Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 49663 

protective film detachment is no longer 

considered probable. Consequently, 

PIAGGIO AERO INDUSTRIES S.p.A. 

issued Mandatory Service Bulletin No. 

SB 80–0101, Rev. N. ZZ, dated February 

19, 2013, to cancel the previous revision 

of this service bulletin. 

Refer to MCAI European Aviation 

Safety Agency (EASA) AD No.: AD 

Cancellation Notice No.: 2013–0085– 

CN, dated April 8, 2013, and Ente 

Nazionale per l’Aviazione Civile 

(ENAC) AD No. 98–208, dated June 9, 

1998, for related information; both may 

be found in the AD docket on the 

Internet at http://www.regulations.gov. 

You may also refer to Piaggio Service 

Bulletin (Mandatory) No.: SB 80 0101, 

Original Issue: May 6, 1998, for related 

information. For service information 

related to this AD, contact Piaggio Aero 

Industries S.p.A Airworthiness Office; 

Via Luigi Cibrario, 4–16154 Genova– 

Italy; telephone: +39 010 6481353; fax: 

+39 010 6481881; email: 

airworthiness@piaggioaero.it; Internet: 

www.piaggioaero.com/#/en/after-sales/ 

service-support. You may review copies 

of the referenced service information at 

the FAA, Small Airplane Directorate, 

901 Locust, Kansas City, Missouri 

64106. For information on the 

availability of this material at the FAA, 

call (816) 329–4148. 

Comments 

We gave the public the opportunity to 

participate in developing this AD. We 

received no comments on the NPRM (78 

FR 32363, May 30, 2013). 

Conclusion 

We reviewed the relevant data and 

determined that rescinding the AD will 

not affect air safety and will reduce the 

burden on the public. We will rescind 

the AD as proposed except for minor 

editorial changes. We have determined 

that these minor changes: 

• Are consistent with the intent that 

was proposed in the NPRM (78 FR 

32363, May 30, 2013) for correcting the 

unsafe condition; and 

• Do not add any additional burden 

upon the public than was already 

proposed in the NPRM (78 FR 32363, 

May 30, 2013). 

Authority for This Rulemaking 

Title 49 of the United States Code 

specifies the FAA’s authority to issue 

rules on aviation safety. Subtitle I, 

section 106, describes the authority of 

the FAA Administrator. ‘‘Subtitle VII: 

Aviation Programs,’’ describes in more 

detail the scope of the Agency’s 

authority. 

We are issuing this rulemaking under 

the authority described in ‘‘Subtitle VII, 

Part A, Subpart III, Section 44701: 

General requirements.’’ Under that 

section, Congress charges the FAA with 

promoting safe flight of civil aircraft in 

air commerce by prescribing regulations 

for practices, methods, and procedures 

the Administrator finds necessary for 

safety in air commerce. This regulation 

is within the scope of that authority 

because it addresses an unsafe condition 

that is likely to exist or develop on 

products identified in this rulemaking 

action. 

Regulatory Findings 

We determined that this AD will not 

have federalism implications under 

Executive Order 13132. This AD will 

not have a substantial direct effect on 

the States, on the relationship between 

the national Government and the States, 

or on the distribution of power and 

responsibilities among the various 

levels of government. 

For the reasons discussed above, I 

certify this regulation: 

(1) Is not a ‘‘significant regulatory 

action’’ under Executive Order 12866, 

(2) Is not a ‘‘significant rule’’ under 

the DOT Regulatory Policies and 

Procedures (44 FR 11034, February 26, 

1979), 

(3) Will not affect intrastate aviation 

in Alaska, and 

(4) Will not have a significant 

economic impact, positive or negative, 

on a substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act. 

List of Subjects in 14 CFR Part 39 

Air transportation, Aircraft, Aviation 

safety, Incorporation by reference, 

Safety. 

Adoption of the Amendment 

Accordingly, under the authority 

delegated to me by the Administrator, 

the FAA proposes to amend 14 CFR part 

39 as follows: 

PART 39—AIRWORTHINESS 

DIRECTIVES 

■ 1. The authority citation for part 39 

continues to read as follows: 

Authority: 49 U.S.C. 106(g), 40113, 44701. 

§ 39.13 [Amended] 

■ 2. The FAA amends § 39.13 by 

removing AD 99–07–10, Amendment 

39–11095 (64 FR 14824, March 29, 

1999), and adding the following new 

AD: 

AD 99–07–10 R1 PIAGGIO AERO 

INDUSTRIES S.p.A: Amendment 39– 

17538; Docket No. FAA–2013–0472; 

Directorate Identifier 98–CE–097–AD. 

(a) Effective Date 

This airworthiness directive (AD) becomes 

effective September 19, 2013. 

(b) Affected ADs 

This AD rescinds AD 99–07–10, 

Amendment 39–11095 (64 FR 14824, March 

29, 1999). 

(c) Applicability 

This AD applies to PIAGGIO AERO 

INDUSTRIES S.p.A Model P–180 airplanes, 

all serial numbers, certificated in any 

category. 

(d) Subject 

Joint Aircraft System Component (JASC)/ 

Air Transport Association (ATA) of America 

Code 54; Nacelles/Pylons. 

Issued in Kansas City, Missouri, on July 25, 

2013. 

Earl Lawrence, 

Manager, Small Airplane Directorate, Aircraft 

Certification Service. 

[FR Doc. 2013–19816 Filed 8–14–13; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 39 

RIN 3038–AC98 

Enhanced Risk Management 

Standards for Systemically Important 

Derivatives Clearing Organizations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting final regulations to 

implement enhanced risk management 

standards for systemically important 

derivatives clearing organizations that 

include increased financial resources 

requirements for systemically important 

derivatives clearing organizations that 

are involved in activities with a more 

complex risk profile or that are 

systemically important in multiple 

jurisdictions, the prohibited use of 

assessments by systemically important 

derivatives clearing organizations in 

calculating their available default 

resources, and enhanced system 

safeguards for systemically important 

derivatives clearing organizations for 

business continuity and disaster 

recovery (‘‘BC–DR’’). This final rule also 

implements special enforcement 

authority over systemically important 

derivatives clearing organizations 

granted to the Commission under 

section 807(c) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (‘‘Dodd-Frank Act’’). 


tkelley on DSK3SPTVN1PROD with RULES
49664 Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 

1See 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/ucm/ 

groups/public/@swaps/documents/file/ 

hr4173_enrolledbill.pdf. 

2Section 701 of the Dodd-Frank Act. 

3 7 U.S.C. 1 et seq. 

4See Commodity Futures Modernization Act of 

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

5See A New Regulatory Framework for Clearing 

Organizations, 66 FR 45604 (Aug. 29, 2001) (final 

rule) (adopting 17 CFR part 39, app. A). 

6See section 725(c) of the Dodd-Frank Act 

(explicitly giving the Commission authority to 

promulgate rules regarding the core principles 

pursuant to its rulemaking authority under section 

8a(5) of the CEA, 7 U.S.C. 12a(5)). 

7See Derivatives Clearing Organization General 

Provisions and Core Principles, 76 FR 69334 (Nov. 

8, 2011) (final rule). 

8 Id. at 69335. 

9Core Principle B also expressly requires DCOs 

to ‘‘possess financial resources that, at a minimum, 

exceed the total amount that would (I) enable the 

organization to meet its financial obligations to its 

members and participants notwithstanding a 

default by the member or participant creating the 

largest financial exposure for that organization in 

extreme but plausible market conditions; and (II) 

enable the [DCO] to cover operating costs of the 

[DCO] for a period of 1 year (as calculated on a 

rolling basis).’’ Section 5b(c)(2)(B) of the CEA, 7 

U.S.C. 7a–1(c)(2)(B) (emphasis added). 

10 17 CFR 39.11(a)(1) (implementing Core 

Principle B pertaining to financial resources). 

11See 17 CFR 39.11(d)(2)(iii) (requiring a DCO to 

apply a 30 percent haircut to the value of potential 

assessments); see also 17 CFR 39.11(d)(2)(iv) 

(permitting a DCO to count the value of 

assessments, after the 30 percent haircut, to meet 

up to 20 percent of its default obligations). 

12Core Principle I also requires DCOs to 

‘‘establish and maintain a program of risk analysis 

and oversight to identify and minimize sources of 

operational risk through the development of 

appropriate controls and procedures, and 

automated systems, that are reliable, secure, and 

have adequate scalable capacity,’’ and ‘‘periodically 

conduct tests to verify that the backup resources of 

the [DCO] are sufficient to ensure daily processing, 

clearing, and settlement.’’ Section 5b(c)(2)(I) of the 

CEA, 7 U.S.C. 7a–1(c)(2)(I). 

13 17 CFR 39.18(e)(3) (implementing Core 

Principle I pertaining to system safeguards). 

14Section 801 of the Dodd-Frank Act. 

DATES: The rules will become effective 

October 15, 2013. Systemically 

important derivatives clearing 

organizations must comply with § 39.29 

and § 39.30 no later than December 31, 

2013. 

FOR FURTHER INFORMATION CONTACT: 

Ananda Radhakrishnan, Director, 202– 

418–5188, aradhakrishnan@cftc.gov, 

Robert B. Wasserman, Chief Counsel, 

202–418–5092, rwasserman@cftc.gov, 

M. Laura Astrada, Associate Chief 

Counsel, 202–418–7622, 

lastrada@cftc.gov, or Tracey Wingate, 

Special Counsel, 202–418–5319, 

twingate@cftc.gov, Division of Clearing 

and Risk, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Core Principles for DCOs 

B. Designation of Systemically Important 

Derivatives Clearing Organizations 

Under Title VIII of the Dodd-Frank Act 

C. Standards for SIDCOs Under Title VIII 

of the Dodd-Frank Act 

D. Principles for Financial Market 

Infrastructures 

E. Existing Prudential Requirements 

F. Risk Management Standards for SIDCOs 

II. Regulation 39.29 

A. Regulation 39.29(a) 

B. Regulation 39.29(b) 

III. Regulation 39.30 

IV. Regulation 39.31 

V. Compliance Dates 

VI. Consideration of Costs and Benefits 

A. Introduction 

B. Background 

C. Benefits and Costs of the Final Rule 

D. Section 15(a) Factors 

VII. Related Matters 

A. Paperwork Reduction Act 

B. Regulatory Flexibility Act 

VIII. Text of Final Rules 

I. Background 

A. Core Principles for DCOs 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.1 Title VII of 

the Dodd-Frank Act, entitled the ‘‘Wall 

Street Transparency and Accountability 

Act of 2010,’’ 2 amended the Commodity 

Exchange Act (‘‘CEA’’ or the ‘‘Act’’) 3 to 

establish a comprehensive regulatory 

framework for over-the-counter (‘‘OTC’’) 

derivatives, including swaps. 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 mandatory clearing and trade 

execution requirements on clearable 

swap contracts; (3) creating rigorous 

recordkeeping and real-time reporting 

regimes; and (4) enhancing the 

Commission’s rulemaking and 

enforcement authorities with respect to, 

among others, 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 that a 

derivatives clearing organization 

(‘‘DCO’’) must comply with to register 

and maintain registration with the 

Commission. The core principles were 

originally added to the CEA by the 

Commodity Futures Modernization Act 

of 2000 (‘‘CFMA’’),4 and in 2001, the 

Commission issued guidance on DCO 

compliance with these core principles.5

However, in furtherance of the goals of 

the Dodd-Frank Act to reduce risk, 

increase transparency, and promote 

market integrity, the Commission, 

pursuant to the Commission’s enhanced 

rulemaking authority,6 withdrew the 

2001 guidance and adopted regulations 

establishing standards for compliance 

with the DCO core principles.7

As noted in the preamble to the 

adopting release for subparts A and B of 

part 39 of the Commission’s regulations, 

the regulations that implement the DCO 

core principles, the Commission sought 

to provide legal certainty for market 

participants, strengthen the risk 

management practices of DCOs, and 

increase overall confidence in the 

financial system by assuring the public 

that DCOs are meeting minimum risk 

management standards.8 These risk 

management standards include, in part: 

(1) With respect to financial 

resources, (a) Core Principle B, which 

requires DCOs to have ‘‘adequate 

financial, operational, and managerial 

resources, as determined by the 

Commission, to discharge each 

responsibility of the [DCO],’’ 9 and (b) 

Commission regulation 39.11, which 

requires a DCO to maintain sufficient 

financial resources to meet its financial 

obligations to its clearing members 

notwithstanding a default by the 

clearing member creating the largest 

financial exposure for the DCO in 

extreme but plausible market 

conditions,10 and permits the inclusion 

of assessment powers to meet a limited 

portion of the DCO’s default resources 

requirement; 11 and 

(2) with respect to business 

continuity, (a) Core Principle I, which 

requires DCOs to ‘‘establish and 

maintain emergency procedures, backup 

facilities, and a plan for disaster 

recovery that allows for (I) the timely 

recovery and resumption of operations 

of the [DCO], and (II) the fulfillment of 

each obligation and responsibility of the 

[DCO],’’ 12 and (b) Commission 

regulation 39.18, which requires a DCO 

to maintain a BC–DR plan, emergency 

procedures, and physical, technological, 

and personnel resources sufficient to 

enable the DCO to resume daily 

processing, clearing, and settlement no 

later than the next business day 

following the disruption of its 

operations.13

B. Designation of Systemically 

Important Derivatives Clearing 

Organizations Under Title VIII of the 

Dodd-Frank Act 

Title VIII of the Dodd-Frank Act, 

entitled ‘‘Payment, Clearing, and 

Settlement Supervision Act of 2010,’’ 14


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Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 49665 

15Section 802(b) of the Dodd-Frank Act. 

16The Council was established by section 111 of 

the Dodd-Frank Act. In general, the Council is 

tasked with identifying ‘‘risks to the financial 

stability of the United States that could arise from 

the material financial distress or failure, or ongoing 

activities, of large, interconnected bank holding 

companies or nonbank financial companies, or that 

could arise outside the financial services 

marketplace,’’ promoting ‘‘market discipline, by 

eliminating expectations on the part of 

shareholders, creditors, and counterparties of such 

companies that the Government will shield them 

from losses in the event of failure,’’ and responding 

‘‘to emerging threats to the stability of the United 

States financial system.’’ Section 112(a)(1) of the 

Dodd-Frank Act. 

17Section 804(a)(1) of the Dodd-Frank Act. The 

term ‘‘systemically important’’ means ‘‘a situation 

where the failure of or a disruption to the 

functioning of a financial market utility . . . could 

create, or increase, the risk of significant liquidity 

or credit problems spreading among financial 

institutions or markets and thereby threaten the 

stability of the financial system of the United 

States.’’ Section 803(9) of the Dodd-Frank Act; see 

also Authority to Designate Financial Market 

Utilities as Systemically Important, 76 FR 44763, 

44774 (July 27, 2011) (final rule). 

18Section 803(6)(A) of the Dodd-Frank Act. In 

section 803(6)(B) of the Dodd-Frank Act, the term 

expressly excludes designated contract markets, 

registered futures associations, swap data 

repositories, and swap execution facilities 

registered under the Commodity Exchange Act (7 

U.S.C. 1 et seq.), or national securities exchanges, 

national securities associations, alternative trading 

systems, security-based swap data repositories, and 

swap execution facilities registered under the 

Securities Exchange Act of 1934 (15 U.S.C. 78a et 

seq.), solely by reason of their providing facilities 

for comparison of data respecting the terms of 

settlement of securities or futures transactions 

effected on such exchange or by means of any 

electronic system operated or controlled by such 

entities, provided that the exclusions in this clause 

apply only with respect to the activities that require 

the entity to be so registered; and any broker, 

dealer, transfer agent, or investment company, or 

any futures commission merchant, introducing 

broker, commodity trading advisor, or commodity 

pool operator, solely by reason of functions 

performed by such institution as part of brokerage, 

dealing, transfer agency, or investment company 

activities, or solely by reason of acting on behalf of 

a financial market utility or a participant therein in 

connection with the furnishing by the financial 

market utility of services to its participants or the 

use of services of the financial market utility by its 

participants, provided that services performed by 

such institution do not constitute critical risk 

management or processing functions of the 

financial market utility. 19 76 FR at 44763. 20Under section 804(a)(2) of the Dodd-Frank Act, 

in determining whether an FMU is or is likely to 

become systemically important, the Council must 

take into consideration the following: (A) The 

aggregate monetary value of transactions processed 

by the FMU; (B) the aggregate exposure of an FMU 

to its counterparties; (C) the relationship, 

interdependencies, or other interactions of the FMU 

with other FMUs or payment, clearing, or 

settlement activities; (D) the effect that the failure 

of or a disruption to the FMU would have on 

critical markets, financial institutions, or the 

broader financial system; and (E) any other factors 

the Council deems appropriate. 

