Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 63113 

1Commission regulations referred to herein are 

found at 17 CFR Ch. 1. 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

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

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

LawRegulation/OTCDERIVATIVES/index.htm. 

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, Public Law 106–554, 114 Stat. 2763 (2000). 

6See Appendix A to Part 39, 17 CFR Part 39. The 

Commission notes that it intends to propose 

removal of Appendix A, in its entirety, as part of 

a future proposed rulemaking. 

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. 

8The term ‘‘clearing members’’ refers to entities 

that have a direct financial relationship to a DCO, 

regardless of the DCO’s organizational structure, 

Continued 

Business at the same time and on the 

same terms and conditions. 

(iii) You and the Associate investment 

fund are providing follow-on financing 

to the Small Business at the same time, 

on the same terms and conditions, and 

in the same proportionate dollar 

amounts as your respective investments 

in the previous round(s) of financing 

(for example, if you invested $2 million 

and your Associate invested $1 million 

in the previous round, your respective 

follow-on investments would be in the 

same 2:1 ratio). 

* * * * * 

(g) Public notice. Before granting an 

exemption under this § 107.730, SBA 

will publish notice of the transaction in 

the Federal Register. 

§ 107.855 [Amended] 

5. Amend § 107.855 by removing 

paragraph (g)(10) and redesignating 

current paragraphs (g)(11) through 

(g)(13) as (g)(10) through (g)(12). 

Dated: October 6, 2010. 

Karen G. Mills, 

Administrator. 

[FR Doc. 2010–25729 Filed 10–13–10; 8:45 am] 

BILLING CODE 8025–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 39 and 140 

RIN 3038–AC98, 3038–AD02 

Financial Resources Requirements for 

Derivatives Clearing Organizations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing rules to implement 

new statutory provisions enacted by 

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

Protection Act (Dodd-Frank Act). The 

proposed regulations establish financial 

resources requirements for derivatives 

clearing organizations (DCOs) for the 

purpose of ensuring that they maintain 

sufficient financial resources to enable 

them to perform their functions in 

compliance with the Commodity 

Exchange Act and the Dodd-Frank Act. 

DATES: Submit comments on or before 

December 13, 2010. 

ADDRESSES: You may submit comments, 

identified by RIN number, by any of the 

following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Agency Web Site: http:// 

www.cftc.gov. Follow the instructions 

for submitting comments on the Web 

site. 

• E-mail: DCOSIDCOfinres@cftc.gov. 

Include the RIN number in the subject 

line of the message. 

• Fax: 202–418–5521. 

• 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. 

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, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the established 

procedures in CFTC Regulation 145.9.1

FOR FURTHER INFORMATION CONTACT: John 

C. Lawton, Deputy Director and Chief 

Counsel, 202–418–5480, 

jlawton@cftc.gov, Phyllis P. Dietz, 

Associate Director, 202–418–5449, 

pdietz@cftc.gov, or Eileen A. Donovan, 

Special Counsel, 202–418–5096, 

edonovan@cftc.gov, Division of Clearing 

and Intermediary Oversight, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21 Street, NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Title VII 

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 

amends 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

Consistent with the CFMA’s principlesbased approach to regulation, the 

Commission did not adopt 

implementing rules and regulations, but 

instead promulgated guidance for DCOs 

on compliance with the core 

principles.6 However 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, where possible, each DCO should 

be afforded an appropriate level of 

discretion in determining how to 

operate its business within the statutory 

framework. At the same time, the 

Commission recognizes that specific 

bright-line regulations may be necessary 

in order to facilitate DCO compliance 

with a given core principle, and 

ultimately, to protect the integrity of the 

U.S. clearing system. Accordingly, in 

developing the proposed regulation, the 

Commission has endeavored to strike an 

appropriate balance between 

establishing general prudential 

standards and prescriptive 

requirements. 

Core Principle B, as amended by the 

Dodd-Frank Act, requires a DCO to 

possess financial resources that, at a 

minimum, exceed the total amount that 

would enable the DCO to meet its 

financial obligations to its clearing 

members 8 notwithstanding a default by 


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63114 Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 

i.e., whether or not the DCO is a membership 

organization. Clearing members include futures 

commission merchants (FCMs) that clear on behalf 

of customers or themselves, and non-FCMs that 

clear solely on behalf of themselves. See also the 

definition of the term ‘‘clearing member’’ in CFTC 

Regulation 1.3(c). 

9Commission staff has been engaged in 

discussions with staff of other members of the 

Council concerning which entities might qualify. 

10Each DCO determines for itself what constitutes 

a ‘‘default,’’ but generally a clearing member is 

considered to be in default when it fails to fulfill 

any obligation to the DCO. 

11 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 its Recommendations 

for Central Counterparties. Under Recommendation 

5, a central counterparty must maintain sufficient 

financial resources to withstand, at a minimum, a 

default by the participant to which it has the largest 

exposure in extreme but plausible market 

conditions. However, the Commission notes that 

CPSS and IOSCO are currently reviewing this 

standard and it may be revised. 

12For example, the positions of each clearing 

member would be margined separately and would 

be stress tested separately. However, losses of each 

would be aggregated and gains would not offset 

losses. 

13See American Institute of Certified Public 

Accountants Auditing Standards Board Statement 

of Auditing Standards No. 59, The Auditor’s 

Consideration of an Entity’s Ability to Continue as 

a Going Concern, as amended. 

the clearing member creating the largest 

financial exposure for the DCO in 

extreme but plausible market 

conditions; and enable the DCO to cover 

its operating costs for a period of 1 year, 

as calculated on a rolling basis. The 

Commission is proposing to adopt 

Regulation 39.11 to establish 

requirements that a DCO will have to 

meet in order to comply with Core 

Principle B. 

