77576 Federal Register / Vol. 75, No. 238 / Monday, December 13, 2010 / 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. 

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. 

PART 71—DESIGNATION OF CLASS A, 

CLASS B, CLASS C, CLASS D, AND 

CLASS E AIRSPACE AREAS; AIR 

TRAFFIC SERVICE ROUTES; AND 

REPORTING POINTS 

1. The authority citation for 14 CFR 

part 71 continues to read as follows: 

Authority: 49 U.S.C. 106(g), 40103, 40113, 

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959– 

1963 Comp., p. 389. 

§ 71.1 [Amended] 

2. The incorporation by reference in 

14 CFR 71.1 of Federal Aviation 

Administration Order 7400.9U, 

Airspace Designations and Reporting 

Points, signed August 18, 2010 and 

effective September 15, 2010, is to be 

amended as follows: 

* * * * * 

Paragraph 6005 Class E airspace extending 

upward from 700 feet or more above the 

surface of the earth. 

* * * * * 

AAL AK E5 Savoonga, AK [Revised] 

(Lat. 63° 41′10.56 ′′ N., long. 170°29′35.39′′ 

W.) 

That airspace extending upward from 700 

feet above the surface within a 7.0-mile 

radius of the Savoonga Airport and within 4 

miles either side of the 060° bearing from the 

Savoonga Airport extending from the 7.0- 

mile radius to 8.5 miles northeast of the 

Savoonga Airport and that airspace extending 

upward from 1,200 feet above the surface 

within a 73-mile radius of the Savoonga 

Airport. 

Issued in Anchorage, AK, on November 15, 

2010. 

Michael A. Tarr, 

Alaska Flight Services Information Area 

Group. 

[FR Doc. 2010–31184 Filed 12–10–10; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1 and 39 

RIN 3038–AC98 

General Regulations and Derivatives 

Clearing Organizations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing regulations to 

implement Title VII of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). These 

proposed amendments would establish 

the regulatory standards for compliance 

with derivatives clearing organization 

(DCO) Core Principles A (Compliance), 

H (Rule Enforcement), N (Antitrust 

Considerations), and R (Legal Risk), as 

well as DCO chief compliance officer 

(CCO) requirements set forth in Section 

5b of the Commodity Exchange Act 

(CEA). The proposed amendments also 

would revise procedures for DCO 

applications, clarify procedures for the 

transfer of a DCO registration, add 

requirements for approval of DCO rules 

establishing a portfolio margining 

program for customer accounts carried 

by a futures commission merchant 

(FCM) that is also registered as a 

securities broker-dealer (FCM/BD), and 

make certain technical amendments. 

The Commission also is proposing 

amendments to update the definitions of 

‘‘clearing member’’ and ‘‘clearing 

organization,’’ and to add definitions for 

certain other terms. 

DATES: Submit comments on or before 

February 11, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AC98, by any of 

the following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.Regulations.gov. Follow the 

instructions for submitting comments. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the Commission’s regulations, 17 CFR 

145.9.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Phyllis P. Dietz, Associate Director, 

202–418–5449, pdietz@cftc.gov, or 

Jonathan M. 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. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Proposed Definitional and Procedural 

Amendments 

B. Proposed Regulations Implementing 

Statutory Requirements for CCOs 

C. Proposed Regulations Implementing 

DCO Core Principles 

II. Discussion 

A. Section 1.3 Definitions 

B. Part 39 Scope and Definitions 

1. Scope of Part 39 

2. Definitions 

C. Procedures for Registration as a DCO 

1. Procedures for DCO Applications 

2. Procedures for Transfer of a DCO 

Registration 

D. Procedures for Submitting DCO Rules 

To Establish a Portfolio Margining 

Program 

E. Compliance With Core Principles 

F. Rule Enforcement Requirements 

G. Antitrust Considerations 

H. Legal Risk Requirements 

III. Technical Amendments 

IV. Effective Date 

V. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

1. Information Provided by Reporting 

Entities/Persons 

2. Information Collection Comments 

C. Cost-Benefit Analysis 

I. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act.2

Title VII of the Dodd-Frank Act 3

amended the CEA 4 to establish a 

comprehensive new regulatory 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS_PART 1
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5See Commodity Futures Modernization Act of 

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

6See 17 CFR part 39, app. A. 

7See 7 U.S.C. 7a–1(c)(2). Section 8a(5) of the CEA 

authorizes the Commission to promulgate such 

regulations ‘‘as, in the judgment of the Commission, 

are reasonably necessary to effectuate any of the 

provisions or to accomplish any of the purposes of 

[the CEA].’’ 7 U.S.C. 12a(5). 

8 7 U.S.C. 7a–1(i). 

9The Dodd-Frank Act established comparable 

CCO requirements for swap data repositories, swap 

dealers and major swap participants, FCMs, and 

swap execution facilities. See Sections 728, 731, 

732, and 733, respectively, of the Dodd-Frank Act. 

10See 75 FR 63732 (Oct. 18, 2010) (proposing 

regulations to implement Core Principle P 

(Conflicts of Interest)); and 75 FR 63113 (Oct. 14, 

2010) (proposing regulations to implement Core 

Principle B (Financial Resources)). Concurrent with 

issuing this notice, the Commission also is 

proposing regulations to implement Core Principles 

J (Reporting), K (Recordkeeping), L (Public 

Information), and M (Information Sharing). The 

Commission expects to issue two additional notices 

of proposed rulemaking to implement DCO core 

principles. 

11Additionally, Section 805(a) of the Dodd-Frank 

Act allows the Commission to prescribe regulations 

for DCOs that the Financial Stability Oversight 

Council has determined are systemically important 

financial market utilities. In a future notice of 

proposed rulemaking, the Commission intends to 

propose a provision that would require all DCOs, 

including systemically important DCOs (SIDCOs), 

to comply with the core principles and the 

regulations thereunder, except to the extent that 

there are special requirements applicable to SIDCOs 

set forth in part 39 of the Commission’s regulations. 

12See infra n. 47. 

framework for swaps and security-based 

swaps. The legislation was enacted to 

reduce risk, increase transparency, and 

promote market integrity within the 

financial system by, among other things: 

(1) Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; (2) 

imposing clearing and trade execution 

requirements on standardized derivative 

products; (3) creating rigorous 

recordkeeping and real-time reporting 

regimes; and (4) enhancing the 

Commission’s rulemaking and 

enforcement authorities with respect to 

all registered entities and intermediaries 

subject to the Commission’s oversight. 

Section 725(c) of the Dodd-Frank Act 

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

which sets forth core principles with 

which a DCO must comply in order to 

be registered and to maintain 

registration as a DCO. The core 

principles were added to the CEA by the 

Commodity Futures Modernization Act 

of 2000 (CFMA).5 The Commission did 

not adopt implementing rules and 

regulations, but instead promulgated 

guidance for DCOs on compliance with 

the core principles.6 Under Section 

5b(c)(2), as amended by the Dodd-Frank 

Act, Congress expressly confirmed that 

the Commission may adopt 

implementing rules and regulations 

pursuant to its rulemaking authority 

under Section 8a(5) of the CEA.7

The Commission continues to believe 

that, where possible, each DCO should 

be afforded an appropriate level of 

discretion in determining how to 

operate its business within the statutory 

framework. At the same time, the 

Commission recognizes that specific, 

bright-line regulations may be necessary 

in order to facilitate DCO compliance 

with a given core principle and, 

ultimately, to protect the integrity of the 

U.S. clearing system. Accordingly, in 

developing the proposed regulations to 

update the Commission’s regulations, 

streamline administrative procedures, 

and implement the DCO core principles 

as amended by the Dodd-Frank Act, the 

Commission has endeavored to strike an 

appropriate balance between 

establishing general prudential 

standards and prescriptive 

requirements. 

In this notice of proposed rulemaking, 

the Commission is proposing to adopt: 

(1) Certain definitional and procedural 

amendments to its regulations for DCOs; 

(2) regulations to implement statutory 

requirements for CCOs; and (3) 

requirements that would implement 

four DCO core principles. 

A. Proposed Definitional and 

Procedural Amendments 

The Commission is proposing to 

amend the definitions of ‘‘clearing 

member’’ and ‘‘clearing organization’’ in 

§ 1.3 of its regulations to make the 

definitions consistent with terminology 

currently used in the CEA, as amended 

by the Dodd-Frank Act. It is also 

proposing to add to § 1.3 definitions for 

the terms ‘‘customer initial margin,’’ 

‘‘initial margin,’’ ‘‘spread margin,’’ 

‘‘variation margin,’’ and ‘‘margin call.’’ In 

addition, the Commission is proposing 

to amend § 39.1 to add definitions of the 

following terms: ‘‘back test,’’ 

‘‘compliance policies and procedures,’’ 

‘‘key personnel,’’ ‘‘stress test,’’ and 

‘‘systemically important derivatives 

clearing organization.’’ 

Based on its experience in reviewing 

DCO applications over the past nearly 

ten years, the Commission is proposing 

to amend § 39.3 to streamline the DCO 

application process by eliminating the 

90-day expedited application review 

period. The proposed amendments also 

would clarify the procedures to be 

followed by a DCO when requesting a 

transfer of its DCO registration due to a 

corporate change and procedures for 

submission of DCO rules to establish a 

portfolio margining program. 

B. Proposed Regulations Implementing 

Statutory Requirements for CCOs 

Section 725(b) of the Dodd-Frank Act, 

codified as Section 5b(i) of the CEA,8

requires each DCO to designate a CCO 

and further specifies the duties of the 

CCO.9 Among the CCO’s responsibilities 

are the preparation and submission to 

the Commission of an annual 

compliance report. Proposed § 30.10 

codifies the statutory requirements for 

CCOs and sets forth additional 

provisions relating to CCOs. 

C. Proposed Regulations Implementing 

DCO Core Principles 

The Commission is proposing to 

codify the DCO core principles in 

Commission regulations and implement 

those statutory standards with 

regulatory requirements to the extent 

necessary to ensure that DCOs are 

subject to a comprehensive, prudential 

regulatory regime. This rulemaking is 

one of a series that will, in its entirety, 

propose regulations to implement all 18 

DCO core principles.10 Section 725(c) of 

the Dodd-Frank Act amended Core 

Principle A, Compliance, to require a 

DCO to comply with each core principle 

set forth in Section 5b(c)(2) of the CEA 

and any requirement that the 

Commission may impose by rule or 

regulation pursuant to Section 8a(5) of 

the CEA.11 Proposed § 39.10 would 

implement Core Principle A. 

