such a request with the 

Secretary of the Commission in the form 

and manner provided by the 

Commission. Withdrawal of an 

application for registration shall not 

affect any action taken or to be taken by 

the Commission based upon actions, 

activities, or events occurring during the 

time that the application for registration 

was pending with the Commission. 


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(d) Reinstatement of dormant 

registration. Before listing or relisting 

products for clearing, a dormant 

registered derivatives clearing 

organization as defined in § 40.1 of this 

chapter must reinstate its registration 

under the procedures of paragraph (a) of 

this section; provided, however, that an 

application for reinstatement may rely 

upon previously submitted materials 

that still pertain to, and accurately 

describe, current conditions. 

(e) Request for vacation of 

registration. A registered derivatives 

clearing organization may vacate its 

registration under section 7 of the Act 

by filing electronically such a request 

with the Secretary of the Commission in 

the form and manner provided by the 

Commission. Vacation of registration 

shall not affect any action taken or to be 

taken by the Commission based upon 

actions, activities or events occurring 

during the time that the entity was 

registered by the Commission. 

* * * * * 

§ 39.7 [Redesignated as § 39.8] 

6. Redesignate § 39.7 as § 39.8. 

§ 39.6 [Redesignated as § 39.7] 

7. Redesignate § 39.6 as § 39.7. 

8. Add subpart B to read as follows: 

Subpart B—Compliance with Core 

Principles 

Sec. 

39.9 Scope. 

39.10 [Reserved] 

39.11 [Reserved] 

39.12 Participant and product eligibility. 

39.13 Risk management. 

39.14 Settlement procedures. 

39.15 Treatment of funds. 

39.16 Default rules and procedures. 

39.17 [Reserved] 

39.18 System safeguards. 

39.19 Reporting. 

39.20 [Reserved] 

39.21 Public information. 

39.22 [Reserved] 

39.23 [Reserved] 

39.24 Governance fitness standards. 

39.25 Conflicts of interest. 

Subpart B—Compliance with Core 

Principles 

§ 39.9 Scope. 

Except as otherwise provided with 

respect to systemically important 

derivatives clearing organizations 

subject to subpart C of this part, the 

provisions of this subpart B apply to any 

derivatives clearing organization, as 

defined under section 1a(15) of the Act 

and § 1.3(d) of this chapter, which is 

registered or deemed to be registered 

with the Commission as a derivatives 

clearing organization, is required to 

register as such with the Commission 

pursuant to section 5b(a) of the Act, or 

which voluntarily registers as such with 

the Commission pursuant to section 

5b(b) or otherwise. 

§ 39.10 [Reserved] 

§ 39.11 [Reserved] 

§ 39.12 Participant and product eligibility. 

(a) Participant eligibility. A 

derivatives clearing organization shall 

establish appropriate admission and 

continuing participation requirements 

for clearing members of the derivatives 

clearing organization that are objective, 

publicly disclosed, and risk-based. 

(1) Fair and open access for 

participation. The participation 

requirements shall permit fair and open 

access; 

(i) A derivatives clearing organization 

shall not adopt restrictive clearing 

member standards if less restrictive 

requirements that would not materially 

increase risk to the derivatives clearing 

organization or clearing members could 

be adopted; 

(ii) A derivatives clearing organization 

shall allow all market participants who 

satisfy participation requirements to 

become clearing members; 

(iii) A derivatives clearing 

organization shall not exclude or limit 

clearing membership of certain types of 

market participants unless the 

derivatives clearing organization can 

demonstrate that the restriction is 

necessary to address credit risk or 

deficiencies in the participants’ 

operational capabilities that would 

prevent them from fulfilling their 

obligations as clearing members. 

(iv) A derivatives clearing 

organization shall not require that 

clearing members must be swap dealers. 

(v) A derivatives clearing organization 

shall not require that clearing members 

maintain a swap portfolio of any 

particular size, or that clearing members 

meet a swap transaction volume 

threshold. 

(2) Financial resources. (i) The 

participation requirements shall require 

clearing members to have access to 

sufficient financial resources to meet 

obligations arising from participation in 

the derivatives clearing organization in 

extreme but plausible market 

conditions. The financial resources may 

include, but are not limited to, a 

clearing member’s capital, a guarantee 

from the clearing member’s parent, or a 

credit facility funding arrangement. For 

purposes of this paragraph, ‘‘capital’’ 

means adjusted net capital as defined in 

§ 1.17 of this chapter, for futures 

commission merchants, and net capital 

as defined in § 15c3–1 of this title, for 

broker-dealers, or any similar risk 

adjusted capital calculation for all other 

prospective clearing members. 

(ii) The participation requirements 

shall set forth capital requirements that 

are based on objective, transparent, and 

commonly accepted standards that 

appropriately match capital to risk. 

Capital requirements shall be scalable so 

that they are proportional to the risks 

posed by clearing members. 

(iii) A derivatives clearing 

organization shall not set a minimum 

capital requirement of more than $50 

million for any person that seeks to 

become a clearing member in order to 

clear swaps. 

(3) Operational requirements. The 

participation requirements shall require 

clearing members to have adequate 

operational capacity to meet obligations 

arising from participation in the 

derivatives clearing organization. The 

requirements shall include, but are not 

limited to: the ability to process 

expected volumes and values of 

transactions cleared by a clearing 

member within required time frames, 

including at peak times and on peak 

days; the ability to fulfill collateral, 

payment, and delivery obligations 

imposed by the derivatives clearing 

organization; and the ability to 

participate in default management 

activities under the rules of the 

derivatives clearing organization and in 

accordance with § 39.16 of this part. 

(4) Monitoring. A derivatives clearing 

organization shall establish and 

implement procedures to verify, on an 

ongoing basis, the compliance of each 

clearing member with each participation 

requirement of the derivatives clearing 

organization. 

(5) Reporting. (i) A derivatives 

clearing organization shall require all 

clearing members, including those that 

are not futures commission merchants, 

to file periodic financial reports with 

the derivatives clearing organization 

which contain any financial information 

that the derivatives clearing 

organization determines is necessary to 

assess whether participation 

requirements are met on an ongoing 

basis. A derivatives clearing 

organization shall require clearing 

members that are futures commission 

merchants to file the financial reports 

that are specified in § 1.10 of this 

chapter with the derivatives clearing 

organization. The derivatives clearing 

organization shall review all such 

financial reports for risk management 

purposes. A derivatives clearing 

organization shall also require clearing 

members that are not futures 

commission merchants to make such 

periodic financial reports available to 


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3720 Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules 

the Commission upon the Commission’s 

request. 

(ii) A derivatives clearing organization 

shall adopt rules that require clearing 

members to provide to the derivatives 

clearing organization, in a timely 

manner, information that concerns any 

financial or business developments that 

may materially affect the clearing 

members’ ability to continue to comply 

with participation requirements. 

(6) Enforcement. A derivatives 

clearing organization shall have the 

ability to enforce compliance with its 

participation requirements and shall 

establish procedures for the suspension 

and orderly removal of clearing 

members that no longer meet the 

requirements. 

(b) Product eligibility. (1) A 

derivatives clearing organization shall 

establish appropriate requirements for 

determining the eligibility of 

agreements, contracts, or transactions 

submitted to the derivatives clearing 

organization for clearing, taking into 

account the derivatives clearing 

organization’s ability to manage the 

risks associated with such agreements, 

contracts, or transactions. Factors to be 

considered in determining product 

eligibility include, but are not limited 

to: 

(i) Trading volume; 

(ii) Liquidity; 

(iii) Availability of reliable prices; 

(iv) Ability of market participants to 

use portfolio compression with respect 

to a particular swap product; 

(v) Ability of the derivatives clearing 

organization and clearing members to 

gain access to the relevant market for 

purposes of creating and liquidating 

positions; 

(vi) Ability of the derivatives clearing 

organization to measure risk for 

purposes of setting margin 

requirements; and 

(vii) Operational capacity of the 

derivatives clearing organization and 

clearing members to address any unique 

risk characteristics of a product. 

(2) A derivatives clearing organization 

shall adopt rules providing that all 

swaps with the same terms and 

conditions submitted to the derivatives 

clearing organization for clearing are 

economically equivalent within the 

derivatives clearing organization and 

may be offset with each other within the 

derivatives clearing organization. A 

derivatives clearing organization shall 

also provide for non-discriminatory 

clearing of a swap executed bilaterally 

or on or subject to the rules of an 

unaffiliated designated contract market 

or swap execution facility. 

(3) A derivatives clearing organization 

shall select contract unit sizes that 

maximize liquidity, open access, and 

risk management. To the extent 

appropriate to further these objectives, a 

derivatives clearing organization shall 

select contract units for clearing 

purposes that are smaller than the 

contract units in which trades submitted 

for clearing were executed. 

(4) A derivatives clearing organization 

that clears swaps shall have rules 

providing that, upon acceptance of a 

swap by the derivatives clearing 

organization for clearing: 

(i) The original swap is extinguished; 

(ii) The original swap is replaced by 

equal and opposite swaps between 

clearing members and the derivatives 

clearing organization; 

(iii) All terms of the cleared swaps 

must conform to templates established 

under derivatives clearing organization 

rules; and 

(iv) If a swap is cleared by a clearing 

member on behalf of a customer, all 

terms of the swap, as carried in the 

customer account on the books of the 

clearing member, must conform to the 

terms of the cleared swap established 

under the derivatives clearing 

organization’s rules. 

§ 39.13 Risk management. 

(a) In general. A derivatives clearing 

organization shall ensure that it 

possesses the ability to manage the risks 

associated with discharging the 

responsibilities of the derivatives 

clearing organization through the use of 

appropriate tools and procedures. 

(b) Documentation requirement. A 

derivatives clearing organization shall 

establish and maintain written policies, 

procedures, and controls, approved by 

its Board of Directors, which establish 

an appropriate risk management 

framework that, at a minimum, clearly 

identifies and documents the range of 

risks to which the derivatives clearing 

organization is exposed, addresses the 

monitoring and management of the 

entirety of those risks, and provides a 

mechanism for internal audit. The risk 

management framework shall be 

regularly reviewed and updated as 

necessary. 

(c) Chief risk officer. A derivatives 

clearing organization shall have a chief 

risk officer who shall be responsible for 

implementing the risk management 

framework, including the procedures, 

policies and controls described in 

paragraph (b) of this section, and for 

making appropriate recommendations to 

the derivatives clearing organization’s 

Risk Management Committee or Board 

of Directors, as applicable, regarding the 

derivatives clearing organization’s risk 

management functions. 

(d) [Reserved] 

(e) Measurement of credit exposure. A 

derivatives clearing organization shall: 

(1) Measure its credit exposure to 

each clearing member and mark to 

market such clearing member’s open 

positions at least once each business 

day; and 

(2) Monitor its credit exposure to each 

clearing member periodically during 

each business day. 

(f) Limitation of exposure to potential 

losses from defaults. A derivatives 

clearing organization, through margin 

requirements and other risk control 

mechanisms, shall limit its exposure to 

potential losses from defaults by its 

clearing members to ensure that: 

(1) The operations of the derivatives 

clearing organization would not be 

disrupted; and 

(2) Non-defaulting clearing members 

would not be exposed to losses that 

nondefaulting clearing members cannot 

anticipate or control. 

(g) Margin requirements—(1) In 

general. The initial margin that a 

derivatives clearing organization 

requires from each clearing member 

shall be sufficient to cover potential 

exposures in normal market conditions. 

Each model and parameter used in 

setting initial margin requirements shall 

be risk-based and reviewed on a regular 

basis. 

(2) Methodology and coverage. (i) A 

derivatives clearing organization shall 

establish initial margin requirements 

that are commensurate with the risks of 

each product and portfolio, including 

any unique characteristics of, or risks 

associated with, particular products or 

portfolios. A derivatives clearing 

organization that clears credit default 

swaps shall appropriately address jumpto-default risk in setting initial margins. 