B. Title VIII 

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 to promote financial 

stability. Section 804 authorizes the 

Financial Stability Oversight Council 

(Council) to designate entities involved 

in clearing and settlement as 

systemically important.9

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 also 

proposing to adopt some additional or 

enhanced requirements for systemically 

important DCOs (SIDCOs). 

The Commission requests comment 

on all aspects of the proposed rules, as 

well as comment on the specific 

provisions and issues highlighted in the 

discussion below. The Commission 

further requests comment on an 

appropriate effective date for final rules, 

once adopted. 

II. Proposed Regulations 

A. DCOs 

1. Amount of Financial Resources 

Required 

As a central counterparty, a DCO must 

have sufficient financial resources to be 

able to withstand a potential default by 

one of its clearing members.10 In the 

event of a default, a DCO would 

continue to have obligations to the 

clearing members that are owed 

variation settlement payments and, 

therefore, the DCO must have sufficient 

liquid resources to meet those 

obligations in a timely fashion. 

Proposed Regulation 39.11(a)(1) would 

require a DCO to maintain sufficient 

financial resources to meet its financial 

obligations to its clearing members 

notwithstanding a default by the 

clearing member creating the largest 

financial exposure for the DCO in 

extreme but plausible market 

conditions. This standard is consistent 

with the standard set forth in Core 

Principle B, and is also consistent with 

current international standards.11

There may be some instances in 

which one clearing member controls 

another clearing member or in which a 

clearing member is under common 

control with another clearing member. 

The Commission proposes to treat such 

affiliated clearing members as a single 

entity for purposes of determining the 

largest financial exposure because the 

default of one affiliate could have an 

impact on the ability of the other to 

meet its financial obligations to the 

DCO.12 However, to the extent that each 

affiliated clearing member is treated as 

a separate entity by the DCO, with 

separate capital requirements, separate 

guaranty fund obligations, and separate 

potential assessment liability, the 

Commission requests comment on 

whether a different approach might be 

warranted. 

Separately, proposed Regulation 

39.11(a)(2) would require a DCO to 

maintain sufficient financial resources 

to cover its operating costs for at least 

one year, calculated on a rolling basis. 

This standard is consistent with the 

standard set forth in amended Core 

Principle B. It is also consistent with 

established accounting standards, under 

which an entity’s ability to continue as 

a going concern comes into question if 

there is evidence that the entity may be 

unable to continue to meet its 

obligations in the next 12 months 

without substantial disposition of assets 

outside the ordinary course of business, 

restructuring of debt, externally forced 

revisions of its operations, or similar 

actions.13

2. Types of Financial Resources 

a. Default Resources 

Proposed Regulation 39.11(b)(1) lists 

the types of financial resources that 

would be available to a DCO to satisfy 

the requirements of proposed 

Regulation 39.11(a)(1): (1) The margin of 

the defaulting clearing member; (2) the 

DCO’s own capital; (3) the guaranty 

fund deposits of the defaulting clearing 

member and non-defaulting clearing 

members; (4) default insurance; (5) if 

permitted by the DCO’s rules, potential 

assessments for additional guaranty 

fund contributions on non-defaulting 

clearing members; and (6) any other 

financial resource deemed acceptable by 

the Commission. A DCO would be able 

to request an informal interpretation 

from CFTC staff on whether or not a 

particular financial resource may be 

acceptable to the Commission. 

In the event of a default by one of its 

clearing members, a DCO would first 

seize the margin of the defaulting 

clearing member. If the margin were 

insufficient to cure the default, the DCO 

might use its own capital to cover the 

shortfall. Currently, Commission 

regulations do not prescribe capital 

requirements for DCOs. The 

Commission invites comment on 

whether it should consider adopting 

such requirements and if so, what those 

requirements should be. 

Clearing members also are typically 

required to maintain a deposit, in the 

form of cash and/or securities, in a 

guaranty fund, which may be used by 

the DCO to cover any loss sustained as 

a result of the failure of a clearing 

member to discharge its obligations to 

the DCO. In the event of a default, the 

DCO may draw on the defaulting 

clearing member’s deposit to satisfy its 

counterparty obligations. If the deposit 

is insufficient, the DCO may draw on 

the guaranty fund deposits of nondefaulting clearing members. 

In addition, a DCO may have an 

assessment power that allows it to 

demand additional funds from nondefaulting clearing members, up to a 

specified amount, if the guaranty fund 

has been exhausted. The size of a 

clearing member’s potential assessment 

obligation is usually established by a 

formula set forth in the DCO’s rules. 

Unlike margin or a guaranty fund, 

assessment powers are not resources on 


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Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 63115 

14This is consistent with DCO Core Principle A, 

which gives a DCO ‘‘reasonable discretion in 

establishing the manner in which it complies with 

the core principles.’’ See Section 5b(c)(2)(A) of the 

CEA, 7 U.S.C. 7a–1(c)(2)(A). 

15The Commission will propose, at a later time, 

additional regulations to implement Core Principle 

D (risk management). 

hand but a promise to pay. A clearing 

member, however, may have a strong 

financial incentive to pay an 

assessment. If a clearing member failed 

to pay its assessment obligation, that 

failure would be treated as a default and 

the clearing member would be subject to 

liquidation of its positions and 

forfeiture of the margin in its 

proprietary account. Thus, in addition 

to a potential general interest in 

maintaining the viability of the DCO 

going forward, a non-defaulting clearing 

member may have a specific incentive 

to pay an assessment depending on the 

size and profitability of its positions and 

the margin on deposit relative to the 

size of the assessment. 

No U.S. futures clearinghouse has 

ever had to exercise its assessment 

power. In light of the apparent low 

probability of a default of such 

magnitude as to require assessments, the 

use of assessment power as a backstop 

rather than increasing the size of 

guaranty funds seems to have been an 

efficient allocation of capital. The 

growth in clearing of swaps, however, 

creates new risks that the Commission 

must evaluate. 