Section 725(c) also amended Core 

Principle H, Rule Enforcement, to 

require a DCO to report to the 

Commission rule enforcement activities 

and sanctions imposed against clearing 

members. Proposed § 39.17 would 

implement Core Principle H. 

The Dodd-Frank Act amended Core 

Principle N, Antitrust Considerations, 

and Core Principle N now conforms to 

the amended antitrust core principle for 

designated contract markets (DCMs). 

Proposed § 39.23 would codify and 

implement Core Principle N. 

Finally, Section 725(c) of the DoddFrank Act established a new Core 

Principle R, Legal Risk, which is 

consistent with the legal risk standard 

recommended by the Committee on 

Payment and Settlement Systems of the 

central banks of the Group of Ten 

countries (CPSS) and the Technical 

Committee of the International 

Organization of Securities Commissions 

(IOSCO).12 Proposed § 39.27 would 

implement Core Principle R. 

The Commission requests comment 

on all aspects of the proposed rules, as 

well as comments on the specific 

provisions and issues highlighted in the 

discussion below. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS_PART 1
77578 Federal Register / Vol. 75, No. 238 / Monday, December 13, 2010 / Proposed Rules 

13 17 CFR 1.3(c). 

14The term ‘‘person’’ is defined as an individual, 

association, partnership, corporation, or trust. See 

Section 1a(38) of the CEA; 7 U.S.C. 1a(38); and 17 

CFR 1.3(u). 

15 17 CFR 1.3(d). 

16Section 1a(15) of the CEA; 7 U.S.C. 1a(15), 

defines a derivatives clearing organization as 

follows: 

(A) IN GENERAL.—The term ‘‘derivatives clearing 

organization’’ means a clearinghouse, clearing 

association, clearing corporation, or similar entity, 

facility, system, or organization that, with respect 

to an agreement, contract, or transaction— 

(i) enables each party to the agreement, contract, 

or transaction to substitute, through novation or 

otherwise, the credit of the derivatives clearing 

organization for the credit of the parties; 

(ii) arranges or provides, on a multilateral basis, 

for the settlement or netting of obligations resulting 

from such agreements, contracts, or transactions 

executed by participants in the derivatives clearing 

organization; or 

(iii) otherwise provides clearing services or 

arrangements that mutualize or transfer among 

participants in the derivatives clearing organization 

the credit risk arising from such agreements, 

contracts, or transactions executed by the 

participants. 

(B) EXCLUSIONS.—The term ‘‘derivatives 

clearing organization’’ does not include an entity, 

facility, system, or organization solely because it 

arranges or provides for— 

(i) settlement, netting, or novation of obligations 

resulting from agreements, contracts, or 

transactions, on a bilateral basis and without a 

central counterparty; 

(ii) settlement or netting of cash payments 

through an interbank payment system; or 

(iii) settlement, netting, or novation of obligations 

resulting from a sale of a commodity in a 

transaction in the spot market for the commodity. 

17 17 CFR 1.3(k). 

18 In this future rulemaking, the Commission also 

expects to propose a technical amendment to 

update the § 39.1 citation to the definition of 

‘‘derivatives clearing organization’’ in the CEA (term 

formerly defined in Section 1a(9) of the CEA; 

renumbered as Section 1a(15) by the Dodd-Frank 

Act). 

II. Discussion 

A. Section 1.3 Definitions 

The Commission proposes to amend 

the definitions of ‘‘clearing member,’’ 

‘‘clearing organization,’’ and ‘‘customer’’ 

found in § 1.3 of its regulations to 

conform them to the concepts and 

terminology of the CEA, as amended. 

The Commission also is proposing to 

add to § 1.3, definitions for ‘‘clearing 

initial margin,’’ ‘‘customer initial 

margin,’’ ‘‘initial margin,’’ ‘‘margin call,’’ 

‘‘spread margin,’’ and ‘‘variation margin.’’ 

Clearing member. The term ‘‘clearing 

member’’ is currently defined in § 1.3(c) 

to mean ‘‘any person who is a member 

of, or enjoys the privilege of clearing 

trades in his own name through, the 

clearing organization of a designated 

contract market or registered derivatives 

transaction execution facility.’’ 13 The 

Commission proposes to amend § 1.3(c) 

to define a ‘‘clearing member’’ as ‘‘any 

person 14 that has clearing privileges 

such that it can process, clear and settle 

trades through a derivatives clearing 

organization on behalf of itself or 

others.’’ This revised definition reflects 

the fact that a clearing member could 

have clearing privileges in connection 

with contracts that are not traded on a 

DCM, and it further clarifies that the 

term ‘‘clearing member,’’ for purposes of 

the Commission’s regulations, is 

intended to refer to a person who is 

authorized to clear through a registered 

DCO, even if the DCO is not a 

membership organization. 

Clearing organization. The term 

‘‘clearing organization’’ is currently 

defined in § 1.3(d) as ‘‘the person or 

organization which acts as a medium for 

clearing transactions in commodities for 

future delivery or commodity option 

transactions, or for effecting settlements 

of contracts for future delivery or 

commodity option transactions, for and 

between members of any designated 

contract market or registered derivatives 

transaction execution facility.’’ 15

Recognizing that there may be CFTC 

regulations or other issuances that 

remain in effect and use the term 

‘‘clearing organization’’ instead of 

‘‘derivatives clearing organization,’’ the 

Commission proposes to include both 

terms as alternatives that have the same 

meaning. The definition would be the 

same as the definition of ‘‘derivatives 

clearing organization’’ in Section 1a(15) 

of the CEA.16 Accordingly, the 

definition would eliminate the 

references to DCMs and derivatives 

transaction execution facilities, thereby 

allowing the definition to encompass 

futures contracts and swaps, including 

swaps traded on a swap execution 

facility (SEF). 

Customer. The Dodd-Frank Act 

expanded the Commission’s regulatory 

authority over swaps. The term 

‘‘customer’’ in § 1.3(k) is currently 

defined to refer to a customer trading in 

any commodity.17 The Commission 

proposes to define customer to refer to 

trading in any commodity or swap as 

defined in Section 1a(47) of the CEA. 

The Commission also is proposing to 

amend § 1.3 to add definitions of terms 

that it expects will be used in future 

proposed regulations to implement Core 

Principle D, Risk Management, as well 

as other provisions of the CEA. 

Clearing initial margin. Proposed 

§ 1.3(jjj) would define the term ‘‘clearing 

initial margin’’ to mean initial margin 

posted by a clearing member with a 

DCO. 

Customer initial margin. Proposed 

§ 1.3(kkk) would define the term 

‘‘customer initial margin’’ to mean initial 

margin posted by a customer with an 

FCM, or by a non-clearing member FCM 

with a clearing member. 

Initial margin. Proposed § 1.3(lll) 

would define the term ‘‘initial margin’’ 

to mean money, securities, or property 

posted by a party to a futures, option, 

or swap as performance bond to cover 

potential future exposures arising from 

changes in the market value of the 

position. 

Margin call. Proposed § 1.3(mmm) 

would define the term ‘‘margin call’’ to 

mean a request from an FCM to a 

customer to post customer initial 

margin; or a request by a DCO to a 

clearing member to post clearing initial 

margin or variation margin. This would 

include margin calls for additional 

funds, sometimes referred to as ‘‘super 

margin’’ calls or ‘‘special margin’’ calls, 

both of which are effectively calls for 

initial margin. 

Spread margin. Proposed § 1.3(nnn) 

would define the term ‘‘spread margin’’ 

to mean a reduced initial margin that 

takes into account correlations between 

certain related positions held in a single 

account. 

Variation margin. Proposed § 1.3(ooo) 

would define the term ‘‘variation 

margin’’ to mean a payment made by a 

party to a futures, option, or swap to 

cover the current exposure arising from 

changes in the market value of the 

position since the trade was executed or 

the previous time the position was 

marked to market. 

B. Part 39 Scope and Definitions 

The Commission proposes to revise 

the statement of the scope of part 39 and 

to add definitions that will appear 

elsewhere in part 39. 

1. Scope of Part 39 

In a future rulemaking, the 

Commission intends to reorganize part 

39 into three subparts, with one subpart 

containing provisions applicable only to 

SIDCOs. Accordingly, the Commission 

intends to revise the statement of scope 

in a future rulemaking to establish that 

the provisions of subparts A and B of 

part 39 will apply to all DCOs, except 

to the extent that there are superseding 

provisions that apply to SIDCOs in 

subpart C.18 Because this reorganization 

is not being proposed in the current 

rulemaking, the Commission is not yet 

proposing any change to the text of 

§ 39.1. However, as a technical matter in 

order to propose certain definitions, the 

Commission is proposing to redesignate 

the current text of § 39.1 as § 39.1(a) 

‘‘Scope,’’ and to add a new paragraph (b) 

‘‘Definitions.’’ 


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19See Section 5b(c)(2)(D) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(D). 

20For example, in a separate notice of proposed 

rulemaking, the Commission proposes to require 

DCOs to provide the Commission with a daily 

report of initial margin requirements and margin on 

deposit for each clearing member, by customer 

origin and house origin. 

21See 66 FR 45604 (Aug. 29, 2001). 

22See 17 CFR 39.3(a) (providing that the 

Commission will review the application for 

registration as a DCO pursuant to the 180-day time 

frame and procedures specified in Section 6(a) of 

the CEA). 

23See 71 FR 1953 (Jan. 12, 2006) (extending the 

60-day review period to 90 days based on the 

Commission’s experience in processing 

applications). 

24 In a separate notice of proposed rulemaking, 

the Commission is proposing to require a DCO to 

notify the Commission of various corporate events, 

all of which would require three months advance 

notice. The Commission is proposing to allow an 

exception to the three-month prior reporting 

requirement if the DCO does not know and 

reasonably could have not have known of the 

anticipated change three months prior to that 

change. In such event, the DCO would be required 

to promptly report such change to the Commission 

as soon as it knows of the change. 

2. Definitions 

Proposed § 39.1(b) would define 

certain terms, for purposes of part 39. 