21 76 FR at 44766. 22See Press Release, Financial Stability Oversight 

Council, Financial Stability Oversight Council 

Makes First Designations in Effort to Protect Against 

Future Financial Crises (July 18, 2012), available at 

http://www.treasury.gov/press-center/pressreleases/Pages/tg1645.aspx. 23Chicago Mercantile Exchange, Inc. (‘‘CME’’) 

and ICE Clear Credit LLC (‘‘ICE Clear Credit’’) are 

the CFTC-registered DCOs that were designated 

systemically important by the Council, for which 

CFTC is the Supervisory Agency. While The 

Options Clearing Corporation (‘‘OCC’’), a CFTCregistered DCO, was designated systemically 

important by the Council, the Securities and 

Exchange Commission (‘‘SEC’’) serves as OCC’s 

Supervisory Agency. 

24See section 803(8)(A) of the Dodd-Frank Act 

(defining ‘‘Supervisory Agency’’ as ‘‘the Federal 

agency that has primary jurisdiction over a 

designated [FMU] under Federal banking, 

securities, or commodity futures laws’’). 

25Specifically, under Commission regulations, a 

systemically important derivatives clearing 

organization is a ‘‘financial market utility that is a 

derivatives clearing organization registered under 

Section 5b of the Act, which has been designated 

by the Financial Stability Oversight Council to be 

systemically important and for which the 

Commission acts as the Supervisory Agency 

pursuant to Section 803(8) of the [Dodd-Frank 

Act].’’ See 17 CFR 39.2. 

26See section 805(a)(2) of the Dodd-Frank Act. 

The Commission notes that it also has the authority 

to prescribe risk management standards governing 

the operations related to payment, clearing, and 

settlement activities for FMUs that are designated 

as systemically important by the Council and that 

are engaged in activities for which the Commission 

is the appropriate financial regulator. Furthermore, 

section 805 establishes a review mechanism by 

which the Council may intervene if the Board of 

Governors of the Federal Reserve System (the 

‘‘Board’’) determines that the existing risk 

management standards set by the Commission ‘‘are 

insufficient to prevent or mitigate significant 

liquidity, credit, operational, or other risks to the 

financial markets or to the financial stability of the 

United States.’’ Section 805(a)(2)(B) of the DoddFrank Act. 

27Section 805(b) of the Dodd-Frank Act. 

was enacted to mitigate systemic risk in 

the financial system and promote 

financial stability.15 Section 804 of the 

Dodd-Frank Act requires the Financial 

Stability Oversight Council 

(‘‘Council’’) 16 to designate those 

financial market utilities (‘‘FMUs’’) that 

the Council determines are, or are likely 

to become, systemically important.17 An 

FMU includes ‘‘any person that 

manages or operates a multilateral 

system for the purpose of transferring, 

clearing, or settling payments, 

securities, or other financial 

transactions among financial 

institutions or between financial 

institutions and the person.’’ 18 As noted 

by the Council, 

FMUs form a critical part of the nation’s 

financial infrastructure. They exist in many 

markets to support and facilitate the transfer, 

clearing or settlement of financial 

transactions, and their smooth operation is 

integral to the soundness of the financial 

system and the overall economy. However, 

their function and interconnectedness also 

concentrate a considerable amount of risk in 

the financial system due, in large part, to the 

interdependencies, either directly through 

operational, contractual or affiliation 

linkages, or indirectly through payment, 

clearing, and settlement processes. In other 

words, problems at one FMU could trigger 

significant liquidity and credit disruptions at 

other FMUs or financial institutions.19

In determining whether an FMU is 

systemically important, the Council 

uses a two-stage designation process, 

applying certain statutory 

considerations 20 and other metrics to 

assess, among other things, ‘‘whether 

possible disruptions [to the functioning 

of an FMU] are potentially severe, not 

necessarily in the sense that they 

themselves might trigger damage to the 

U.S. economy, but because such 

disruptions might reduce the ability of 

financial institutions or markets to 

perform their normal intermediation 

functions.’’ 21 On July 18, 2012, the 

Council designated eight FMUs as 

systemically important under Title 

VIII.22 Two of these designated FMUs 

are CFTC-registered DCOs 23 for which 

the Commission is the Supervisory 

Agency.24 Such designated CFTCregistered DCOs are also known as 

systemically important derivatives 

clearing organizations (‘‘SIDCOs’’).25

C. Standards for SIDCOs Under Title 

VIII of the Dodd-Frank Act 

Section 805 of the Dodd-Frank Act 

directs the Commission to consider 

relevant international standards and 

existing prudential requirements when 

prescribing risk management standards 

governing the operations related to 

payment, clearing, and settlement 

activities for FMUs that are (1) 

designated as systemically important by 

the Council, and (2) engaged in 

activities for which the Commission is 

the Supervisory Agency.26 Under Title 

VIII, the objectives and principles for 

these risk management standards are to: 

(1) Promote risk management; (2) 

promote safety and soundness; (3) 

reduce systemic risks; and (4) support 

the stability of the broader financial 

system.27 As outlined in section 805(c), 

these standards may address such areas 

as: ‘‘(1) Risk management policies and 

procedures; (2) margin and collateral 

requirements; (3) participant or 

counterparty default policies and 

procedures; (4) the ability to complete 

timely clearing and settlement of 

financial transactions; (5) capital and 

financial resources requirements for 

designated [FMUs]; and (6) other areas 

that are necessary to achieve the 

objectives and principles in [section 

805(b) of the Dodd-Frank Act].’’ 

The Commission has reviewed the 

risk management standards set forth in 

part 39 of the Commission’s regulations 

in light of recently promulgated relevant 

international standards and existing 

prudential requirements to identify 


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49666 Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 

28See Bank for International Settlements’ 

Committee on Payment and Settlement Systems and 

Technical Committee of the International 

Organization of Securities Commissions, 

‘‘Principles for Financial Market Infrastructures,’’ 

(April 2012), available at http://www.iosco.org/

library/pubdocs/pdf/IOSCOPD377.pdf; see also 

Financial Stability Board, ‘‘OTC Derivatives Market 

Reforms: Third Progress Report on 

Implementation,’’ (June 15, 2012), available at 

http://www.financialstabilityboard.org/

publications/r_120615.pdf (noting publication of 

the PFMIs as achieving ‘‘an important milestone in 

the global development of a sound basis for central 

clearing of all standardised OTC derivatives’’). 

29 In Asia, Singapore has adopted the PFMIs into 

its financial regulations pertaining to FMIs. See 

Monetary Authority of Singapore, ‘‘Supervision of 

Financial Market Infrastructures in Singapore,’’ 

(January 2013), available at http://www.mas.gov.sg/ 

∼/media/MAS/About%20MAS/Monographs

%20and%20information%20papers/MAS

Monograph_Supervision_of_Financial_Market_

Infrastructures_in_Singapore%202.pdf. In addition, 

Australia, Canada and the European Union have 

publicly indicated their intent to adopt the PFMIs. 

See Reserve Bank of Australia, ‘‘Consultation on 

New Financial Stability Standards,’’ (August 2012), 

available at http://www.rba.gov.au/paymentssystem/clearing-settlement/consultations/201208-

new-fin-stability-standards/index.html; Canadian 

Securities Administrators Consultation Paper 91– 

406 ‘‘Derivatives: OTC Central Counterparty 

Clearing,’’ (June 20, 2012), available at http:// 

www.osc.gov.on.ca/documents/en/SecuritiesCategory9/csa_20120620_91-406_counterpartyclearing.pdf; and Regulation (EU) No 648/2012 of 

the European Parliament and of the Council on OTC 

Derivatives, Central Counterparties and Trade 

Repositories, preamble paragraph 90, 2012 O.J. (L 

201), available at http://eur-lex.europa.eu/LexUri

Serv/LexUriServ.do?uri=OJ:L:2012:201:FULL:

EN:PDF. 

In the United States, the SEC adopted a final rule 

that incorporates heightened risk management 

standards for CCPs that clear security-based swaps, 

based on, in part, the PFMIs’ ‘‘cover two’’ standard 

for CCPs engaged in a more complex risk profile or 

that are systemically important in multiple 

jurisdictions. See 17 CFR 240.17Ad–22(b)(3) (2013) 

(requiring, in relevant part, SEC-registered clearing 

agencies (i.e., CCPs) to maintain sufficient financial 

resources to withstand, at a minimum, a default by 

the participant family to which they have the 

largest exposure in extreme but plausible 

conditions, provided that a security-based swap 

clearing agency, (i.e., a CCP that clears securitybased swaps) shall maintain sufficient financial 

resources to withstand, at a minimum, a default by 

the two participant families to which it has the 

largest exposure in extreme but plausible market 

conditions). 

30Part 39 of the Commission’s regulations was 

informed by the consultative report for the PFMIs 

and incorporates the vast majority of the standards 

set forth in the PFMIs. See Financial Resources 

Requirements for Derivatives Clearing 

Organizations, 75 FR 63113 (Oct. 14, 2010); Risk 

Management Requirements for Derivatives Clearing 

Organizations, 76 FR 3698 (Jan. 20, 2011); see also 

Bank for International Settlements’ Committee on 

Payment and Settlement Systems and Technical 

Committee of the International Organization of 

Securities Commissions, ‘‘Principles for Financial 

Market Infrastructures: Consultative Report,’’ 

(March 2011), available at http://www.iosco.org/

library/pubdocs/pdf/IOSCOPD350.pdf (‘‘CPSS– 

IOSCO Consultative Report’’). 

31The PFMIs define a ‘‘financial market 

infrastructure’’ as a ‘‘multilateral system among 

participating institutions, including the operator of 

the system, used for the purposes of clearing, 

settling, or recording payments, securities, 

derivatives, or other financial transactions.’’ See 

PFMIs, Introduction, 1.8. 

32The FSB is an international organization that 

coordinates with national financial authorities and 

international policy organizations to develop and 

promote effective regulatory, supervisory, and other 

financial sector policies. See generally http:// 

www.financialstabilityboard.org. 

33PFMIs, Background, 1.6. 

34 Id. 

35The international standards for FMIs, prior to 

the publication of the PFMIs, included the 

‘‘Recommendations for Securities Settlement 

Systems’’ published by CPSS in 2001, the ‘‘Core 

Principles for Systemically Important Payment 

Systems’’ published by CPSS–IOSCO in 2001, and 

the ‘‘Recommendations for Central Counterparties’’ 

published by CPSS–IOSCO in 2004 (collectively the 

‘‘CPSS–IOSCO Principles and Recommendations’’). 

See PFMIs, Background, 1.4 and 1.5. 

36 Id. at Introduction, 1.2. 

37 Id. at Background, 1.15. 

38Pursuant to the PFMIs, key risks faced by FMIs 

include legal, credit, liquidity, general business, 

custody, investment, and operational risks. See id. 

at Overview of Key Risks in Financial Market 

Infrastructures, 2.1. 

39The PFMIs define ‘‘credit risk’’ as the ‘‘risk that 

a counterparty, whether a participant or other 

entity, will be unable to meet fully its financial 

obligations when due, or at any time in the future.’’ 

Id. at Annex H: Glossary. 

40 Id. at Principle 4: Credit Risk, Key 

Consideration 4. 

41Such activities ‘‘with a more complex risk 

profile’’ include clearing financial instruments that 

are characterized by discrete jump-to-default price 

changes or that are highly correlated with potential 

participant defaults. Id. at Principle 4: Credit Risk, 

Explanatory Note 3.4.19. 

42 Id. at Principle 4: Credit Risk. Financial 

resources sufficient to cover the default of the two 

participants and their affiliates creating the largest 

credit exposure in extreme but plausible 

circumstances are sometimes referred to as cover 

those areas in which additional risk 

management standards for SIDCOs 

would be necessary and appropriate. 

D. Principles for Financial Market 

Infrastructures 

1. Overview 

The Commission has determined that 

the international standards most 

relevant to the risk management of 

SIDCOs, for purposes of meeting the 

Commission’s obligation pursuant to 

section 805(a)(2)(A) of the Dodd-Frank 

Act, are the Principles for Financial 

Market Infrastructures (‘‘PFMIs’’), which 

were developed by the Bank for 

International Settlements’ Committee on 

Payment and Settlement Systems 

(‘‘CPSS’’) and the Technical Committee 

of the International Organization of 

Securities Commissions (‘‘IOSCO’’) 

(collectively, ‘‘CPSS–IOSCO’’).28 The 

Commission notes that the adoption and 

implementation of the PFMIs by 

numerous foreign jurisdictions 

highlights the role these principles play 

in creating a global, unified set of 

international risk management 

standards for central counterparties 

(‘‘CCPs’’).29 Moreover, the Commission, 

which is a member of the Board of 

IOSCO, is working towards 

implementing rules and regulations that 

are fully consistent with the PFMIs by 

the end of 2013.30

The PFMIs establish international risk 

management standards for financial 

market infrastructures (‘‘FMIs’’), 

including CCPs, that facilitate clearing 

and settlement.31 In February 2010, 

CPSS–IOSCO launched a review of the 

existing sets of international standards 

for FMIs in support of a broader effort 

by the Financial Stability Board 

(‘‘FSB’’) 32 to strengthen core financial 

infrastructures and markets by ensuring 

that gaps in international standards are 

identified and addressed.33 CPSS– 

IOSCO endeavored to incorporate in its 

review process lessons from the 2008 

financial crisis and the experience of 

using the existing international 

standards, as well as policy and 

analytical work by other international 

committees including the Basel 

Committee on Banking Supervision 

(‘‘BCBS’’).34 The PFMIs replace CPSS– 

IOSCO’s previous recommendations 

applicable to CCPs.35 In issuing the 

PFMIs, CPSS–IOSCO sought to 

strengthen and harmonize existing 

international standards and incorporate 

new specifications for CCPs clearing 

OTC derivatives.36 The stated objectives 

of the PFMIs are to enhance the safety 

and efficiency of FMIs and, more 

broadly, reduce systemic risk and foster 

transparency and financial stability.37

The PFMIs set out 24 principles 

addressing various risk components of 

an FMI’s operations, including, as most 

relevant to this final rule, credit and 

operational risk.38

2. Principle 4: Credit Risk 

Principle 4 addresses the risk that a 

counterparty to the CCP will be unable 

to fully meet its financial obligations 

when due.39 Specifically, Principle 4 

states that a ‘‘CCP should cover its 

current and potential future exposures 

to each participant fully with a high 

degree of confidence using margin and 

other prefunded financial resources.’’ 40

Additionally, Principle 4 provides that 

a CCP involved in activities with a more 

complex risk profile 41 or that is 

systemically important in multiple 

jurisdictions should maintain additional 

financial resources sufficient to cover a 

wide range of potential stress scenarios, 

including, but not limited to, the default 

of the two participants and their 

affiliates that would potentially cause 

the largest aggregate credit exposure to 

the CCP in extreme but plausible market 

conditions.42


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two. All other CCPs, under the PFMIs, are required 

to maintain financial resources sufficient to cover 

a wide range of potential stress scenarios, which 

includes, but is not limited to, the default of the 

participant and its affiliates that would potentially 

cause the largest aggregate credit exposure to the 

CCP in extreme but plausible market conditions, 

otherwise known as ‘‘cover one.’’ Id. 

43 Id. at Principle 4: Credit Risk, Key 

Consideration 7. 

44 Id. 

45 Id. at Overview of Key Risks in Financial 

Market Infrastructures, 2.9. 

46 Id. at Principle 17: Operational Risk. 

47 Id. at Key Consideration 6. 

48The BCBS is comprised of senior 

representatives of bank supervisory authorities and 

central banks from around the world, including 

Argentina, Australia, Belgium, Brazil, Canada, 

China, France, Germany, Hong Kong SAR, India, 

Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, 

the Netherlands, Russia, Saudi Arabia, Singapore, 

South Africa, Spain, Sweden, Switzerland, Turkey, 

the United Kingdom, and the United States. See 

Bank for International Settlements’ Basel 

Committee on Banking Supervision, ‘‘Basel III: A 

Global Regulatory Framework for More Resilient 

Banks and Banking Systems,’’ (December 2010; 

revised June 2011), available at http://www.bis.org/ 

publ/bcbs189.htm (‘‘Basel III: A Global Regulatory 

Framework’’). 

49See Bank for International Settlements’ Basel 

Committee on Banking Supervision, ‘‘Capital 

Requirements for Bank Exposures to Central 

Counterparties,’’ (July 2012), available at 

www.bis.org/publ/bcbs227.pdf (‘‘Basel CCP Capital 

Requirements’’). The Basel CCP Capital 

Requirements are one component of Basel III, a 

framework that is part of ‘‘a comprehensive set of 

reform measures, developed by the [BCBS], to 

strengthen the regulation, supervision and risk 

management of the banking sector.’’ See Bank for 

International Settlements’ Web site for a 

compilation of documents that form the regulatory 

framework of Basel III, available at http:// 

www.bis.org/bcbs/basel3.htm. 