(ii) A derivatives clearing organization 

shall use models that generate initial 

margin requirements sufficient to cover 

the derivatives clearing organization’s 

potential future exposures to clearing 

members based on price movements in 

the interval between the last collection 

of variation margin and the time within 

which the derivatives clearing 

organization estimates that it would be 

able to liquidate a defaulting clearing 

member’s positions (liquidation time); 

provided, however, that a derivatives 

clearing organization shall use a 

liquidation time that is a minimum of 

five business days for cleared swaps that 

are not executed on a designated 

contract market, whether the swaps are 

carried in a customer account subject to 

section 4d(a) or 4d(f) of the Act, or 

carried in a house account, and a 

liquidation time that is a minimum of 

one business day for all other products 

that it clears, and shall use longer 


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liquidation times, if appropriate, based 

on the unique characteristics of 

particular products or portfolios. 

(iii) The actual coverage of the initial 

margin requirements produced by such 

models, along with projected measures 

of the models’ performance, shall meet 

an established confidence level of at 

least 99%, based on data from an 

appropriate historic time period, for: 

(A) Each product (that is margined on 

a product basis); 

(B) Each spread within or between 

products for which there is a defined 

spread margin rate, as described in 

paragraph (g)(4) of this section; 

(C) Each account held by a clearing 

member at the DCO, by customer origin 

and house origin; and 

(D) Each swap portfolio, by beneficial 

owner. 

(iv) A derivatives clearing 

organization shall determine the 

appropriate historic time period based 

on the characteristics, including 

volatility patterns, as applicable, of each 

product, spread, account, or portfolio. 

(3) Independent validation. A 

derivatives clearing organization’s 

systems for generating initial margin 

requirements, including its theoretical 

models, must be reviewed and validated 

by a qualified and independent party, 

on a regular basis. 

(4) Spread margins. (i) A derivatives 

clearing organization may allow 

reductions in initial margin 

requirements for related positions 

(spread margins) if the price risks with 

respect to such positions are 

significantly and reliably correlated. 

The price risks of different positions 

will only be considered to be reliably 

correlated if there is a theoretical basis 

for the correlation in addition to an 

exhibited statistical correlation. That 

theoretical basis may include, but is not 

limited to, the following: 

(A) The products on which the 

positions are based are complements of, 

or substitutes for, each other; 

(B) One product is a significant input 

into the other product(s); 

(C) The products share a significant 

common input; or 

(D) The prices of the products are 

influenced by common external factors. 

(ii) A derivatives clearing organization 

shall regularly review its spread margins 

and the correlations on which they are 

based. 

(5) Price data. A derivatives clearing 

organization shall have a reliable source 

of timely price data in order to measure 

the derivatives clearing organization’s 

credit exposure accurately. A 

derivatives clearing organization shall 

also have written procedures and sound 

valuation models for addressing 

circumstances where pricing data is not 

readily available or reliable. 

(6) Daily review. On a daily basis, a 

derivatives clearing organization shall 

determine the adequacy of its initial 

margin requirements for each product 

(that is margined on a product basis). 

(7) Back tests. A derivatives clearing 

organization shall conduct back tests, as 

defined in § 39.2 of this part, using 

historical price changes based on a time 

period that is equivalent in length to the 

historic time period used by the 

applicable margin model for 

establishing the confidence level 

described in paragraph (g)(2) of this 

section or a longer time period, unless 

another time period is specified by this 

paragraph. 

(i) On a daily basis, a derivatives 

clearing organization shall conduct back 

tests with respect to products that are 

experiencing significant market 

volatility, to test the adequacy of its 

initial margin requirements and spread 

margin requirements for such products 

that are margined on a product basis. 

(ii) On at least a monthly basis, a 

derivatives clearing organization shall 

conduct back tests to test the adequacy 

of its initial margin requirements and 

spread margin requirements for each 

product that is margined on a product 

basis. 

(iii) On at least a monthly basis, a 

derivatives clearing organization shall 

conduct back tests to test the adequacy 

of its initial margin requirements for 

each account held by a clearing member 

at the DCO, by origin, house and 

customer, and each swap portfolio, by 

beneficial owner, over at least the 

previous 30 days. 

(8) Customer margin—(i) Gross 

margin. A derivatives clearing 

organization shall collect initial margin 

on a gross basis for each clearing 

member’s customer account equal to the 

sum of the initial margin amounts that 

would be required by the derivatives 

clearing organization for each 

individual customer within that account 

if each individual customer were a 

clearing member. A derivatives clearing 

organization may not net positions of 

different customers against one another. 

A derivatives clearing organization may 

collect initial margin for its clearing 

members’ house accounts on a net basis. 

(ii) Customer initial margin 

requirements. A derivatives clearing 

organization shall require its clearing 

members to collect customer initial 

margin, as defined in § 1.3 of this 

chapter, from their customers, for nonhedge positions, at a level that is greater 

than 100% of the derivatives clearing 

organization’s initial margin 

requirements with respect to each 

product and swap portfolio. The 

derivatives clearing organization shall 

have reasonable discretion in 

determining the percentage by which 

customer initial margins must exceed 

the derivatives clearing organization’s 

initial margin requirements with respect 

to particular products or swap 

portfolios. The Commission may review 

such percentage levels and require 

different percentage levels if the 

Commission deems the levels 

insufficient to protect the financial 

integrity of the clearing members or the 

derivatives clearing organization. 

(iii) Withdrawal of customer initial 

margin. A derivatives clearing 

organization shall require its clearing 

members to ensure that their customers 

do not withdraw funds from their 

accounts with such clearing members 

unless the net liquidating value plus the 

margin deposits remaining in a 

customer’s account after such 

withdrawal are sufficient to meet the 

customer initial margin requirements 

with respect to all products and swap 

portfolios held in such customer’s 

account which are cleared by the 

derivatives clearing organization. 

(9) Time deadlines. A derivatives 

clearing organization shall establish and 

enforce time deadlines for initial and 

variation margin payments to the 

derivatives clearing organization. 

(h) Other risk control mechanisms— 

(1) Risk limits. (i) A derivatives clearing 

organization shall impose risk limits on 

each clearing member, by customer 

origin and house origin, in order to 

prevent a clearing member from 

carrying positions for which the risk 

exposure exceeds a specified threshold 

relative to the clearing member’s and/or 

the derivatives clearing organization’s 

financial resources. The derivatives 

clearing organization shall have 

reasonable discretion in determining: 

(A) The method of computing risk 

exposure; 

(B) The applicable threshold(s); and 

(C) The applicable financial resources 

under this provision; provided however, 

that the ratio of exposure to capital must 

remain the same across all capital 

levels. The Commission may review 

such methods, thresholds, and financial 

resources and require the application of 

different methods, thresholds, or 

financial resources, as appropriate. 

(ii) A derivatives clearing organization 

may permit a clearing member to exceed 

the threshold(s) applied pursuant to 

paragraph (h)(1)(i) of this section 

provided that the derivatives clearing 

organization requires the clearing 

member to post additional initial margin 

that the derivatives clearing 

organization deems sufficient to 


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appropriately eliminate excessive risk 

exposure at the clearing member. The 

Commission may review the amount of 

additional initial margin and require a 

different amount of additional initial 

margin, as appropriate. 

(2) Large trader reports. A derivatives 

clearing organization shall obtain from 

its clearing members, copies of all 

reports that are required to be filed with 

the Commission by such clearing 

members pursuant to part 17 of this 

chapter. With respect to exclusively 

self-cleared contracts, a derivatives 

clearing organization shall obtain from 

the relevant reporting market, copies of 

all reports that are required to be filed 

with the Commission on behalf of such 

clearing members by the relevant 

reporting market, pursuant to § 17.00(i) 

of this chapter. A derivatives clearing 

organization shall review such reports 

on a daily basis to ascertain the risk of 

the overall portfolio of each large trader, 

including positions at all clearing 

members carrying accounts for each 

such large trader, and shall take 

additional actions with respect to such 

clearing members, when appropriate, as 

specified in paragraph (h)(6) of this 

section, in order to address any risks 

posed by any such large trader. 

(3) Stress tests. A derivatives clearing 

organization shall conduct stress tests, 

as defined in § 39.2 of this part, as 

follows: 

(i) On a daily basis, a derivatives 

clearing organization shall conduct 

stress tests with respect to each large 

trader who poses significant risk to a 

clearing member or the derivatives 

clearing organization, including 

positions at all clearing members 

carrying accounts for each such large 

trader. The derivatives clearing 

organization shall have reasonable 

discretion in determining which traders 

to test and the methodology used to 

conduct such stress tests. The 

Commission may review the selection of 

accounts and the methodology and 

require changes, as appropriate. 

(ii) On at least a weekly basis, a 

derivatives clearing organization shall 

conduct stress tests with respect to each 

clearing member account, by customer 

origin and house origin, and each swap 

portfolio, by beneficial owner, under 

extreme but plausible market 

conditions. The derivatives clearing 

organization shall have reasonable 

discretion in determining the 

methodology used to conduct such 

stress tests. The Commission may 

review the methodology and require 

changes, as appropriate. 

(4) Portfolio compression. (i) A 

derivatives clearing organization shall 

offer multilateral portfolio compression 

exercises, on a regular basis, for its 

clearing members that clear swaps, to 

the extent that such exercises are 

appropriate for those swaps that it 

clears. 

(ii) A derivatives clearing organization 

shall require its clearing members to 

participate in all such exercises, to the 

extent that any swap in the applicable 

portfolio is eligible for inclusion in the 

exercise, unless including the swap 

would be reasonably likely to 

significantly increase the risk exposure 

of the clearing member. 

(iii) A derivatives clearing 

organization may permit clearing 

members participating in compression 

exercises to set risk tolerance limits for 

their portfolios, provided that the 

clearing members do not set such risk 

tolerances at an unreasonable level or 

use such risk tolerances to evade the 

requirements of this paragraph. 

(5) Clearing members’ risk 

management policies and procedures. 

(i) A derivatives clearing organization 

shall adopt rules that: 

(A) Require its clearing members to 

maintain current written risk 

management policies and procedures; 

(B) Ensure that it has the authority to 

request and obtain information and 

documents from its clearing members 

regarding their risk management 

policies, procedures, and practices, 

including, but not limited to, 

information and documents relating to 

the liquidity of their financial resources 

and their settlement procedures; and 

(C) Require its clearing members to 

make information and documents 

regarding their risk management 

policies, procedures, and practices 

available to the Commission upon the 

Commission’s request. 

(ii) A derivatives clearing organization 

shall review the risk management 

policies, procedures, and practices of 

each of its clearing members on a 

periodic basis and document such 

reviews. 

(6) Additional authority. A derivatives 

clearing organization shall take 

additional actions with respect to 

particular clearing members, when 

appropriate, based on the application of 

objective and prudent risk management 

standards including, but not limited to: 

(i) Imposing enhanced capital 

requirements; 

(ii) Imposing enhanced margin 

requirements; 

(iii) Imposing position limits; 

(iv) Prohibiting an increase in 

positions; 

(v) Requiring a reduction of positions; 

(vi) Liquidating or transferring 

positions; and 

(vii) Suspending or revoking clearing 

membership. 

§ 39.14 Settlement procedures. 

(a) Definitions—(1) Settlement. For 

purposes of this section, ‘‘settlement’’ 

means: 

(i) Payment and receipt of variation 

margin for futures, options, and swap 

positions; 

(ii) Payment and receipt of option 

premiums; 

(iii) Deposit and withdrawal of initial 

margin for futures, options, and swap 

positions; 

(iv) All payments due in final 

settlement of futures, options, and swap 

positions on the final settlement date 

with respect to such positions; and 

(v) All other cash flows collected from 

or paid to each clearing member, 

including but not limited to, payments 

related to swaps such as coupon 

amounts. 

(2) Settlement bank. For purposes of 

this section, ‘‘settlement bank’’ means a 

bank that maintains an account either 

for the derivatives clearing organization 

or for any of its clearing members, 

which is used for the purpose of 

transferring funds and receiving 

transfers of funds in connection with 

settlements with the derivatives clearing 

organization. 

(b) Daily settlements. A derivatives 

clearing organization shall effect a 

settlement with each clearing member at 

least once each business day, and shall 

have the authority and operational 

capacity to effect a settlement with each 

clearing member, on an intraday basis, 

either routinely, when thresholds 

specified by the derivatives clearing 

organization are breached, or in times of 

extreme market volatility. 

(c) Settlement banks. A derivatives 

clearing organization shall employ 

settlement arrangements that eliminate 

or strictly limit its exposure to 

settlement bank risks, including the 

credit and liquidity risks arising from 

the use of such banks to effect 

settlements with its clearing members. 