Although some of these terms may be 

defined in § 1.3 or other sections of the 

Commission’s regulations, the 

definitions set forth in § 39.1(b) would 

apply to provisions contained in part 39 

and such other rules as may explicitly 

cross-reference these definitions. 

Back test. The proposed rule would 

define the term ‘‘back test’’ to mean a test 

that compares a DCO’s initial margin 

requirements with historical price 

changes to determine the extent of 

actual margin coverage. The 

Commission anticipates using this term 

in regulations relating to Core Principle 

D, Risk Management.19

Compliance policies and procedures. 

The proposed rule would define the 

term ‘‘compliance policies and 

procedures’’ to mean all policies, 

procedures, codes, including a code of 

ethics, safeguards, rules, programs, and 

internal controls that are required to be 

adopted or established by a DCO 

pursuant to the CEA, Commission 

regulations, or orders. Compliance 

policies and procedures would include 

those policies and procedures that are 

not explicitly required by law, such as 

those relating to customer record 

protection and procedures and 

safeguards for electronic signatures. 

Customer account or customer origin. 

The proposed rule would define these 

terms to mean a clearing member’s 

account held on behalf of customers, as 

defined in § 1.3(k) of the Commission’s 

regulations. A customer account is also 

a futures account, as that term is defined 

by § 1.3(vv) of the Commission’s 

regulations. The Commission proposes 

to define these terms as distinguishable 

from a ‘‘house account’’ or ‘‘house 

origin,’’ in connection with proposed 

reporting and other requirements under 

part 39, which may make such a 

distinction.20

House account or house origin. The 

proposed rule would define ‘‘house 

account’’ or ‘‘house origin’’ to mean a 

clearing member’s combined proprietary 

accounts, as defined in § 1.3(y). 

Key personnel. The proposed rule 

would define the term ‘‘key personnel’’ 

to mean personnel who play a 

significant role in the operation of the 

DCO, provision of clearing and 

settlement services, risk management, or 

oversight of compliance with the CEA 

and Commission regulations. Key 

personnel would include, but would not 

be limited to, those persons who are or 

perform the functions of any of the 

following: The chief executive officer; 

president; CCO; chief operating officer; 

chief risk officer; chief financial officer; 

chief technology officer; and emergency 

contacts or persons who are responsible 

for business continuity or disaster 

recovery planning or program 

execution. 

Stress test. The proposed rule would 

define the term ‘‘stress test’’ to mean a 

test that compares the impact of a 

potential price move, change in option 

volatility, or change in other inputs that 

affect the value of a position, to the 

financial resources of a DCO, clearing 

member, or large trader to determine the 

adequacy of such financial resources. 

Systemically important derivatives 

clearing organization. The proposed 

rule would define the term 

‘‘systemically important derivatives 

clearing organization’’ to mean a 

financial market utility that is a DCO 

registered under Section 5b of the CEA, 

and which has been designated by the 

Financial Stability Oversight Council to 

be systemically important. As noted 

above, the Commission intends that 

certain proposed rules would apply 

only to SIDCOs. 

C. Procedures for Registration as a DCO 

1. Procedures for DCO Applications 

The proposed rules would remove the 

90-day expedited review provision. In 

2001, the Commission adopted § 39.3 to 

implement the CFMA’s core principle 

regime and to establish registration 

standards and procedures for DCOs, 

which were then a new category of 

registrant.21 Although the CEA does not 

require the Commission to review DCO 

applications within a prescribed time 

period or subject to any prescribed 

procedures, the Commission 

nonetheless adopted the time period 

and procedures specified in Section 6(a) 

of the CEA for review of applications for 

designation of a contract market or 

registration of a derivatives transaction 

execution facility.22 The Commission 

initially provided for an expedited 60- 

day review process, which it changed to 

a 90-day review process in 2006.23

Since 2006, the Commission has 

learned that a 90-day expedited review 

period is not practicable in most 

instances, particularly in cases where 

the margin methodology to be applied 

or the products to be cleared are novel 

or complex. The proposed amendments 

to § 39.3 would therefore eliminate the 

90-day expedited review period 

provided under § 39.3(a)(3) and remove 

related provisions for termination of the 

90-day review under § 39.3(b). The 

Commission notes that the 180-day 

review period does not preclude it from 

rendering a decision in less than 180 

days. 

2. Procedures for Transfer of a DCO 

Registration 

The Commission is proposing to add 

a new paragraph (h) to § 39.3 to 

formalize the procedures that a DCO 

must follow when requesting the 

transfer of its DCO registration and 

positions comprising open interest for 

clearing and settlement, in anticipation 

of a corporate change (e.g., a merger, 

corporate reorganization, or change in 

corporate domicile), which results in 

the transfer of all or substantially all of 

the DCO’s assets to another legal entity. 

Under proposed § 39.3(h), the DCO 

would submit to the Commission a 

request for transfer no later than three 

months prior to the anticipated 

corporate change, in accordance with 

the reporting requirements of proposed 

§ 39.19.24 The request would include: 

(1) The underlying agreement that 

governs the corporate change; (2) a 

narrative description of the corporate 

change, including the reason for the 

change, its impact on the DCO’s 

financial resources, governance, and 

operations, and its impact on the rights 

and obligations of clearing members and 

market participants holding the 

positions that comprise the DCO’s open 

interest; (3) a discussion of the 

transferee’s ability to comply with the 

CEA, including the core principles 

applicable to DCOs, and the 

Commission’s regulations thereunder; 

(4) the governing documents of the 

transferee, including but not limited to 

articles of incorporation and bylaws; (5) 

the transferee’s rules marked to show 

changes from the current rules of the 


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25 15 U.S.C. 78o(c)(3). 

26 7 U.S.C. 6d. 

27An order under Section 4d of the CEA would 

permit the commingling of exchange-traded futures 

and options on futures with securities. 

28Core Principle A provides that ‘‘To be 

registered and to maintain registration as a 

derivatives clearing organization, a derivatives 

clearing organization shall comply with each core 

principle described in this paragraph and any 

requirement that the Commission may impose by 

rule or regulation pursuant to section 8a(5).’’ 7 

U.S.C. 7a–1(c)(2)(A)(i). 

29Core Principle A provides that ‘‘Subject to any 

rule or regulation prescribed by the Commission, a 

derivatives clearing organization shall have 

reasonable discretion in establishing the manner by 

which the derivatives clearing organization 

complies with each core principle described in this 

paragraph.’’ 7 U.S.C. 7a–1(c)(2)(A)(ii). 

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

31 7 U.S.C. 12a(2) and (3). 

32See Section 5b(i)(2)(A) of the CEA; 7 U.S.C. 7a– 

1(i)(2)(A). Proposed § 1.3(zz) defines the term 

‘‘Board of Directors’’ to mean ‘‘the Board of Directors 

or Board of Governors of a company or 

organization, or equivalent governing body.’’ See 75 

FR at 63747. 

DCO; and (6) a list of contracts, 

agreements, transactions, or swaps for 

which the DCO requests transfer of open 

interest. 

Proposed § 39.3(h) also would require, 

as a condition of approval, that the DCO 

submit a representation that it is in 

compliance with the CEA, including the 

DCO core principles, and the 

Commission’s regulations. In addition, 

the DCO would have to submit a 

representation by the transferee that the 

transferee understands that a DCO is a 

regulated entity that must comply with 

the CEA, including the DCO core 

principles and the Commission’s 

regulations, in order to maintain its 

registration as a DCO; and further, that 

the transferee will continue to comply 

with all self-regulatory requirements 

applicable to a DCO under the CEA and 

the Commission’s regulations. 

The Commission would review any 

requests for transfer of registration and 

open interest as soon as practicable and 

determine whether the transferee would 

be able to continue to operate the DCO 

in compliance with the CEA and the 

Commission’s regulations. The request 

would be approved or denied pursuant 

to a Commission order. 

The Commission notes that there are 

differences in the proposed procedures 

for registration/designation transfer 

requests for DCOs, DCMs, swap 

execution facilities, and swap data 

repositories. The Commission requests 

comment on the proposed requirements 

for registration transfer requests under 

§ 39.3(h), generally, and, more 

specifically, solicits comment on the 

extent to which there should be 

uniformity or differentiation in 

procedures applied to different types of 

registrants. 

D. Procedures for Submitting DCO Rules 

To Establish a Portfolio Margining 

Program 

Section 713(a) of the Dodd-Frank Act 

amended Section 15(c)(3) of the 

Securities Exchange Act of 1934 25 to 

require the SEC to adopt rules that 

permit securities to be held in a 

portfolio margining account that is 

regulated as a futures account pursuant 

to a portfolio margining program 

approved by the Commission. Similarly, 

Section 713(b) of the Dodd-Frank Act 

amended Section 4d of the CEA26 to 

require the Commission to adopt rules 

that permit futures and options on 

futures to be held in a portfolio 

margining account regulated as a 

securities account pursuant to a 

portfolio margining program approved 

by the SEC. In both cases, the SEC and 

the Commission are required to consult 

with each other in the adoption of such 

rules in order to ensure that the relevant 

transactions and accounts are subject to 

comparable requirements to the extent 

practicable for similar products. 

As a first step towards meeting this 

goal, the Commission is proposing to 

amend part 39 to include procedural 

requirements for a DCO that intends to 

offer a portfolio margining program. 

Under proposed § 39.4(e), a DCO 

seeking to provide clearing and 

settlement services for a futures 

portfolio margining account that holds 

securities would have to submit its 

proposed portfolio margining rules for 

Commission approval under § 40.5 of 

the Commission’s regulations. This will 

enable the DCO to satisfy the statutory 

requirement that the futures portfolio 

margining program be approved by the 

Commission, as a pre-condition to the 

SEC permitting securities to be held in 

the account. Concurrent with its request 

for rule approval, the DCO also would 

be required to submit a petition for a 

related order under Section 4d of the 

CEA.27

The Commission is proposing only 

procedural requirements as part of this 

notice. It anticipates consulting with the 

SEC in the future to determine the 

substantive requirements it would 

impose in approving a futures portfolio 

margining program and, additionally, in 

granting an exemption under Section 

4(c) of the CEA and an order under 

Section 4d of the CEA to permit futures 

and options on futures to be held in a 

securities portfolio margining account. 