50 ‘‘Bank’’ is defined in accordance with the Basel 

framework to mean bank, banking group, or other 

entity (i.e., bank holding company) whose capital is 

being measured. See Basel III: A Global Regulatory 

Framework, Definition of Capital, paragraph 51, at 

12. The term ‘‘bank,’’ as used herein, also includes 

subsidiaries and affiliates of the banking group or 

other entity. The Commission notes that a bank may 

be a client and/or a clearing member of a SIDCO. 

51See Basel CCP Capital Requirements, Annex 4, 

section II, 6(i). 

52 ‘‘Trade exposure’’ is a measure of the amount 

of loss a bank is exposed to based on the size of 

its position, given a CCP’s failure. Under the Basel 

CCP Capital Requirements, ‘‘trade exposure’’ is 

defined to include the current and potential future 

exposure of a bank acting as either a clearing 

member or a client to a CCP arising from OTC 

derivatives, exchange traded derivatives 

transactions, or securities financing transactions, as 

well as initial margin. See Basel CCP Capital 

Requirements, Annex 4, section I, A: General 

Terms. ‘‘Current exposure’’ includes variation 

margin that is owed by the CCP but not yet been 

received by the clearing member or client. Id. at n. 

2. ‘‘Default fund exposure’’ is a measure of the loss 

a bank acting as a clearing member is exposed to 

arising from the use of its contributions to the CCP’s 

mutualized default fund resources. See Basel CCP 

Capital Requirements, Annex 4, section I, A: 

General Terms. BIS defines ‘‘potential future 

exposure’’ as ‘‘the additional exposure that a 

counterparty might potentially assume during the 

life of a contract or set of contracts beyond the 

current replacement cost of the contract or set of 

contracts.’’ See Bank for International Settlements’ 

Committee on Payment and Settlement Systems, ‘‘A 

Glossary of Terms Used in Payment and Settlement 

Systems,’’ (March 2003), available at http:// 

www.bis.org/publ/cpss00b.pdf. 

53See id. at Annex 4, section IX., Exposures to 

Qualifying CCPs, paragraphs 110–119 (describing 

the methodology for calculating a bank’s trade 

exposure to a qualified CCP); see also id. at 

paragraph 126 (describing the methodology for 

calculating a bank’s trade exposure to a nonqualifying CCP). 

54 Id. at section I, A: General Terms. 

55The term ‘‘client’’ as used herein refers to a 

customer of a bank. 

56 Id. at section IX: Central Counterparties, 

paragraphs 110 and 114. Client trade exposures are 

risk-weighted at 2 percent if the following two 

conditions are met: (1) the offsetting transactions 

are identified by the CCP as client transactions and 

collateral to support them is held by the CCP and/ 

or clearing member, as applicable, under 

arrangements that prevent losses to the client due 

to the default or insolvency of the clearing member, 

or the clearing member’s other clients, or the joint 

default or insolvency of the clearing member and 

any of its other clients, and (2) relevant laws, 

regulations, contractual or administrative 

arrangements provide that the offsetting 

transactions with the defaulted or insolvent clearing 

member are highly likely to continue to be 

indirectly transacted through the CCP, or by the 

CCP, should the clearing member default or become 

insolvent. However, in certain circumstances, risk 

weight may increase. Specifically, if the first 

condition is not met (i.e., where a client is not 

protected from losses in the case that the clearing 

member and another client of the clearing member 

Continued 

More generally, Principle 4 states that 

all FMIs should establish explicit rules 

and procedures to address any credit 

losses they may face as a result of an 

individual or combined default among 

its participants with respect to any of 

their obligations to the FMI.43 These 

rules and procedures should also 

address how potentially uncovered 

credit losses would be allocated, how 

the funds an FMI may borrow from 

liquidity providers would be repaid, 

and how an FMI would replenish the 

financial resources used during a stress 

event, such as a default, so that the FMI 

can continue to operate in a safe and 

sound manner.44

3. Principle 17: Operational Risk 

Principle 17 addresses the risk of 

deficiencies in information systems or 

internal processes, human errors, 

management failures, or disruptions 

from external events that will result in 

the reduction or deterioration of 

services provided by the FMI.45

Principle 17 states that ‘‘[b]usiness 

continuity management should aim for 

timely recovery of operations and 

fulfilment [sic] of the FMI’s obligations, 

including in the event of a wide-scale or 

major disruption.’’ 46 Additionally, an 

FMI’s business continuity plan ‘‘should 

incorporate the use of a secondary site 

and should be designed to ensure that 

critical information technology (IT) 

systems can resume operations within 

two hours following disruptive 

events.’’ 47

4. The Role of the PFMIs in 

International Banking Standards 

Where a CCP is prudentially 

supervised in a jurisdiction that does 

not have domestic rules and regulations 

that are consistent with the PFMIs, the 

implementation of certain international 

banking regulations will have 

significant cost implications for that 

CCP and its market participants. 

In July 2012, the BCBS,48 the 

international body that sets standards 

for the regulation of banks, published 

the ‘‘Capital Requirements for Bank 

Exposures to Central Counterparties’’ 

(‘‘Basel CCP Capital Requirements’’), 

which sets forth interim rules governing 

the capital charges arising from bank 

exposures to CCPs related to OTC 

derivatives, exchange-traded 

derivatives, and securities financing 

transactions.49 The Basel CCP Capital 

Requirements create financial incentives 

for banks 50 to clear financial derivatives 

with CCPs that are licensed in a 

jurisdiction where the relevant regulator 

has adopted rules or regulations that are 

consistent with the PFMIs. Specifically, 

the Basel CCP Capital Requirements 

introduce new capital charges based on 

counterparty risk for banks conducting 

financial derivatives transactions 

through a CCP.51 These new capital 

charges relate to a bank’s trade exposure 

and default fund exposure to a CCP.52

The capital charges for trade exposure 

are based upon a function that 

multiplies exposure by risk weight. Risk 

weight is a measure that represents the 

likelihood that the loss to which the 

bank is exposed will be incurred, and 

the extent of that loss. The risk weight 

assigned under the BCBS standards 

varies significantly depending on 

whether or not the counterparty is a 

‘‘qualified’’ CCP (‘‘QCCP’’).53 A ‘‘QCCP’’ 

is defined as an entity that (1) is 

licensed to operate as a CCP, and is 

permitted by the appropriate regulator 

to operate as such, and (2) is 

prudentially supervised in a jurisdiction 

where the relevant regulator has 

established and publicly indicated that 

it applies to the CCP on an ongoing 

basis, domestic rules and regulations 

that are consistent with the PFMIs.54 If 

a bank transacts through a QCCP acting 

either as (1) a clearing member of a CCP 

for its own account or for clients,55 or 

(2) a client of a clearing member that 

enters into an OTC derivatives 

transaction with the clearing member 

acting as a financial intermediary, then 

the risk weight is 2 percent for purposes 

of calculating the counterparty risk.56 If 


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49668 Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 

jointly default or become jointly insolvent), but the 

second condition is met, the bank’s trade exposure 

is risk-weighted at 4 percent. If neither condition is 

met, the bank must capitalize its exposure to the 

CCP as a bilateral trade. Id. at paragraphs 115 and 

116. 

57See Bank for International Settlements’ Basel 

Committee on Banking Supervision, ‘‘Consultative 

Document: Capitalisation of Bank Exposures to 

Central Counterparties,’’ (November 2011; revised 

July 2012), paragraph 28, available at http:// 

www.bis.org/publ/bcbs206.pdf (stating that ‘‘the 

applicable risk weight [for clearing member trades 

with a non-qualifying CCP] would be at least 20% 

(if the CCP is a bank) or 100% (if it is a corporate 

financial institution according to the definition 

included in paragraph 272 of the Basel framework, 

revised by Basel III’’); see also Basel III: A global 

regulatory framework for more resilient banks and 

banking systems (June 2011), paragraph 102, 

available at http://www.bis.org/publ/bcbs189.pdf 

(revising paragraph 272 of the Basel framework). 

58See Basel CCP Capital Requirements, Annex 4, 

section IX, paragraphs 121–125. The Commission 

notes that the 1250 percent risk weight represents 

the reciprocal of the 8 percent capital ratio, which 

is the percentage of a bank’s capital to its riskweighted assets (i.e., 1250 percent times 8 percent 

equals 100 percent). 

59 Id. at paragraph 122. 

60 Id. at paragraph 125. See also Basel CCP Capital 

Requirements, Annex 4, section IX, paragraphs 125 

(explaining that ‘‘More specifically, under [the 1250 

percent risk-weight] approach, the Risk Weighted 

Assets (RWA) for both bank i’s trade and default 

fund exposures to each CCP are equal to: Min {(2% 

* TEi + 1250% * DFi); (20% * TEi)} where TEi is 

bank i’s trade exposure to the CCP, as measured by 

the bank according to paragraphs 110 to 112 of this 

Annex; and DFi is bank i’s pre-funded contribution 

to the CCP’s default fund.’’). 

61 Id. at paragraph 127. 

62The Commission notes that the failure of 

SIDCOs to be QCCPs may negatively impact the 

broader US derivatives market as well. For example, 

higher clearing costs may result in fewer 

transactions, and less overall liquidity. 

63Notice of Proposed Rulemaking for Financial 

Market Utilities (‘‘Regulation HH’’), 76 FR 18445 

(April 4, 2011) (Financial Market Utilities) 

(proposing regulation HH in accordance with 

section 805 of the Dodd-Frank Act, which directed 

the Board to establish risk management standards 

governing the operations related to the payment, 

clearing, and settlement activities of those FMUs 

that have been designated as systemically important 

by the Council for which the Board is the 

Supervisory Agency. Note, however, that FMUs that 

are registered as clearing agencies with the SEC 

under section 17A of the Securities Exchange Act 

of 1934, or that are registered as DCOs with the 

CFTC under section 5b of the CEA are expressly 

exempt from regulation HH.). 

64 Id. at 18447. 

65 Id. at 18448; see also Financial Market Utilities 

(‘‘Regulation HH’’), 77 FR 45907, 45908 (Aug. 2, 

2012) (final rule). 

66Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 

7a–1(c)(2)(B) (emphasis added). 

67Section 5b(c)(2)(I) of the CEA, 7 U.S.C. 

7a–1(c)(2)(I). 

68See supra discussion in n.17. 

the CCP is non-qualifying, then the risk 

weight is the same as a bilateral OTC 

derivative trade and the bank applies 

the corresponding bilateral risk-weight 

treatment, which is at least 20 percent 

if the CCP is a bank, or as high as 100 

percent if the CCP is a corporate 

financial institution.57

With respect to default fund exposure, 

whenever a clearing member bank is 

required to capitalize for exposures 

arising from default fund contributions 

to a QCCP, the clearing member bank 

may apply one of two methodologies for 

determining the capital requirement: 

The risk-sensitive approach, or the 1250 

percent risk-weight approach.58 The 

risk-sensitive approach considers 

various factors in determining the risk 

weight for a bank’s default exposure to 

a QCCP, such as (1) the size and quality 

of a QCCP’s financial resources, (2) the 

counterparty credit risk exposures of 

such CCP, and (3) the application of 

such financial resources via the CCP’s 

loss bearing waterfall in the event one 

or more clearing members default.59 The 

1250 percent risk-weight approach 

allows a clearing member bank to apply 

a 1250 percent risk weight to its default 

fund exposures to the QCCP, subject to 

an overall cap of 20 percent on the riskweighted assets from all trade exposures 

to the QCCP.60 In other words, banks 

with exposures to QCCPs have a cap on 

their default fund exposure. In contrast, 

a clearing member bank with exposures 

to a non-qualified CCP must apply a risk 

weight of 1250 percent with no cap for 

default fund exposures.61

Thus, the Basel CCP Capital 

Requirements provide incentives for 

banks to clear derivatives through CCPs 

that are QCCPs by setting lower capital 

charges for exposures arising from 

derivatives cleared through a QCCP and 

setting significantly higher capital 

charges for exposures arising from 

derivatives cleared through nonqualifying CCPs. The increased capital 

charges for transactions through nonqualifying CCPs may have significant 

business and operational implications 

for U.S. DCOs, particularly SIDCOs that 

operate internationally and are not 

QCCPs.62 Specifically, banks faced with 

much higher capital charges might 

transfer their OTC derivatives business 

away from such SIDCO to a QCCP in 

order to benefit from the preferential 

capital charges provided by the Basel 

CCP Capital Requirements. 

Alternatively, banks might reduce or 

discontinue their OTC business 

altogether. Banks might also pass on to 

their customers the higher costs of 

transacting with a non-qualifying DCO 

as a result of the higher capital 

treatment. Accordingly, customers using 

such banks as intermediaries would 

have an incentive to transfer their 

business to an intermediary that clears 

at a QCCP. In short, a SIDCO’s failure to 

be a QCCP may cause it to face a 

competitive disadvantage retaining 

members and customers. 

As discussed further below in Section 

VI, the incentives noted in the foregoing 

paragraph have important implications 

for the cost and benefit considerations 

required by section 15(a) of the CEA. 

E. Existing Prudential Requirements 

In April 2011, a year before the PFMIs 

were published, the Board proposed 

regulation HH, which sets forth, in part, 

risk management standards for those 

FMUs, for which the Board is the 

Supervisory Agency, that have been 

designated systemically important by 

the Council under Title VIII.63 The 

Board, in proposing regulation HH, 

stated that the risk management 

standards most relevant to the risk 

management of FMUs, and the most 

appropriate basis for setting initial risk 

management standards under Title VIII, 

were the then-current international risk 

management standards set by CPSS– 

IOSCO’s Principles and 

Recommendations.64 The Board did 

note, in both its proposed and final 

rulemaking, that CPSS–IOSCO intended 

to update and replace the CPSS–IOSCO 

Principles and Recommendations with 

the PFMIs, and the Board anticipated at 

that time that it would review the 

PFMIs, consult with other appropriate 

agencies and the Council, and seek 

public comment on the adoption of the 

revised international standards.65

F. Risk Management Standards for 

SIDCOs 

As noted above, the CEA specifies 

certain core principles that all DCOs 

must comply with in order to register 

and maintain registration with the 

Commission. Core Principle B sets out 

minimum financial resources 

requirements for all DCOs and expressly 

states that a DCO must have ‘‘adequate 

financial, operational, and managerial 

resources, as determined by the 

Commission, to discharge each 

responsibility of the DCO.’’ 66 Moreover, 

under Core Principle I, a DCO must 

have procedures, facilities, and a 

disaster recovery plan that allow it to, 

on an emergency basis, have a ‘‘timely 

recovery and resumption’’ of its 

operations, and fulfill each of its 

obligations and responsibilities.67 In 

light of the statutory language described 

above, and because the failure of or a 

disruption to the functioning of a SIDCO 

could ‘‘create, or increase, the risk of 

significant liquidity or credit problems 

spreading among financial institutions 

or markets and thereby threaten the 

stability of the financial system of the 

United States,’’ 68 the Commission, in 


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69Section 5b(c)(2) of the CEA, 7 U.S.C. 7a–1(c)(2). 

70See section 805(a)(2) of the Dodd-Frank Act. 

71See Financial Resources Requirements for 

Derivatives Clearing Organizations, 75 FR 63113, 

63119–63120 (Oct. 14, 2010). 

72 Id. 

73See Risk Management Requirements for 

Derivatives Clearing Organizations, 76 FR 3698, 

3726–3727 (Jan. 20, 2011). 

74 Id. at 3727. 

75See section 5b(c)(2)(B)(ii)(I) of the CEA, 7 

U.S.C. 7a–1(c)(2)(B)(ii)(I); see also 75 FR at 63116. 

76See 17 CFR 39.11(a)(1); see also 75 FR 63114 

(noting that for purposes of determining the largest 

financial exposure for DCOs under Core Principle 

B, the treatment of commonly controlled affiliates 

as a single entity is necessary because the default 

of one affiliate could have an impact on the ability 

of the other to meet its financial obligations to the 

DCO). 

77 17 CFR 39.11(d)(2)(iii) and (iv). 

78 75 FR at 63119. 

79 Id. 

80See 76 FR at 3726–3727. 

81See section 5(c)(2)(I)(ii)(I) of the CEA, 7 U.S.C. 

7a–1(c)(2)(I)(ii)(I). 

82See 17 CFR 39.18(e)(3). 