The Commission is proposing that 

DCOs put rules and procedures in place 

to ensure timely payment of 

assessments by clearing members. First, 

each DCO must require its clearing 

members to have the ability to meet an 

assessment within the time frame of a 

normal variation settlement cycle. 

Second, each DCO must monitor, on a 

continual basis, each clearing member’s 

financial and operational capacity to 

pay potential assessments. 

As discussed below, the Commission 

is proposing to limit the degree to which 

assessment powers may be considered 

to be an available financial resource. 

The Commission invites comment on 

whether these limits and requirements 

are appropriate. More generally, the 

Commission is also seeking comment on 

whether assessment powers should be 

considered to be a financial resource 

available to satisfy the requirements of 

proposed Regulation 39.11(a)(1). 

b. Operating Resources 

Proposed Regulation 39.11(b)(2) lists 

the types of financial resources that 

would be available to a DCO to satisfy 

the requirements of proposed 

Regulation 39.11(a)(2): (1) The DCO’s 

own capital; and (2) any other financial 

resource deemed acceptable by the 

Commission. A DCO would be able to 

request an informal interpretation from 

CFTC staff on whether or not a 

particular financial resource may be 

acceptable to the Commission. The 

Commission invites commenters to 

recommend particular financial 

resources, and explain the basis, for 

inclusion in the final regulation. In this 

regard, the Commission notes that the 

proposed rule does not specify that a 

DCO must hold equity capital. The 

Commission requests comment on 

whether such a provision would be 

appropriate. 

c. Allocation of Resources 

Proposed Regulation 39.11(b)(3) 

would allow a DCO to allocate a 

financial resource, in whole or in part, 

to satisfy the requirements of either 

proposed Regulation 39.11(a)(1) (default 

risk) or proposed Regulation 39.11(a)(2) 

(operating costs), but not both, and only 

to the extent the use of that financial 

resource is not otherwise limited by the 

CEA, Commission regulations, the 

DCO’s rules, or any contractual 

arrangements to which the DCO is a 

party. In the event that a default would 

force a DCO to cease operations, the 

DCO would need sufficient financial 

resources to cover the default and 

conduct an orderly wind down of its 

business. 

3. Computation of the Financial 

Resources Requirement 

Proposed Regulation 39.11(c)(1) 

would require a DCO to perform stress 

testing on a monthly basis in order to 

make a reasonable calculation of the 

financial resources it needs to meet the 

requirements of proposed Regulation 

39.11(a)(1). In the first instance, the 

DCO would have reasonable discretion 

in determining the methodology it uses 

to make the calculation.14 Because 

effective stress testing involves a great 

deal of judgment, the Commission is not 

proposing that DCOs test a particular 

scenario. Rather, the proposed 

regulation requires DCOs to take into 

account both historical data and 

hypothetical situations. (By definition, a 

stress test using only historical data 

would never cover a market move 

setting a new record.) Within those 

guidelines, DCOs would have discretion 

in selecting scenarios, subject to 

Commission review. 

The Commission would review the 

methodology and require changes as 

appropriate. The methodology must 

address any unique risks associated 

with particular products, such as the 

jump to default risk and compounding 

effects of credit default swaps. 

Because of the comprehensive nature 

of the stress tests required for 

determining the size of the financial 

resources package, the Commission is 

proposing that these tests be conducted 

monthly. As will be discussed in a later 

rulemaking,15 the Commission is likely 

to require more frequent stress testing in 

connection with DCO risk management 

programs. Such tests would be 

conducted for different purposes and 

might use different inputs. The 

Commission requests comment on 

whether monthly tests are appropriate 

for purposes of calculating required 

financial resources. 

Proposed Regulation 39.11(c)(2) 

would require a DCO to make a 

reasonable calculation each month of 

the financial resources it needs to meet 

the requirements of proposed 

Regulation 39.11(a)(2). In the first 

instance, the DCO would have 

reasonable discretion in determining the 

methodology it uses to make the 

calculation. However, the Commission 

may review the methodology and 

require changes as appropriate. 

4. Valuation of Financial Resources 

Proposed Regulation 39.11(d)(1) 

would require a DCO, no less frequently 

than monthly, to calculate the current 

market value of each financial resource 

used to meet its obligations under 

proposed Regulation 39.11(a). A DCO 

would be required to perform the 

valuation at other times as appropriate, 

because market values may fluctuate 

and proposed Regulation 39.11(a) 

requires the DCO to be able to meet its 

obligations on a rolling basis. When 

valuing a financial resource, a DCO 

would be required to reduce the value, 

as appropriate, to reflect any market or 

credit risk specific to that particular 

resource, i.e., apply a haircut. The 

Commission would permit each DCO to 

exercise its discretion in determining 

the applicable haircuts. However, such 

haircuts would have to be evaluated on 

a quarterly basis, would be subject to 

Commission review, and would have to 

be acceptable to the Commission. 

Notwithstanding a DCO’s general 

discretion in applying haircuts, 

proposed Regulation 39.11(d)(2)(i) 

would require a 30 percent haircut on 

the value of a DCO’s assessment power. 

This is because in the event of a default, 

the defaulting clearing member would 

not be able to pay its assessment and 

other clearing members might also be 

unable or unwilling to pay. Based on the 

significant percentage of total margin 

that may be attributable to a few of the 

largest clearing members, failure to pay 


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63116 Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 

16This filing deadline is consistent with the 

deadline imposed on FCMs for the filing of monthly 

financial reports. See 17 CFR 1.10(b). 

assessments could approach the 30 

percent level. The Commission invites 

comment on whether this proposed 

valuation of assessments is appropriate. 