The Dodd-Frank Act does not set a 

deadline for these actions, and the 

Commission believes that it is important 

to give this matter due consideration, 

both in terms of consultation with the 

SEC and, more broadly, in obtaining 

industry views on the topic before 

proposing substantive regulations or 

other guidance. The Commission 

requests comment on possible strategies 

for the Commission and the SEC to 

address issues raised by portfolio 

margining and to facilitate the 

availability of portfolio margining 

programs for qualified participants. 

E. Compliance With Core Principles 

As noted above, Section 725(c) of the 

Dodd-Frank Act amended Core 

Principle A to require a registered DCO 

to comply with each core principle set 

forth in Section 5b(c)(2) of the CEA and 

any requirement that the Commission 

may impose by rule or regulation 

pursuant to Section 8a(5) of the CEA.28

The Dodd-Frank Act also provides a 

DCO with reasonable discretion to 

establish the manner by which it 

complies with each core principle.29

Proposed §§ 39.10(a) and 39.10(b) 

would codify these provisions, 

respectively. 

Section 725(b) of the Dodd-Frank Act 

amended Section 5b of the CEA to 

require each DCO to designate an 

individual as its CCO, responsible for 

the DCO’s compliance with Commission 

regulations and filing an annual 

compliance report.30 Proposed 

§ 39.10(c)(1) would require each DCO to 

establish the position of CCO and to 

designate a CCO. The proposed 

provision also would require that the 

DCO provide the CCO with the 

responsibility and authority to develop 

and enforce appropriate compliance 

policies and procedures to fulfill his or 

her duties. 

Proposed § 39.10(c)(1)(i) would 

require a DCO to designate an 

individual with the background and 

skills appropriate for fulfilling the 

responsibilities of the position. The rule 

also would require the person to meet 

minimum ethical requirements, and 

prohibit from serving as a CCO any 

person who would be disqualified from 

registration under Sections 8a(2) or 

8a(3) of the CEA.31

The Dodd-Frank Act requires that a 

CCO report directly to the board of 

directors or the senior officer of the 

DCO.32 This requirement is codified as 

proposed § 39.10(c)(1)(ii). The proposed 

rule also would require the board of 

directors or the senior officer to approve 

the compensation of the CCO. 

Proposed § 39.10(c)(1)(iii) would 

require a CCO to meet with the board of 

directors or the senior officer at least 

once a year to discuss the effectiveness 

of the DCO’s compliance policies and 


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33 In addition to the board of directors or the 

senior officer, under the Commission’s proposed 

§ 39.13(g), a DCO’s Risk Management Committee 

would be required to review the performance of the 

CCO and make recommendations to the board. See 

75 FR at 63750. 

34The notification requirement is being proposed 

by the Commission in a separate notice of proposed 

rulemaking. 

35See Section 5b(i)(2) of the CEA; 7 U.S.C. 7a– 

1(i)(2). 

36The Commission notes, however, that the first 

statutory requirement identified under the heading 

‘‘duties,’’ i.e., that the CCO report to the board of 

directors or the senior officer, is codified in 

proposed § 39.10(c)(1)(ii). 

37See Section 5b(i)(3) of the CEA; 7 U.S.C. 7a– 

1(i)(3). 

38See also § 1.10(b)(2)(ii) (90-day time period for 

an FCM to submit the Form 1–FR–FCM to the 

Commission). 

39The annual reporting requirement of proposed 

§ 39.19(c)(3)(ii) is being proposed by the 

Commission in a separate notice of proposed 

rulemaking. 

40See Section 5b(i)(3)(B)(ii) of the CEA; 7 U.S.C. 

7a-1(i)(3)(B)(ii). 

procedures, as well as the 

administration of those policies and 

procedures by the CCO. The meeting 

would afford an opportunity for the 

CCO and the board of directors or the 

senior officer to speak freely about any 

compliance issues of concern, and 

would further the Commission’s goal of 

promoting self-assessment and internal 

oversight of compliance matters. The 

Commission notes that the requirement 

for an annual discussion would not 

preclude the board of directors or the 

senior officer from meeting with the 

CCO more frequently.33

Proposed § 39.10(c)(1)(iv) would 

require that a change in the designation 

of the individual serving as the CCO be 

reported to the Commission, in 

accordance with the requirements of 

proposed § 39.19(c)(4)(xi).34

The Dodd-Frank Act sets forth the 

duties of a CCO,35 and proposed 

§ 39.10(c)(2) codifies those duties in 

paragraphs (i)–(vi).36 The Commission 

believes the statutory duties are largely 

self-explanatory, but in the interest of 

clarity, those duties are briefly 

discussed. 

Proposed § 39.10(c)(2)(i) would 

require the CCO to review the DCO’s 

compliance with each core principle. 

Under proposed § 39.10(c)(2)(ii), in 

consultation with the board of directors 

or the senior officer, the CCO also 

would be required to resolve any 

conflicts of interest that may arise. 

These conflicts would include: Conflicts 

between business considerations and 

compliance requirements; conflicts 

between the consideration to restrict 

clearing membership to certain types of 

clearing members and the requirement 

that a DCO provide fair and open access; 

conflicts between and among different 

categories of clearing members of the 

DCO; conflicts between a DCO’s clearing 

members and its management; and 

conflicts between a DCO’s management 

and members of the board of directors. 

Proposed §§ 39.10(c)(2)(iii) and (iv) 

would require the CCO to administer 

each policy and procedure that is 

required under Section 5b of the CEA, 

and ensure compliance with the CEA 

and Commission regulations relating to 

agreements, contracts, or transactions, 

and with Commission regulations under 

Section 5b of the CEA, respectively. 

Under proposed § 39.10(c)(2)(v), the 

CCO also would establish procedures 

for the remediation of noncompliance 

issues identified by the CCO through a 

compliance office review, look-back, 

internal or external audit finding, selfreported error, or validated complaint. 

Finally, under proposed 

§ 39.10(c)(2)(vi), a CCO would establish 

and follow appropriate procedures for 

the handling, management response, 

remediation, retesting, and closing of 

noncompliance issues. 

In addition to the duties set forth in 

the Dodd-Frank Act, proposed 

§ 39.10(c)(2)(vii) would require a CCO to 

develop a compliance manual designed 

to promote compliance with the 

applicable laws, rules, and regulations, 

and a code of ethics designed to prevent 

ethical violations and to promote ethical 

conduct. The Commission believes that 

these tools are essential to a CCO’s 

ability to fulfill the duties imposed by 

the CEA and the Commission’s 

regulations. 

Section 725(b) of the Dodd-Frank Act 

requires a CCO to prepare an annual 

report that describes the DCO’s 

compliance with the CEA, regulations 

promulgated under the CEA, and each 

policy and procedure of the DCO, 

including the code of ethics and 

conflicts of interest policies.37 Proposed 

§ 39.10(c)(3) would codify these 

requirements. 

Proposed § 39.10(c)(4) would 

establish requirements for submission of 

the annual report to the Commission. 

The rule would require the CCO to 

provide the annual report to the board 

or the senior officer for review prior to 

submitting the annual report to the 

Commission, and it would require the 

DCO to record such action in board 

minutes or otherwise, as evidence of 

compliance with this requirement. The 

proposed rule would further specify that 

the annual report be electronically 

provided to the Commission not more 

than 90 days after the end of the DCO’s 

fiscal year,38 and that it be submitted 

concurrently with the fiscal year-end 

audited financial statement that is 

required to be furnished to the 

Commission pursuant to proposed 

§ 39.19(c)(3)(ii).39

The Dodd-Frank Act requires the 

CCO’s annual report to include a 

certification that, under penalty of law, 

the compliance report is accurate and 

complete.40 Proposed § 39.10(c)(4)(ii) 

would codify this certification 

requirement. 

Proposed § 39.10(c)(4)(iii) would 

require a DCO to promptly submit an 

amended annual report if material errors 

or omissions in the report are identified 

after the report is submitted to the 

Commission. If a DCO is unable to 

submit an annual report within 90 days 

after the end of the DCO’s fiscal year, 

proposed § 39.10(c)(4)(iv) would permit 

the DCO to request that the Commission 

extend the deadline, provided the 

DCO’s failure to submit the report in a 

timely manner could not be avoided 

without unreasonable effort or expense. 

Extensions of the deadline would be 

granted at the discretion of the 

Commission. 

Proposed § 39.10(c)(5) would require 

a DCO to maintain: (i) A copy of the 

policies and procedures adopted in 

furtherance of compliance with the CEA 

and Commission regulations; (ii) copies 

of materials, including written reports 

provided to the board of directors or the 

senior officer in connection with review 

of the annual report; and (iii) any 

records relevant to the DCO’s annual 

report, including work papers and 

financial data. These records are 

designed to provide Commission staff 

with a basis upon which to determine 

whether the DCO has complied with the 

applicable Commission regulations and 

DCO rules and policies. The DCO would 

be required to maintain these records in 

accordance with § 1.31 and proposed 

§ 39.20 of the Commission’s regulations. 

The Commission specifically seeks 

comment on the degree of flexibility in 

the reporting structure for CCOs that 

should be afforded under the proposed 

rules. Specifically, the Commission 

requests comment on: (i) Whether it 

would be more appropriate for a CCO to 

report to the senior officer or the board 

of directors; (ii) whether the senior 

officer or board of directors generally is 

a stronger advocate of compliance 

matters within an organization; and (iii) 

whether the proposed rules allow for 

sufficient flexibility with regard to a 

DCO’s business structure. 

The Commission also is seeking 

comment on whether additional 

limitations should be placed on the 

persons who may be designated as a 

CCO. For example, should the 


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41Core Principle H provides that: 

Each derivatives clearing organization shall— 

(i) maintain adequate arrangements and resources 

for— 

(I) the effective monitoring and enforcement of 

compliance with the rules of the derivatives 

clearing organization; and 

(II) the resolution of disputes; 

(ii) have the authority and ability to discipline, 

limit, suspend, or terminate the activities of a 

member or participant due to a violation by the 

member or participant of any rule of the derivatives 

clearing organization; and 

(iii) report to the Commission regarding rule 

enforcement activities and sanctions imposed 

against members and participants as provided in 

clause (ii). 

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

1(c)(2)(H). 