83 76 FR at 3726. Chicago Mercantile Exchange 

Inc. (‘‘CME Clearing’’) and ICC, the two existing 

SIDCOs, must comply with regulation 39.30, 

including the two-hour recovery time objective 

requirement, by December 31, 2013. Thereafter, any 

DCO that is designated as systemically important by 

the Council for which the Commission is the 

Supervisory Agency will be required to comply 

with regulation 39.30 within one year after 

designation by the Council. 

84 Id. at 3727. 

85See 12 U.S.C. 1818 (b)–(n) (granting authority 

for enforcement powers). 

86 76 FR at 3727. 

87The comment period for the proposed rule on 

Financial Resources Requirements for Derivatives 

Clearing Organizations, which proposed the 

increased financial resources requirements for 

SIDCOs, initially closed on December 13, 2010, but 

was extended until June 3, 2011. The comment 

period for the proposed rule on Risk Management 

Requirements for Derivatives Clearing 

Organizations, which proposed a two hour recovery 

time and special enforcement authority, closed on 

April 25, 2011. 

88See 75 FR at 63117. 

89See infra n. 110 and 125. 

90See 76 FR at 69352 (Derivatives Clearing 

Organization Core Principles) (final rule). 

91The Commission notes again that section 

805(a)(1) of the Dodd-Frank Act requires the 

Commission to consider international standards in 

promulgating risk management rules. 

92 Id. 

93See supra n. 28. 

94See supra n. 23, 24. 

95See supra n. 48; see also discussion in section 

I. D. 4. 

accordance with section 5b(c)(2) of the 

Act 69 and section 805 of the DoddFrank Act,70 proposed heightened 

requirements to increase the minimum 

financial resources requirements for 

SIDCOs,71 restrict the use of 

assessments in meeting such 

obligations,72 enhance the system 

safeguards for SIDCOs,73 and grant the 

Commission special enforcement 

authority over SIDCOs pursuant to 

section 807 of the Dodd-Frank Act.74

First, the Commission proposed to 

increase the amount of financial 

resources a SIDCO must maintain in 

order to comply with Core Principle B 

and Commission regulation 39.11.75

Regulation 39.11, in part, (1) requires a 

DCO to maintain sufficient financial 

resources to meet its financial 

obligations to its clearing members 

notwithstanding a default by the 

clearing member creating the largest 

financial exposure for the DCO in 

extreme but plausible market 

conditions, provided that if a clearing 

member controls another clearing 

member or is under common control 

with another clearing member, affiliated 

clearing members shall be deemed to be 

a single clearing member for the 

purposes of this provision; 76 and (2) 

permits a DCO to include the value of 

potential assessments, subject to a 30 

percent haircut, in calculating up to 20 

percent of the default resource 

requirements.77 For SIDCOs, the 

Commission proposed a regulation that 

would require a SIDCO to (1) maintain 

sufficient financial resources to meet the 

SIDCO’s financial obligations to its 

clearing members notwithstanding a 

default by the two clearing members 

creating the largest combined financial 

exposure for the SIDCO in extreme but 

plausible market conditions,78 and (2) 

only count the value of assessments, 

after a 30 percent haircut, to meet up to 

20 percent of the resources required to 

meet obligations arising from a default 

by the clearing member creating the 

second largest financial exposure.79

In addition to financial resources 

requirements, the Commission also 

proposed to improve system safeguards 

for SIDCOs by enhancing certain BC–DR 

procedures.80 Core Principle I requires a 

DCO to establish and maintain 

emergency procedures, backup 

facilities, and a plan for disaster 

recovery that allows for the timely 

recovery and resumption of 

operations.81 Pursuant to Commission 

regulation 39.18, the required recovery 

time objective would be no later than 

the next business day.82 However, 

because the systemic importance of 

SIDCOs carries with it a responsibility 

to be reliably available on a nearcontinuous basis to fulfill their 

obligations, the Commission proposed a 

regulation that would require a SIDCO 

to have a BC–DR plan with the objective 

of enabling, and the physical, 

technological, and personnel resources 

sufficient to enable, the SIDCO to 

recover its operations and resume daily 

processing, clearing, and settlement no 

later than two hours following the 

disruption, including a wide-scale 

disruption.83

As part of the Commission’s proposed 

regulations for SIDCOs, the Commission 

also included special enforcement 

authority over SIDCOs 84 pursuant to 

section 807(c) of the Dodd-Frank Act, 

which would grant the Commission 

authority under the provisions of 

subsections (b) through (n) of section 8 

of the Federal Deposit Insurance Act 

(‘‘FDIA’’) 85 in the same manner and to 

the same extent as if the SIDCO were an 

insured depository institution and the 

Commission were the appropriate 

federal banking agency for such insured 

depository institution.86

The Commission requested comments 

on the proposed regulations,87

including comments on the potential 

competitive effects of imposing higher 

risk standards on SIDCOs as a subset of 

DCOs.88 The Commission received 

thirteen comment letters from the public 

regarding the proposed SIDCO rules. 

Several commenters advocated that any 

new Commission regulations 

correspond with applicable 

international standards.89

Because efforts to finalize the PFMIs 

were ongoing, new rules could have put 

SIDCOs at a competitive disadvantage 

vis-a`-vis foreign CCPs not yet subject to 

comparable rules, and, at the time, no 

DCO had been designated as 

systemically important by the Council, 

the Commission concluded it would be 

premature to finalize the SIDCO 

regulations in the Derivatives Clearing 

Organization Core Principles adopting 

release.90 Instead, the Commission 

decided, consistent with section 

805(a)(1) of the Dodd-Frank Act,91 to 

monitor domestic and international 

developments concerning CCPs and 

reconsider the proposed SIDCO 

regulations in light of such 

developments.92

As discussed above, since the final 

adoption of subparts A and B of part 39 

of the Commission’s regulations 

implementing the DCO core principles, 

there have been significant domestic 

and international developments, 

including (1) the publication of the final 

PFMIs in April 2012,93 (2) the 

designation of two registered DCOs for 

which the Commission is the 

Supervisory Agency, as systemically 

important by the Council,94 and (3) the 

adoption of the Basel CCP Capital 

Requirements in July 2012,95 which 

provide for significantly less favorable 

capital treatment for bank exposures to 

CCPs unless the relevant regulator of the 

CCP establishes regulations that are 

consistent with the PFMIs by the end of 


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96See Bank for International Settlements’ Basel 

Committee on Banking Supervision, ‘‘Basel III 

Counterparty Credit Risk and Exposures to Central 

Counterparties—Frequently Asked Questions,’’ 

(November 2012; revised December 2012), available 

at http://www.bis.org/publ/bcbs237.pdf) (stating 

that if (1) a CCP regulator has provided a public 

statement on the status of a CCP (QCCP or nonqualifying), then banks will treat exposures to this 

CCP accordingly. Otherwise, the bank will 

determine whether a CCP is qualifying based on the 

criteria in the definition of a QCCP in Annex 4, 

Section 1 of the Basel CCP Capital Requirements; 

(2) during 2013, if a CCP regulator has not yet 

implemented the PFMIs, but has publicly stated 

that it is working towards implementing these 

principles, the CCPs that are regulated by the CCP 

regulator may be treated as QCCPs. However, a CCP 

regulator may still declare a specific CCP nonqualifying; and (3) after 2013, if a CCP regulator has 

yet to implement the PFMIs, then the bank will 

determine whether a CCP subject to such a CCP 

regulator’s jurisdiction is qualifying on the basis of 

the criteria outlined in the definition of a QCCP in 

Annex 4, Section 1 of the Basel CCP Capital 

Requirements.). 

97See, e.g., CME Group Inc., letter dated May 3, 

2013 (‘‘CME 2013 Letter’’) (stating that the PFMIs 

establish ‘‘more demanding international risk 

management and related standards for payment, 

clearing and settlement systems, including central 

counterparties’’ and that in recognition of ‘‘the 

systemic protections and robustness of designated 

CCPs who adhere to the PFMIs,’’ the Basel CCP 

Capital Requirements provide ‘‘capital incentives 

for exposures to such QCCPs relative to nonQualified CCPs.’’ Moreover, the letter states that it 

‘‘is important to [Chicago Mercantile Exchange Inc.] 

to be designated a QCCP . . . in order for [its] 

market participants to obtain optimal capital 

treatment for their business at [Chicago Mercantile 

Exchange Inc. . . .]’’). 

98See 75 FR at 63119. 

99Comments on proposed regulation 39.29(a) 

include the following: See The Options Clearing 

Corporation, December 10, 2010 letter (‘‘OCC 

December Letter’’); Michael Greenberger, December 

10, 2010 letter (‘‘Greenberger Letter’’); CME Group 

Inc., letter dated December 13, 2010 (‘‘CME 

December Letter’’); CME 2013 Letter; International 

Swaps and Derivatives Association, Inc., letter 

dated December 10, 2010) (‘‘ISDA Letter’’); 

Americans for Financial Reform, letter dated 

December 13, 2010 (‘‘AFR Letter’’); Futures Industry 

Association, letter dated December 13, 2010 (‘‘FIA 

Letter’’); LCH. Clearnet Group Limited, letter dated 

December 10, 2010 (‘‘LCH December Letter’’); ICE 

Clear Credit LLC, letter dated April 26, 2013 (‘‘ICC 

Letter’’). The comment files for each proposed 

rulemaking can be found on the Commission’s Web 

site at www.cftc.gov. 

100See CME December Letter at 7; FIA Letter at 

2; LCH December Letter at 1. More broadly, Chris 

Barnard argued that all DCOs are SIDCOs ‘‘[g]iven 

their aggregate nature and high levels of 

interconnectedness.’’ See Chris Barnard, letter, 

dated May 10, 2011, (‘‘Barnard Letter’’) at 2. 

101See Greenberger Letter at 6; LCH December 

Letter at 3. 

102See ICC Letter at 2. 

103See ISDA Letter at 8; AFR Letter at 3. 

104See ISDA Letter at 8. 

105See AFR Letter at 3. 

106See OCC December Letter at 2, 5, and 6. 

107 Id. at 2. In addition, OCC argued that the 

proposed regulation did not fully consider the costs 

associated with meeting the cover two standard nor 

the risk of driving clearing volume to 

clearinghouses that are not required to meet the 

cover two standard. Id. 

108 Id. at 6. 

109 Id. at 5. 

110 Id. at 12. 

111See FIA Letter at 2, CME December Letter at 

7–8. 

112See FIA Letter at 2. 

113 Id. 

2013.96 Given these developments and 

requests from market participants to 

harmonize CFTC regulations with the 

PFMIs,97 the Commission believes the 

time is ripe to finalize the previously 

proposed SIDCO regulations. 

II. Regulation 39.29 

A. Proposed Regulation 39.29(a) 

Regulation 39.29(a), as proposed, 

would have required SIDCOs to 

maintain sufficient financial resources 

to meet financial obligations to its 

clearing members notwithstanding a 

default by the two clearing members 

creating the largest combined financial 

exposure for the SIDCO in extreme but 

plausible market conditions.98

The Commission received nine 

comment letters from market 

participants regarding the specific 

requirements set forth in proposed 

regulation 39.29(a).99 The majority of 

these commenters expressed concern 

that heightened requirements for 

SIDCOs could place them at a 

competitive disadvantage vis-a`-vis other 

DCOs and foreign CCPs that clear and 

settle similar OTC derivatives.100

Two commenters, Mr. Michael 

Greenberger and LCH. Clearnet Group 

Limited (‘‘LCH’’), generally supported 

the proposed financial resources 

requirements for SIDCOs.101 ICE Clear 

Credit LLC (‘‘ICC’’), one of the two 

existing SIDCOs, stated that it currently 

is in compliance with the proposed 

cover two requirement and 

acknowledged ‘‘the importance of 

clearing houses with more complex risk 

management requirements maintaining 

robust financial resources.’’ 102 Both the 

International Swaps and Derivatives 

Association (‘‘ISDA’’) and Americans for 

Financial Reform (‘‘AFR’’) suggested 

alternative approaches to the proposed 

cover two requirement for SIDCOs.103

ISDA encouraged the Commission to 

consider ‘‘whether the appropriate size 

of a SIDCO’s financial resources should 

be determined following an assessment 

by the Commission of the specific risks 

posed by the relevant SIDCO and the 

individual products it clears, rather than 

set to a uniform level that may be either 

insufficient or overly conservative.’’ 104

AFR stated that a SIDCO’s minimum 

financial resources requirements should 

be based on risk exposure as well as the 

number of defaults because while in ‘‘a 

concentrated market, a single default 

can have great consequence,’’ and in ‘‘a 

more diverse market, the probability of 

multiple defaults is greater and is a 

more meaningful scenario.’’ 105

OCC, however, disagreed with the 

necessity to impose a cover two 

requirement on all SIDCOs.106 OCC 

argued that the Commission should not 

impose a rigid financial resources 

requirement on every SIDCO because 

mandating the default of the two largest 

clearing members for purposes of 

calculating the financial resources 

requirement does not necessarily have a 

beneficial result in that ‘‘it restricts the 

ability of a DCO to measure its resources 

against those contingencies that it 

deems to be the most likely threats to its 

liquidity and solvency.’’ 107 OCC agreed 

that all clearing organizations should 

consider possible simultaneous defaults 

by multiple clearing members but that 

the simultaneous defaults of a clearing 

organization’s two largest clearing 

members, at least in the context of how 

that might occur within OCC, seem 

extremely implausible.108 OCC did state 

that ‘‘the clearing of OTC derivatives 

presents unique risk management 

concerns, and, depending on the 

particular product and applicable risk 

management framework, perhaps even 

heightened concerns that warrant 

special regulatory treatment.’’ 109

Additionally, OCC argued for 

international consistency on this issue, 

and encouraged the Commission to 

follow the PFMIs and ‘‘avoid taking 

final action on the Proposed Rules prior 

to receiving greater clarity in terms of 

the positions and proposals that 

European and U.K. legislators and 

regulators and CPSS[-]IOSCO eventually 

adopt.’’ 110

The Futures Industry Association 

(‘‘FIA’’) and, in its initial comment 

letter, CME commented that the 

proposed cover two requirement for 

SIDCOs could competitively 

disadvantage SIDCOs in both domestic 

and international markets.111 FIA stated 

that the proposed regulation would 

create a two-tier system between those 

DCOs designated as systemically 

important and those DCOs that are not 

designated as such.112 FIA believes that 

the two-tier system could put SIDCOs 

‘‘at a competitive disadvantage to the 

extent that they need to increase margin 

or guaranty fund requirements to cover 

the additional cost of covering the risk 

of loss resulting from the default of the 

second largest clearing member.’’ 113 In 

this regard, FIA recommended that the 

Commission require all DCOs, not just 

SIDCOs, to maintain sufficient financial 

resources to withstand the default of the 

two clearing members creating the 

largest combined financial exposure for 


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114 Id. 115See CME December Letter at 7. 116 Id. 117 Id. at 7–8. 118 Id. at 8. 119 Id. 120CME 2013 Letter at 2. 121CME 2013 Letter at 2–3. 122CME 2013 Letter at 3. 123 Id. 

124 Id. 

125See LCH December Letter at 1–2 (citing to the 

Bank for International Settlements’ Committee on 

Payment and Settlement Systems September 2010 

report entitled Market Structure Developments in 

the Clearing Industry: Implications for Financial 

Stability for the opinion that ‘‘regulatory 

complexity, and with it the potential for regulatory 

arbitrage, may increase, especially when competing 

CCPs are regulated by different authorities and/or 

are located in different jurisdictions.’’ Id. at 4. 

126Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a– 

1(c)(2)(B). 

127The Commission finds the comments arguing 

for international regulatory consistency to be 

persuasive and recognizes the importance of 

harmonizing U.S. regulations with international 

CCP risk management standards. 

128See supra n. 41, 42. Moreover, the same 

proviso regarding the treatment of affiliate clearing 

members as set out in 39.11(a)(1), i.e., that ‘‘if a 

clearing member controls another clearing member 

or is under common control with another clearing 

member, affiliated clearing members shall be 

deemed to be a single clearing member for the 

purposes of this provision’’ is incorporated in 

regulation 39.29(a) and is repeated in the rule text 

for clarity. See also 75 FR 63116 (stating that as 

DCOs, SIDCOs are still subject to Title VII and the 

regulations thereunder, except to the extent that the 

Commission proposes higher standards pursuant to 

Title VIII). 