To further increase the likelihood that 

the DCO will have resources 

immediately available to meet a default, 

the Commission is proposing that, in 

calculating the financial resources 

available to meet its obligations, a DCO 

may only count the value of 

assessments, after the haircut, to meet 

up to 20 percent of the resources 

requirement generated by the stress 

testing. The Commission requests 

comment on this restriction. 

5. Liquidity of Financial Resources 

In assessing the adequacy of a DCO’s 

financial resources, the liquidity of 

resources must be considered. For 

example, the time span of an intra-day 

settlement cycle (from the time 

positions are marked to market until the 

time clearing members are required to 

pay) may be only a few hours. In the 

event of a clearing member defaulting 

on a payment to the DCO during the 

intra-day settlement cycle, the DCO 

would need access to liquid assets 

easily convertible to cash. DCOs often 

use committed lines of credit to provide 

this liquidity. 

Proposed Regulation 39.11(e)(1) 

would require a DCO to have financial 

resources sufficiently liquid to enable 

the DCO to fulfill its obligations as a 

central counterparty during a one-day 

settlement cycle. 

In particular, the proposed regulations 

would require a DCO to have sufficient 

capital in the form of cash to cover the 

average daily settlement variation pay 

per clearing member over the last fiscal 

quarter. For purposes of this calculation, 

if a clearing member had pays in both 

its house and customer accounts, the 

amount would be the sum of the two 

pays. If the clearing member had a pay 

in its house account and a collect in its 

customer account, the amount would be 

that of the house pay. If the clearing 

member had collects in both of its 

accounts, that day’s variation settlement 

would not be included in the 

calculation. The DCO would be 

permitted to take into account a 

committed line of credit or similar 

facility for the purpose of meeting the 

remainder of the liquidity requirement. 

The Commission requests comment 

on the proposed liquidity standards. In 

particular, the Commission requests 

comment on whether the liquidity 

requirement should cover more than a 

one-day cycle. The Commission also 

requests comment on what standards 

might be applicable to lines of credit. 

For example, should the Commission 

require that there be a diversified set of 

providers or that a line of credit have 

same-day drawing rights? 

Proposed Regulation 39.11(e)(2) 

would require DCOs to maintain 

unencumbered liquid financial assets in 

the form of cash or highly liquid 

securities, equal to six months’ 

operating costs. The Commission 

believes that having six months’ worth 

of unencumbered liquid financial assets 

would give a DCO time to liquidate the 

remaining financial assets it would need 

to continue operating for the last six 

months of the required one-year period. 

If a DCO does not have six months’ 

worth of unencumbered liquid financial 

assets, it may use a committed line of 

credit or similar facility to satisfy this 

requirement. 

The Commission notes that a 

committed line of credit or similar 

facility is not listed in proposed 

Regulations 39.11(b)(1) or 39.8(b)(2) as a 

financial resource available to a DCO to 

satisfy the requirements of proposed 

Regulations 39.11(a)(1) and 39.11(a)(2), 

respectively. A DCO may only use a 

committed line of credit or similar 

facility to meet the liquidity 

requirements set forth in proposed 

Regulations 39.11(e)(1) and 39.11(e)(2). 

To the extent that a DCO relies on a 

guaranty fund, adequate liquidity is 

crucial. To address liquidity concerns, 

proposed Regulation 39.11(e)(3) 

provides that: (i) Assets in a guaranty 

fund must have minimal credit, market, 

and liquidity risks and must be readily 

accessible on a same-day basis, (ii) cash 

balances must be invested or placed in 

safekeeping in a manner that bears little 

or no principal risk, and (iii) letters of 

credit are not a permissible asset for a 

guaranty fund. 

6. Reporting Requirements 

Under proposed Regulation 

39.11(f)(1), at the end of each fiscal 

quarter, or at any time upon 

Commission request, a DCO would be 

required to report to the Commission: (i) 

The amount of financial resources 

necessary to meet the requirements set 

forth in the regulation; and (ii) the value 

of each financial resource available to 

meet those requirements. The DCO 

would have to include with its report a 

financial statement, including the 

balance sheet, income statement, and 

statement of cash flows, of the DCO or 

its parent company (if the DCO does not 

have an independent financial 

statement and the parent company’s 

financial statement is prepared on a 

consolidated basis). If one of the 

financial resources a DCO is using to 

meet the regulation’s requirements is a 

guaranty fund, the DCO would also have 

to report the value of each individual 

clearing member’s guaranty fund 

deposit. 

Proposed Regulation 39.11(f)(2) 

requires a DCO to provide the 

Commission with sufficient 

documentation that explains both the 

methodology it used to calculate its 

financial requirements and the basis for 

its determinations regarding valuation 

and liquidity. The DCO also must 

provide copies of any agreements 

establishing or amending a credit 

facility, insurance coverage, or other 

arrangement that evidences or otherwise 

supports its conclusions. The 

sufficiency of the documentation would 

be determined by the Commission in its 

sole discretion. 

A DCO would have 17 business 

days16 from the end of the fiscal quarter 

to file its report, but would also be able 

to request an extension of time from the 

Commission. 

B. SIDCOs 

As DCOs, SIDCOs would remain 

subject to the requirements of Title VII 

and the regulations thereunder, except 

to the extent the Commission 

promulgated higher standards pursuant 

to Title VIII. With regard to Core 

Principle B, the Commission is 

proposing higher standards in two 

respects, as described below. 

1. Amount of Financial Resources 

Required 

Because the failure of a SIDCO to 

meet its obligations would have a 

greater impact on the financial system 

than the failure of other DCOs, the 

Commission is proposing that SIDCOs 

be required to meet a higher standard. 

Specifically, proposed Regulation 

39.29(a) would require a SIDCO to 

maintain sufficient financial resources 

to meet its financial obligations to its 

clearing members notwithstanding a 

default by the two clearing members 

creating the largest combined financial 

exposure for the SIDCO in extreme but 

plausible market conditions. 