42 Id. 

43The Commission is proposing reporting 

requirements in a separate notice of proposed 

rulemaking. 

44See supra Section II.E. of this notice. 

45Core Principle N provides as follows: ‘‘Unless 

necessary or appropriate to achieve the purposes of 

this Act, a derivatives clearing organization shall 

not—(i) adopt any rule or take any action that 

results in any unreasonable restraint of trade; or (ii) 

impose any material anticompetitive burden.’’ See 

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

1(c)(2)(N). See also Section 5(d)(19) of the CEA; 7 

U.S.C. 7(d)(19) (DCM Core Principle 19); and 

proposed § 38.100 of the Commission’s regulations, 

which is being proposed by the Commission in a 

separate notice of proposed rulemaking. 

46Section 5b(c)(2)(R) of the CEA; 7 U.S.C. 7a– 

1(c)(2)(R). 

47See Comm. on Payment & Settlement Sys. & 

Technical Comm. of the Int’l Org. of the Sec. 

Comm’ns CPSS–IOSCO, Recommendations for 

Central Counterparties, at 13, CPSS Publication No. 

64 (Nov. 2004). In November 2004, the CPSS– 

IOSCO Task Force on Securities Settlement Systems 

issued Recommendations for Central 

Counterparties. The CPSS–IOSCO 

recommendations identify legal risk as the risk that 

a CCP’s rules, procedures, and contracts are not 

supported by relevant laws and regulations. Id. at 

9. Under CPSS–IOSCO Recommendation 1, a CCP 

should mitigate legal risk through the development 

of a sound, legal framework. Id. at 4, 13. The 

Commission notes that CPSS and IOSCO are 

currently reviewing this standard and it may be 

revised. 

Commission restrict the CCO position 

from being held by an attorney who 

represents the DCO or its board of 

directors, such as an in-house or general 

counsel? The rationale for such a 

restriction is based on the concern that 

the interests of defending the DCO 

would be in conflict with the duties of 

the CCO. 

The Commission specifically seeks 

comment on whether there is a need for 

a regulation requiring the DCO to 

insulate a CCO from undue pressure and 

coercion. Is it necessary to adopt rules 

to address the potential conflict between 

and among compliance interests, 

commercial interests, and ownership 

interests of a DCO? If there is no need 

for such a provision, how would such 

potential conflicts be addressed? 

The Commission additionally 

requests comment on an appropriate 

effective date for the CCO requirements. 

In particular, for a DCO that does not 

currently have an employee designated 

to perform the function of a CCO, what 

is a reasonable time frame for hiring a 

CCO and for implementing the required 

compliance policies and procedures set 

forth in § 39.10? 

F. Rule Enforcement Requirements 

Section 725(c) of the Dodd-Frank Act 

amended Core Principle H, Rule 

Enforcement, to require a DCO to 

maintain adequate arrangements and 

resources for the effective monitoring 

and enforcement of compliance with its 

rules and resolution of disputes.41

Proposed § 39.17(a)(1) would codify 

these requirements. Section 725(c) of 

the Dodd-Frank Act also required a DCO 

to have the authority and ability to 

discipline, limit, suspend, or terminate 

the activities of a member or participant 

due to a violation by the member or 

participant of any rule of the derivatives 

clearing organization.42 Proposed 

§ 39.17(a)(2) would codify this 

requirement. Additionally, pursuant to 

the reporting requirement of Core 

Principle H, proposed § 39.17(a)(3) 

would cross-reference the proposed rule 

enforcement reporting requirements of 

proposed § 39.19(c)(4)(xiii).43

Under proposed § 39.17(b), the board 

of directors of a DCO may delegate to 

the DCO’s Risk Management Committee 

responsibility for compliance with the 

requirements of paragraph (a) of § 39.17, 

unless the responsibilities are otherwise 

required to be carried out by the CCO. 

Finally, proposed § 39.17(c) would 

cross-reference proposed 

§ 39.10(c)(2)(ii), which provides the 

CCO with the duty to resolve conflicts 

of interest.44

G. Antitrust Considerations 

Section 725(c) of the Dodd-Frank Act 

amended Core Principle N, Antitrust 

Considerations, conforming the 

standard for DCOs to the standard 

applied to DCMs under Core Principle 

19.45 Proposed § 39.23 would codify 

Core Principle N as amended by the 

Dodd-Frank Act. The Commission is 

taking the same approach with respect 

to DCM Core Principle 19, but requests 

comment on whether there are 

additional standards or requirements 

that should be imposed to more 

effectively implement the purposes of 

DCO Core Principle N. 

H. Legal Risk Requirements 

Section 725(c) of the Dodd-Frank Act 

set forth a new Core Principle R, Legal 

Risk. Pursuant to Core Principle R, 

‘‘[e]ach derivatives clearing organization 

shall have a well-founded, transparent, 

and enforceable legal framework for 

each aspect of the activities of the 

derivatives clearing organization.’’ 46

This core principle is consistent with 

the recommendations of CPSS–IOSCO, 

which conclude that ‘‘if the legal 

framework [of a central counterparty 

(CCP), in this case, a DCO] is 

underdeveloped, opaque or 

inconsistent, the resulting legal risk 

could undermine the [CCP]’s ability to 

operate effectively,’’ and increase the 

likelihood that market participants may 

suffer a loss because the CCP’s rules, 

procedures, and contracts that support 

its activities, property rights, and other 

interests are not supported by relevant 

laws and regulations.47

Proposed § 39.27(a) would address 

these concerns, in part, by requiring a 

DCO to be duly organized, legally 

authorized to conduct clearing business 

in the relevant jurisdiction, and to 

remain in good standing at all times. 

The proposed rule also would require a 

DCO that provides clearing services 

outside the United States to be duly 

organized to conduct business in the 

relevant jurisdiction, to remain in good 

standing at all times, and to be 

authorized by the appropriate foreign 

licensing authority. 

Proposed § 39.27 would set forth 

requirements for various activities of a 

DCO, as applicable. Proposed 

§ 39.27(b)(1) would require the legal 

framework of a DCO to provide for the 

DCO to act as a counterparty, including 

novation. Through novation, the DCO is 

substituted as the counterparty to both 

the buyer and the seller of the original 

contract. 

Proposed § 39.27(b)(2) would require 

the legal framework of a DCO to address 

netting arrangements. Netting reduces 

the number and value of deliveries and 

payments needed to settle a set of 

transactions and reduces the potential 

losses to a DCO in the event of a 

clearing member’s default. 

Proposed § 39.27(b)(3) would require 

the legal framework to provide for the 

DCO’s interest in collateral. Generally, 

collateral arrangements involve either a 

pledge or a title transfer. In either case, 

a DCO should have a high degree of 

assurance that its interest has been 

validly created in the relevant 

jurisdiction, validly perfected, if 

necessary, and is enforceable under 

applicable law. 

Proposed § 39.27(b)(4) would require 

the legal framework to provide for the 

steps that the DCO would take to 

address the default of a clearing 

member, including but not limited to, 

the unimpeded ability to liquidate 


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48 5 U.S.C. 601 et seq. 

49 ‘‘Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act,’’ 47 FR 18618 (Apr. 30, 

1982). 

50See ‘‘A New Regulatory Framework for Clearing 

Organizations,’’ 66 FR 45604, 45609 (Aug. 29, 2001). 

51 44 U.S.C. 3501 et seq. 

collateral and close out or transfer 

positions in a timely manner. A DCO 

must act quickly in the event of a 

clearing member’s default, and 

ambiguity over the enforceability of its 

procedures could delay, and possibly 

prevent altogether, a DCO from taking 

actions that fulfill its obligations to nondefaulting clearing members or 

minimize its potential losses. 

A critical issue in a DCO’s settlement 

arrangements is the timing of the 

finality of funds transfers between the 

DCO’s settlement accounts and the 

accounts of its clearing members. To 

address this, proposed § 39.27(b)(5) 

would require the legal framework of a 

DCO to ensure that its settlement bank 

arrangements provide that funds 

transfers are final, i.e., irrevocable and 

unconditional, when the DCO’s 

accounts are debited and credited. 

In circumstances where a DCO crosses 

borders through linkages, remote 

clearing members, or the taking of 

collateral, the rules governing the DCO’s 

activities should clearly indicate the law 

that is intended to apply to each aspect 

of a DCO’s operations. Potential 

conflicts of law should be identified and 

the DCO should address conflict of law 

issues when there is a difference in the 

substantive laws of the jurisdictions that 

have potential interests in a DCO’s 

activities. Proposed § 39.27(c)(1) would 

require the legal framework of a DCO 

that provides clearing services outside 

the United States to identify and 

address any conflict of law issues and, 

in entering into cross-border 

agreements, to specify a choice of law. 

Proposed § 39.27(c)(2) would require 

a DCO to be able to demonstrate the 

enforceability of its choice of law in 

relevant jurisdictions and that its rules, 

procedures and contracts are 

enforceable in all relevant jurisdictions. 

This could be accomplished, for 

example, by means of a legal opinion. 

The Commission solicits comment as 

to the legal risks addressed in proposed 

§ 39.27 and whether the rule should 

address additional legal risks. 

III. Technical Amendments 

Section 39.3(a) currently requires that 

an organization applying for DCO 

registration must ‘‘file electronically an 

application for registration with the 

Secretary of the Commission at its 

Washington, DC, headquarters.’’ The 

Commission is proposing to revise this 

provision and §§ 39.3(c) (withdrawal of 

an application for registration) and 

39.3(f) (request for vacation of 

registration) by instructing applicants to 

file electronically an application for 

registration with the Secretary in the 

form and manner provided by the 

Commission. Given the shift from 

paper-based to electronic submissions, 

it is no longer necessary to specify the 

location of the Secretary. Moreover, 

because the Commission may modify 

procedures for electronic submissions 

from time to time, the proposed rule 

would not specify filing instructions. 

The Commission’s filing procedures 

will be posted on its Web site and any 

further questions can be addressed to 

the Office of the Secretary. 

The Commission also is proposing 

conforming amendments to paragraphs 

(a)(1), (c), (e), and (g) of § 39.3, to reflect 

the deletion of current paragraphs (a)(3) 

and (b) related to the elimination of the 

90-day expedited review period for DCO 

applications. 