129See supra section I.D.4. for a more detailed 

discussion on the role of the PFMIs in international 

banking. See also CME 2013 Letter at 2 (stating that 

‘‘it is important to CME [Clearing] to be designated 

a QCCP . . . in order for [its] market participants 

to obtain optimal capital treatment for their 

business at CME [Clearing] . . .’’). 

the DCO in extreme but plausible 

market conditions.114

CME’s initial comment letter echoed 

FIA’s approach, arguing that having 

lower financial resources requirements 

for DCOs that are not SIDCOs would 

allow those DCOs to offer lower 

guaranty fund and margin 

requirements.115 According to CME, this 

‘‘would likely attract additional volume 

to at least some non-systemically 

important DCOs and transform them 

into de facto SIDCOs.’’ 116 CME argued 

that until such time as a ‘‘de facto 

SIDCO’’ was designated as systemically 

important by the Council, SIDCOs 

would be competitively disadvantaged 

because the ‘‘de facto SIDCO’’ would be 

operating under the lower and less 

costly general regulatory standards for 

DCOs.117 CME argued that such a result 

would disregard the objectives of Title 

VIII.118 CME suggested that the 

Commission, in lieu of adopting the 

proposed regulation, adopt a regulation 

that subjects SIDCOs to more frequent 

stress testing (e.g., bi-monthly rather 

than monthly) and reporting 

requirements (e.g., monthly rather than 

quarterly).119 Following publication of 

the PFMIs and the Basel CCP Capital 

Requirements, CME submitted a 

supplemental comment letter stating 

that its subsidiary, CME Clearing began 

offering clearing services for the interest 

rate swap and credit default swap 

markets.120 As a result, CME Clearing 

has three distinct guaranty funds: one 

for interest rate swap products (‘‘IRS 

Guaranty Fund’’), one for credit default 

swap products (‘‘CDS Guaranty Fund’’), 

and one for futures and other cleared 

OTC products (‘‘Base Guaranty 

Fund’’).121 Moreover, CME stated that 

the IRS Guaranty Fund and the CDS 

Guaranty Fund are already sized to the 

cover two standard.122 While CME 

stated that it is satisfied with the size of 

the Base Guaranty Fund, which is 

currently set to meet a cover one 

standard, CME anticipates that the 

Commission will promulgate a cover 

two standard as part of the 

Commission’s implementation of the 

standards set forth in the PFMIs.123 As 

such, CME requested that the 

Commission ‘‘consider the impact to 

clearing firms when specifying the 

timelines associated with compliance 

with the cover [two] standard and 

suggests as long a time horizon as 

possible for implementation,’’ with ‘‘an 

effective date of the end of 2013, or later 

to the extent practicable to maintain 

QCCP status in accordance with BCBS 

227, which we believe would assist in 

minimizing the impact to the clearing 

firm community.’’ 124

Additionally, LCH, which was 

supportive of the proposal, urged the 

Commission ‘‘to minimize the 

divergence’’ between U.S.-regulated 

CCPs and other CCPs and ensure a level 

playing field between SIDCOs and other 

large CCPs around the world by 

conforming as much as possible the 

Commission’s final rules on SIDCOs to 

the global standards set forth by the 

PFMIs.125

The Commission notes that Core 

Principle B requires DCOs to have 

‘‘adequate financial, operational, and 

managerial resources, as determined by 

the Commission, to discharge each 

responsibility of the DCO.’’ 126 Pursuant 

to Core Principle B, at a minimum, 

DCOs must be able to meet a cover one 

requirement. As discussed above, 

because of the impact that the failure of 

or a disruption to the operations of a 

SIDCO could have on the U.S. financial 

markets, the Commission proposed 

increased standards for SIDCOs. 

However, after consideration of the 

comments, and consistent with the 

directive in section 805 of the DoddFrank Act to consider relevant 

international standards and existing 

prudential requirements, the 

Commission is adopting regulation 

39.29(a) with a revision in order to 

harmonize U.S. regulations with 

international CCP risk management 

standards.127

Specifically, rather than apply the 

cover two requirement to all SIDCOs, 

the revised regulation 39.29(a) would 

parallel the financial resources standard 

in Principle 4 of the PFMIs and only 

require a SIDCO that is systemically 

important in multiple jurisdictions or 

that is involved in activities with a more 

complex risk profile to maintain 

financial resources sufficient to enable it 

to meet its financial obligations to its 

clearing members notwithstanding a 

default by the two clearing members 

creating the largest combined financial 

exposure for the SIDCO in extreme but 

plausible market conditions, provided 

that if a clearing member controls 

another clearing member or is under 

common control with another clearing 

member, affiliated clearing members 

shall be deemed to be a single clearing 

member for the purposes of this 

provision.128

Thus, regulation 39.29(a) will 

promote consistency and efficiency in 

the financial markets by holding 

SIDCOs to the same cover two standard 

as similarly situated foreign CCPs. 

Additionally, because the PFMIs set 

forth international risk management 

standards for CCPs, this international 

harmonization should mitigate some of 

the competition concerns raised by the 

commenters. Moreover, adoption of this 

revised regulation is part of the 

Commission’s broader efforts to adopt 

and implement regulations that are 

consistent with the PFMIs so that 

SIDCOs operating internationally can be 

considered QCCPs. Such QCCP status 

should help a SIDCO avoid competitive 

harm internationally by providing bank 

clearing members and clients with the 

opportunity to obtain the more favorable 

capital charges set forth by the Basel 

CCP Capital Requirements.129

After careful review and 

consideration of the comments, and in 

light of international standards and 

prudential regulations, the Commission 

is adopting a regulation 39.29(a), as 

revised, to require the cover two 

standard for those SIDCOs that are 

systemically important in multiple 

jurisdictions or that are involved in 

activities with a more complex risk 

profile. 


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130See 75 FR at 63117. Accordingly, SIDCOs 

would have to hold a greater percentage of financial 

resources in margin and guaranty funds. Id. 

131 Id. 

132See AFR Letter; FIA Letter; Barnard Letter; ICC 

Letter; CME 2013 Letter. 

133See FIA Letter at 3. 

134See AFR Letter at 3. 

135 Id. AFR also argued that DCOs should be 

prohibited from including assessments in meeting 

their financial resources requirements as well. 

136See ICC Letter at 2. 

137See CME 2013 Letter at 3, n.7. 

138See Barnard Letter at 2. 

139See PFMIs, Definitions; see also Principle 5: 

Collateral, Explanatory Note 3.5.6; see also Bank for 

International Settlements’ Committee on the Global 

Financial System, ‘‘The Role of Margin 

Requirements and Haircuts in Procyclicality,’’ 

CGFS Papers No. 36 (March 2010), available at 

http://www.bis.org/publ/cgfs36.htm. 

140Section 5b(c)(2)(B) of the CEA, 7 U.S.C. 7a– 

1(c)(2)(B). 

141See supra n. 40 and accompanying text. 

142See PFMIs, Principle 4: Credit Risk, 

Explanatory Note 3.4.17 (stating that a CCP 

typically uses a sequence of prefunded financial 

resources, often referred to as a ‘‘waterfall,’’ to 

manage its losses caused by participant defaults. 

The waterfall may include a defaulter’s initial 

margin, the defaulter’s contribution to a prefunded 

default arrangement, a specified portion of the 

CCP’s own funds, and other participants’ 

contributions to a prefunded default arrangement). 

143 Id. at Principle 6: Margin, Explanatory Note 

3.6.10. 

144 Id. 

145 Id. 

146 Id. 

147See 76 FR at 3726. 

148The following definitions pertaining to system 

safeguards were codified at 17 CFR 39.18(a): 

B. Proposed Regulation 39.29(b) 

Regulation 39.29(b), as proposed, 

would have precluded SIDCOs from 

counting the value of assessments in 

calculating the resources available to 

meet the obligations arising from a 

default by the clearing member creating 

the single largest financial exposure,130

but would have permitted SIDCOs to 

count the value of assessments, after a 

30 percent haircut, in calculating the 

resources available to meet up to 20 

percent of the obligations arising from a 

default of the clearing member creating 

the second largest financial exposure.131

The Commission received five 

comment letters from market 

participants regarding the specific 

requirements set forth in proposed 

regulation 39.29(b).132 FIA agreed with 

the Commission’s proposed limitation 

on the use of assessments by SIDCOs, 

stating that the proposed limitation was 

reasonable, prudent, and sufficient to 

ensure that a SIDCO does not unduly 

rely on its assessment power.133 In 

contrast, AFR argued that the use of 

assessments in calculating the resources 

available to meet a SIDCO’s obligations 

under proposed regulation 39.29(b) 

should be prohibited.134 AFR 

emphasized that a DCO should be 

financially viable at all times, regardless 

of whether it might be able to call on its 

members to provide additional 

capital.135 In addition, ICC, one of the 

two existing SIDCOs, stated that it does 

not rely upon its right of assessment to 

meet the cover two standard 136 and 

CME, the parent company of the other 

existing SIDCO, stated that ‘‘each of 

[CME Clearing’s] guaranty funds are prefunded by the respective clearing 

members.’’ 137 More broadly, Chris 

Barnard commented that the use of 

assessments by DCOs may cause procyclical problems and increase systemic 

risk in times of financial stress.138

The Commission recognizes the 

potential pro-cyclical effects of 

assessments and agrees that a SIDCO 

should not be permitted to use the value 

of assessments in calculating the 

resources available to meet its 

obligations under regulation 39.29(a). 

‘‘Pro-cyclicality,’’ as defined in the 

PFMIs, refers to ‘‘changes in riskmanagement practices that are 

positively correlated with market, 

business, or credit cycle fluctuations 

and that may cause or exacerbate 

financial instability.’’ 139 In the context 

of assessments, a SIDCO’s call for 

additional capital from its clearing 

members in order to cover any losses in 

a default scenario (generally needed on 

an expedited basis) may trigger greater 

distress on the financial markets, which 

presumably have already been 

weakened. In other words, in a stressed 

market where credit is tightening and 

margin calls are increased, a SIDCO’s 

assessment of additional claims upon its 

clearing members may well exacerbate 

already weakened financial markets by 

potentially forcing clearing members 

and/or their customers to deleverage in 

falling asset markets, which will further 

drive down asset prices and stifle 

liquidity, or force clearing members to 

default in their obligations to the 

SIDCO. This in turn could start a 

downward spiral which, combined with 

restricted credit, might lead to 

additional defaults of clearing members 

and/or their customers, and would play 

a significant role in the destabilization 

of the financial markets. In striking a 

balance between the need for SIDCOs to 

effectively and efficiently use their 

resources and the mitigation of procyclical behaviors, the Commission 

believes prefunding default obligations 

is the appropriate mechanism for 

SIDCOs to meet their default resource 

obligations. 

As discussed above, Core Principle B 

requires DCOs to have ‘‘adequate 

financial, operational, and managerial 

resources, as determined by the 

Commission, to discharge each 

responsibility of the DCO.’’ 140

Moreover, the PFMIs require a CCP to 

use prefunded financial resources to 

cover current and potential future 

exposures,141 which may include initial 

margin, contributions to a prefunded 

default arrangement (e.g., a guaranty 

fund), and a specified portion of the 

CCP’s own funds.142 In addition, the 

PFMIs encourage CCPs to address procyclicality in their margin 

arrangements 143 and state that ‘‘a CCP 

could consider increasing the size of its 

prefunded default arrangements to limit 

the need and likelihood of large or 

unexpected margin calls in times of 

market stress.’’ 144 Prefunding financial 

resources requires market participants 

to pay more during times of relative 

market stability and low-market 

volatility through prefunded default 

arrangement contributions.145 However, 

paying more during a period of 

economic stability or even an upturn 

may ‘‘result in additional protection and 

[be] potentially less costly and less 

disruptive adjustments in periods of 

high market volatility.’’ 146

The Commission believes the role of 

a SIDCO, in part, is to add stability and 

confidence in the financial markets, and 

to the extent that the prohibition of the 

inclusion of the value of assessments by 

SIDCOs in meeting their default 

resource requirements helps to stem 

pro-cyclicality and the potential 

weakening of financial markets, the 

Commission is in favor of this approach. 

Moreover, prohibition of the inclusion 

of the value of assessments will help 

ensure that a SIDCO has, when needed, 

adequate resources to discharge each of 

its responsibilities. 

Accordingly, after consideration of 

the comments, relevant international 

standards, and existing prudential 

requirements, the Commission is 

adopting regulation 39.29(b) with a 

revision to prohibit the use of 

assessments by SIDCOs in calculating 

financial resources available to meet the 

SIDCO’s obligations under regulation 

39.29(a). 

III. Regulation 39.30 

Regulation 39.30(a), as proposed, 

would have required a SIDCO to have a 

BC–DR plan, that has the objective of, 

and the physical, technological, and 

personnel resources sufficient to, enable 

the SIDCO to recover operations and 

resume daily processing, clearing, and 

settlement no later than two hours 

following a disruption,147 including a 

wide-scale disruption.148


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A ‘‘recovery time objective’’ is defined as ‘‘the 

time period within which an entity should be able 

to achieve recovery and resumption of clearing and 

settlement of existing and new products, after those 

capabilities become temporarily inoperable for any 

reason up to or including a wide-scale disruption.’’ 

A ‘‘wide-scale disruption’’ is defined as ‘‘an event 

that causes a severe disruption or destruction of 

transportation, telecommunications, power, water, 

or other critical infrastructure components in a 

relevant area, or an event that results in an 

evacuation or unavailability of the population in a 

relevant area.’’ ‘‘Relevant area’’ is defined as ‘‘the 

metropolitan or other geographic area within which 

a derivatives clearing organization has physical 

infrastructure or personnel necessary for it to 

conduct activities necessary to the clearing and 

settlement of existing and new products. The term 

‘relevant area’ also includes communities 

economically integrated with, adjacent to, or within 

normal commuting distance of that metropolitan or 

other geographic area.’’ 

149See 76 FR at 3726–3727. 

150 Id. 

151 Id. at 3727. 

152 Id. 

153See 17 CFR 39.18(f) (stating, in relevant part, 

that a DCO may maintain the resources required 

under BC–DR procedures enumerated in regulation 

39.18(e)(1) by ‘‘either (1) Using its own employees 

as personnel, and property that it owns, licenses, 

or leases (own property); or (2) Through written 

contractual arrangements with another derivatives 

clearing organization or other service provider 

(outsourcing).’’) 

154See 76 FR at 3727. 155See id; see also 17 CFR 39.18(j). 156Comments on proposed regulation 39.30 

include the following: See Intercontinental 

Exchange, Inc. letter dated March 21, 2011 (‘‘ICE 

Letter’’); OCC letter dated March 21, 2011 (‘‘OCC 

Letter’’); CME Group Inc., letter dated March 21, 

2011 (‘‘CME March Letter’’); ICC Letter; and CME 

2013 Letter. The Commission received no 

comments regarding proposed regulation 39.30(b) 

or 39.30(c). 

157See ICC Letter at 2. 158See ICE Letter at 7–8; CME March Letter at 14– 

15; OCC Letter at 19–20. 159 ICC Letter at 2. 160 Id. 161See ICE Letter at 7; CME March Letter at 14. 162 ICE Letter at 8. 163See the Federal Reserve Board, the Office of 

the Comptroller of the Currency and the Securities 

and Exchange Commission, ‘‘Interagency Paper on 

Sound Practices to Strengthen the Resilience of the 

U.S. Financial System’’ (the ‘‘Sound Practices 

Paper’’), 68 FR 17809 (April 11, 2003). 

164 Id. at 17812 (stating that core clearing and 

settlement organizations should develop the 

capacity to recover and resume clearing and 

settlement activities within the business day on 

which the disruption occurs with the overall goal 

of achieving recovery and resumption within two 

hours after an event). 165CME March Letter at 15. 166CME March Letter at 14. 167CME 2013 Letter at 4 (CME also acknowledges 

that ‘‘Principle 17 of the PFMIs states that a BC– 

DR Plan should be designed to ensure that critical 

information technology systems can resume 

operations within two hours following disruptive 

events.’’) (emphasis added). 

168OCC Letter at 19. 