(1) A derivatives clearing organization 

shall have documented criteria with 

respect to those banks that are 

acceptable settlement banks for the 

derivatives clearing organization and its 

clearing members, including criteria 

addressing the capitalization, 

creditworthiness, access to liquidity, 

operational reliability, and regulation or 

supervision of such banks. 

(2) A derivatives clearing organization 

shall monitor each approved settlement 

bank on an ongoing basis to ensure that 

such bank continues to meet the criteria 

established pursuant to paragraph (c)(1) 

of this section. 


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(3) A derivatives clearing organization 

shall monitor the full range and 

concentration of its exposures to its own 

and its clearing members’ settlement 

banks and assess its own and its 

clearing members’ potential losses and 

liquidity pressures in the event that the 

settlement bank with the largest share of 

settlement activity were to fail. A 

derivatives clearing organization shall: 

(i) Maintain settlement accounts at 

additional settlement banks; 

(ii) Approve additional settlement 

banks for use by its clearing members; 

(iii) Impose concentration limits with 

respect to its own or its clearing 

members’ settlement banks; and/or 

(iv) Take any other appropriate 

actions, if any such actions are 

reasonably necessary in order to 

eliminate or strictly limit such 

exposures. 

(d) Settlement finality. A derivatives 

clearing organization shall ensure that 

settlements are final when effected by 

ensuring that settlement fund transfers 

are irrevocable and unconditional when 

the derivatives clearing organization’s 

accounts are debited or credited. A 

derivatives clearing organization’s legal 

agreements with its settlement banks 

shall state clearly when settlement fund 

transfers will occur and a derivatives 

clearing organization shall routinely 

confirm that its settlement banks are 

effecting fund transfers as and when 

required by such legal agreements. 

(e) Recordkeeping. A derivatives 

clearing organization shall maintain an 

accurate record of the flow of funds 

associated with each settlement. 

(f) Netting arrangements. A 

derivatives clearing organization shall 

possess the ability to comply with each 

term and condition of any permitted 

netting or offset arrangement with any 

other clearing organization. 

(g) Physical delivery. With respect to 

contracts, agreements, and transactions 

that are settled by physical transfers of 

the underlying instruments or 

commodities, a derivatives clearing 

organization shall: 

(1) Establish rules that clearly state 

each obligation that the derivatives 

clearing organization has assumed with 

respect to physical deliveries, including 

whether it has an obligation to make or 

receive delivery of a physical 

instrument or commodity, or whether it 

indemnifies clearing members for losses 

incurred in the delivery process; and 

(2) Ensure that the risks of each such 

obligation are identified and managed. 

§ 39.15 Treatment of funds. 

(a) Required standards and 

procedures. A derivatives clearing 

organization shall establish standards 

and procedures that are designed to 

protect and ensure the safety of funds 

and assets belonging to clearing 

members and their customers. 

(b) Segregation of funds and assets— 

(1) Segregation. A derivatives clearing 

organization shall comply with the 

segregation requirements of section 4d 

of the Act and Commission regulations 

thereunder, or any other applicable 

Commission regulation or order 

requiring that customer funds and assets 

be segregated, set aside, or held in a 

separate account. 

(2) Commingling of futures, options 

on futures, and swaps positions—(i) 

Cleared swap account. In order for a 

derivatives clearing organization and its 

clearing members to commingle 

customer positions in futures, options 

on futures, and swaps, and any money, 

securities, or property received to 

margin, guarantee or secure such 

positions, in an account subject to the 

requirements of section 4d(f) of the Act, 

the derivatives clearing organization 

shall file rules for Commission approval 

pursuant to § 40.5 of this chapter. Such 

rule submission shall include, at a 

minimum, the following: 

(A) An identification of the futures, 

options on futures, and swaps that 

would be commingled, including 

contract specifications or the criteria 

that would be used to define eligible 

futures, options on futures, and swaps; 

(B) An analysis of the risk 

characteristics of the eligible products; 

(C) A description of whether the 

swaps would be executed bilaterally 

and/or executed on a designated 

contract market and/or a swap 

execution facility; 

(D) An analysis of the liquidity of the 

respective markets for the futures, 

options on futures, and swaps that 

would be commingled, the ability of 

clearing members and the derivatives 

clearing organization to offset or 

mitigate the risk of such futures, options 

on futures, and swaps in a timely 

manner, without compromising the 

financial integrity of the account, and, 

as appropriate, proposed means for 

addressing insufficient liquidity; 

(E) An analysis of the availability of 

reliable prices for each of the eligible 

products; 

(F) A description of the financial, 

operational, and managerial standards 

or requirements for clearing members 

that would be permitted to commingle 

such futures, options on futures, and 

swaps; 

(G) A description of the systems and 

procedures that would be used by the 

derivatives clearing organization to 

oversee such clearing members’ risk 

management of any such commingled 

positions; 

(H) A description of the financial 

resources of the derivatives clearing 

organization, including the composition 

and availability of a guaranty fund with 

respect to the futures, options on 

futures, and swaps that would be 

commingled; 

(I) A description and analysis of the 

margin methodology that would be 

applied to the commingled futures, 

options on futures, and swaps, 

including any margin reduction applied 

to correlated positions, and any 

applicable margin rules with respect to 

both clearing members and customers; 

(J) An analysis of the ability of the 

derivatives clearing organization to 

manage a potential default with respect 

to any of the futures, options on futures, 

or swaps that would be commingled; 

(K) A discussion of the procedures 

that the derivatives clearing 

organization would follow if a clearing 

member defaulted, and the procedures 

that a clearing member would follow if 

a customer defaulted, with respect to 

any of the commingled futures, options 

on futures, or swaps in the account; and 

(L) A description of the arrangements 

for obtaining daily position data from 

each beneficial owner of futures, 

options on futures, and swaps in the 

account. 

(ii) Futures account. In order for a 

derivatives clearing organization and its 

clearing members to commingle 

customer positions in futures, options 

on futures, and swaps, and any money, 

securities, or property received to 

margin, guarantee or secure such 

positions, in an account subject to the 

requirements of section 4d(a) of the Act, 

the derivatives clearing organization 

shall file with the Commission a 

petition for an order pursuant to section 

4d(a) of the Act. Such petition shall 

include, at a minimum, the information 

required under paragraph (b)(2)(i) of this 

section. 

(iii) Commission action. (A) The 

Commission may request additional 

information in support of a rule 

submission filed under paragraph (b)(i) 

of this section, and may grant approval 

of such rules in accordance with § 40.5 

of this chapter. 

(B) The Commission may request 

additional information in support of a 

petition filed under paragraph (b)(ii) of 

this section, and may issue an order 

under section 4d of the Act in its 

discretion. 

(c) Holding of funds and assets. A 

derivatives clearing organization shall 

hold funds and assets belonging to 

clearing members and their customers 

in a manner which minimizes the risk 


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of loss or of delay in the access by the 

derivatives clearing organization to such 

funds and assets. 

(1) Types of assets. A derivatives 

clearing organization shall limit the 

assets it accepts as initial margin to 

those that are have minimal credit, 

market, and liquidity risks. A 

derivatives clearing organization may 

not accept letters of credit as initial 

margin. 

(2) Valuation. A derivatives clearing 

organization shall use prudent valuation 

practices to value assets posted as initial 

margin on a daily basis. 

(3) Haircuts. A derivatives clearing 

organization shall apply appropriate 

reductions in value to reflect market and 

credit risk (haircuts), including in 

stressed market conditions, to the assets 

that it accepts in satisfaction of initial 

margin obligations, and shall evaluate 

the appropriateness of such haircuts on 

at least a quarterly basis. 

(4) Concentration limits. A derivatives 

clearing organization shall apply 

appropriate limitations on the 

concentration of assets posted as initial 

margin, as necessary, in order to ensure 

its ability to liquidate such assets 

quickly, with minimal adverse price 

effects, and shall evaluate the 

appropriateness of any such 

concentration limits, on at least a 

monthly basis. 

(5) Pledged assets. If a derivatives 

clearing organization permits its 

clearing members to pledge assets for 

initial margin while retaining such 

assets in accounts in the names of such 

clearing members, the derivatives 

clearing organization shall ensure that 

such assets are unencumbered and that 

such a pledge has been validly created 

and validly perfected in the relevant 

jurisdiction. 

(d) Permitted investments. Funds and 

assets belonging to clearing members 

and their customers that are invested by 

a derivatives clearing organization shall 

be held in instruments with minimal 

credit, market, and liquidity risks. Any 

investment of customer funds or assets 

by a derivatives clearing organization 

shall comply with § 1.25 of this part, as 

if all such funds and assets comprise 

customer funds subject to segregation 

pursuant to section 4d(a) of the Act and 

Commission regulations thereunder. 

§ 39.16 Default rules and procedures. 

(a) In general. A derivatives clearing 

organization shall adopt rules and 

procedures designed to allow for the 

efficient, fair, and safe management of 

events during which clearing members 

become insolvent or default on the 

obligations of such clearing members to 

the derivatives clearing organization. 

(b) Default management plan. A 

derivatives clearing organization shall 

maintain a current written default 

management plan that delineates the 

roles and responsibilities of its Board of 

Directors, its Risk Management 

Committee, any other committee that 

has responsibilities for default 

management, and the derivatives 

clearing organization’s management, in 

addressing a default, including any 

necessary coordination with, or 

notification of, other entities and 

regulators. Such plan shall address any 

differences in procedures with respect 

to highly liquid contracts (such as 

certain futures) and less liquid contracts 

(such as certain swaps). A derivatives 

clearing organization shall conduct and 

document a test of its default 

management plan on at least an annual 

basis. 

(c) Default procedures. (1) A 

derivatives clearing organization shall 

adopt procedures that would permit the 

derivatives clearing organization 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 derivatives clearing 

organization. 

(2) A derivatives clearing organization 

shall adopt rules that set forth its default 

procedures, including: 

(i) The derivatives clearing 

organization’s definition of a default; 

(ii) The actions that the derivatives 

clearing organization may take upon a 

default, which shall include the prompt 

transfer, liquidation, or hedging of the 

customer or proprietary positions of the 

defaulting clearing member, as 

applicable, and which may include, in 

the discretion of the derivatives clearing 

organization, the auctioning or 

allocation of such positions to other 

clearing members; 

(iii) Any obligations that the 

derivatives clearing organization 

imposes on its clearing members to 

participate in auctions, or to accept 

allocations, of a defaulting clearing 

member’s positions, provided that any 

allocation shall be proportional to the 

size of the participating or accepting 

clearing member’s positions at the 

derivatives clearing organization; 

(iv) The sequence in which the funds 

and assets of the defaulting clearing 

member and the financial resources 

maintained by the derivatives clearing 

organization would be applied in the 

event of a default; 

(v) A provision that customer margin 

posted by a defaulting clearing member 

shall not be applied in the event of a 

proprietary default; 

(vi) A provision that proprietary 

margins posted by a defaulting clearing 

member shall be applied in the event of 

a customer default, if the relevant 

customer margin is insufficient to cover 

the shortfall; and 

(3) A derivatives clearing organization 

shall make its default rules publicly 

available as provided in § 39.21 of this 

part. 

(d) Insolvency of a clearing member. 

(1) A derivatives clearing organization 

shall adopt rules that require a clearing 

member to provide prompt notice to the 

derivatives clearing organization if it 

becomes the subject of a bankruptcy 

petition, receivership proceeding, or the 

equivalent; 

(2) Upon receipt of such notice, a 

derivatives clearing organization shall 

review the continuing eligibility of the 

clearing member for clearing 

membership; and 

(3) Upon receipt of such notice, a 

derivatives clearing organization shall 

take any appropriate action, in its 

discretion, with respect to such clearing 

member or its positions, including but 

not limited to liquidation or transfer of 

positions, and suspension or revocation 

of clearing membership. 

§ 39.17 [Reserved] 

§ 39.18 System safeguards. 

(a) Definitions. For purposes of this 

section and of § 39.30 of this part: 

Relevant area means the metropolitan 

or other geographic area within which a 

derivatives clearing organization has 

physical infrastructure or personnel 

necessary for it to conduct activities 

necessary to the clearance and 

settlement of existing and new 

contracts. The term ‘‘relevant area’’ also 

includes communities economically 

integrated with, adjacent to, or within 

normal commuting distance of that 

metropolitan or other geographic area. 