In addition, the Commission is 

proposing amendments to the 

delegation provision of current 

paragraph (g), to correct the reference to 

‘‘delegates,’’ by substituting the word 

‘‘designee,’’ in reference to action taken 

by the Director of the Division of 

Clearing and Intermediary Oversight or 

the Director’s designee with the 

concurrence of the General Counsel or 

the General Counsel’s designee. 

The Commission is proposing to 

revise § 39.4(c)(2) to remove the 

reference to accepting for clearing a new 

product that is not traded on a 

‘‘derivatives transaction execution 

facility’’ and inserting in its place a 

reference to a ‘‘swap execution facility.’’ 

IV. Effective Date 

The Commission is proposing that the 

effective date for the proposed 

regulations, except those relating to the 

CCO under proposed § 39.3(c), be 30 

days after publication of final rules in 

the Federal Register. The Commission 

is proposing that the requirements for 

CCOs become effective not more than 

180 days from the date the final rules 

are published in the Federal Register. 

The Commission believes that this 

would give DCOs adequate time to 

implement the CCO regulations which, 

depending on the DCO, might include 

hiring a CCO and putting into place a 

compliance program. The Commission 

requests comment on whether the 

proposed effective dates are appropriate 

and, if not, the Commission further 

requests comment on possible 

alternative effective dates and the basis 

for any such alternative dates. 

V. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 48 requires Federal agencies, in 

promulgating regulations, to consider 

the impact of those regulations on small 

businesses. The regulations adopted 

herein will affect DCOs. The 

Commission has previously established 

certain definitions of ‘‘small entities’’ to 

be used by the Commission in 

evaluating the impact of its regulations 

on small entities in accordance with the 

RFA,49 and it has previously determined 

that DCOs are not small entities for the 

purpose of the RFA.50 Accordingly, 

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

Chairman, on behalf of the Commission, 

certifies that the proposed regulations 

will not have a significant economic 

impact on a substantial number of small 

entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(‘‘PRA’’) 51 imposes certain requirements 

on Federal agencies in connection with 

their conducting or sponsoring any 

collection of information as defined by 

the PRA. An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a currently valid 

control number. OMB has not yet 

assigned a control number to the new 

collection. 

This proposed rulemaking would 

result in new collection of information 

requirements within the meaning of the 

PRA. The Commission therefore is 

submitting this proposal to the Office of 

Management and Budget (‘‘OMB’’) for 

review. If adopted, responses to this 

collection of information would be 

mandatory. 

The Commission will protect 

proprietary information according to the 

Freedom of Information Act and 17 CFR 

part 145, ‘‘Commission Records and 

Information.’’ In addition, Section 

8(a)(1) of the Act strictly prohibits the 

Commission, unless specifically 

authorized by the Act, from making 

public ‘‘data and information that would 

separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ The Commission also is 

required to protect certain information 

contained in a government system of 

records according to the Privacy Act of 

1974, 5 U.S.C. 552a. 

1. Information Provided by Reporting 

Entities/Persons 

Section 725 of the Dodd-Frank Act 

and proposed regulations require each 


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52 7 U.S.C. 19(a). 

respondent to file an annual report with 

the Commission. Commission staff 

estimates that each respondent would 

expend 40–80 hours to prepare each 

annual report, depending on the size of 

the DCO. Commission staff estimates 

that respondents could expend $4,000 

to $8,000 annually, based on an hourly 

cost of $100, to comply with the 

proposed regulations. 

The proposed regulations also require 

each respondent to retain certain 

records. Each respondent must retain: 

(1) A copy of the policies and 

procedures adopted in furtherance of 

compliance with the CEA; (2) copies of 

materials, including written reports 

provided to the board of directors in 

connection with the board’s review of 

the annual report; and (3) any records 

relevant to the annual report, including, 

but not limited to, work papers and 

other documents that form the basis of 

the report, and memoranda, 

correspondence, other documents, and 

records that are (a) created, sent or 

received in connection with the annual 

report and (b) contain conclusions, 

opinions, analyses, or financial data 

related to the annual report. Staff 

believes the cost of keeping these 

electronic documents will not exceed 

more than $1000 annually. 

2. Information Collection Comments 

The Commission invites the public 

and other federal agencies to comment 

on any aspect of the reporting and 

recordkeeping burdens discussed above. 

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

Commission solicits comments in order 

to: (i) Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed collection 

of information; (iii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (iv) minimize the 

burden of the collection of information 

on those who are to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

Comments may be submitted directly 

to the Office of Information and 

Regulatory Affairs, by fax at (202) 395– 

6566 or by e-mail at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted comments so that they can be 

summarized and addressed in the final 

rule. Refer to the Addresses section of 

this notice of proposed rulemaking for 

comment submission instructions to the 

Commission. A copy of the supporting 

statements for the collections of 

information discussed above may be 

obtained by visiting RegInfo.gov. OMB 

is required to make a decision 

concerning the collection of information 

between 30 and 60 days after 

publication of this release. 

Consequently, a comment to OMB is 

most assured of being fully effective if 

received by OMB (and the Commission) 

within 30 days after publication of this 

notice of proposed rulemaking. 

C. Cost-Benefit Analysis 

Section 15(a) of the CEA 52 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

a rulemaking under the CEA. By its 

terms, Section 15(a) does not require the 

Commission to quantify the costs and 

benefits of a rule or to determine 

whether the benefits of the rulemaking 

outweigh its costs; rather, it requires 

that the Commission ‘‘consider’’ the 

costs and benefits of its action. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

rule is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

CEA. 

Summary of Proposed Requirements 

Proposed amendments to part 39 of 

the Commission’s regulations would 

establish the regulatory standards for 

compliance with DCO core principles 

regarding compliance, rule enforcement, 

antitrust, and legal risk, as well as CCO 

requirements set forth in Section 5b of 

the CEA. The proposed amendments to 

part 39 also would revise procedures for 

DCO applications, clarify procedures for 

the transfer of a DCO registration, and 

add requirements for approval of DCO 

rules establishing a portfolio margining 

program for customer accounts carried 

by an FCM/BD. 

Costs 

The Commission has determined that 

the cost to market participants and the 

public if these rules are not adopted 

could be substantial. Significantly, 

without these rules to promote a culture 

of institutional ethics and compliance, 

sound risk management and the 

financial integrity of the futures markets 

would not be strengthened, to the 

detriment of market participants and the 

public. Moreover, competitiveness 

would be affected without the 

prohibition against DCO rules and other 

actions that would result in 

unreasonable restraints of trade or 

material, anticompetitive burdens. 

Benefits 

With respect to benefits, the 

Commission has determined that the 

benefits of the proposed rules are many 

and substantial. DCO registration 

applications will be processed 

transparently and efficiently, making 

clearing services available to the futures 

and swap markets, in order to protect 

the integrity of these markets through 

the sound risk management practices 

associated with clearing and the 

efficiency that competition between 

clearinghouses will foster. The 

protection of market participants, 

financial integrity of the markets, and 

sound risk management will further be 

promoted by the compliance of each 

DCO with the rules and standards that 

are being adopted to implement the core 

principles, notably those associated 

with conflicts of interest, portfolio 

margining, financial safeguards, and 

legal certainty regarding margin, 

member defaults, settlement and funds 

transfers, and conflicts of law. 

Public Comment. The Commission 

invites public comment on its 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 

17 CFR Part 1 

Definitions, Commodity futures, and 

Swaps. 

17 CFR Part 39 

Definitions, Commodity futures, 

Reporting and recordkeeping 

requirements, and Swaps. 

In light of the foregoing, the 

Commission hereby proposes to amend 

parts 1 and 39 of Title 17 of the Code 

of Federal Regulations as follows: 


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PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

Authority and Issuance 

1. The authority for part 1 is revised 

to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1, 

16, 16a, 19, 21, 23, and 24, as amended by 

the Dodd-Frank Wall Street Reform and 

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

124 Stat. 1376 (2010). 

2. Amend § 1.3 by revising paragraphs 

(c), (d), and (k), and adding paragraphs 

(jjj), (kkk), (lll), (mmm), (nnn), and (ooo) 

to read as follows: 

§ 1.3 Definitions. 

* * * * * 

(c) Clearing member. This term means 

any person that has clearing privileges 

such that it can process, clear and settle 

trades through a derivatives clearing 

organization on behalf of itself or others. 

The derivatives clearing organization 

need not be organized as a membership 

organization. 

(d) Clearing organization or 

derivatives clearing organization. This 

term means a clearinghouse, clearing 

association, clearing corporation, or 

similar entity, facility, system, or 

organization that, with respect to an 

agreement, contract, or transaction— 

(1) Enables each party to the 

agreement, contract, or transaction to 

substitute, through novation or 

otherwise, the credit of the derivatives 

clearing organization for the credit of 

the parties; 

(2) Arranges or provides, on a 

multilateral basis, for the settlement or 

netting of obligations resulting from 

such agreements, contracts, or 

transactions executed by participants in 

the derivatives clearing organization; or 

(3) Otherwise provides clearing 

services or arrangements that mutualize 

or transfer among participants in the 

derivatives clearing organization the 

credit risk arising from such agreements, 

contracts, or transactions executed by 

the participants. 

(4) Exclusions. The terms clearing 

organization and derivatives clearing 

organization do not include an entity, 

facility, system, or organization solely 

because it arranges or provides for— 

(i) Settlement, netting, or novation of 

obligations resulting from agreements, 

contracts or transactions, on a bilateral 

basis and without a central 

counterparty; 

(ii) Settlement or netting of cash 

payments through an interbank payment 

system; or 

(iii) Settlement, netting, or novation of 

obligations resulting from a sale of a 

commodity in a transaction in the spot 

market for the commodity. 

* * * * * 

(k) Customer; commodity customer; 

swap customer. These terms have the 

same meaning and refer to a customer 

trading in any commodity named in the 

definition of commodity herein, or in 

any swap as defined in section 1a(47) of 

the Act: Provided, however, an owner or 

holder of a proprietary account as 

defined in paragraph (y) of this section 

shall not be deemed to be a customer 

within the meaning of section 4d of the 

Act, the regulations that implement 

sections 4d and 4f of the Act and § 1.35, 

and such an owner or holder of such a 

proprietary account shall otherwise be 

deemed to be a customer within the 

meaning of the Act and §§ 1.37 and 1.46 

and all other sections of these rules, 

regulations, and orders which do not 

implement sections 4d and 4f of the Act. 