169 Id. 

170 Id. 

In order to achieve the specified 

recovery time objective (‘‘RTO’’) in 

proposed regulation 39.30(a), proposed 

regulation 39.30(b) would have required 

SIDCOs to maintain a geographic 

dispersal of physical, technological, and 

personnel resources.149 Pursuant to 

proposed regulation 39.30(b)(1), 

physical and technological resources 

would have to be located outside the 

relevant area of the infrastructure the 

entity normally relies upon to conduct 

activities necessary to the clearance and 

settlement of existing and new 

contracts, and the entity could not rely 

on the same critical transportation, 

telecommunications, power, water, or 

other critical infrastructure components 

the entity normally relies upon for such 

activities.150 Additionally, proposed 

regulation 39.30(b)(2) would have 

required SIDCOs to maintain personnel 

sufficient to meet the RTO after 

interruption of normal clearing by a 

wide-scale disruption affecting the 

relevant area, who live and work 

outside the relevant area.151 To avoid 

duplication and maximize flexibility, 

proposed regulation 39.30(b)(3) 152

provided that SIDCOs could use the 

outsourcing provisions applicable to 

non-SIDCO DCOs as set forth in 

regulation 39.18(f).153

Regulation 39.30(c), as proposed, 

would have required that each SIDCO 

conduct regular, periodic tests of its BC– 

DR plans and resources, and of its 

capacity to achieve the required RTO in 

the event of a wide-scale disruption.154

Additionally, proposed regulation 

39.30(c) incorporated the provisions of 

regulation 39.18(j) concerning testing by 

DCOs, including the purpose of the 

testing, the conduct of the testing, and 

reporting and review of the testing.155

The Commission received five 

comment letters regarding the specific 

requirements set forth in proposed 

regulation 39.30(a).156 One commenter 

stated that the recovery time for its 

technology systems is currently 

approximately two hours based upon 

past disaster recovery tests,157 and three 

commenters opposed the two-hour 

RTO.158 ICC, one of the two existing 

SIDCOs, acknowledged ‘‘the importance 

of maintaining market integrity during 

disruptive events’’ and noted that a twohour RTO is consistent with Principle 

17 of the PFMIs.159 In addition, ICC 

stated that the ‘‘two-hour benchmark is 

unlikely to require [it] to hire additional 

personnel or to require a different level 

of cross-training related to its wide-scale 

disruption plan,’’ and that it ‘‘is 

unlikely that [ICC] will incur any 

additional backup technology costs 

related to the CFTC’s proposed RTO.160

Both Intercontinental Exchange, Inc. 

(‘‘ICE’’) and CME, on the other hand, 

expressed concern that requiring a more 

stringent RTO for SIDCOs would impose 

significant costs.161 ICE argued that 

‘‘assigning an RTO to a SIDCO instead 

of assigning the objective the RTO is 

intended to achieve adds significant 

cost to a SIDCO’s business continuity 

program but does not necessarily 

increase overall resilience of the 

financial system.’’ 162 ICE and CME also 

highlighted the approach referenced in 

the Interagency Paper on Sound 

Practices to Strengthen the Resilience of 

the U.S. Financial System (the ‘‘Sound 

Practices Paper’’),163 published in 2003, 

which argued for a same-business-day 

RTO with a two-hour RTO as an 

aspirational goal for clearing and 

settlement organizations.164 CME urged 

the Commission to adopt the same 

approach as the Sound Practices Paper 

for SIDCOs, i.e., the same-business-day 

RTO with a two-hour RTO on a 

voluntary basis.165 In addition, CME 

stated that ‘‘[m]oving to a 2-hour RTO 

would impose enormous costs on 

SIDCOs, and the CFTC has provided no 

cost/benefit analysis in connection with 

this aspect of the proposed 

Regulation.’’ 166 Nonetheless, in a 

supplemental comment letter, CME 

stated that ‘‘in light of the systemic 

importance of CME [Clearing]’s clearing 

functions and the intended benefits, 

including compliance with the PFMI 

requirements for critical information 

technology, CME [Clearing] has 

obtained budget approval and allocated 

resources towards a two hour RTO and 

will be working throughout 2013 

towards achieving a two hour RTO.’’ 167

OCC commented that, though a 

laudable goal, a two-hour RTO was not 

consistently achievable without 

sacrificing core DCO functions and 

increasing the risks of error and 

backlogs.168 In addition, OCC argued 

that in its experience, it often takes 

three hours to fully recover and meet its 

responsibilities and avoid significant 

market disruption.169 OCC also argued 

that further efforts to reduce RTO would 

not be cost-effective and could increase 

rather than decrease reliability risk.170

With respect to commenters’ concerns 

that the proposed regulation will 

significantly increase costs on SIDCOs, 

the Commission recognizes these 

concerns but notes that a systemic 

importance designation under Title VIII 

means that the failure of a SIDCO to 

meet its obligations will have a greater 

impact on the U.S. financial system than 

the failure of a DCO not so designated. 

Thus, the Commission believes the 

financial system has a vested interest in 

enhancing risk management 

requirements for SIDCOs to increase a 

SIDCO’s financial resiliency and to 


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171See supra n. 46, 47 (referring to the PFMIs, 

Principle 17: Operational Risk). 

172 Id. 

173See supra n. 160 and accompanying text. 

174CME 2013 Letter at 4. 

175See supra section I.D.4. 

176See 76 FR at 3726–3727. 

177See PFMIs, Principle 17: Operations Risk. 

178See also 12 U.S.C. 1818(b)–(n) (granting 

authority for enforcement powers). 

179 76 FR at 3727. The Commission notes that 

Title VIII preserved and expanded the CFTC’s 

examination and enforcement authority with 

respect to designated entities within its jurisdiction. 

See Cong. Rec. 156 S5924–5 (daily ed. July 14, 

2010) (statement of Sen. Lincoln that Title VIII 

‘‘preserves and expands the CFTC’s and SEC’s 

examination and enforcement authorities with 

respect to designated entities within their 

respective jurisdictions,’’ and that ‘‘the authorities 

granted in Title VIII are intended to be both 

additive and complementary to the authorities 

granted to the CFTC and SEC in Title VII and to 

those agencies’ already existing legal authorities. 

The authority provided in Title VIII to the CFTC 

and SEC with respect to designated clearing entities 

and financial institutions engaged in designated 

activities would not and is not intended to displace 

the CFTC’s and SEC’s regulatory regime that would 

apply to these institutions or activities.’’). 

180OCC December Letter at 11. 

181CME December Letter at 8. 

182See 76 FR at 3714. 

183OCC March Letter at 21. 

184 7 U.S.C. 19(a). 

mitigate the risk of significant liquidity 

or credit problems spreading among 

financial institutions or markets, 

threatening the stability of the U.S. 

financial system. In the event of a widescale disruption, the resiliency of the 

U.S. financial markets might depend on 

the rapid recovery of SIDCOs to support 

critical market functions and thereby 

allow other market participants (i.e., the 

counterparties) to process their 

transactions. In addition, in such a 

scenario, it is reasonable to assume that 

there will be other market participants 

in locations not affected by the 

disruption that will need to clear and 

settle pending transactions as well. In 

short, the failure of a SIDCO to complete 

core clearing and settlement functions 

within a rapid period could create 

systemic liquidity and credit 

dislocations on a global scale. 

Additionally, the Commission notes 

that while it may be true that a two-hour 

RTO was an aspirational goal in 2003, 

standards and technology have 

advanced in the last ten years. As 

discussed above, the current 

international standard for CCPs, as set 

forth by the PFMIs, is to have a BC–DR 

plan that incorporates a two-hour 

RTO.171 Specifically, the PFMIs state 

that an FMI’s business continuity plan 

‘‘should incorporate the use of a 

secondary site and should be designed 

to ensure that critical information 

technology systems can resume 

operations within two hours following 

disruptive events.’’ 172 Because the twohour RTO is the international standard 

and foreign CCPs are anticipated to 

operate under this timeframe, any 

competitive disadvantages to SIDCOs in 

implementing this regulation should be 

mitigated because all similarly situated 

CCPs will likely be operating under this 

standard. Indeed, ICC, one of the two 

existing SIDCOs, has stated that it is 

unlikely that it will need to hire 

additional personnel or incur additional 

technology costs to meet this 

standard.173 Moreover, as discussed 

above, CME Clearing, the other existing 

SIDCO, ‘‘has obtained budget approval 

and allocated resources towards a two 

hour RTO and will be working 

throughout 2013 towards achieving a 

two hour RTO.’’ 174

The Commission believes that 

enhancing the system safeguard 

requirements a SIDCO must maintain 

under Core Principle I will increase 

stability in the financial markets and is 

therefore consistent with Title VIII’s 

objectives. Moreover, regulation 39.30(a) 

will promote regulatory consistency for 

SIDCOs and similarly situated CCPs 

because the two-hour RTO is the 

international standard, under the 

PFMIs, for CCPs operating in other 

jurisdictions. As discussed above, the 

Commission is fully committed to 

adopting and implementing regulations 

that are consistent with the PFMIs to 

ensure that SIDCOs are QCCPs under 

the Basel CCP Capital Requirements so 

that banks transacting through SIDCOs 

can receive preferential capital 

treatment.175 Therefore, the Commission 

is adopting regulation 39.30(a) as 

proposed. 

The Commission did not receive any 

comments regarding proposed 

regulations 39.30(b) or 39.30(c). 

Therefore, for reasons stated in the 

proposal, the Commission is adopting 

regulations 39.30(b) and 39.30(c) as 

proposed.176 However, to mitigate costs, 

the Commission notes that regulation 

39.30(b) should be interpreted in a 

manner consistent with the PFMIs, 

which state ‘‘[a] particular site may be 

primary for certain functions and 

secondary for others. It is not intended 

that an FMI would be required to have 

numerous separate secondary sites for 

each of its essential functions.’’ 177

IV. Regulation 39.31 

Regulation 39.31 proposed to codify 

the special enforcement authority 

granted to the Commission over SIDCOs 

pursuant to section 807(c) of the DoddFrank Act, which states that for 

purposes of enforcing the provisions of 

Title VIII of the Dodd-Frank Act, a 

SIDCO is subject to, and the 

Commission has authority under, 

provisions (b) through (n) of section 8 of 

the FDIA178 in the same manner and to 

the same extent as if the SIDCO were an 

insured depository institution and the 

Commission were the appropriate 

Federal banking agency for such insured 

depository institution.179 The 

Commission did not receive any 

comment letters on this proposed 

regulation, which tracks the statutory 

text in section 807 of the Dodd-Frank 

Act. Therefore, for reasons stated in the 

proposal, the Commission is adopting 

regulation 39.31 as proposed. 

V. Effective Date and Compliance Dates 

For purposes of publication in the 

Code of Federal Regulations, all of the 

rules adopted herein will have an 

effective date of 60 days after 

publication in the Federal Register. The 

Commission received three comments, 

however, requesting additional time to 

come into compliance with these rules. 

Regarding the compliance date of 

regulation 39.29, OCC requested that 

DCOs be afforded a reasonable amount 

of time to raise ‘‘any material amount of 

additional resources’’ and requested a 

delayed implementation of two years.180

CME stated that the financial resources 

that DCOs are required to maintain will 

increase dramatically and requested an 

implementation period of no less than 

180 days.181 Regarding the compliance 

date of regulation 39.30, the 

Commission had proposed a compliance 

date of one year after publication of the 

final rules or July 12, 2012.182 OCC 

commented that this is a short and 

burdensome deadline that will be 

difficult to meet and encouraged the 

Commission to adopt a two-year 

compliance period for the requirements 

applicable to SIDCOs.183 The 

Commission received no comments 

regarding regulation 39.31. 

Given the mandate to implement 

these standards, and the necessity of 

SIDCOs to fulfill their obligations on a 

near continuous basis, after careful 

consideration of the comments received, 

the Commission is extending the 

compliance date for regulations 39.29 

and 39.30 to December 31, 2013. 

VI. Consideration of Costs and Benefits 

A. Introduction 

Section 15(a) requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders.184


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185See supra section I.A. through I.F. for a more 

detailed discussion on the risk management 

standards for SIDCOs, including the designation 

process for SIDCOs and standards for SIDCOs under 

Title VIII of the Dodd-Frank Act. 

186See supra section I.F. for discussion on the 

risk management standards for SIDCOs proposed by 

the Commission. 

187 Id. 

188 Id. 

189 Id. 

190 Id. 

191See supra section I.D.1. for a general 

discussion on the PFMIs. 

192 Id. 

193See supra section I.D.4. for a discussion on the 

role of the PFMIs in international banking 

standards. 

194 Id. 

195 Id. 

196See OCC December Letter at 12 (OCC 

requesting that the Commission avoid taking final 

action on the proposed SIDCO regulations until the 

adoption of the PFMIs to ensure consistency with 

international regulations) and LCH December Letter 

at 1–2 (LCH urging the Commission to conform as 

much as possible the Commission’s final rules on 

SIDCOs to the global standards set forth in the 

PFMIs). 

197See supra section II. for a discussion on the 

proposed and revised rule text of regulation 39.29. 

198 Id. 

199See supra discussion I.C. and I.F. 

Section 15(a) further specifies that the 

costs and benefits shall be evaluated in 

light of five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission’s cost and benefit 

considerations in accordance with 

section 15(a) are discussed below. 

B. Background 

In this final rulemaking, the 

Commission is adopting regulations to 

implement enhanced risk management 

standards for SIDCOs.185

As noted above, consistent with the 

DCO core principles and section 805 of 

the Dodd-Frank Act, which requires the 

Commission to consider relevant 

international and existing prudential 

requirements when prescribing risk 

management standards for SIDCOs, the 

Commission proposed the following 

enhanced requirements for SIDCOs: 186

(1) Regulation 39.29(a) which would 

require a SIDCO to maintain sufficient 

resources to meet a ‘‘cover two’’ 

standard in order to comply with Core 

Principle B; 187 (2) regulation 39.29(b) 

which would strictly limit the value of 

assessments that could be used in 

meeting that requirement; 188 (3) 

regulation 39.30 which would require a 

SIDCO to have a BC–DR plan with a 

two-hour RTO in order to comply with 

Core Principle I (‘‘two-hour RTO’’); 189

and (4) regulation 39.31 which, under 

section 807(c) of the Dodd-Frank Act, 

grants the Commission special 

enforcement authority over SIDCOs.190

As also discussed above, after the 

Commission proposed the SIDCO risk 

management standards and received 

comments, the PFMIs were 

published.191 The PFMIs establish 

international risk management 

standards for FMIs, including CCPs, that 

facilitate clearing and settlement.192 The 

PFMIs also play a significant role in the 

Basel CCP Capital Requirements, which 

introduce new capital charges based on 

counter party risk for banks conducting 

financial derivatives transactions 

through a CCP.193 These capital charges 

vary significantly depending on whether 

or not the counterparty is a QCCP, that 

is, a CCP that is subject to regulations 

consistent with the PFMIs.194

Effectively, the Basel CCP Capital 

Requirements incentivize banks to clear 

derivatives through QCCPs by setting 

lower capital charges for exposures 

arising from derivatives cleared through 

a QCCP and setting significantly higher 

capital charges for exposures arising 

from derivatives cleared through nonqualifying CCPs.195 As discussed further 

below, these differences in capital 

charges are extremely important in 

considering whether to adopt 

requirements for SIDCOs, which are 

consistent with the PFMIs, or 

requirements that fall short of that 

standard. 

In light of the directive of section 805 

of the Dodd-Frank Act to consider 

relevant international standards and 

existing prudential requirements when 

prescribing risk management standards 

for designated systemically important 

FMUs, as well as the recent publication 

of the PFMIs, and public comments on 

the proposed SIDCO regulations, the 

Commission has determined it is 

necessary and appropriate to finalize the 

proposed enhanced risk management 

standards for SIDCOs. However, in 

order to harmonize the proposed 

regulations with the existing 

international standards set forth by the 

PFMIs, as requested by some 

commenters,196 the Commission has 

revised proposed regulation 39.29(a) 

and 39.29(b). Rather than apply the 

cover two requirement to all SIDCOs, 

revised regulation 39.29(a) parallels the 

financial resources standard in Principle 

4 of the PFMIs and only requires a 

SIDCO that is systemically important in 

multiple jurisdictions or that is involved 

in activities with a more complex risk 

profile to maintain financial resources 

sufficient to meet the cover two 

requirement.197 Revised regulation 

39.29(b), which is also consistent with 

Principle 4 of the PFMIs, prohibits a 

SIDCO from the use of assessments in 

calculating its financial resources 

available to meet the SIDCO’s 

obligations under regulation 39.29(a).198

The Commission considered the 

following alternatives: (1) Not to adopt 

any of the proposed SIDCO risk 

management regulations, (2) to adopt 

the SIDCO risk management regulations 

only as proposed, or (3) to adopt the 

proposed SIDCO risk management 

regulations with revisions consistent 

with relevant international standards 

and existing prudential requirements. 

As detailed above, the Commission has 

concluded it is necessary and 

appropriate in this final rulemaking to 

adopt regulation 39.29, as revised, 

regulation 39.30, as proposed, and 

regulation 39.31, as proposed.199

In the discussion that follows, the 

Commission considers the costs and 

benefits of the final rulemaking in light 

of the comments it received and section 

15(a) of the CEA. As the requirement in 

regulation 39.31 is imposed by the 

Dodd-Frank Act, any associated costs 

and benefits are the result of statutory 

directives as determined by Congress, 

not an act of Commission discretion. 