Recovery time objective means the 

time period within which an entity 

should be able to achieve recovery and 

resumption of clearing and settlement of 

existing and new contracts, after those 

capabilities become temporarily 

inoperable for any reason up to or 

including a wide-scale disruption. 

Wide-scale disruption means an event 

that causes a severe disruption or 

destruction of transportation, 

telecommunications, power, water, or 

other critical infrastructure components 

in a relevant area, or an event that 

results in an evacuation or 

unavailability of the population in a 

relevant area. 

(b) In general—(1) Program of risk 

analysis. Each derivatives clearing 

organization shall establish and 


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maintain a program of risk analysis and 

oversight with respect to its operations 

and automated systems to identify and 

minimize sources of operational risk 

through: 

(i) The development of appropriate 

controls and procedures; and 

(ii) The development of automated 

systems that are reliable, secure, and 

have adequate scalable capacity. 

(2) Resources. Each derivatives 

clearing organization shall establish and 

maintain resources that allow for the 

fulfillment of each obligation and 

responsibility of the derivatives clearing 

organization in light of the risks 

identified pursuant to paragraph (b)(1) 

of this section. 

(3) Verification of adequacy. Each 

derivatives clearing organization shall 

periodically verify that resources 

described in paragraph (b)(2) are 

adequate to ensure daily processing, 

clearing, and settlement. 

(c) Elements of program. A derivatives 

clearing organization’s program of risk 

analysis and oversight with respect to 

its operations and automated systems, 

as described in paragraph (b) of this 

section, shall address each of the 

following categories of risk analysis and 

oversight: 

(1) Information security; 

(2) Business continuity and disaster 

recovery planning and resources; 

(3) Capacity and performance 

planning; 

(4) Systems operations; 

(5) Systems development and quality 

assurance; and 

(6) Physical security and 

environmental controls. 

(d) Standards for program. In 

addressing the categories of risk analysis 

and oversight required under paragraph 

(c) of this section, a derivatives clearing 

organization shall follow generally 

accepted standards and industry best 

practices with respect to the 

development, operation, reliability, 

security, and capacity of automated 

systems. 

(e) Business continuity and disaster 

recovery—(1) Plan and resources. A 

derivatives clearing organization shall 

maintain a business continuity and 

disaster recovery plan, emergency 

procedures, and physical, technological, 

and personnel resources sufficient to 

enable the timely recovery and 

resumption of operations and the 

fulfillment of each obligation and 

responsibility of the derivatives clearing 

organization following any disruption of 

its operations. 

(2) Responsibilities and obligations. 

The responsibilities and obligations 

described in paragraph (e)(1) shall 

include, without limitation, daily 

processing, clearing, and settlement of 

transactions cleared. 

(3) Recovery time objective. The 

derivatives clearing organization’s 

business continuity and disaster 

recovery plan described in paragraph 

(e)(1) of this section shall have the 

objective of, and the physical, 

technological, and personnel resources 

described therein shall be sufficient to, 

enable the derivatives clearing 

organization to resume daily processing, 

clearing, and settlement no later than 

the next business day following the 

disruption. 

(f) Location of resources; outsourcing. 

A derivatives clearing organization may 

maintain the resources required under 

paragraph (e)(1) of this section either: 

(1) Using its own employees as 

personnel, and property that it owns, 

licenses, or leases (own resources); or 

(2) Through written contractual 

arrangements with another derivatives 

clearing organization or other service 

provider (outsourcing). 

(i) Retention of responsibility. A 

derivatives clearing organization that 

enters into such a contractual 

arrangement shall retain complete 

liability for any failure to meet the 

responsibilities specified in paragraph 

(e) of this section, although it is free to 

seek indemnification from the service 

provider. The outsourcing derivatives 

clearing organization must employ 

personnel with the expertise necessary 

to enable it to supervise the service 

provider’s delivery of the services. 

(ii) Testing. The testing referred to in 

paragraph (j) of this § 39.18 and 

§ 39.30(c) of this part shall include all 

own and outsourced resources, and 

shall verify that all such resources will 

work effectively together. 

(g) Notice of exceptional events. A 

derivatives clearing organization shall 

notify staff of the Division of Clearing 

and Intermediary Oversight promptly of: 

(1) Any hardware or software 

malfunction, cyber security incident, or 

targeted threat that materially impairs, 

or creates a significant likelihood of 

material impairment, of automated 

system operation, reliability, security, or 

capacity; or 

(2) Any activation of the derivatives 

clearing organization’s business 

continuity and disaster recovery plan. 

(h) Notice of planned changes. A 

derivatives clearing organization shall 

give staff of the Division of Clearing and 

Intermediary Oversight timely advance 

notice of all: 

(1) Planned changes to automated 

systems that are likely to have a 

significant impact on the reliability, 

security, or adequate scalable capacity 

of such systems; and 

(2) Planned changes to the derivatives 

clearing organization’s program of risk 

analysis and oversight. 

(i) Recordkeeping. A derivatives 

clearing organization shall maintain, 

and provide to Commission staff 

promptly upon request, pursuant to 

§ 1.31 of this chapter, current copies of 

its business continuity plan and other 

emergency procedures, its assessments 

of its operational risks, and records of 

testing protocols and results, and shall 

provide any other documents requested 

by Commission staff for the purpose of 

maintaining a current profile of the 

derivatives clearing organization’s 

automated systems. 

(j) Testing—(1) Purpose of testing. A 

derivatives clearing organization shall 

conduct regular, periodic, and objective 

testing and review of: 

(i) Its automated systems to ensure 

that they are reliable, secure, and have 

adequate scalable capacity; and 

(ii) Its business continuity and 

disaster recovery capabilities, using 

testing protocols adequate to ensure that 

the derivatives clearing organization’s 

backup resources are sufficient to meet 

the requirements of paragraph (e) of this 

section. 

(2) Conduct of testing. Testing shall be 

conducted by qualified, independent 

professionals. Such qualified 

independent professionals may be 

independent contractors or employees 

of the derivatives clearing organization, 

but shall not be persons responsible for 

development or operation of the systems 

or capabilities being tested. 

(3) Reporting and review. Reports 

setting forth the protocols for, and 

results of, such tests shall be 

communicated to, and reviewed by, 

senior management of the derivatives 

clearing organization. Protocols of tests 

which result in few or no exceptions 

shall be subject to more searching 

review. 

(k) Coordination of business 

continuity and disaster recovery plans. 

A derivatives clearing organization 

shall, to the extent practicable: 

(1) Coordinate its business continuity 

and disaster recovery plan with those of 

its clearing members, in a manner 

adequate to enable effective resumption 

of daily processing, clearing, and 

settlement following a disruption; 

(2) Initiate and coordinate periodic, 

synchronized testing of its business 

continuity and disaster recovery plan 

and the plans of its clearing members; 

and 

(3) Ensure that its business continuity 

and disaster recovery plan takes into 

account the plans of its providers of 

essential services, including 

telecommunications, power, and water. 


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§ 39.19 Reporting. 

(a) [Reserved] 

(b) [Reserved] 

(c) (1) [Reserved] 

(i) [Reserved] 

(ii) [Reserved] 

(iii) [Reserved] 

(iv) End-of-day positions for each 

clearing member, by customer origin 

and house origin. 

(2) [Reserved] 

(3)(i) [Reserved] 

(ii) [Reserved] 

(iii) The annual verification required 

by § 39.24(b)(4) of this part. 

(iv) Time of report. The reports 

required by this paragraph (c)(3) shall be 

submitted concurrently to the 

Commission not more than 90 days after 

the end of the derivatives clearing 

organization’s fiscal year; provided that, 

a derivatives clearing organization may 

request from the Commission an 

extension of time to submit either 

report, provided the derivatives clearing 

organization’s failure to submit the 

report in a timely manner could not be 

avoided without unreasonable effort or 

expense. Extensions of the deadline will 

be granted at the discretion of the 

Commission. 

(4) (i)–(xv) [Reserved] 

(xvi) Action of Board of Directors or 

Risk Management Committee. A report 

when (A) the Board of Directors of a 

derivatives clearing organization rejects 

a recommendation or supersedes an 

action of the Risk Management 

Committee; or 

(B) The Risk Management Committee 

rejects a recommendation or supersedes 

an action of its subcommittee, as 

required by § 39.25(b) of this part. 

(xvii) Election of Board of Directors. A 

report after each election of its Board of 

Directors in accordance with 

§ 40.9(b)(1)(iii) of this chapter. 

(xviii) System safeguards. A report of 

(A) exceptional events as required by 

§ 39.18(g) of this part; or 

(B) Planned changes as required by 

§ 39.18(h) of this part. 

§ 39.20 [Reserved] 

§ 39.21 Public information. 

(a) [Reserved] 

(b) [Reserved] 

(c)(1)–(5) [Reserved] 

(6) The derivatives clearing 

organization’s rules and procedures for 

defaults in accordance with § 39.16 of 

this part; 

(7) Governance and conflicts of 

interest in accordance with § 39.24(a)(2) 

of this part and § 40.9(d) of this chapter; 

and 

(8) Any other matter that is relevant 

to participation in the clearing and 

settlement activities of the derivatives 

clearing organization. 

§ 39.22 [Reserved] 

§ 39.23 [Reserved] 

§ 39.24 Governance fitness standards. 

(a) [Reserved] 

(b)(1)–(3) [Reserved] 

(4) Verification. Each derivatives 

clearing organization must collect and 

verify information that supports 

compliance with the standards in 

paragraphs (b)(2) and (3) of this section, 

and provide that information to the 

Commission on an annual basis in 

accordance with the requirements of 

§ 39.19(c)(3)(iv) of this part. Such 

information may take the form of a 

certification based on verifiable 

information, an affidavit from the 

general counsel of the derivatives 

clearing organization, registration 

information, or other substantiating 

information. 

§ 39.25 Conflicts of interest. 

(a) [Reserved] 

(b) Reporting to the Commission. In 

the event that: 

(1) The Board of Directors of a 

derivatives clearing organization rejects 

a recommendation or supersedes an 

action of the Risk Management 

Committee, or 

(2) The Risk Management Committee 

rejects a recommendation or supersedes 

an action of its subcommittee (as 

described in § 39.13(d)(5) of this part), 

the derivatives clearing organization 

shall submit a written report to the 

Commission within 30 days of such a 

rejection or supersession detailing: 

(i) The recommendation or action of 

the Risk Management Committee (or 

subcommittee thereof); 

(ii) The rationale for such 

recommendation or action; 

(iii) The rationale of the Board of 

Directors (or the Risk Management 

Committee, if applicable) for rejecting 

such recommendation or superseding 

such action; and 

(iv) The course of action that the 

Board of Directors (or the Risk 

Management Committee, if applicable) 

decided to take contrary to such 

recommendation or action. 

9. Add subpart C to read as follows: 

Subpart C—Provisions applicable to 

systemically important derivatives clearing 

organizations. 

Sec. 

39.28 Scope. 

39.29 [Reserved] 

39.30 System safeguards. 

30.31 Special enforcement authority. 

Subpart C—Provisions applicable to 

systemically important derivatives 

clearing organizations. 

§ 39.28 Scope. 

(a) The provisions of this subpart C 

apply to any derivatives clearing 

organization, as defined in section 

1a(15) of the Act and § 1.3(d) of this 

chapter, 

(1) Which is registered or deemed to 

be registered with the Commission as a 

derivatives clearing organization, is 

required to register as such with the 

Commission pursuant to section 5b(a) of 

the Act, or which voluntarily registers 

as such with the Commission pursuant 

to section 5b(b) or otherwise; and 

(2) Which is a systemically important 

derivatives clearing organization as 

defined in § 39.2 of this part. 

(b) A systemically important 

derivatives clearing organization is 

subject to the provisions of subparts A 

and B of this part 39 except to the extent 

different requirements are imposed by 

provisions of this subpart C. 

(c) 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 § 40.10 of this 

chapter. 

§ 39.29 [Reserved] 

§ 39.30 System safeguards. 