A fundamental premise of the DoddFrank Act is that more over-the-counter 

(OTC) products must be brought into the 

cleared environment. Although no U.S. 

futures clearinghouse has ever had more 

than one clearing member default at a 

time, the size and complexity of the 

OTC derivatives markets may increase 

the chance that more than one clearing 

member could default simultaneously. 

Consequently, the Commission has 

determined that SIDCOs should be 


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Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 63117 

17 5 U.S.C. 601 et seq. 

18 47 FR 18618 (Apr. 30, 1982). 

19See 66 FR 45605, 45609 (August 29, 2001). 

20 44 U.S.C. 3501 et seq. 

subject to regulations that increase their 

ability to contain the effects of such 

defaults. 

2. Valuation of Financial Resources 

In order to add another layer of 

protection for SIDCOs, proposed 

Regulation 39.29(b) would require that a 

SIDCO may not count the value of 

assessments to meet the obligations 

arising from a default by the clearing 

member creating the single largest 

financial exposure. This means that a 

SIDCO would be required to hold a 

greater percentage of its financial 

resources in margin and the guaranty 

fund than a DCO that is not a SIDCO. 

However, because the Commission 

believes that assessment powers can be 

a capital efficient means of providing a 

back-up source of funding, the 

Commission is proposing to permit 

SIDCOs to count the value of 

assessments, after the 30 percent 

haircut, to meet up to 20 percent of the 

obligations arising from a default by the 

clearing member creating the second 

largest financial exposure. This is the 

standard proposed for non-systemically 

important DCOs in connection with the 

largest potential exposure. 

The Commission requests comment 

on the proposed higher standards for 

SIDCOs. In particular, the Commission 

requests comment on the potential 

competitive effects of imposing higher 

standards on a subset of DCOs. 

III. Technical Amendments 

Proposed Regulation 140.94 would 

allow the Commission to delegate the 

authority to perform certain functions 

that are reserved to the Commission 

under proposed Regulation 39.11. 

Specifically, the Director of the Division 

of Clearing and Intermediary Oversight 

would be given the authority to deem a 

financial resource acceptable under 

proposed Regulations 39.11(b)(1)(vi) 

and (b)(2)(ii); to review methodology 

and require changes under proposed 

Regulations 39.11(c)(1) and (c)(2); to 

request information under proposed 

Regulation 39.11(f)(1); and to grant an 

extension of the filing deadline for 

financial reports in accordance with 

proposed Regulation 39.11(f)(4). 

IV. 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.17 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.18

The Commission has previously 

determined that DCOs are not small 

entities for the purpose of the RFA.19

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 

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. The Paperwork Reduction 

Act of 1995 (PRA) 20 imposes certain 

requirements on Federal agencies 

(including the Commission) in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA. This 

proposed rulemaking would result in 

new collection of information 

requirements within the meaning of the 

PRA. The Commission therefore is 

submitting this proposal to the Office of 

Management and Budget (OMB) for 

review. If adopted, responses to this 

collection of information would be 

mandatory. The Commission will 

protect proprietary information 

according to the Freedom of Information 

Act and 17 CFR Part 145, ‘‘Commission 

Records and Information.’’ In addition, 

section 8(a)(1) of the 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 is also 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 require each 

respondent to file information with the 

Commission on a quarterly basis, which 

would result in four annual responses 

per respondent. Commission staff 

estimates that each respondent would 

expend 10 hours to prepare each filing 

required under the proposed 

regulations. Commission staff estimates 

that it would receive filings from 12 

respondents annually. Accordingly the 

burden in terms of hours would in the 

aggregate be 40 hours annually per 

respondent and 480 hours annually for 

all respondents. 

Commission staff estimates that 

respondents could expend up to $1,840 

annually, based on an hourly wage rate 

of $46, to comply with the proposed 

regulations. This would result in an 

aggregated cost of $22,080 per annum 

(12 respondents × $1,840). 

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. 


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63118 Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 

C. Cost-Benefit Analysis 

Section 15(a) of the CEA requires that 

the Commission, before promulgating a 

regulation under the CEA or issuing an 

order, consider the costs and benefits of 

its action. By its terms, Section 15(a) 

does not require the Commission to 

quantify the costs and benefits of a new 

regulation or determine whether the 

benefits of the rule outweigh its costs. 

Rather, Section 15(a) simply requires 

the Commission to ‘‘consider the costs 

and benefits’’ of its action. 

Section 15(a) further specifies that 

costs and benefits shall be evaluated in 

light of the following considerations: 

(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. Accordingly, the 

Commission could, in its discretion, 

give greater weight to any one of the five 

considerations and could, in its 

discretion, determine that, 

notwithstanding its costs, a particular 

regulation was 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. 

The Commission has evaluated the 

costs and benefits of the proposed 

regulations in light of the specific 

considerations identified in Section 

15(a) of the CEA, as follows: 

1. Protection of market participants 

and the public. The proposed 

regulations would require DCOs to 

continually assess and monitor the 

adequacy of their financial resources 

under standards established by the 

Commission. This would further the 

goal of avoiding market disruptions and 

financial losses to market participants 

and the general public. 

2. Efficiency and competition. The 

proposed regulations would promote 

financial strength and stability, thereby 

fostering efficiency and a greater ability 

to compete in the broader financial 

markets. The proposed regulations 

would reward efficiency insofar as 

DCOs that operate efficiently would 

have lower operating costs and therefore 

would require fewer resources to 

comply with the regulations. 

3. Financial integrity of futures 

markets and price discovery. The 

proposed regulations are designed to 

ensure that DCOs can sustain their 

market operations and meet their 

financial obligations to market 

participants, thus contributing to the 

financial integrity of the futures and 

options markets as a whole. This, in 

turn, further supports the price 

discovery and risk transfer functions of 

such markets. 