For the remaining regulations in this 

rulemaking, 39.29(a) (cover two), 

39.29(b) (prohibition of assessments) 

and 39.30 (two-hour RTO), the 

Commission considers the costs and 

benefits attributable to these enhanced 

requirements against the DCO regulatory 

framework established in part 39, which 

provides minimum risk standards for 

DCOs and sets the baseline for cost and 

benefit considerations. Specifically, 

regulation 39.11 (implementing DCO 

Core Principle B) sets a cover one 

standard as the minimum financial 

resources requirement for all DCOs 

whereas regulation 39.29(a) sets a cover 

two financial resources requirement for 

all SIDCOs engaged activities with a 

more complex risk profile or that are 

systemically important in multiple 

jurisdictions. Regulation 39.11 permits 

the inclusion of assessment powers, to 

a limited extent, in calculating whether 

a DCO meets its default resources 

requirement, whereas regulation 

39.29(b) prohibits the use of 

assessments by SIDCOs in meeting those 

obligations. Regulation 39.18 requires a 

DCO to have an RTO of no later than the 

next business day following the 

disruption of its operations whereas 

regulation 39.30 (implementing DCO 

Core Principle I) requires SIDCOs to 

have a BC–DR plan with a two-hour 


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49676 Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 

200See supra section I.B. 

201See ICC Letter at 1. See also CME 2013 Letter 

at 2–3. 

202See supra section II.B. for discussion on the 

pro-cyclical impact of assessments. 203 Id. 

RTO following the disruption of its 

operations. 

The Commission invited public 

comment on all aspects of the proposed 

SIDCO rulemaking but did not receive 

any comments with quantitative data 

from which the Commission could 

calculate the costs and benefits of the 

proposed enhanced requirements. The 

Commission did receive qualitative 

comments on the Commission’s 

proposed consideration of costs and 

benefits generally, as well as specifically 

to the requirements central to this final 

rule: Cover two, use of assessments and 

two-hour RTO. These comments are 

summarized below in connection with 

the Commission’s consideration of the 

costs and benefits of the final rules 

being promulgated herein. 

C. Benefits and Costs of the Final Rule 

1. Benefits 

As explained in the subsections that 

follow, this final rule promotes the 

financial strength, operational security 

and reliability of SIDCOs, reduces 

systemic risk, and increases the stability 

of the broader U.S. financial system. In 

addition, the regulations harmonize U.S 

regulations with international standards 

which will, in important ways, place 

SIDCOs on a level playing field with 

their competitors in the global financial 

markets: 

a. Regulation 39.29(a): Cover Two 

The cover two requirement increases 

the financial stability of certain SIDCOs 

which, in turn, increases the overall 

stability of the US financial markets. 

This is so because enhancing a SIDCO’s 

financial resources requirements from 

the minimum of cover one to a more 

stringent cover two standard helps to 

ensure the affected SIDCO will have 

greater financial resources to meet its 

obligations to market participants, 

including in the case of defaults by 

multiple clearing members. These 

added financial resources lessen the 

likelihood of the SIDCO’s failure which, 

given the designation of systemically 

important, could threaten the stability of 

the US financial system.200 By 

bolstering certain SIDCOs’ resources, 

regulation 39.29(a) contributes to the 

financial integrity of the financial 

markets and reduces the likelihood of 

systemic risk from spreading through 

the financial markets due to one of those 

SIDCOs’ failure or disruption. 

According to commenters, existing 

SIDCOs already fund their default 

resources using a cover two standard for 

products with a more complex risk 

profile.201 Although the benefit 

associated with regulation 39.29(a) is 

somewhat lessened by the already 

established practice of cover two by the 

relevant SIDCOs, there is a long-term 

benefit of setting the cover two standard 

as the new regulatory minimum to 

ensure that even in periods of apparent 

stability and low market volatility, these 

SIDCOs will continue to have increased 

financial resource requirements and, 

ultimately, greater financial stability. 

This approach of obtaining resources in 

such low-stress periods avoids the need 

to call for additional resources from 

clearing members during less stable, 

more volatile times, which would have 

pro-cyclical effects on the U.S. financial 

markets.202 In addition, the cover two 

requirement will apply to SIDCOs 

deemed systemically important in 

multiple jurisdictions. 

b. Regulation 39.29(b): Prohibited Use of 

Assessments To Meet Regulation 

39.29(a) Obligations 

As discussed below and throughout 

this release, the Commission believes 

that prohibiting the use of assessments 

by a SIDCO in meeting its default 

resource obligations (i.e. those under 

regulations 39.11(a)(1) and 39.29(a)) 

increases the financial stability of the 

SIDCO, which in turn, increases the 

overall stability of the U.S. financial 

markets. 

Assessment powers are more likely to 

be exercised during periods of financial 

market stress. If during such a period, a 

clearing member defaults and the loss to 

the SIDCO is sufficiently large to 

deplete (1) the collateral posted by the 

defaulting entity, (2) the defaulting 

entity’s default fund contribution, and 

(3) the remaining pre-funded default 

fund contributions, a SIDCO’s exercise 

of assessment powers over the nondefaulting clearing members may 

exacerbate a presumably already 

weakened financial market. The 

demand by a SIDCO for more capital 

from its clearing members could force 

one or more additional clearing 

members into default because they 

cannot meet the assessment. The 

inability to meet the assessment could 

lead clearing members and/or their 

customers to de-leverage (i.e., sell off 

their positions) in falling asset markets, 

which further drives down asset prices 

and may result in clearing members 

and/or their customers defaulting on 

their obligations to each other and/or to 

the SIDCO. In such extreme 

circumstances, assessments could 

trigger a downward spiral and lead to 

the destabilization of the financial 

markets. Prohibiting the use of 

assessments by a SIDCO in meeting 

default resources obligations is intended 

to require the SIDCO to retain more 

financial resources upfront, i.e. to 

prefund its financial resources 

requirement to cover its potential 

exposure. 

The increase in prefunding of 

financial resources by a SIDCO may 

increase costs to clearing members of 

that SIDCO (e.g. requiring clearing 

members to post additional funds with 

the SIDCO),203 but it also reduces the 

likelihood that the SIDCO will require 

additional capital infusions during a 

time of financial stress when raising 

such additional capital is expensive 

relative to market norms. By increasing 

prefunded financial resources, a SIDCO 

becomes less reliant on the ability of its 

clearing members to pay an assessment, 

more secure in its ability to meets its 

obligations, and more viable in any 

given situation, even in the case of 

multiple defaults of clearing members. 

Accordingly, regulation 39.29(b) 

increases the financial security and 

reliability of the SIDCO which will 

thereby further increase the overall the 

stability of the U.S. financial markets. 

c. Regulation 39.30: Two-Hour RTO 

A two-hour RTO in a SIDCO’s BC–DR 

plan increases the soundness and 

operating resiliency of the SIDCO, 

which in turn, increases the overall 

stability of the U.S. financial markets. 

Given the significant role SIDCOs 

play within the financial market 

infrastructure and the need to preserve, 

to the greatest extent practicable, their 

near-continuous operation, regulation 

39.30 prescribes an enhanced RTO of 

two hours. The two-hour RTO ensures 

that even in the event of a wide-scale 

disruption, the potential negative effects 

upon U.S. financial markets be 

minimized because the affected SIDCO 

will recover rapidly and resume its 

critical market functions, thereby 

allowing other market participants to 

process their transactions, even those 

participants in locations not directly 

affected by the disruption. The two-hour 

RTO increases a SIDCO’s operational 

resiliency by requiring the SIDCO to 

have the resources and technology 

necessary to resume operations 

promptly. This resiliency, in turn, 

increases the overall stability of the U.S. 

financial markets. 


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204See supra section I. D. 4. for a discussion of 

the Basel CCP Capital Requirements. 

205 Id. 

206For example, ICC, one of the two existing 

SIDCOs, stated that it already implements the 

‘‘cover two’’ requirement, that it does not rely upon 

its right of assessment in meeting that requirement, 

and that it is unlikely to incur significant costs in 

implementing the two hour RTO. See ICC Letter at 

1–2. In addition, CME Clearing, the other existing 

SIDCO, implements the ‘‘cover two’’ requirement 

for two of its three guaranty funds, has each of its 

guaranty funds pre-funded by the respective 

clearing members, and, though the cost will be 

significant, has already ‘‘obtained budget approval 

and allocated resources towards a two hour RTO.’’ 

See CME 2013 Letter at 2–4. 

207 In the event that these additional resources 

need to be raised by the SIDCO, as opposed to 

reallocated, this cost is the funding cost for raising 

these additional resources. In addition, to the extent 

that there is uncertainty over whether cover two 

applies (for example, as in the case of whether a 

DCO gets deemed to be systemically important in 

multiple jurisdictions or whether a given product 

is, indeed, of a more complex risk profile), the cost 

of cover two is the opportunity cost (funding cost) 

of the additional financial resources weighted by 

the likelihood that cover two will apply. 

208See section II. for a discussion on comments 

received on the proposed regulation 39.29(a). 

209 Id. 

210 Id. 

211 Id. 

212 Id. 

213 ICC Letter at 2. 

214See supra n. 23 (designation of CME and ICC 

as SIDCOs). 

215See ICC Letter at 1–2. See also CME 2013 

Letter at 2–3. 

d. Benefits of QCCP Status 

As discussed above,204 the 

international Basel CCP Capital 

Requirements provide incentives for 

banks to clear derivatives through CCPs 

that are qualified CCPs or ‘‘QCCPs’’ by 

setting lower capital charges for 

exposures arising from derivatives 

cleared through a QCCP and setting 

significantly higher capital charges for 

exposures arising from derivatives 

cleared through non-qualifying CCPs.205

The enhanced risk management 

standards for SIDCOs adopted in this 

final rulemaking are consistent with the 

international standards set forth in the 

PFMIs and address part of the remaining 

divergences between part 39 of the 

Commission’s regulations and the 

PFMIs, which will provide an 

opportunity for SIDCOs to gain QCCP 

status. The Commission believes there is 

a benefit for a SIDCO if it is able to offer 

to its clearing members and their 

customers the favorable capital 

treatment under the Basel CCP Capital 

Requirements. 

2. Costs 

The Commission requested but did 

not receive any quantitative data or 

specific cost estimates associated with 

the proposed regulations. However, in 

qualitative terms, the Commission 

recognizes that this final rule may 

impose important costs on SIDCOs 

depending on the financial resources 

requirements and system safeguards 

procedures the SIDCOs currently 

implement. In other words, the costs 

range from minimal (to the extent 

SIDCOs are already operating, or 

planning to operate, consistent with the 

final rules) to significant (for those who 

are not).206

To the extent costs increase, the 

Commission has considered that higher 

trading costs for market participants (i.e. 

increased clearing fees, guaranty fund 

contributions, and margin fees, etc.) 

may discourage market participation 

and result in decreased liquidity and 

reduced price discovery. However, the 

Commission has also considered the 

costs to market participants and the 

public if these regulations are not 

adopted. Significantly, without these 

regulations to ensure that SIDCOs 

operate under certain enhanced risk 

management standards, in a manner that 

is consistent with internationally 

accepted standards, the financial 

integrity and security of the U.S. 

financial markets would be at a greater 

risk relative to international markets. 

This, too, could adversely affect the 

attractiveness of the U.S. financial 

markets subject to the Commission’s 

jurisdiction as compared to foreign 

competitors. In addition, without the 

final rule, SIDCOs would not have the 

opportunity to gain QCCP status, 

thereby putting them at a significant 

competitive disadvantage in the global 

financial markets which, again, would 

be to the detriment of their clearing 

members and their customers. The 

Commission notes that to the extent it 

addresses the remaining divergences 

between part 39 of the Commission’s 

regulations and the PFMIs through 

future rulemakings, and these 

rulemakings, along with the regulations 

adopted herein, do not provide an 

opportunity for non-SIDCO DCOs to 

obtain QCCP status, this would place 

such non-SIDCO DCOs at a competitive 

disadvantage to SIDCOs. Moreover, the 

resulting cost to the DCOs would be the 

inability to offer the favorable capital 

treatment under the Basel CCP Capital 

Requirements to their customers and 

clearing members. 

a. Regulation 39.29(a): Cover Two 

The cost of the cover two requirement 

for certain SIDCOs includes the 

opportunity cost of the additional 

financial resources needed to satisfy the 

guaranty fund requirements for the risk 

of loss resulting from the default of the 

second largest clearing member.207

As discussed above in more detail, the 

Commission received comments from 

market participants addressing the costs 

associated with a cover two standard.208

OCC argued that if heightened risk 

management standards are imposed on 

a DCO in such a way as to substantially 

increase the costs for clearing members 

and their customers to clear transactions 

through a SIDCO rather than a nonSIDCO, there is risk of undermining the 

goals of both Titles VII and VIII of the 

Dodd-Frank Act by driving clearing 

volume to less-regulated 

clearinghouses.209 FIA commented that 

the cover two requirement would put 

SIDCOs at a competitive disadvantage to 

other DCOs to the extent that they need 

to increase margin or guaranty fund 

requirements to cover the default of the 

second largest clearing member.210 FIA 

recommended that the Commission 

adopt an alternative approach by 

extending the cover two requirement to 

all DCOs, not just SIDCOs, and allow 

ample time for DCOs to come into 

compliance.211 CME stated that a cover 

two requirement would allow some 

DCOs to offer lower guaranty fund and 

margin requirements, which would 

attract additional volume to that DCO 

and make it a de facto SIDCO. SIDCOs 

would then be at a competitive 

disadvantage relative to the de facto 

SIDCO until such time as the de facto 

SIDCO was designated as a SIDCO.212

ICC, one of the two existing SIDCOs, on 

the other hand, is in compliance with 

the cover two requirement and 

therefore, would not incur additional 

costs to meet the cover two 

requirement.213

As noted above, and in comment 

letters from CME and ICC,214 SIDCOs 

already implement the cover two 

standard for products with a more 

complex risk profile, and therefore, the 

costs of compliance with cover two 

should be mitigated given these existing 

practices.215

However, there are likely to be costs 

associated with the uncertainty as to 

whether a SIDCO is deemed 

systemically important in multiple 

jurisdictions and what constitutes a 

product with a more complex risk 

profile. These costs are associated with 

business planning, i.e. how to fund a 

cover two requirement. In addition, the 

possibility exists that some market 

participants will port their positions 

from a SIDCO that either (1) is deemed 

systemically important in multiple 

jurisdictions or (2) clears products of a 

more complex risk profile to another 

SIDCO for which neither (1) nor (2) 

applies or to another DCO that is not 


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49678 Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 

216For example under Title VIII, a SIDCO may 

establish and maintain an account with the Federal 

Reserve Bank if permitted to do so by such Federal 

Reserve Bank and by the Board. See section 806(a) 

of the Dodd-Frank Act. 

217See ICC Letter at 2 (stating that ICC ‘‘does not 

rely upon (count) [its] right of assessment to meet 

the [‘‘cover two’’ requirement]’’). See also CME 

2013 Letter at 3, n.7. 

218See ICC Letter at 2 (noting that the two-hour 

RTO is consistent with Principle 17 of the PFMIs, 

and stating that it is unlikely to incur ‘‘any 

significant additional personnel training cost 

associated with the CFTC’s proposed RTO of two 

hours’’ or ‘‘any additional backup technology costs 

related to the CFTC’s proposed RTO.’’). See also 

CME 2013 Letter at 4 (noting that ‘‘in light of the 

systemic importance of CME [Clearing]’s clearing 

functions and the intended benefits, including 

compliance with the PFMI requirements for critical 

information technology, CME [Clearing] has 

obtained budget approval and allocated resources 

towards a two hour RTO and will be working 

throughout 2013 towards achieving a two hour 

RTO.’’). 

219See supra n. 139 and accompanying text for 

a discussion of pro-cyclicality. 

systemically important because the 

value of the cover two protection to 

these market participants is less than 

the price at which that protection is 

being offered. These market participants 

will transact with DCOs that operate 

under cover one, which is a lower 

financial resources requirement, and 

thus, get the benefit of lower 

transactional fees and forego the 

enhanced protections associated with 

the SIDCOs. Such an event adversely 

impacts the reduction in systemic risk 

that the cover two standard affords. 

However, the potential cost to the 

SIDCO and to the goal of systemic risk 

reduction is likely mitigated because (a) 

not every product offered by the SIDCO 

is available at other DCOs and (b) a 

SIDCO may offer benefits not available 

to a DCO that is not designated as 

systemically important,216 thereby 

reducing the likelihood that market 

participants will port their positions to 

other DCOs. 

b. Regulation 39.29(b): Prohibition on 

the Use of Assessments in Calculation of 

Default Resources To Meet Obligations 

Under Regulation 39.29(a) 

The costs associated with the 

prohibited use of assessments by 

SIDCOs in calculating the SIDCO’s 

obligations under regulation 39.29(a) 

include the opportunity cost of the 

additional financial resources needed to 

replace the value of such assessments. 