(a) Notwithstanding § 39.18(e)(3) of 

this part, the business continuity and 

disaster recovery plan described in 

§ 39.18(e)(1) for each systemically 

important derivatives clearing 

organization shall have the objective of 

enabling, and the physical, 

technological, and personnel resources 

described in § 39.18(e)(1) shall be 

sufficient to enable, the 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 ensure 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 must maintain a 

degree of geographic dispersal of 

physical, technological and personnel 

resources consistent with the following: 

(1) Physical and technological 

resources, sufficient to enable the entity 


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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 

infrastructure the entity normally relies 

upon to conduct activities necessary to 

the clearance and settlement of existing 

and new contracts, 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, 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, must live and work outside that 

relevant area; 

(3) The provisions of § 39.18(f) of this 

part shall apply to these resource 

requirements. 

(c) Each systemically important 

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 § 39.18(j) of this part apply to such 

testing. 

(d) The requirements of this section 

shall apply to a derivatives clearing 

organization not earlier than one year 

after such derivatives clearing 

organization is designated as 

systemically important. 

§ 39.31 Special enforcement authority. 

For purposes of enforcing the 

provisions of Title VIII of the DoddFrank 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. 

10. Revise appendix A to read as 

follows: 

Appendix A to Part 39—Form DCO 

Derivatives Clearing Organization 

Application for Registration 

BILLING CODE 6351–01–P 


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BILLING CODE 6351–01–C 

Description of Exhibits 

Exhibit A—General Information/Compliance 

• Attach as Exhibit A–1, a regulatory 

compliance chart setting forth each Core 

Principle and providing citations to the 

Applicant’s relevant rules, policies, and 

procedures that address each Core Principle, 

and a brief summary of the manner in which 

Applicant will comply with each Core 

Principle. 

• Attach as Exhibit A–2, a current copy of 

Applicant’s rulebook. The rulebook must 

consist of all the rules necessary to carry out 

Applicant’s role as a derivatives clearing 

organization. Applicant must certify that its 

rules constitute a binding agreement between 

Applicant and its clearing members and, in 

addition to the separate clearing member 

agreements, establish rights and obligations 

between Applicant and its clearing members. 

• Attach as Exhibit A–3, a narrative 

summary of Applicant’s proposed clearing 

activities including (i) the anticipated start 

date of clearing products (or, if Applicant is 

already clearing products, the anticipated 

start date of activities for which Applicant is 

seeking an amendment to its registration) and 

(ii) a description of the scope of Applicant’s 

proposed clearing activities (e.g., clearing for 

a designated contract market; clearing for a 

swap execution facility; clearing over-thecounter (‘‘OTC’’) products). 

• Attach as Exhibit A–4, a detailed 

business plan setting forth, at a minimum, 

the nature of and rationale for Applicant’s 

activities as a derivatives clearing 

organization, the context in which it is 

beginning or expanding its activities, and the 

nature, terms, and conditions of the products 

it will clear. 

• Attach as Exhibit A–5, a list of the names 

of any person (i) who owns 5% or more of 

Applicant’s stock or other ownership or 

equity interests; or (ii) who, either directly or 

indirectly, through agreement or otherwise, 

may control or direct the management or 

policies of Applicant. Provide as part of 

Exhibit A–5 the full name and address of 

each such person, indicate the person’s 

ownership percentage, and attach a copy of 

the agreement or, if there is no agreement, an 

explanation of the basis upon which such 

person exercises or may exercise such control 

or direction. 

• Attach as Exhibit A–6, a list of 

Applicant’s current officers, directors, 

governors, general partners, LLC managers, 

and members of all standing committees 

(including any committee referenced in 

Section (a)(2) of Exhibit P herein), as 

applicable, or persons performing functions 

similar to any of the foregoing, indicating for 

each: 

a. Name and Title (with respect to a 

director, such title must include participation 

on any committee of Applicant); 

b. Phone number (both work and mobile) 

and e-mail contact information; 

c. Dates of commencement and, if 

appropriate, termination of present term of 

office or position; 

d. Length of time each such person has 

held the same office or position; 

e. Brief description of the business 

experience of each person over the last ten 

years; 

f. Any other current business affiliations in 

the financial services industry; 

g. If such person is not an employee of 

Applicant, list any compensation paid to the 

person as a result of his or her position at 

Applicant. For a director, describe any 

performance-based compensation; 

h. A certification for each such person that 

the individual would not be disqualified 

under Section 8a(2) of the Act or § 1.63; and 

i. With respect to a director, whether such 

director is a public director or a clearing 

member customer, and the basis for such a 

determination as to the director’s status. 

If another entity ‘‘operates’’ Applicant, 

attach for such entity all of the items 

indicated in Exhibit A–6. For this purpose, 

the term ‘‘operate’’ shall be as defined in 

§ 40.9(b)(2) 

• Attach as Exhibit A–7, a diagram of the 

entire corporate organizational structure of 

Applicant including the legal name of all 

entities within the organizational structure 

and the applicable percentage ownership 

among affiliated entities. Additionally, 

provide (i) a list of all jurisdictions in which 

Applicant or its affiliated entities are doing 

business; (iii) the registration status of 

Applicant and its affiliated entities, 

including pending applications or exemption 

requests and whether any applications or 

exemptions have been denied (e.g., country, 

regulator, registration category, date of 

registration or request for exemption, date of 

denial, if applicable); and (ii) the address for 


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legal service of process for Applicant (which 

cannot be a post office box) for each 

applicable jurisdiction. 

• Attach as Exhibit A–8, a copy of the 

constituent documents, articles of 

incorporation or association with all 

amendments thereto, partnership or limited 

liability agreements, and existing bylaws, 

operating agreement, and rules or 

instruments corresponding thereto, of 

Applicant. Provide a certificate of good 

standing or its equivalent for Applicant for 

each jurisdiction in which Applicant is doing 

business, including any foreign jurisdiction, 

dated within one month of the date of the 

Form DCO. 

• Attach as Exhibit A–9, a brief description 

of any material pending legal proceeding(s) 

or governmental investigation(s) to which 

Applicant or any of its affiliates is a party or 

is subject, or to which any of its or their 

property is at issue. Include the name of the 

court or agency where the proceeding(s) is 

pending, the date(s) instituted, the principal 

parties involved, a description of the factual 

allegations in the complaint(s), the laws that 

were allegedly violated, and the relief sought. 

Include similar information as to any such 

proceeding(s) or any investigation known to 

be contemplated by any governmental 

agency. 

• If Applicant intends to use the services 

of an outside service provider (including 

services of its clearing members or market 

participants), to enable Applicant to comply 

with any of the Core Principles, Applicant 

must submit as Exhibit A–10 all agreements 

entered into or to be entered into between 

Applicant and the outside service provider, 

and identify (1) the services that will be 

provided; (2) the staff who will provide the 

services; and (3) the Core Principles 

addressed by such arrangement. If a 

submitted agreement is not final and 

executed, the Applicant must submit 

evidence that constitutes reasonable 

assurance that such services will be provided 

as soon as operations require. 

• Attach as Exhibit A–11, documentation 

that demonstrates compliance with the Chief 

Compliance Officer (‘‘CCO’’) requirements set 

forth in § 39.10(c), including but not limited 

to: 

a. Evidence of the designation of an 

individual to serve as Applicant’s CCO with 

full responsibility and authority to develop 

and enforce appropriate compliance policies 

and procedures; 

b. A description of the background and 

skills of the person designated as the CCO 

and a certification that the individual would 

not be disqualified under Section 8a(2) of the 

Act or § 1.63; 

c. To whom the CCO reports (i.e., the 

senior officer or the Board of Directors); 

d. Any plan of communication or regular 

or special meetings between the CCO and the 

Board of Directors or senior officer as 

appropriate; 

e. A job description setting forth the CCO’s 

duties; 

f. Procedures for the remediation of 

noncompliance issues; and 

g. A copy of Applicant’s Compliance 

Manual (including a code of ethics and 

conflict of interest policy). 

Exhibit B—Financial Resources 

• Attach as Exhibit B, documents that 

demonstrate compliance with the financial 

resources requirements set forth in § 39.11, 

including but not limited to: 

a. General—Provide as Exhibit B–1: 

(1) The most recent set of audited financial 

statements of Applicant or of its parent 

company, including the balance sheet, 

income statement, statement of cash flows, 

notes to the financial statements, and 

accountant’s opinion; 

(2) If the audited financial statements are 

not dated within 1 month of the date of filing 

of the Form DCO, Applicant must provide a 

set of unaudited financial statements current 

within 1 month of the date of filing of the 

Form DCO; 

(3) If Applicant does not have audited 

financial statements, Applicant must provide 

a balance sheet as of a date within 1 month 

of the date of filing of the Form DCO and an 

income statement and statement of cash 

flows reflecting the period since Applicant’s 

formation and a date that is within 1 month 

of the date of filing of the Form DCO. These 

statements must be accompanied by an 

independent certified public accountant’s 

review report; and 

(4) Evidence of ability to satisfy the 

requirements of Exhibits B–2 and B–3 below 

which may include (i) pro forma financial 

statements setting forth all projections and 

assumptions used therein, and (ii) a narrative 

description of how Applicant will fund its 

financial resources obligations on the first 

day of its operation as a derivatives clearing 

organization. 

b. Default Resources—Provide as Exhibit 

B–2: 

(1) A calculation of the financial resources 

needed to enable Applicant to meet its 

requirements under § 39.11(a)(1). Applicant 

must provide hypothetical default scenarios 

designed to reflect a variety of market 

conditions, and the assumptions and 

variables underlying the scenarios must be 

explained. All results of the analysis must be 

included. This calculation requires a start-up 

enterprise to estimate its largest anticipated 

financial exposure. A start-up must be able 

to explain the basis for its estimate; 

(2) Proof of unencumbered assets sufficient 

to satisfy § 39.11(a)(1). This may be 

demonstrated by a copy of a bank balance 

statement(s) in the name of Applicant and 

may be combined with the types of financial 

resources set forth in § 39.11(b)(1). If relying 

on § 39.11(b)(1)(vi), such other resources 

must be thoroughly explained. If relying on 

§ 39.11(b)(1)(ii) and/or (vi), Applicant cannot 

also count these assets when demonstrating 

its compliance with its operating resources 

requirement under § 39.11(a)(2) and 

Applicant must detail the amounts or 

percentages of such assets that apply to each 

financial resource requirement; 

(3) A demonstration that Applicant can 

perform the monthly calculations required by 

§ 39.11(c)(1); 

(4) A demonstration that Applicant’s 

financial resources are sufficiently liquid as 

required by § 39.11(e)(1); 

(5) A demonstration of how Applicant will 

be able to maintain, at all times, the level of 

resources required by § 39.11(a)(1); and 

(6) A demonstration of how default 

resources financial information will be 

updated and reported to clearing members 

and the public under § 39.21, and to the 

Commission as required by § 39.11(f)(1) and 

§ 39.19. 

c. Operating Resources—Provide as Exhibit 

B–3: 

(1) A calculation of the financial resources 

needed to enable Applicant to meet its 

requirements under § 39.11(a)(2); 

(2) Proof of assets sufficient to satisfy the 

amount required under § 39.11(a)(2). This 

may be demonstrated by a copy of a bank 

balance statement(s) in the name of 

Applicant and may be combined with the 

types of financial resources set forth in 

§ 39.11(b)(2). If relying on § 39.11(b)(2)(ii), 

such other resources must be thoroughly 

explained. If relying on § 39.11(b)(2)(i) or (ii), 

Applicant cannot also count these assets 

when demonstrating its compliance with 

meeting its default resources requirement 

under § 39.11(a)(1) and Applicant must detail 

the amounts or percentages of such assets 

that apply to each financial resource 

requirement; 

(3) Proof of adequate physical 

infrastructure to carry out business 

operations, which includes an office(s) 

(separate from any personal dwelling) with a 

U.S. street address (not merely a post office 

box number) that has electricity, HVAC, and 

running water and meets all local building 

and fire codes. This location must be the 

same as the principal executive offices 

address identified on the cover sheet of the 

Form DCO; 

(4) Proof of adequate technological systems 

necessary to carry out operations including 

properly working computers, networks, 

appropriate software, telephones, fax 

machines, Internet access, and photocopiers; 

(5) A calculation pursuant to § 39.11(c)(2), 

including the total projected operating costs 

for Applicant’s first year of operation, 

calculated on a monthly basis with an 

explanation of the basis for calculating each 

cost and a discussion of the type, nature, and 

number of the various costs included; 

(6) A demonstration that Applicant’s 

financial resources are sufficiently liquid and 

unencumbered, as required by § 39.11(e)(2); 

(7) A demonstration of how Applicant will 

maintain, at all times, the level of resources 

required by § 39.11(a)(2) with an explanation 

of asset valuation methodology and 

calculation of projected revenue, if 

applicable; and 

(8) A demonstration of how operating 

resources financial information will be 

updated and reported to clearing members 

and the public under § 39.21, and to the 

Commission as required by § 39.11(f)(1) and 

§ 39.19. 

d. Human Resources—Provide as Exhibit 

B–4: 

(1) An organizational chart showing 

Applicant’s current and planned staff by 

position and title, including key personnel 

(as such term is defined in § 39.2) and, if 

applicable, managerial staff reporting to key 

personnel. 