4. Sound risk management practices. 

The proposed regulations, by setting 

specific standards with respect to how 

DCOs should assess, monitor, and report 

the adequacy of their financial 

resources, would contribute to their 

maintenance of sound risk management 

practices and further the goal of 

minimizing systemic risk. 

5. Other public considerations. As 

highlighted by recent events in the 

global credit markets, maintaining 

sufficient financial resources is a critical 

aspect of any financial entity’s risk 

management system, and ultimately 

contributes to the goal of stability in the 

broader financial markets. Therefore, 

the Commission believes it is prudent to 

include financial resources 

requirements for entities applying to 

become or operating as DCOs. 

Accordingly, after considering the five 

factors enumerated in the CEA, the 

Commission has determined to propose 

the regulations set forth below. 

List of Subjects in 17 CFR Parts 39 and 

140 

Commodity futures, Reporting and 

recordkeeping requirements. 

For the reasons stated in the 

preamble, the Commission proposes to 

amend 17 CFR parts 39 and 140 as 

follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

1. The authority citation for part 39 is 

revised to read as follows: 

Authority: 7 U.S.C. 7a–1 as amended by 

Pub. L. 111–203, 124 Stat. 1376. 

2. Add § 39.11 to read as follows: 

§ 39.11 Financial resources requirements. 

(a) General rule. A derivatives 

clearing organization shall maintain 

financial resources sufficient to cover its 

exposures with a high degree of 

confidence and to enable it to perform 

its functions in compliance with the 

core principles set out in section 5b of 

the Act. A derivatives clearing 

organization shall identify and 

adequately manage its general business 

risks and hold sufficient liquid 

resources to cover potential business 

losses that are not related to clearing 

members’ defaults, so that the 

derivatives clearing organization can 

continue to provide services as an 

ongoing concern. Financial resources 

shall be considered sufficient if their 

value, at a minimum, exceeds the total 

amount that would: 

(1) Enable the derivatives clearing 

organization to meet its financial 

obligations to its clearing members 

notwithstanding a default by the 

clearing member creating the largest 

financial exposure for the derivatives 

clearing organization in extreme but 

plausible market conditions; Provided 

that if a clearing member controls 

another clearing member or is under 

common control with another clearing 

member, the affiliated clearing members 

shall be deemed to be a single clearing 

member for purposes of this provision; 

and 

(2) Enable the derivatives clearing 

organization to cover its operating costs 

for a period of at least one year, 

calculated on a rolling basis. 

(b) Types of financial resources. (1) 

Financial resources available to satisfy 

the requirements of paragraph (a)(1) 

may include: 

(i) Margin of a defaulting clearing 

member; 

(ii) The derivatives clearing 

organization’s own capital; 

(iii) Guaranty fund deposits; 

(iv) Default insurance; 

(v) Potential assessments for 

additional guaranty fund contributions, 

if permitted by the derivatives clearing 

organization’s rules; and 

(vi) Any other financial resource 

deemed acceptable by the Commission. 

(2) Financial resources available to 

satisfy the requirements of paragraph 

(a)(2) may include: 

(i) The derivatives clearing 

organization’s own capital; and 

(ii) Any other financial resource 

deemed acceptable by the Commission. 

(3) A financial resource may be 

allocated, in whole or in part, to satisfy 

the requirements of either paragraph 

(a)(1) or paragraph (a)(2), but not both 

paragraphs, and only to the extent the 

use of such financial resource is not 

otherwise limited by the Act, 

Commission regulations, the derivatives 

clearing organization’s rules, or any 

contractual arrangements to which the 

derivatives clearing organization is a 

party. 

(c) Computation of financial resources 

requirement. (1) A derivatives clearing 

organization shall, on a monthly basis, 

perform stress testing that will allow it 

to make a reasonable calculation of the 

financial resources needed to meet the 

requirements of paragraph (a)(1). The 

derivatives clearing organization shall 

have reasonable discretion in 

determining the methodology used to 

compute such requirements, provided 

that the methodology must take into 

account both historical data and 

hypothetical scenarios. The Commission 


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Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 63119 

may review the methodology and 

require changes as appropriate. 

(2) A derivatives clearing organization 

shall, on a monthly basis, make a 

reasonable calculation of its projected 

operating costs over a 12-month period 

in order to determine the amount 

needed to meet the requirements of 

paragraph (a)(2) of this section. The 

derivatives clearing organization shall 

have reasonable discretion in 

determining the methodology used to 

compute such projected operating costs. 

The Commission may review the 

methodology and require changes as 

appropriate. 

(d) Valuation of financial resources. 

(1) At appropriate intervals, but not less 

than monthly, a derivatives clearing 

organization shall compute the current 

market value of each financial resource 

used to meet its obligations under 

paragraph (a) of this section. Reductions 

in value to reflect market and credit risk 

(haircuts) shall be applied as 

appropriate and evaluated on a monthly 

basis. 

(2) If assessments for additional 

guaranty fund contributions are 

permitted by the derivatives clearing 

organization’s rules, in calculating the 

financial resources available to meet its 

obligations under paragraph (a)(1) of 

this section: 

(i) The derivatives clearing 

organization shall have rules requiring 

that its clearing members have the 

ability to meet an assessment within the 

time frame of a normal variation 

settlement cycle; 

(ii) The derivatives clearing 

organization shall monitor, on a 

continual basis, the financial and 

operational capacity of its clearing 

members to meet potential assessments; 

(iii) The derivatives clearing 

organization shall apply a 30 percent 

haircut to the value of potential 

assessments, and 

(iv) The derivatives clearing 

organization shall only count the value 

of assessments, after the haircut, to meet 

up to 20 percent of those obligations. 

(e) Liquidity of financial resources. 