* * * * * 

(jjj) Clearing initial margin. This term 

means initial margin posted by a 

clearing member with a derivatives 

clearing organization. 

(kkk) Customer initial margin. This 

term means initial margin posted by a 

customer with a futures commission 

merchant, or by a non-clearing member 

futures commission merchant with a 

clearing member. 

(lll) Initial margin. This term means 

money, securities, or property posted by 

a party to a futures, option, or swap as 

performance bond to cover potential 

future exposures arising from changes in 

the market value of the position. 

(mmm) Margin call. This term means 

a request from a futures commission 

merchant to a customer to post customer 

initial margin; or a request by a 

derivatives clearing organization to a 

clearing member to post clearing initial 

margin or variation margin. 

(nnn) Spread margin. This term 

means reduced initial margin that takes 

into account correlations between 

certain related positions held in a single 

account. 

(ooo) Variation margin. This term 

means a payment made by a party to a 

futures, option, or swap to cover the 

current exposure arising from changes 

in the market value of the position since 

the trade was executed or the previous 

time the position was marked to market. 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

Authority and Issuance 

3. The authority for part 39 is revised 

to read as follows: 

Authority: 7 U.S.C. 2, 5, 6, 6d, 7a–1,7a– 

2, and 7b as amended by the Dodd-Frank 

Wall Street Reform and Consumer Protection 

Act, Pub. L. 111–203, 124 Stat. 1376 (2010). 

4. Amend § 39.1 by: 

a. Redesignating the existing text as 

paragraph (a); 

b. Adding a new heading to newly 

designated paragraph (a); and 

c. Adding a new paragraph (b) to read 

as follows: 

§ 39.1 Scope and Definitions. 

(a) Scope. * * * 

(b) Definitions. For the purposes of 

this part, 

Back test means a test that compares 

a derivatives clearing organization’s 

initial margin requirements with 

historical price changes to determine 

the extent of actual margin coverage. 

Compliance policies and procedures 

means all policies, procedures, codes, 

including a code of ethics, safeguards, 

rules, programs, and internal controls 

that are required to be adopted or 

established by a derivatives clearing 

organization pursuant to the Act, 

Commission regulations, or orders, or 

that otherwise facilitate compliance 

with the Act and Commission 

regulations. 

Customer account or customer origin 

means a clearing member’s account held 

on behalf of customers, as defined in 

§ 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 


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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 paragraph 

(a)(1), removing paragraph (a)(3), 

removing and reserving paragraph (b), 

revising paragraphs (c), (e), (f), and 

(g)(1), and adding paragraph (h) to read 

as follows: 

§ 39.3 Procedures for registration. 

(a) * * * 

(1) An organization desiring to be 

registered as a derivatives clearing 

organization shall file electronically an 

application for registration with the 

Secretary of the Commission in the form 

and manner provided by the 

Commission. The Commission will 

review the application for registration as 

a derivatives clearing organization 

pursuant to the 180-day timeframe and 

procedures specified in section 6(a) of 

the Act. The Commission may approve 

or deny the application or, if deemed 

appropriate, register the applicant as a 

derivatives clearing organization subject 

to conditions. 

* * * 

(b) [Reserved]. 

(c) Withdrawal of application for 

registration. An applicant for 

registration may withdraw its 

application submitted pursuant to 

paragraph (a) of this section by filing 

electronically such a request with the 

Secretary of the Commission in the form 

and manner provided by the 

Commission. Withdrawal of an 

application for registration shall not 

affect any action taken or to be taken by 

the Commission based upon actions, 

activities, or events occurring during the 

time that the application for registration 

was pending with the Commission. 

* * * * * 

(e) Reinstatement of dormant 

registration. Before listing or relisting 

contracts for clearing, a dormant 

registered derivatives clearing 

organization as defined in § 40.1 of this 

chapter must reinstate its registration 

under the procedures of paragraph (a) of 

this section; provided, however, that an 

application for reinstatement may rely 

upon previously submitted materials 

that still pertain to, and accurately 

describe, current conditions. 

(f) Request for vacation of registration. 

A registered derivatives clearing 

organization may vacate its registration 

under section 7 of the Act by filing 

electronically such a request with the 

Secretary of the Commission in the form 

and manner provided by the 

Commission. Vacation of registration 

shall not affect any action taken or to be 

taken by the Commission based upon 

actions, activities or events occurring 

during the time that the facility was 

registered by the Commission. 

(g) * * * 

(1) The Commission hereby delegates, 

until it orders otherwise, to the Director 

of the Division of Clearing and 

Intermediary Oversight or the Director’s 

designee, with the concurrence of the 

General Counsel or the General 

Counsel’s designee, the authority to 

notify an applicant seeking designation 

under section 6(a) of the Act that the 

application is materially incomplete and 

the running of the 180-day period is 

stayed. 

* * * * * 

(h) Request for transfer of registration 

and open interest. (1) In anticipation of 

a corporate change that will result in the 

transfer of all or substantially all of a 

derivatives clearing organization’s assets 

to another legal entity, the derivatives 

clearing organization shall submit a 

request for approval to transfer the 

derivatives clearing organization’s 

registration and positions comprising 

open interest for clearing and 

settlement. 

(2) Timing of submission and other 

procedural requirements. (i) The request 

shall be submitted no later than three 

months prior to the anticipated 

corporate change, or as otherwise 

permitted under § 39.19(c)(4)(x)(C) of 

this part. 

(ii) The derivatives clearing 

organization shall submit a request for 

transfer by filing electronically such a 

request with the Secretary of the 

Commission in the form and manner 

provided by the Commission. 

(iii) The derivatives clearing 

organization shall submit a confirmation 

of change report pursuant to 

§ 39.19(c)(4)(x)(D) of this part. 

(3) Required information. The request 

shall include the following: 

(i) The underlying agreement that 

governs the corporate change; 

(ii) A narrative description of the 

corporate change, including the reason 

for the change and its impact on the 

derivatives clearing organization’s 

financial resources, governance, and 

operations, and its impact on the rights 

and obligations of clearing members and 

market participants holding the 

positions that comprise the derivatives 

clearing organization’s open interest; 

(iii) A discussion of the transferee’s 

ability to comply with the Act, 

including the core principles applicable 

to derivatives clearing organizations, 

and the Commission’s regulations 

thereunder; 

(iv) The governing documents of the 

transferee, including but not limited to 

articles of incorporation and bylaws; 

(v) The transferee’s rules marked to 

show changes from the current rules of 

the derivatives clearing organization; 

(vi) A list of contracts, agreements, 

transactions or swaps for which the 

DCO requests transfer of open interest; 

(vii) A representation by the 

derivatives clearing organization that it 

is in compliance with the Act, including 

the core principles applicable to 

derivatives clearing organizations, and 

the Commission’s regulations 

thereunder; and 

(viii) A representation by the 

transferee that it understands that the 

derivatives clearing organization is a 

regulated entity that must comply with 

the Act, including the core principles 

applicable to derivatives clearing 

organizations, and the Commission’s 

regulations thereunder, in order to 

maintain its registration as a derivatives 

clearing organization; and further, that 

the transferee will continue to comply 

with all self-regulatory requirements 

applicable to a derivatives clearing 

organization under the Act and the 

Commission’s regulations thereunder. 

(4) Commission determination. The 

Commission will review a request as 

soon as practicable, and based on the 

Commission’s determination as to the 

transferee’s ability to continue to 

operate the DCO in compliance with the 

Act and the Commission’s regulations 

thereunder, such request will be 

approved or denied pursuant to a 

Commission order. 

6. Amend § 39.4 by revising paragraph 

(c)(2) and adding paragraph (e) to read 

as follows: 

§ 39.4 Procedures for implementing 

derivatives clearing organization rules and 

clearing new products. 

* * * * * 

(c) * * * 

(2) Acceptance of certain new 

products for clearing. A derivatives 

clearing organization that accepts for 

clearing a new product that is not traded 

on a designated contract market or a 

registered swap execution facility must 

submit to the Commission any rules 

establishing the terms and conditions of 

the product that make it acceptable for 

clearing with a certification that the 

clearing of the product and the rules 

and terms and conditions comply with 

the Act and the rules thereunder 


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pursuant to the procedures of § 40.2 of 

this chapter. 

* * * * * 

(e) Holding securities in a futures 

portfolio margining account. A 

derivatives clearing organization 

seeking to provide a portfolio margining 

program under which securities would 

be held in a futures account as defined 

in § 1.3(vv) of this chapter, shall submit 

rules to implement such portfolio 

margining program for Commission 

approval in accordance with § 40.5 of 

this chapter. Concurrent with the 

submission of such rules for 

Commission approval, the derivatives 

clearing organization shall petition the 

Commission for an order under section 

4d of the Act. 

7. Add § 39.10 to read as follows: 

§ 39.10 Compliance with Core Principles. 

(a) To be registered and to maintain 

registration as a derivatives clearing 

organization, a derivatives clearing 

organization shall comply with each 

core principle set forth in section 

5b(c)(2) of the Act and any requirement 

that the Commission may impose by 

rule or regulation pursuant to section 

8a(5) of the Act; and 

(b) Subject to any rule or regulation 

prescribed by the Commission, a 

registered derivatives clearing 

organization shall have reasonable 

discretion in establishing the manner by 

which it complies with each core 

principle. 

(c) Chief Compliance Officer. (1) 

Designation. Each derivatives clearing 

organization shall establish the position 

of chief compliance officer, designate an 

individual to serve as the chief 

compliance officer, and provide the 

chief compliance officer with the full 

responsibility and authority to develop 

and enforce, in consultation with the 

board of directors or the senior officer, 

appropriate compliance policies and 

procedures, as defined in § 39.1(b), to 

fulfill the duties set forth in the Act and 

Commission regulations. 

(i) The individual designated to serve 

as chief compliance officer shall have 

the background and skills appropriate 

for fulfilling the responsibilities of the 

position. No individual who would be 

disqualified from registration under 

sections 8a(2) or 8a(3) of the Act may 

serve as a chief compliance officer. 

(ii) The chief compliance officer shall 

report to the board of directors or the 

senior officer of the derivatives clearing 

organization. The board of directors or 

the senior officer shall approve the 

compensation of the chief compliance 

officer. 