(2) A discussion and description of the 

staffing requirements needed to fulfill all 

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services, and areas of supervision necessary 

to operate Applicant on a day-to-day basis; 

and 

(3) The names and qualifications of 

individuals who are key personnel or other 

managerial staff who will carry out the 

operations and associated functions, tasks, 

services, and supervision needed to run the 

Applicant on day-to-day basis. In particular, 

Applicant must identify such individuals 

who are responsible for risk management, 

treasury, clearing operations and compliance 

(and specify whether each such person is an 

employee or consultant/agent). 

Exhibit C—Participant and Product 

Eligibility 

• Attach as Exhibit C, documents that 

demonstrate compliance with the participant 

and product eligibility requirements set forth 

in § 39.12 of the Commission’s regulations, 

including but not limited to: 

a. Participant Eligibility—Provide as 

Exhibit C–1, an explanation of the 

requirements for becoming a clearing 

member and how those requirements satisfy 

§ 39.12 and, where applicable, support 

Applicant’s compliance with other Core 

Principles. Applicant must address how its 

participant eligibility requirements comply 

with the core principles and regulations 

thereunder for financial resources, risk 

management and operational capacity. The 

explanation also must include: 

(1) A final version of the membership 

agreement between Applicant and its 

clearing members that sets forth the full 

scope of respective rights and obligations; 

(2) A discussion of how Applicant will 

monitor for and enforce compliance with its 

eligibility criteria, especially minimum 

financial requirements; 

(3) An explanation of how the eligibility 

criteria are objective and allow for fair and 

open access to Applicant. Applicant must 

include an explanation of the differences 

between various classes of membership or 

participation that might be based on different 

levels of capital and/or creditworthiness. 

Applicant must also include information 

about whether any differences exist in how 

Applicant will monitor and enforce the 

obligations of its various clearing members 

including any differences in access, privilege, 

margin levels, position limits, or other 

controls; 

(4) If Applicant allows intermediation, 

Applicant must describe the requirements 

applicable to those who may act as 

intermediaries on behalf of customers or 

other market participants; 

(5) A description of the program for 

monitoring the financial status of the clearing 

members on an ongoing basis; 

(6) The procedures that Applicant will 

follow in the event of the bankruptcy or 

insolvency of a clearing member, which did 

not result in a default to Applicant; 

(7) A description of whether and how 

Applicant would adjust clearing member 

participation under continuing eligibility 

criteria based on the financial, risk, or 

operational status of a clearing member; 

(8) A discussion of whether Applicant’s 

clearing members will be required to be 

registered with the Commission; and 

(9) A list of current or prospective clearing 

members. If a current or prospective clearing 

member is a Commission registrant, 

Applicant must identify the member’s 

designated self-regulatory organization. 

b. Product Eligibility—Provide as Exhibit 

C–2, an explanation of the criteria for 

instruments acceptable for clearing 

including: 

(1) The regulatory status of each market on 

which a contract to be cleared by Applicant 

is traded (e.g., DCM, SEF, not a registered 

market), and whether the market for which 

Applicant clears intends to join the Joint 

Audit Committee. For OTC agreements, 

contracts, or transactions not traded on a 

registered market, Applicant must describe 

the nature of the OTC market and its interest 

in having the particular OTC agreement, 

contract, or transaction cleared; 

(2) The criteria, and the factors considered 

in establishing the criteria, for determining 

the types of products that will be cleared; 

(3) An explanation of how the criteria for 

deciding what products to clear take into 

account the different risks inherent in 

clearing different agreements, contracts, or 

transactions and how those criteria affect 

maintenance of assets to support the 

guarantee function in varying risk 

environments; 

(4) A precise list of all the agreements, 

contracts, or transactions to be covered by 

Applicant’s registration order, including the 

terms and conditions of all agreements, 

contracts, or transactions; 

(5) A forecast of expected volume and open 

interest at the outset of clearing operations, 

after six months, and after one year of 

operation; and 

(6) The mechanics of clearing the contract, 

such as reliance on exchange for physical, 

exchange for swap, or other substitution 

activity; whether the contracts are matched 

prior to submission for clearing or after 

submission; and other aspects of clearing 

mechanics that are relevant to understanding 

the products that would be eligible for 

clearing. 

Exhibit D—Risk Management 

• Attach as Exhibit D, documents that 

demonstrate compliance with the risk 

management requirements set forth in § 39.13 

of the Commission’s regulations, including 

but not limited to: 

a. Risk Management Framework—Provide 

as Exhibit D–1, a copy of Applicant’s written 

policies, procedures, and controls, as 

approved by Applicant’s Board of Directors, 

that establish Applicant’s risk management 

framework as required by § 39.13(b). 

Applicant must also provide a description of 

the composition and responsibilities of 

Applicant’s Risk Management Committee. 

b. Measuring Risk—Provide as Exhibit D– 

2, a narrative explanation of how Applicant 

has projected and will continue to measure 

its counterparty risk exposure, including: 

(1) A description of the risk-based margin 

calculation methodology; 

(2) The assumptions upon which the 

methodology was designed, including the 

risk analysis tools and procedures employed 

in the design process; 

(3) An explanation as to why a particular 

methodology was chosen over other 

methodologies that might have been suitable, 

including a comparison of margin levels 

calculated using other margin methodologies; 

(4) A demonstration of the margin 

methodology as applied to real or 

hypothetical clearing scenarios; 

(5) A description of the data sources for 

inputs used in the methodology, e.g. 

historical price data reflecting market 

volatility over various periods of time; 

(6) A description of the sources of price 

data for the measurement of current 

exposures and the valuation models for 

addressing circumstances where pricing data 

is not readily available or reliable; 

(7) The frequency and circumstances under 

which the margin methodology will be 

reviewed and the criteria for deciding how 

often to review and whether to modify a 

margin methodology; 

(8) An independent validation of 

Applicant’s systems for generating initial 

margin requirements, including its 

theoretical models; 

(9) The frequency of measuring 

counterparty risk exposures (mark to market), 

whether counterparty risk exposures are 

routinely measured on an intraday basis, 

whether Applicant has the operational 

capacity to measure counterparty risk 

exposures on an intraday basis, and the 

circumstances under which Applicant would 

conduct a non-routine intraday measurement 

of counterparty risk exposures; 

(10) Preliminary forecasts regarding future 

counterparty risk exposure and assumptions 

upon which such forecasts of exposure are 

based; 

(11) A description of any systems or 

software that Applicant will require clearing 

members to use in order to margin their 

positions in their internal bookkeeping 

systems, and whether and under what terms 

and conditions Applicant will provide such 

systems or software to clearing members; and 

(12) A description of the extent to which 

counterparty risk can be offset through the 

clearing process (i.e., the limitations, if any, 

on Applicant’s duty to fulfill its obligations 

as the buyer to every seller and the seller to 

every buyer). 

c. Limiting Risk—Provide as Exhibit D–3, 

a narrative discussion addressing the 

specifics of Applicant’s clearing activities, 

including: 

(1) How Applicant will collect financial 

information about its clearing members and 

other traders or market participants, monitor 

price movements, and mark to market, on a 

daily basis, the products and/or portfolios it 

clears; 

(2) How Applicant will monitor accounts 

carried by clearing members, the 

accumulation of positions by clearing 

members and other market participants, and 

compliance with position limits; and how it 

will use large trader information; 

(3) How Applicant will determine variation 

margin levels and outstanding initial margin 

due; 

(4) How Applicant will identify unusually 

large pays on a proactive basis before they 

occur; 

(5) Whether and how Applicant will 

compare price moves and position 

information to historical patterns and to the 


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financial information collected from its 

clearing members; how it will identify 

unusually large pays on a daily basis; 

(6) How Applicant will use various risk 

tools and procedures such as: (i) value-at-risk 

calculations; (ii) stress testing; (iii) back 

testing; and/or (iv) other risk management 

tools and procedures; 

(7) How Applicant will communicate with 

clearing members, settlement banks, other 

derivatives clearing organizations, designated 

contract markets, swap execution facilities, 

major swap participants, swap data 

repositories, and other entities in emergency 

situations or circumstance that might require 

immediate action by the Applicant; 

(8) How Applicant will monitor risk 

outside business hours; 

(9) How Applicant will review its clearing 

members’ risk management practices; 

(10) Whether Applicant will impose credit 

limits and/or employ other risk filters (such 

as automatic system denial of entry of trades 

under certain conditions); 

(11) Plans for handling ‘‘extreme market 

volatility’’ and how Applicant defines that 

term; 

(12) An explanation of how Applicant will 

be able to offset positions in order to manage 

risk including: (i) ensuring both Applicant 

and clearing members have the operational 

capacity to do so; and (ii) liquidity of the 

relevant market, especially with regard to 

OTC products and OTC markets; 

(13) Plans for managing accounts that are 

‘‘too big’’ to liquidate and for conducting 

‘‘what if’’ analyses on these accounts; 

(14) If options are involved, how Applicant 

will manage the different and more complex 

risk presented by these products; 

(15) If Applicant intends to clear swaps, 

whether and how often Applicant will offer 

multilateral portfolio compression exercises 

for its clearing members; and 

(16) If Applicant intends to clear credit 

default swaps, how Applicant will manage 

the unique risks associated with clearing 

these products, such as jump-to-default risk. 

d. Existence of collateral (funds and assets) 

to apply to losses resulting from realized 

risk—Provide as Exhibit D–4: 

(1) An explanation of the factors, process, 

and methodology used for calculating and 

setting required collateral levels, the required 

inputs, the appropriateness of those inputs, 

and an illustrative example; 

(2) An analysis supporting the sufficiency 

of Applicant’s collateral levels for capturing 

all or most price moves that may take place 

in one settlement cycle; 

(3) A description of how Applicant will 

value open positions and collateral assets; 

(4) A description and explanation of the 

forms of assets allowed as collateral, why 

they are acceptable, and whether there are 

any haircuts or concentration limits on 

certain kinds of assets, including how often 

any such haircuts and concentration limits 

are reviewed; 

(5) An explanation of how and when 

Applicant will collect collateral, whether and 

under what circumstances it will collect 

collateral on an intraday basis, and what will 

happen if collateral is not received in a 

timely manner. Include a proposed collateral 

collection schedule based on changes in 

market positions and collateral values; and 

(6) If options are involved, a full 

explanation of how it will manage the 

associated risk through the use of collateral 

including, if applicable, a discussion of its 

option pricing model, how it establishes its 

implied volatility scan range, and other 

matters related to the complex matter of 

managing the risk associated with the 

clearing of option contracts. 