(1) The derivatives clearing organization 

shall effectively measure, monitor, and 

manage its liquidity risks, maintaining 

sufficient liquid resources such that it 

can, at a minimum, fulfill its cash 

obligations when due. The derivatives 

clearing organization shall hold assets 

in a manner where the risk of loss or of 

delay in its access to them is minimized. 

The financial resources allocated by the 

derivatives clearing organization to meet 

the requirements of paragraph (a)(1) of 

this section shall be sufficiently liquid 

to enable the derivatives clearing 

organization to fulfill its obligations as 

a central counterparty during a one-day 

settlement cycle. The derivatives 

clearing organization shall have 

sufficient capital in the form of cash to 

meet the average daily settlement 

variation pay per clearing member over 

the last fiscal quarter. If any portion of 

the remainder of the financial resources 

is not sufficiently liquid, the derivatives 

clearing organization may take into 

account a committed line of credit or 

similar facility for the purpose of 

meeting this requirement. 

(2) The financial resources allocated 

by the derivatives clearing organization 

to meet the requirements of paragraph 

(a)(2) of this section must include 

unencumbered, liquid financial assets 

(i.e., cash and/or highly liquid 

securities) equal to at least six months’ 

operating costs. If any portion of such 

financial resources is not sufficiently 

liquid, the derivatives clearing 

organization may take into account a 

committed line of credit or similar 

facility for the purpose of meeting this 

requirement. 

(3)(i) Assets in a guaranty fund shall 

have minimal credit, market, and 

liquidity risks and shall be readily 

accessible on a same-day basis; 

(ii) Cash balances shall be invested or 

placed in safekeeping in a manner that 

bears little or no principal risk; and 

(iii) Letters of credit shall not be a 

permissible asset for a guaranty fund. 

(f) Reporting requirements. (1) Each 

fiscal quarter, or at any time upon 

Commission request, a derivatives 

clearing organization shall: 

(i) Report to the Commission; 

(A) The amount of financial resources 

necessary to meet the requirements of 

paragraph (a); 

(B) The value of each financial 

resource available, computed in 

accordance with the requirements of 

paragraph (d); and 

(C) How the derivatives clearing 

organization meets the liquidity 

requirements of paragraph (e); 

(ii) Provide the Commission with a 

financial statement, including the 

balance sheet, income statement, and 

statement of cash flows, of the 

derivatives clearing organization or of 

its parent company; and 

(iii) Report to the Commission the 

value of each individual clearing 

member’s guaranty fund deposit, if the 

derivatives clearing organization reports 

having guaranty funds deposits as a 

financial resource available to satisfy 

the requirements of paragraph (a)(1) of 

this section. 

(2) The calculations required by this 

paragraph shall be made as of the last 

business day of the derivatives clearing 

organization’s fiscal quarter. 

(3) The derivatives clearing 

organization shall provide the 

Commission with: 

(i) Sufficient documentation 

explaining the methodology used to 

compute its financial resources 

requirements under paragraph (a) of this 

section, 

(ii) Sufficient documentation 

explaining the basis for its 

determinations regarding the valuation 

and liquidity requirements set forth in 

paragraphs (d) and (e) of this section, 

and 

(iii) Copies of any agreements 

establishing or amending a credit 

facility, insurance coverage, or other 

arrangement evidencing or otherwise 

supporting the derivatives clearing 

organization’s conclusions. 

(4) The report shall be filed not later 

than 17 business days after the end of 

the derivatives clearing organization’s 

fiscal quarter, or at such later time as the 

Commission may permit, in its 

discretion, upon request by the 

derivatives clearing organization. 

3. Add § 39.29 to read as follows: 

§ 39.29 Financial resources requirements. 

(a) General rule. Notwithstanding the 

requirements of § 39.11(a)(1) of this part, 

a systemically important derivatives 

clearing organization shall maintain 

financial resources sufficient to enable it 

to meet its financial obligations to its 

clearing members notwithstanding a 

default by the two clearing members 

creating the largest combined financial 

exposure for the systemically important 

derivatives clearing organization in 

extreme but plausible market 

conditions. 

(b) Valuation of financial resources. 

Notwithstanding the requirements of 

§ 39.11(d)(2) of this part, if assessments 

for additional guaranty fund 

contributions are permitted by the 

systemically important derivatives 

clearing organization’s rules, in 

calculating the financial resources 

available to meet its obligations under 

paragraph (a) of this section: 

(1) The systemically important 

derivatives clearing organization may 

not count the value of assessments to 

meet the obligations arising from a 

default by the clearing member creating 

the largest financial exposure for the 

systemically important derivatives 

clearing organization in extreme but 

plausible market conditions; and 

(2) The systemically important 

derivatives clearing organization may 

only count the value of assessments, 

after the haircut set forth in 

§ 39.11(d)(2)(iii) of this part, to meet up 

to 20 percent of the obligations arising 

from a default by the clearing member 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
63120 Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 

creating the second largest financial 

exposure for the systemically important 

derivatives clearing organization in 

extreme but plausible market 

conditions. 

PART 140—ORGANIZATION, 

FUNCTIONS, AND PROCEDURES OF 

THE COMMISSION 

4. The authority citation for part 140 

continues to read as follows: 

Authority: 7 U.S.C. 2 and 12a. 

5. In § 140.94, revise paragraphs (a)(4) 

and (a)(5) and add a new paragraph 

(a)(6) to read as follows: 

§ 140.94 Delegation of authority to the 

Director of the Division of Clearing and 

Intermediary Oversight. 

(a) * * * 

(4) All functions reserved to the 

Commission in § 5.12 of this chapter, 

except for those relating to nonpublic 

treatment of reports set forth in § 5.12(i) 

of this chapter; 

(5) All functions reserved to the 

Commission in § 5.14 of this chapter; 

and 

(6) All functions reserved to the 

Commission in §§ 39.11(b)(1)(vi), 

(b)(2)(ii), (c)(1), (c)(2), (f)(1), and (f)(4) of 

this chapter. 