This may require an infusion of 

additional capital. The cost of this 

regulation should be mitigated for 

SIDCOs because neither CME Clearing 

nor ICC, the two existing SIDCOs, rely 

on assessments to meet their default 

fund obligations for products with a 

more complex risk profile.217

Additionally, analogous to the case with 

the cover two standard, market 

participant demand may shift from a 

SIDCO to a DCO with a lower 

capitalization requirement. 

c. Regulation 39.30: Two-Hour RTO 

The Commission recognizes that a 

two-hour RTO may increase operational 

costs for SIDCOs by requiring additional 

resources, including personnel, 

technological and geographically 

dispersed resources, in order to comply 

with the final rule. Moreover, the 

implementation of a two-hour RTO is 

expected to impose one-time costs to set 

up the enhanced resources as well as 

recurring costs to operate the additional 

resources. However, as noted above, the 

Commission requested but did not 

receive quantitative data from which to 

estimate the dollar costs associated with 

implementing a two-hour RTO, and in 

particular the costs of moving from a 

next day RTO, the minimum standard 

established by the DCO core principles 

and regulation 39.18, to a two-hour RTO 

as required by regulation 39.30. The 

Commission did, however, receive 

qualitative comments regarding the 

costs associated with the two-hour RTO, 

which are discussed in more detail 

above. For example, CME, ICE and OCC 

all initially opposed the enhanced RTO, 

citing to the increase of costs associated 

with the proposed regulation 39.30. 

However, more recently, the 

Commission received comments from 

CME and ICC acknowledging the 

importance of the two-hour RTO and 

their intent to implement a two-hour 

RTO.218

D. Section 15(a) Factors 

1. Protection of Market Participants and 

the Public 

The enhanced financial resources 

requirements and system safeguard 

requirements for SIDCOs, as set forth in 

this final rulemaking, will further the 

protection of market participants and 

the public by increasing the financial 

stability and operational security of 

SIDCOs, and more broadly, increase the 

stability of the U.S. financial markets. A 

designation of systemic importance 

under Title VIII means the failure of a 

SIDCO or the disruption of its clearing 

and settlement activities could create or 

increase the risk of significant liquidity 

or credit problems spreading among 

financial institutions or markets, 

thereby threatening the stability of the 

U.S. financial markets. The regulations 

contained in this final rule are designed 

to help ensure that SIDCOs continue to 

function even in extreme circumstances, 

including multiple defaults by clearing 

members and wide-scale disruptions. 

While there may be increased costs 

associated with the implementation of 

the final rules, these costs are mitigated 

by the countervailing benefits of the 

increased safety and soundness of the 

SIDCOs and the reduction of systemic 

risk, which protect market participants 

and the public form the adverse 

consequences that would result from a 

SIDCO failure or a disruption in its 

functioning. 

2. Efficiency, Competitiveness, and 

Financial Integrity 

The regulations set forth in this final 

rulemaking will promote financial 

strength and stability of SIDCOs, as well 

as, more broadly, efficiency and greater 

competition in the global markets. The 

regulations promote efficiency insofar as 

SIDCOs that operate with enhanced 

financial resources as well as increased 

system safeguards are more secure and 

are less likely to fail. The regulations 

promote competition because they are 

consistent with the international 

standards set forth in the PFMIs and 

will help to ensure that SIDCOs are 

afforded the opportunity to gain QCCP 

status and thus avoid an important 

competitive disadvantage relative to 

similarly situated foreign CCPs that are 

QCCPs. Additionally, by increasing the 

stability and strength of the SIDCOs, the 

regulations in the final rule help to 

ensure that SIDCOs can meet their 

obligations in the most extreme 

circumstances and can resume 

operations even in the face of wide-scale 

disruption, which contributes to the 

financial integrity of the financial 

markets. In requiring more SIDCO 

financial resources to be pre-funded by 

(1) expanding the potential losses those 

resources are intended to cover and (2) 

restricting the means for satisfying those 

resource requirements, i.e. through 

prohibiting the use of assessments in 

determining guarantee fund 

contributions, the requirements of this 

final rule seek to lessen the incidence of 

pro-cyclical demands for additional 

funding resources and, in so doing, 

promote both financial integrity and 

market stability.219

3. Price Discovery 

The regulations in the final 

rulemaking enhance risk management 

standards for SIDCOs which may result 

in increased public confidence, which, 

in turn, might lead to expanded 

participation in the affected markets, i.e. 

products with a more complex risk 

profile. The expanded participation in 

these markets (i.e. greater transactional 


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Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 49679 

220See section 804(a)(4) of the Dodd-Frank Act 

(Congressional findings). 

221 44 U.S.C. 3501 et seq. 

222 76 FR 69334 at 69428. 

223See ‘‘A New Regulatory Framework for 

Clearing Organizations,’’ 66 FR 45604, 45609 (Aug. 

29, 2001), ‘‘17 CFR part 40 Provisions Common to 

Registered Entities,’’ 75 FR 67282 (November 2, 

2010), and ‘‘Provisions Common to Registered 

Entities,’’ 76 FR 44776, 44789 (July 27, 2011). 

volume) may have a positive impact on 

price discovery. Conversely, the 

Commission notes that these enhanced 

risk management standards are also 

associated with additional costs and to 

the extent that SIDCOs pass along the 

additional costs to their clearing 

members and customers, participation 

in the affected markets may decrease 

and have a negative impact on price 

discovery. However, it is the 

Commission’s belief that such higher 

transactional costs should be greatly 

offset by the lower capital charges 

granted to clearing members and 

customers clearing derivative 

transactions through SIDCOs that are 

deemed QCCPs. 

4. Sound Risk Management Practices 

The regulations in the final 

rulemaking contribute to the sound risk 

management practices of SIDCOs 

because the requirements promote the 

safety and soundness of the SIDCOs by 

(1) enhancing the financial resources 

requirements, which provide greater 

certainty for market participants that all 

obligations will be honored by the 

SIDCOs and (2) enhancing system 

safeguards to facilitate the continuous 

operation and rapid recovery of 

activities, which provide certainty and 

security to market participants that 

potential disruptions will be reduced 

and, by extension, the risk of loss of 

capital and liquidity will be reduced. 

5. Other Public Interest Considerations 

The Commission notes the strong 

public interest for jurisdictions to either 

adopt the PFMIs or establish standards 

consistent with the PFMIs in order to 

allow CCPs licensed in the relevant 

jurisdiction to gain QCCP status. As 

emphasized throughout this rulemaking, 

SIDCOs that gain QCCP status will 

avoid a competitive disadvantage in the 

financial markets by avoiding the much 

higher capital charges imposed by the 

Basel CCP Capital Requirements. 

Moreover, because ‘‘enhancements to 

the regulation and supervision of 

systemically important financial market 

utilities . . . are necessary . . . to 

support the stability of the broader 

financial system,’’ 220 adopting these 

rules promotes the public interest in a 

more stable broader financial system. 

VII. Related Matters 

A. Paperwork Reduction Act 

The Commission may not conduct or 

sponsor, and a registered entity is not 

required to respond to, a collection of 

information unless it displays a 

currently valid Office of Management 

and Budget (OMB) control number. The 

Commission’s adoption of §§ 39.28, 

39.29, 39.30, and 39.31 (DCO) imposes 

no new information collection 

requirements on registered entities 

within the meaning of the Paperwork 

Reduction Act.221 The OMB has 

previously assigned control numbers for 

the required collections of information 

under a prior related final rulemaking to 

which this rulemaking relates.222 The 

titles for the previous collections of 

information are ‘‘Part 40, Provisions 

Common to Registered Entities’’, OMB 

control number 3038–0093, ‘‘Financial 

Resources Requirements for Derivatives 

Clearing Organizations, OMB control 

number 3038–0066,’’ ‘‘Information 

Management Requirements for 

Derivatives Clearing Organizations, 

OMB control number 3038–0069,’’ 

‘‘General Regulations and Derivatives 

Clearing Organizations, OMB control 

number 3038–0081,’’ and ‘‘Risk 

Management Requirements for 

Derivatives Clearing Organizations, 

OMB control number 3038–0076.’’ This 

rulemaking is applicable to a subset of 

DCOs designated as SIDCOs, who must 

comply with existing information 

collection requirements for DCOs. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that agencies consider whether 

the rules they propose will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact. The rules proposed by the 

Commission will affect only DCOs 

designated as SIDCOs. The Commission 

has previously established certain 

definitions of ‘‘small entities’’ to be used 

by the Commission in evaluating the 

impact of its regulations on small 

entities in accordance with the RFA. 

The Commission has previously 

determined that DCOs are not small 

entities for the purpose of the RFA.223

Accordingly, the Chairman, on behalf of 

the Commission, hereby certifies 

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

proposed rules will not have a 

significant economic impact on a 

substantial number of small entities. 

List of Subjects in 17 CFR Part 39 

Commodity futures, Consumer 

protection, Enforcement authority, 

Financial resources, Reporting and 

recordkeeping requirements, Risk 

management. 

For the reasons stated in the 

preamble, amend 17 CFR part 39 as 

follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

■ 1. The authority citation for part 39 is 

revised to read as follows: 

Authority: 7 U.S.C. 2 and 7a–1 as amended 

by the Dodd-Frank Wall Street Reform and 

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

124 Stat. 1376; Subpart C also issued under 

12 U.S.C. 5464. 

■ 2. Add subpart C to read as follows: 

Subpart C—Provisions Applicable to 

Systemically Important Derivatives Clearing 

Organizations 

Sec. 

39.28 Scope. 

39.29 Financial resources requirements. 

39.30 System safeguards. 

39.31 Special enforcement authority. 

Subpart C—Provisions Applicable to 

Systemically Important Derivatives 

Clearing Organizations 

§ 39.28 Scope. 

(a) The provisions of this subpart C 

apply to any derivatives clearing 

organization, as defined in section 

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

chapter, 

(1) Which is registered or deemed to 

be registered with the Commission as a 

derivatives clearing organization, is 

required to register as such with the 

Commission pursuant to section 5b(a) of 

the Act, or which voluntarily registers 

as such with the Commission pursuant 

to section 5b(b) or otherwise; and 

(2) Which is a systemically important 

derivatives clearing organization as 

defined in § 39.2. 

(b) A systemically important 

derivatives clearing organization is 

subject to the provisions of subparts A 

and B of this part 39 except to the extent 

different requirements are imposed by 

provisions of this subpart C. 

(c) A systemically important 

derivatives clearing organization shall 

provide notice to the Commission in 

advance of any proposed change to its 

rules, procedures, or operations that 

could materially affect the nature or 

level of risks presented by the 

systemically important derivatives 

clearing organization, in accordance 

with the requirements of § 40.10 of this 

chapter. 


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49680 Federal Register / Vol. 78, No. 158 / Thursday, August 15, 2013 / Rules and Regulations 

§ 39.29 Financial resources requirements. 

(a) General rule. Notwithstanding the 

requirements of § 39.11(a)(1), a 

systemically important derivatives 

clearing organization that is 

systemically important in multiple 

jurisdictions or that is involved in 

activities with a more complex risk 

profile shall maintain financial 

resources sufficient to enable it to meet 

its financial obligations to its clearing 

members notwithstanding a default by 

the two clearing members creating the 

largest combined financial exposure for 

the systemically important derivatives 

clearing organization in extreme but 

plausible market conditions; Provided 

that if a clearing member controls 

another clearing member or is under 

common control with another clearing 

member, affiliated clearing members 

shall be deemed to be a single clearing 

member for the purposes of this 

provision. 

(b) Valuation of financial resources. 

Notwithstanding the requirements of 

§ 39.11(d)(2), assessments for additional 

guaranty fund contributions (i.e., 

guarantee fund contributions that are 

not pre-funded) shall not be included in 

calculating the financial resources 

available to meet a systemically 

important derivatives clearing 

organization’s obligations under 

paragraph (a) of this section. 

§ 39.30 System safeguards. 

(a) Notwithstanding § 39.18(e)(3), the 

business continuity and disaster 

recovery plan described in § 39.18(e)(1) 

for each systemically important 

derivatives clearing organization shall 

have the objective of enabling, and the 

physical, technological, and personnel 

resources described in § 39.18(e)(1) shall 

be sufficient to enable, the derivatives 

clearing organization to recover its 

operations and resume daily processing, 

clearing, and settlement no later than 

two hours following the disruption, for 

any disruption including a wide-scale 

disruption. 

(b) To ensure its ability to achieve the 

recovery time objective specified in 

paragraph (a) of this section in the event 

of a wide-scale disruption, each 

systemically important derivatives 

clearing organization must maintain a 

degree of geographic dispersal of 

physical, technological and personnel 

resources consistent with the following: 

(1) For each activity necessary to the 

clearance and settlement of existing and 

new contracts, physical and 

technological resources, sufficient to 

enable the entity to meet the recovery 

time objective after interruption of 

normal clearing by a wide-scale 

disruption, must be located outside the 

relevant area of the infrastructure the 

entity normally relies upon to conduct 

that activity, and must not rely on the 

same critical transportation, 

telecommunications, power, water, or 

other critical infrastructure components 

the entity normally relies upon for such 

activities; 

(2) Personnel, sufficient to enable the 

entity to meet the recovery time 

objective after interruption of normal 

clearing by a wide-scale disruption 

affecting the relevant area in which the 

personnel the entity normally relies 

upon to engage in such activities are 

located, must live and work outside that 

relevant area; 

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

apply to these resource requirements. 

(c) Each systemically important 

derivatives clearing organization must 

conduct regular, periodic tests of its 

business continuity and disaster 

recovery plans and resources and its 

capacity to achieve the required 

recovery time objective in the event of 

a wide-scale disruption. The provisions 

of § 39.18(j) apply to such testing. 

(d) The requirements of this section 

shall apply to a derivatives clearing 

organization not earlier than one year 

after such derivatives clearing 

organization is designated as 

systemically important. 

§ 39.31 Special enforcement authority. 

For purposes of enforcing the 

provisions of Title VIII of the DoddFrank Act, a systemically important 

derivatives clearing organization shall 

be subject to, and the Commission has 

authority under the provisions of 

subsections (b) through (n) of section 8 

of the Federal Deposit Insurance Act (12 

U.S.C. 1818) in the same manner and to 

the same extent as if the systemically 

important derivatives clearing 

organization were an insured depository 

institution and the Commission were 

the appropriate Federal banking agency 

for such insured depository institution. 

Issued in Washington, DC, on August 9, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Appendix to Final Rule on Enhanced 

Risk Management Standards for 

Systemically Important Derivatives 

Clearing Organizations—Commission 

Voting Summary 

Note: The following appendix will not 

appear in the Code of Federal Regulations 

Appendix 1—Commission Voting Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton, O’Malia, and Wetjen 

voted in the affirmative. 

[FR Doc. 2013–19791 Filed 8–14–13; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 891 

[Docket No. FR–5167–C–03] 

RIN 2502–AI67 

Streamlining Requirements Governing 

the Use of Funding for Supportive 

Housing for the Elderly and Persons 

With Disabilities Programs; Correction 

AGENCY: Office of the Assistant 

Secretary of Housing—Federal Housing 

Commissioner, HUD. 

ACTION: Correcting amendment. 

SUMMARY: On June 20, 2013, HUD 

published a final rule that amended 

regulations for the purpose of 

streamlining the requirements 

applicable to mixed finance 

developments in the Section 202 

Supportive Housing for the Elderly 

(Section 202) and the Section 811 

Supportive Housing for Persons with 

Disabilities (Section 811) programs and 

amending certain regulations governing 

all Section 202 and Section 811 

developments. This publication corrects 

an error in the final rule regarding the 

duration of the fund reservations for 

capital advances. 

DATES: Effective: August 15, 2013, and 

applicable beginning July 22, 2013. 

FOR FURTHER INFORMATION CONTACT: 

Aretha Williams, Office of Housing 

Assistance and Grant Administration, 

Office of Housing, Department of 

Housing and Urban Development, 451 

7th Street SW., Room 6136, Washington, 

DC 20410–8000; telephone number 202– 

708–3000 (this is not a toll-free 

number). Persons with hearing or 

speech impairments may access this 

number via TTY by calling the toll-free 

Federal Relay Service at 1–800–877– 

8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On June 20, 2013 (78 FR 37106), HUD 

published a final rule amending 

regulations governing the Section 202 

and Section 811 programs to streamline 

requirements for mixed finance 

developments and to amend other 

regulations for these programs. One 

amendment the rule made was to extend 


tkelley on DSK3SPTVN1PROD with RULES