Exhibit E—Settlement Procedures 

• Attach as Exhibit E, documents that 

demonstrate compliance with the settlement 

procedures requirements set forth in § 39.14 

of the Commission’s regulations, including 

but not limited to: 

a. Settlement—Provide as Exhibit E–1, a 

full description of the daily process of 

settling financial obligations on all open 

positions being cleared. This must include: 

(1) Procedures for completing settlements 

on a timely basis during normal market 

conditions (and no less frequently than once 

each business day); 

(2) Procedures for completing settlements 

on a timely basis in varying market 

circumstances including in the event of a 

default by the clearing member creating the 

largest financial exposure for Applicant in 

extreme but plausible market conditions; 

(3) A description of how contracts will be 

marked to market on at least a daily basis; 

(4) Identification of the settlement banks 

used by Applicant (including identification 

of the lead settlement bank, if applicable) and 

a copy of Applicant’s settlement bank 

agreement(s). Such settlement bank 

agreements must (i) outline daily cash 

settlement procedures, (ii) state clearly when 

settlement fund transfers will occur, (iii) 

provide procedures for settlements on bank 

holidays when the markets are open, and (iv) 

ensure that settlements are final when 

effected; 

(5) Identification of settlement banks that 

Applicant will allow its clearing members to 

use for margin calls and variation 

settlements; 

(6) A description of the criteria and review 

process used by Applicant when selecting 

settlement banks; procedures for monitoring 

the continued appropriateness of all 

settlement banks including a description of 

how Applicant monitors its concentration 

risk or exposure to each settlement bank; 

(7) The specific means by which settlement 

instructions are communicated from 

Applicant to the settlement bank(s); 

(8) A timetable showing the flow of funds 

associated with the settlement of products for 

a 24-hour period or such other settlement 

timeframe specified by a particular product; 

this may be presented in the form of a chart, 

as in the following example: 


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(9) A description of what happens in the 

event that there are insufficient funds in a 

clearing member’s settlement account; 

(10) An explanation of how and when 

Applicant will collect variation margin, 

whether and under what circumstances it 

will collect variation margin on an intraday 

basis, what will happen if variation margin 

is not received in a timely manner, and a 

proposed variation margin collection 

schedule based on changes in market prices; 

(11) All the information above, to the 

extent relevant, for any products cleared that 

may be denominated in a foreign currency; 

and 

(12) With respect to physical settlements, 

identify Applicant’s rules that clearly state 

each obligation of Applicant with respect to 

physical deliveries, and explain how 

Applicant intends to identify and manage 

risks arising from physical settlement. 

b. Recordkeeping—Provide as Exhibit E–2, 

a full description of the following: 

(1) The nature and quality of the 

information collected concerning the flow of 

funds involved in clearing and settlement; 

and 

(2) How such information will be recorded, 

maintained, and accessed. 

c. Interfaces with other clearing 

organizations—Provide as Exhibit E–3, a 

description of Applicant’s relationships with 

other derivatives clearing organizations, 

clearing agencies, financial market utilities or 

foreign entities that perform similar functions 

including how compliance with the terms 

and conditions of agreements or 

arrangements with such other entities will be 

satisfied, e.g., any netting or offset 

arrangements, cross-margining, portfolio 

margining, linkage, common banking, 

common clearing programs or limited 

guaranty agreements or arrangements. 

Exhibit F—Treatment of Funds 

• Attach as Exhibit F, documents that 

demonstrate compliance with the treatment 

of funds requirements set forth in § 39.15 of 

the Commission’s regulations, including but 

not limited to: 

a. Safe custody—Provide as Exhibit F–1, 

documents that demonstrate: 

(1) How Applicant will ensure the 

safekeeping of funds and collateral in 

depositories and how Applicant will 

minimize the risk of loss or of delay in 

accessing such funds and collateral; 

(2) The depositories that will hold the 

funds and collateral and any written 

agreements between or among such 

depositories, Applicant or its clearing 

members regarding the legal status of the 

funds and collateral and the specific 

conditions or prerequisites for movement of 

the funds and collateral; and 

(3) How Applicant will limit the 

concentration of risk in depositories where 

funds and collateral are deposited. 

b. Segregation of customer and proprietary 

funds—Provide as Exhibit F–2, documents 

that demonstrate: 

(1) The appropriate segregation of customer 

funds and associated acknowledgement 

documentation; and 

(2) Requirements or restrictions regarding 

commingling customer funds with 

proprietary funds, obligating customer funds 

for any purpose other than to purchase, clear, 

and settle the products Applicant is clearing, 

procedures regarding customer funds which 

are subject to cross-margin or similar 

agreements, and any other aspects of 

customer fund segregation. 

c. Investment standards—Provide as 

Exhibit F–3, documents that demonstrate: 

(1) How customer funds would be invested 

in instruments with minimal credit, market, 

and liquidity risks, and in compliance with 

the requirements of § 1.25; and 

(2) How Applicant will obtain and keep 

associated records and data regarding the 

details of such investments. 


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Exhibit G—Default Rules and Procedures 

• Attach as Exhibit G, documents that 

demonstrate compliance with the default 

rules and procedures requirements set forth 

in § 39.16 of the Commission’s regulations, 

including but not limited to: 

a. Default Management Plan—Applicant 

must provide a copy of its written default 

management plan which must contain all of 

the information required by § 39.16(b), along 

with Applicant’s most recently documented 

results of a test of its default management 

plan. 

b. Definition of default—Applicant must 

describe or otherwise document: 

(1) The events (activities, lapses, or 

situations) that will constitute a clearing 

member default; 

(2) What action Applicant can take upon a 

default and how Applicant will otherwise 

enforce the rules applicable in the event of 

default, including the steps and the sequence 

of the steps that will be followed. Identify 

whether a Default Management Committee 

exists and, if so, its role in the default 

process; and 

(3) An example of a hypothetical default 

scenario and the results of the default 

management process used in the scenario. 

c. Remedial action—Applicant must 

describe or otherwise document: 

(1) The authority and methods by which 

Applicant may take appropriate action in the 

event of the default of a clearing member 

which may include, among other things, 

liquidating positions, hedging, auctioning, 

allocating (including any obligations of 

clearing members to participate in auctions 

or to accept allocations), and transferring of 

customer accounts to another clearing 

member (including an explanation of the 

movement of positions and collateral on 

deposit); and 

(2) Actions taken by a clearing member or 

other events that would put a clearing 

member on Applicant’s ‘‘watch list’’ or 

similar device. 

d. Process to address shortfalls—Applicant 

must describe or otherwise document: 

(1) Procedures for the prompt application 

of Applicant and/or clearing member 

financial resources to address monetary 

shortfalls resulting from a default; 

(2) How Applicant will make publicly 

available its default rules including a 

description of the priority of application of 

financial resources in the event of default 

(i.e., the ‘‘waterfall’’); and 

(3) How Applicant will take timely action 

to contain losses and liquidity pressures and 

to continue to meet each obligation of 

Applicant. 

e. Use of cross-margin programs—Describe 

or otherwise document, as applicable, how 

cross-margining programs will provide for 

fair and efficient means of covering losses in 

the event of a default of any clearing member 

participating in the program. 

f. Customer priority rule—Describe or 

otherwise document rules and procedures 

regarding priority of customer accounts over 

proprietary accounts of defaulting clearing 

members and, where applicable, specifically 

in the context of specialized margin 

reduction programs such as cross-margining 

or common banking arrangements with other 

derivatives clearing organizations, clearing 

agencies, financial market utilities or foreign 

entities that perform similar functions. 

Exhibit H—Rule Enforcement 

• Attach as Exhibit H, documents that 

demonstrate compliance with the rule 

enforcement requirements set forth in § 39.17 

of the Commission’s regulations, including 

but not limited to: 

a. Surveillance—Describe or otherwise 

document arrangements and resources for the 

effective monitoring and enforcement of 

compliance with Applicant’s rules and the 

resolution of disputes. 

b. Enforcement—Applicant must describe 

or otherwise document: 

(1) Arrangements and resources for the 

effective enforcement of rules and authority 

and ability to discipline and limit or suspend 

a member’s activities pursuant to clear and 

fair standards; 

(2) Arrangements for enforcing compliance 

with its rules and addressing instances of 

non-compliance, including: Disciplinary 

tools such as limiting, suspending, or 

terminating a clearing member’s access or 

member privileges; 

(3) How Applicant will address situations 

related to, but which may not constitute an 

event of default, such as a clearing member’s 

failure to comply with certain rules or to 

maintain eligibility standards, or actions 

taken by other regulatory bodies; 

(4) The standards and any procedural 

protections Applicant will follow in 

imposing any such enforcement measure; 

and 

(5) Processes for reporting to the 

Commission Applicant’s rule enforcement 

activities and possible sanctions that could 

be imposed against clearing members. 

c. Dispute resolution—Describe or 

otherwise document arrangements and 

resources for resolution of disputes between 

customers and clearing members, and 

between clearing members. 

Exhibit I—System Safeguards 

• Attach as Exhibit I, documents that 

demonstrate compliance with the system 

safeguards requirements set forth in § 39.18 

of the Commission’s regulations, including 

but not limited to: 

a. A description of Applicant’s program of 

risk analysis and oversight with respect to its 

operations and automated systems. This 

program must be designed to ensure daily 

processing, clearing, and settlement of 

transactions and address each of the 

following categories of risk: 

(1) Information security; 

(2) Business continuity-disaster recovery 

planning and resources; 

(3) Capacity and performance planning; 

(4) Systems operations; 

(5) Systems development and quality 

assurance; and 

(6) Physical security and environmental 

controls. 

b. An explanation of how Applicant will 

establish and maintain resources that allow 

for the fulfillment of its program of risk 

analysis and oversight with respect to its 

operations and automated systems, and a 

description of such resources, including: 

(1) A description of how Applicant will 

periodically verify that its resources are 

adequate to ensure daily processing, clearing, 

and settlement; 

(2) A demonstration that Applicant’s 

automated systems are reliable, secure, and 

have (and will continue to have) adequate 

scalable capacity; 

(3) A description of the physical, 

technological and personnel resources and 

procedures used by Applicant as part of its 

business continuity and disaster recovery 

plan, and support for the conclusion that 

these resources are sufficient to enable the 

Applicant to resume daily processing, 

clearing and settlement no later than the next 

business day following a disruption; and 

(4) A statement identifying which such 

resources are Applicant’s own resources and 

which are provided by a service provider 

(outsourced). For resources that are 

outsourced, provide (i) all contracts 

governing the outsourcing arrangements, 

including all schedules and other 

supplemental materials, and (ii) a 

demonstration that Applicant employs 

personnel with the expertise necessary to 

enable them to supervise the service 

provider’s delivery of the services. 

c. An explanation of how Applicant will 

ensure the proper functioning of its systems, 

including its program for the periodic 

objective testing and review of its systems 

and back-up facilities (including all of its 

own and outsourced resources), and 

verification that all such resources will work 

effectively together; 

d. Identification of the persons conducting 

the testing, including information as to their 

qualifications and independence; 

e. A description of Applicant’s emergency 

procedures, including a copy of its written 

plan for business continuity and disaster 

recovery and a description of how Applicant 

will coordinate its business continuity and 

disaster recovery plan (including testing) 

with those of its clearing members and 

providers of essential services such as 

telecommunications, power and water; and 

f. A description of how Applicant will 

report exceptional events and planned 

changes to the Commission as required by 

§§ 39.18(g) and 39.18(h). 

Exhibit J—Reporting 

• Attach as Exhibit J, documents that 

demonstrate compliance with the reporting 

requirements set forth in § 39.19 of the 

Commission’s regulations including but not 

limited to: 

a. How Applicant will make available to 

Commission staff all the information 

Commission staff need in order to carry out 

effective oversight. This must include a 

discussion of what will be made available on 

a routine basis, how often it will be made 

available, and the method of its transmission. 

The same items must be addressed for 

information it will make available on a nonroutine basis and what events would 

precipitate the generation of such data or 

information. Applicant must also address the 

manner in which any information will be 

made available to clearing members, 

customers, market participants and/or the 

general public. If not part of an initial 

application, Applicant must provide a 

representation that it will provide the 


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following when initially generated or when 

content changes occur: 

(1) A list of current members/market 

participants; 

(2) A list of all products currently eligible 

for clearing; 

(3) The initial margin collection schedule; 

(4) Information on any disciplinary actions 

(such as suspensions, etc.); 

(5) Information concerning any physical or 

other emergencies; 

(6) All information concerning any default 

by a member and the impact of the default 

on Applicant’s financial resources; 

(7) A copy of any examination/evaluation/ 

compliance report of any regulatory body 

other than the Commission that oversees 

Applicant; 

(8) A copy of any internal examination/ 

evaluation/compliance reports such as, but 

not limited to, those related to stress testing 

and systems testing; 

(9) Key personnel that have particular 

knowledge of the market(s) for which 

Applicant clears and any changes in those 

personnel, especially those to be contacted in 

case of market volatility or to respond to 

inquiries and emergencies; 

(10) Copies of audited financial statements 

of Applicant; and 

(11) Information regarding counterparties 

and their positions, stress test results, 

internal governance, legal proceedings, and 

other clearing activities. 

b. Forms or templates to be used to satisfy 

the daily, quarterly, annual, and eventspecific reporting requirements specified in 

§ 39.19(c) of the Commission’s regulations. 