* * * * * 

Issued in Washington, DC, on October 1, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–25322 Filed 10–13–10; 8:45 am] 

BILLING CODE P 

DEPARTMENT OF VETERANS 

AFFAIRS 

38 CFR Parts 1 and 2 

RIN 2009–AN72 

Release of Information From 

Department of Veterans Affairs 

Records 

AGENCY: Department of Veterans Affairs. 

ACTION: Proposed rule. 

SUMMARY: The Department of Veterans 

Affairs (VA) proposes to amend its 

regulations governing the submission 

and processing of requests for 

information under the Freedom of 

Information Act (FOIA) in order to 

implement provisions of the E–FOIA 

Act and the Openness in Government 

Act, and to reorganize and clarify 

existing regulations. The proposed 

regulations would establish the 

procedures and rules necessary for VA 

to process requests for information 

under the FOIA, including matters such 

as how to file a request or appeal, how 

requests for business information are 

handled, and how issues regarding fees 

are resolved. The intended effect of 

these regulations is to implement 

legislative changes made to the FOIA, as 

noted above, and to provide the public 

clear instructions and useful 

information regarding the filing and 

processing of FOIA requests. 

DATES: Comments must be received on 

or before December 13, 2010. 

ADDRESSES: Written comments may be 

submitted through http:// 

www.Regulations.gov/; by mail or handdelivery to the Director, Regulations 

Management (02REG), Department of 

Veterans Affairs, 810 Vermont Avenue, 

NW., Room 1068, Washington, DC 

20420; or by fax to (202) 273–9026. 

Comments should indicate that they are 

submitted in response to ‘‘RIN 2900– 

AN72, Release of Information from 

Department of Veterans Affairs 

Records.’’ Copies of comments received 

will be available for public inspection in 

the Office of Regulation Policy and 

Management, Room 1063B, between the 

hours of 8 a.m. and 4:30 p.m., Monday 

through Friday (except holidays). Please 

call (202) 461–4902 for an appointment. 

In addition, during the comment period, 

comments may be viewed online 

through the Federal Docket Management 

System (FDMS) at http:// 

www.Regulations.gov/. 

FOR FURTHER INFORMATION CONTACT: 

Catherine Nachmann, Staff Attorney, 

Office of the General Counsel (024), 

Department of Veterans Affairs, 810 

Vermont Avenue, NW., Washington, DC 

20420, (202) 461–7684. (This is not a 

toll free number.) 

SUPPLEMENTARY INFORMATION: The FOIA, 

codified at 5 U.S.C. 552, requires an 

agency to publish public guidance 

regarding its implementation of the 

statute, such as rules of procedure and 

substantive rules of general 

applicability. The Privacy Act of 1974, 

as amended, codified at 5 U.S.C. 552a, 

requires an agency to publish its rules 

and procedures implementing that 

statute. Section 501(a) of title 38, U.S.C., 

authorizes the Secretary of Veterans 

Affairs to prescribe rules and 

regulations to carry out the laws 

administered by VA, including when 

information may be released from 

claimant records under 38 U.S.C. 5701, 

what activities fall within 38 U.S.C. 

5705 regarding confidentiality of 

medical quality assurance records, 

whether and to whom information 

pertaining to those activities may be 

released, and when information may be 

released from records covered by 38 

U.S.C. 7332 regarding the identity, 

diagnosis, or treatment of drug abuse, 

alcoholism or alcohol abuse, infection 

with the human immunodeficiency 

virus, and sickle cell anemia. 

We propose to amend VA’s 

regulations pertaining to release of 

information under 5 U.S.C. 552. VA’s 

current FOIA regulations are codified at 

38 CFR 1.550 through 1.557, including 

reserved §§ 1.558 and 1.559. This 

proposed rule would implement the 

FOIA in §§ 1.550 through 1.562. The 

proposed rule would in large part cover 

the same issues as are covered in VA’s 

current regulations, such as how to 

submit a request for records, how VA 

addresses a request for records, and fees 

for addressing record requests under the 

FOIA. We propose to update these 

regulations to accommodate current 

means of communication with VA, 

streamline the existing procedures 

based on our experience administering 

the FOIA, incorporate changes in the 

procedural requirements of the FOIA 

since promulgation of current 

regulations, make VA’s procedures 

easier for the public to understand, and 

generally reorganize and renumber the 

applicable provisions. 

In addition, we propose to add new 

provisions to explicitly implement the 

E–FOIA Act, Public Law 104–231, and 

the Openness in Government Act, 

Public Law 110–175. For additional 

resources on any of the procedural 

requirements of the FOIA, E–FOIA Act, 

or Openness in Government Act in 

particular, see the detailed information 

available at the U.S. Department of 

Justice (DOJ) website. For example, a 

copy of the FOIA can be located at 

http://www.justice.gov/oip/amendedfoia-redlined.pdf. The current edition of 

the VA FOIA Reference Guide can be 

located at http://www.foia.va.gov/docs/ 

RequesterHandbook.pdf, and specific 

information about implementing the 

FOIA and its amendments can be found 

in guidance issued by DOJ through its 

FOIA Updates and FOIA Post 

publications, located at http:// 

www.usdoj.gov/oip/foi-upd.htm and 

http://www.justice.gov/oip/foiapost/ 

mainpage.htm. 

Changes to 38 CFR Part 1 

1.550 Purpose 

Current § 1.550 is entitled ‘‘General’’ 

and provides a general statement of VA 

policy regarding disclosure of 

information to the extent permitted by 

law, including when VA would 

otherwise be authorized to withhold the 

information, if the disclosure is for a 

useful purpose or when disclosure will 

not affect the proper conduct of official 


jlentini on DSKJ8SOYB1PROD with PROPOSALS