(iii) The chief compliance officer shall 

meet with the board of directors or the 

senior officer at least once a year to 

discuss the effectiveness of the 

compliance policies and procedures, as 

well as the administration of those 

policies and procedures by the chief 

compliance officer. 

(iv) A change in the designation of the 

individual serving as the chief 

compliance officer of the derivatives 

clearing organization shall be reported 

to the Commission in accordance with 

the requirements of § 39.19(c)(4)(xi) of 

this part. 

(2) Chief Compliance Officer Duties. 

The chief compliance officer’s duties 

shall include, but are not limited to: 

(i) Reviewing the derivatives clearing 

organization’s compliance with the core 

principles set forth in section 5b of the 

Act (7 U.S.C. 7a–1), and the 

Commission’s regulations thereunder; 

(ii) In consultation with the board of 

directors or the senior officer, resolving 

any conflicts of interest that may arise; 

(iii) Administering each policy and 

procedure that is required under section 

5b of the Act (7 U.S.C. 7a–1); 

(iv) Ensuring compliance with the Act 

and Commission regulations relating to 

agreements, contracts, or transactions, 

and with Commission regulations 

prescribed under section 5b of the Act 

(7 U.S.C. 7a–1); 

(v) Establishing procedures for the 

remediation of noncompliance issues 

identified by the chief compliance 

officer through any compliance office 

review, look-back, internal or external 

audit finding, self-reported error, or 

validated complaint; 

(vi) Establishing and following 

appropriate procedures for the handling, 

management response, remediation, 

retesting, and closing of noncompliance 

issues; and 

(vii) Establishing a compliance 

manual designed to promote 

compliance with the applicable laws, 

rules, and regulations and a code of 

ethics designed to prevent ethical 

violations and to promote ethical 

conduct. 

(3) Annual report. The chief 

compliance officer shall, not less than 

annually, prepare and sign a written 

report that covers the most recently 

completed fiscal year of the derivatives 

clearing organization, and provide the 

annual report to the board of directors 

or the senior officer. The annual report 

shall, at a minimum: 

(i) Contain a description of the 

derivatives clearing organization’s 

compliance with respect to the Act and 

Commission regulations, and each of the 

derivative clearing organization’s 

compliance policies and procedures, 

including the code of ethics and conflict 

of interest policies; 

(ii) Review each core principle, and 

with respect to each: 

(A) Identify the compliance policies 

and procedures that ensure compliance 

with the core principle; 

(B) Provide an assessment as to the 

effectiveness of these policies and 

procedures; 

(C) Discuss areas for improvement, 

and recommend potential or prospective 

changes or improvements to the DCO’s 

compliance program and resources 

allocated to compliance; 

(iii) List any material changes to 

compliance policies and procedures 

since the last annual report; 

(iv) Describe the financial, 

managerial, and operational resources 

set aside for compliance with the Act 

and Commission regulations; 

(v) Describe any material compliance 

matters, including incidents of 

noncompliance, since the date of the 

last annual report and describe the 

corresponding action taken; and 

(vi) Delineate the roles and 

responsibilities of the DCO’s board of 

directors, relevant board committees, 

and staff in addressing any conflict of 

interest, including any necessary 

coordination with, or notification of, 

other entities, including regulators. 

(4) Submission of Annual Report to 

the Commission. (i) Prior to submitting 

the annual report to the Commission, 

the chief compliance officer shall 

provide the annual report to the board 

of directors or the senior officer of the 

derivatives clearing organization for 

review. Submission of the report to the 

board of directors or the senior officer 

shall be recorded in the board minutes 

or otherwise, as evidence of compliance 

with this requirement. 

(ii) The annual report shall be 

submitted electronically to the 

Commission not more than 90 days after 

the end of the derivatives clearing 

organization’s fiscal year, concurrently 

with submission of the fiscal year-end 

audited financial statement that is 

required to be furnished to the 

Commission pursuant to § 39.19(c)(3)(ii) 

of this part. The report shall include a 

certification by the chief compliance 

officer that, to the best of his or her 

knowledge and reasonable belief, and 

under penalty of law, the annual report 

is accurate and complete. 

(iii) The derivatives clearing 

organization shall promptly submit an 

amended annual report if material errors 

or omissions in the report are identified 

after submission. An amendment must 

contain the certification required under 

subparagraph (c)(4)(ii) of this section. 

(iv) A derivatives clearing 

organization may request from the 

Commission an extension of time to 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS_PART 1
77588 Federal Register / Vol. 75, No. 238 / Monday, December 13, 2010 / Proposed Rules 

submit its annual report in accordance 

with § 39.19(c)(3) of this part. 

(5) Recordkeeping. (i) The derivatives 

clearing organization shall maintain: 

(A) A copy of the compliance policies 

and procedures, as defined in § 39.1(b), 

and all other policies and procedures 

adopted in furtherance of compliance 

with the Act and Commission 

regulations; 

(B) Copies of materials, including 

written reports provided to the board of 

directors or the senior officer in 

connection with the review of the 

annual report under paragraph (c)(4)(i) 

of this section; and 

(C) Any records relevant to the annual 

report, including, but not limited to, 

work papers and other documents that 

form the basis of the report, and 

memoranda, correspondence, other 

documents, and records that are created, 

sent, or received in connection with the 

annual report and contain conclusions, 

opinions, analyses, or financial data 

related to the annual report. 

(ii) The derivatives clearing 

organization shall maintain records in 

accordance with § 1.31 of this chapter 

and § 39.20 of this part. 

8. Add § 39.17 to read as follows: 

§ 39.17 Rule enforcement requirements. 

(a) In general. Each derivatives 

clearing organization shall: (1) Maintain 

adequate arrangements and resources 

for the effective monitoring and 

enforcement of compliance with the 

rules of the derivatives clearing 

organization and the resolution of 

disputes; 

(2) Have the authority and ability to 

discipline, limit, suspend, or terminate 

the activities of a clearing member due 

to a violation by the clearing member of 

any rule of the derivatives clearing 

organization; and 

(3) Report to the Commission 

regarding rule enforcement activities 

and sanctions imposed against clearing 

members as provided in paragraph (a) 

(2) of this section, in accordance with 

§ 39.19(c)(4)(xiii) of this part. 

(b) Authority to enforce rules. The 

board of directors of the derivatives 

clearing organization may delegate 

responsibility for compliance with the 

requirements of paragraph (a) of this 

section to the Risk Management 

Committee, unless the responsibilities 

are otherwise required to be carried out 

by the chief compliance officer pursuant 

to the Act or this part. 

9. Add § 39.23 to read as follows: 

§ 39.23 Antitrust considerations. 

Unless necessary or appropriate to 

achieve the purposes of the Act, a 

derivatives clearing organization shall 

not adopt any rule or take any action 

that results in any unreasonable 

restraint of trade, or impose any 

material anticompetitive burden. 

10. Add § 39.27 to read as follows: 

§ 39.27 Legal risk considerations. 

(a) Legal Authorization. A derivatives 

clearing organization shall be duly 

organized, legally authorized to conduct 

business, and remain in good standing 

at all times in the relevant jurisdictions. 

If the derivatives clearing organization 

provides clearing services outside the 

United States, it shall be duly organized 

to conduct business and remain in good 

standing at all times in the relevant 

jurisdictions, and be authorized by the 

appropriate foreign licensing authority. 

(b) Legal framework. A derivatives 

clearing organization shall operate 

pursuant to a well-founded, transparent, 

and enforceable legal framework that 

addresses each aspect of the activities of 

the derivatives clearing organization. As 

applicable, the framework shall provide 

for: 

(1) The derivatives clearing 

organization to act as a counterparty, 

including novation; 

(2) Netting arrangements; 

(3) The derivatives clearing 

organization’s interest in collateral; 

(4) The steps that a derivatives 

clearing organization would take to 

address a default of a clearing member, 

including but not limited to, the 

unimpeded ability to liquidate collateral 

and close out or transfer positions in a 

timely manner; 

(5) Finality of settlement and funds 

transfers that are irrevocable and 

unconditional when effected (when a 

derivatives clearing organization’s 

accounts are debited and credited); and 

(6) Other significant aspects of the 

derivatives clearing organization’s 

operations, risk management 

procedures, and related requirements. 

(c) Conflict of Laws. If a derivatives 

clearing organization provides clearing 

services outside the United States: 

(1) The derivatives clearing 

organization shall identify and address 

any conflict of law issues. The 

derivatives clearing organization’s 

contractual agreements shall specify a 

choice of law. 

(2) The derivatives clearing 

organization shall be able to 

demonstrate the enforceability of its 

choice of law in relevant jurisdictions 

and that its rules, procedures, and 

contracts are enforceable in all relevant 

jurisdictions. 

Issued in Washington, DC, on December 1, 

2010 by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to General Regulations and 

Derivatives Clearing Organizations— 

Commission Voting Summary and 

Statement of Chairman Gary Gensler 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn, Sommers, Chilton and 

O’Malia voted in the affirmative. No 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rule on legal and 

compliance matters for clearinghouses, 

which would revise procedures for 

derivatives clearing organization (DCO) 

applications, clarify procedures for the 

transfer of a DCO registration and add 

requirements for approval of DCO rules for 

portfolio margining of futures and securities 

in a futures account. 

The rule is intended to ensure that 

sufficient resources are devoted to 

compliance with laws and regulations, which 

is a core component of sound risk 

management practices. It would fulfill the 

Dodd-Frank Act’s requirement that each DCO 

have a chief compliance officer who is 

responsible for establishing and 

administering compliance policies, as well as 

resolving certain conflicts of interest. 

Finally, the proposed rulemaking would 

implement DCO Core Principles for 

compliance, rule enforcement, antitrust 

consideration and legal risk, which would 

promote compliance with the CEA and 

would enhance the integrity of the clearing 

and settlement process. 

[FR Doc. 2010–31029 Filed 12–10–10; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 30 

RIN 3038–AC54 

Foreign Futures and Options Contracts 

on a Non-Narrow-Based Security 

Index; Commission Certification 

Procedures 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: Currently, a security index 

futures contract traded on, or subject to 

the rules of, a foreign board of trade may 

be offered or sold to persons located 

within the United States pursuant to a 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS_PART 1