Exhibit K—Recordkeeping 

• Attach as Exhibit K, documents that 

demonstrate compliance with the 

recordkeeping requirements set forth in 

§ 39.20 of the Commission’s regulations 

including but not limited to: 

a. Applicant’s recordkeeping and record 

retention policies and procedures; 

b. The different activities related to the 

entity as a derivatives clearing organization 

for which it must maintain records; 

c. The manner in which records relating to 

swaps and swap data are gathered and 

maintained; and 

d. How Applicant will satisfy the 

performance standards of § 1.31 as applicable 

to derivatives clearing organizations, 

including: 

(1) What ‘‘full’’ or ‘‘complete’’ will 

encompass with respect to each type of book 

or record that will be maintained; 

(2) The form and manner in which books 

or records will be compiled and maintained 

with respect to each type of activity for 

which such books or records will be kept; 

(3) Confirmation that books and records 

will be open to inspection by any 

representative of the Commission or of the 

U.S. Department of Justice; 

(4) How long books and records will be 

readily available and how they will be made 

readily available during the first two years; 

and 

(5) How long books and records will be 

maintained (and confirmation that, in any 

event, they will be maintained as required in 

§ 1.31). 

Exhibit L—Public Information 

• Attach as Exhibit L, documents that 

demonstrate compliance with the public 

information requirements set forth in § 39.21 

of the Commission’s regulations including 

but not limited to: 

a. Applicant’s procedures for making its 

rulebook, a list of all current clearing 

members, and the information listed in 

§ 39.21(c) readily available to the general 

public, in a timely manner, by posting such 

information on Applicant’s Web site no later 

than the business day following the day to 

which the information pertains; 

b. Any other information routinely made 

available to the public by Applicant; 

c. How Applicant will make information 

available to clearing members and market 

participants in order to allow such persons 

to become familiar with Applicant’s 

procedures before participating in clearing 

operations; and 

d. How clearing members will be informed 

of their specific rights and obligations 

preceding a default and upon a default, and 

of the specific rights, options and obligations 

of Applicant preceding and upon a clearing 

member’s default. 

Exhibit M—Information Sharing 

• Attach as Exhibit M, documents that 

demonstrate compliance with the 

information sharing requirements set forth in 

§ 39.22 of the Commission’s regulations, 

including but not limited to: 

a. The appropriate and applicable 

information sharing agreements to which 

Applicant is, or intends to be, a party 

including any domestic or international 

information-sharing agreements or 

arrangements, whether formal or informal, 

which involve or relate to Applicant’s 

operations, especially as it relates to 

measuring and addressing counterparty risk; 

b. A description of the types of information 

expected to be shared and how that 

information will be shared; 

c. An explanation as to how information 

obtained pursuant to any information-sharing 

agreements or arrangements would be used to 

further the objectives of Applicant’s risk 

management program and any of its 

surveillance programs including financial 

surveillance and continuing eligibility of its 

clearing members; and 

d. An explanation as to how Applicant 

expects to obtain accurate information 

pursuant to the information-sharing 

agreement or arrangement and the 

mechanisms or procedures which would 

allow for timely use and application of all 

information. 

Exhibit N—Antitrust Considerations 

• Attach as Exhibit N, documents that 

demonstrate compliance with the antitrust 

considerations requirements set forth in 

§ 39.23 of the Commission’s regulations, 

including but not limited to policies or 

procedures to ensure compliance with the 

antitrust considerations requirements. 

Exhibit O—Governance Fitness Standards 

• Attach as Exhibit O, documents that 

demonstrate compliance with the governance 

fitness standards requirements set forth in 

§ 39.24 of the Commission’s regulations, 

including but not limited to: 

a. The manner in which its governance 

arrangements permit consideration of the 

views of Applicant’s owners, whether voting 

or non-voting, and its participants (clearing 

members and customers) including (i) the 

general method by which Applicant will 

learn of the views of Applicant’s owners, 

other than through their exercise of voting 

power, or the views of participants, other 

than through representation on the Board of 

Directors or any committee of Applicant, and 

(ii) the manner in which Applicant will 

consider such views; 

b. The fitness standards applicable to 

members of the Board of Directors, members 

of any Disciplinary Panel, members of any 

Disciplinary Committee, clearing members, 

any individual or entity with direct access to 

settlement or clearing activities, and any 

party affiliated with any of the above 

individuals or entities, as well as natural 

persons who, directly or indirectly, own 

greater than 10% of any one class of equity 

interest in Applicant; including a description 

or other documentation explaining how 

Applicant will collect and verify information 

that supports compliance with the fitness 

standards; and 

c. The manner in which Applicant will 

condition clearing member access and other 

direct access to its settlement and clearing 

activities on agreement to be subject to the 

jurisdiction of Applicant. 

Exhibit P—Conflicts of Interest 

• Attach as Exhibit P, documents that 

demonstrate compliance with the conflicts of 

interest requirements set forth in §§ 39.13(d), 

39.25, and 40.9 of the Commission’s 

regulations, including but not limited to: 

a. A copy of: 

(1) The charter (or mission statement) of 

Applicant (if not attached as Exhibit A–8). 

(2) The charter (or mission statement) of 

Applicant’s Board of Directors, each 

committee with a composition requirement 

(including any Executive Committee), as well 

as each other committee that has the 

authority to amend or constrain actions of 

Applicant’s Board of Directors (if not 

attached as Exhibit A–8). 

(3) If another entity ‘‘operates’’ the 

Applicant, the charter (or mission statement) 

of such entity’s Board of Directors (if not 

attached as Exhibit A–8); and a description 

of the manner in which the Applicant will 

ensure that the entity complies with 

§ 40.9(b)(2)(ii)(B) and (C) (Officers and 

Directors; Books and Records). 

(4) An internal organizational chart 

showing the lines of responsibility and 

accountability for each operational unit. 

b. Describe or otherwise document: 

(1) Applicant’s rules and procedures for 

ensuring compliance with the requirements 

of § 39.25(b) (including ensuring parent 

compliance with § 39.25(b)(4)), including 

through remediation as detailed in 

§ 39.25(b)(5); 

(2) Applicant’s nominations process for the 

Board of Directors and the process for 

assigning members of the Board of Directors 

or other persons to any committee referenced 

in item a.(2) above; 

1. The manner in which the Board of 

Directors reviews its performance and the 


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performance of its members on an annual 

basis; and 

2. The procedures for removing a member 

of the Board of Directors, including where 

the conduct of such member is likely to be 

prejudicial to the sound and prudent 

management of Applicant; 

(3) The composition of its Nominating 

Committee, including the number or 

percentage of public directors, and the 

identity of the Chairman of the Committee; 

(4) The composition of any Executive 

Committee, including the number or 

percentage of public directors; 

(5) The composition of the Risk 

Management Committee, including the 

number or percentage of public directors, the 

number or percentage of customer 

representatives, and the identity of the 

Chairman of the committee; 

1. Whether the Risk Management 

Committee is an executive committee or an 

advisory committee; and 

2. Whether the Risk Management 

Committee has delegated certain functions to 

the Risk Management Subcommittee, 

including a description or other 

documentation of the functions so delegated; 

(6) The form of report to be used in 

reporting to the Commission those instances 

in which the Board rejects a recommendation 

or supersedes an action of the Risk 

Management Committee, or the Risk 

Management Committee rejects a 

recommendation or supersedes an action of 

its subcommittee; 

(7) The manner in which Applicant will 

ensure compliance with § 39.13(d)(6) 

(Discretion); and the manner in which 

Applicant will ensure compliance with 

§ 40.9(c)(ii)(A) and (B) (Prohibition on 

Domination of and Recusal Procedures with 

respect to the Disciplinary Panel), and 

§ 40.9(c)(iii) (Appeals), including whether the 

Board of Directors has delegated the 

functions of the Disciplinary Panel to any 

other committee; 

(8) The manner in which Applicant will 

record and summarize ‘‘significant 

decisions,’’ as such term is described in 

§ 40.9(d); 

(9) The manner in which Applicant will 

ensure that all information required under 

§ 40.9(d) is current, accurate, clear, and 

readily accessible to both the Commission 

and the public; 

(10) Any written procedures that Applicant 

intends to adopt to identify, on an ongoing 

basis, existing and potential conflicts of 

interest; 

(11) Applicant’s process for making fair 

and non-biased decisions in the event of a 

conflict of interest; and 

(12) Applicant’s written policies or 

procedures on safeguarding non-public 

information, and the manner in which such 

policies or procedures fulfill the minimum 

standards set forth in § 40.9(f)(2). 

Exhibit Q—Composition of Governing Boards 

• Attach as Exhibit Q, documents that 

demonstrate compliance with the 

composition of governing boards 

requirements set forth in § 39.26, including 

but not limited to documentation describing 

the composition of Applicant’s Board of 

Directors, including the number or 

percentage of public directors and customer 

representatives. 

Exhibit R—Legal Risk Considerations 

• Attach as Exhibit R, documents that 

demonstrate compliance with the legal risk 

considerations requirements set forth in 

§ 39.27 of the Commission’s regulations, 

including but not limited to: 

a. A discussion of how Applicant operates 

pursuant to a well-founded, transparent, and 

enforceable legal framework that addresses 

each aspect of the activities of Applicant. The 

framework must provide for Applicant to act 

as a counterparty, including, as applicable: 

(1) Novation; 

(2) Netting arrangements; 

(3) Applicant’s interest in collateral 

(including margin); 

(4) The steps that Applicant can take to 

address a default of a clearing member, 

including but not limited to, the unimpeded 

ability to liquidate collateral and close out or 

transfer positions in a timely manner; 

(5) Finality of settlement and funds 

transfers that are irrevocable and 

unconditional when effected (when 

Applicant’s accounts are debited and 

credited); and 

(6) Other significant aspects of Applicant’s 

operations, risk management procedures, and 

related requirements. 

b. If Applicant provides, or will provide, 

clearing services outside the United States, 

Applicant must (i) provide a memorandum 

from local counsel analyzing insolvency 

issues in the foreign jurisdiction where 

Applicant is based and (ii) describe or 

otherwise document: 

(1) How Applicant has identified and 

addressed any conflict of law issues; 

(2) Which jurisdiction’s law is intended to 

apply to each aspect of Applicant’s 

operations; 

(3) The enforceability of Applicant’s choice 

of law in relevant jurisdictions; and 

(4) That its rules, procedures, and products 

are enforceable in all relevant jurisdictions. 

Issued in Washington, DC, on December 

16, 2010, by the Commission. 

Sauntia S. Warfield, 

Assistant Secretary of the Commission. 

Appendices to Risk Management 

Requirements for Derivatives Clearing 

Organizations—Commission Voting 

Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn, Sommers, Chilton and 

O’Malia voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rulemaking for risk 

management requirements for derivatives 

clearing organizations (DCOs). The proposal 

establishes robust risk management 

standards, which is particularly important as 

more swaps are moved into central 

clearinghouses. The proposed rule meets or 

exceeds international standards and 

recommendations. It establishes 

methodologies for clearinghouses to set 

margin with regard to swaps contracts. 

The proposed regulations will enhance 

legal certainty for DCOs, clearing members 

and market participants by providing a 

regulatory framework to support DCO risk 

management practices. This will help 

strengthen the financial integrity of the 

futures and swap markets. The proposed 

participant eligibility requirements will 

promote fair and open access to clearing. 

Importantly, the proposal addresses rules of 

how a futures commission merchant can 

become a member of a swaps clearinghouse. 

The proposal promotes more inclusiveness 

while allowing the clearinghouses to scale a 

member’s participation and risk based upon 

its capital. 

The proposal would establish a registration 

application form to bring about greater 

uniformity and transparency in the DCO 

application process and facilitate greater 

efficiency and consistency in processing 

submissions. 

[FR Doc. 2011–690 Filed 1–19–11; 8:45 am] 

BILLING CODE 6351–01–P 


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