Vol. 78 Friday, 

No. 159 August 16, 2013 

Part IV 

Commodity Futures Trading Commission 

17 CFR Parts 39, 140, and 190 

Derivatives Clearing Organizations and International Standards; Proposed 

Rule 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
50260 Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 

1 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, 124 Stat. 1376 

(2010). The text of the Dodd-Frank Act may be 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 39, 140, and 190 

RIN Number 3038–AE06 

Derivatives Clearing Organizations and 

International Standards 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’) is 

proposing amendments to its 

regulations to establish additional 

standards for compliance with the 

derivatives clearing organization 

(‘‘DCO’’) core principles set forth in 

Section 5b(c)(2) of the Commodity 

Exchange Act (‘‘CEA’’) for systemically 

important DCOs (‘‘SIDCOs’’) and DCOs 

that elect to opt-in to the SIDCO 

regulatory requirements (‘‘Subpart C 

DCOs’’). SIDCOs and Subpart C DCOs 

would be required to comply with the 

requirements applicable to all DCOs, 

which are set forth in the Commission’s 

DCO regulations on compliance with 

core principles, to the extent those 

requirements are not inconsistent with 

the requirements of the regulations in 

this proposed rule. The proposed 

amendments include: Procedural 

requirements for opting in to the 

regulatory regime as well as substantive 

requirements relating to governance, 

financial resources, system safeguards, 

special default rules and procedures for 

uncovered losses or shortfalls, risk 

management, additional disclosure 

requirements, efficiency, and recovery 

and wind-down procedures. These 

additional requirements would also be 

consistent with the Principles for 

Financial Market Infrastructures 

(‘‘PFMIs’’) published by the Committee 

on Payment and Settlement Systems 

and the Board of the International 

Organization of Securities Commissions 

(‘‘CPSS–IOSCO’’). In addition, the 

Commission is proposing certain 

delegation provisions and certain 

technical clarifications. 

DATES: Submit comments on or before 

September 16, 2013. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AE06, 

by any of the following methods: 

• Agency Web site: http:// 

comments.cftc.gov. 

• Mail: Secretary of the Commission, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

• Hand Delivery/Courier: Same as 

Mail, above. 

• Federal eRulemaking Portal: http:// 

www.Regulations.gov. Follow the 

instructions for submitting comments. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the procedures 

established in Commission regulation 

145. 

The Commission reserves the right 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

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

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been 

redacted or removed that contain 

comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Ananda Radhakrishnan, Director, 

Division of Clearing and Risk (‘‘DCR’’), 

at 202–418–5188 or 

aradhakrishnan@cftc.gov; Robert B. 

Wasserman, Chief Counsel, DCR, at 

202–418–5092 or rwasserman@cftc.gov; 

M. Laura Astrada, Associate Chief 

Counsel, DCR, at 202–418–7622 or 

lastrada@cftc.gov; Peter A. Kals, Special 

Counsel, DCR, at 202–418–5466 or 

pkals@cftc.gov; Jocelyn Partridge, 

Special Counsel, DCR, at 202–418–5926 

or jpartridge@cftc.gov; Tracey Wingate, 

Special Counsel, DCR, at 202–418–5319 

or twingate@cftc.gov; or Kathryn L. 

Ballintine, Attorney-Advisor, DCR, at 

202–418–5575 or kballintine@cftc.gov, 

in each case, at the Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION:

Table of Contents 

I. Background 

A. Regulatory Framework for Registered 

DCOs 

B. Designation of DCOs as Systemically 

Important Under Title VIII of the DoddFrank Act 

C. Existing Standards for SIDCOs 

D. DCO Core Principles and Existing 

Regulations for Registered DCOs 

E. PFMIs 

F. The Role of the PFMIs in International 

Banking Standards 

G. Proposed Rulemaking Applicable to 

SIDCOs and Subpart C DCOs 

II. Discussion of Revised and Proposed Rules 

A. Regulation 39.2 (Definitions) 

B. Regulation 39.30 (Scope) 

C. Regulation 39.31 (Election To Become 

Subject to the Provisions of Subpart C) 

D. Regulation 39.32 (Governance for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

E. Regulation 39.33 (Financial Resources 

for Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

F. Regulation 39.34 (System Safeguards for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

G. Regulation 39.35 (Default Rules and 

Procedures for Uncovered Losses or 

Shortfalls (Recovery) for Systemically 

Important Derivatives Clearing 

Organizations and Subpart C Derivatives 

Clearing Organizations) 

H. Regulation 39.36 (Risk Management for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

I. Regulation 39.37 (Additional Disclosure 

for Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

J. Regulation 39.38 (Efficiency for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

K. Regulation 39.39 (Recovery and WindDown for Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

L. Regulation 39.40 (Consistency With the 

Principles for Financial Market 

Infrastructures) 

M. Regulation 39.41 (Special Enforcement 

Authority For Systemically Important 

Derivatives Clearing Organizations) 

N. Regulation 39.42 (Advance Notice of 

Material Risk-Related Rule Changes by 

Systemically Important Derivatives 

Clearing Organizations) 

O. Regulation 140.94 (Delegation of 

Authority to the Director of the Division 

of Clearing and Risk) 

P. Regulation 190.09 (Member Property) 

III. Effective Date 

IV. Related Matters 

A. Paperwork Reduction Act 

B. Regulatory Flexibility Act 

C. Consideration of Costs and Benefits 

I. Background 

A. Regulatory Framework for Registered 

DCOs 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’).1 Title VII of the 


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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) 

(adopting 17 CFR Part 39, Appendix A). 

6See Section 725(c)(2)(i) of the Dodd Frank Act 

(giving the Commission explicit authority to 

promulgate rules regarding the core principles 

pursuant to its rulemaking authority under Section 

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

7See Derivatives Clearing Organization General 

Provisions and Core Principles, 76 FR 69334 (Nov. 

8, 2011). 

8 Id. at 69335. 

9Section 801 of the Dodd-Frank Act. 

10Section 802(b) of the Dodd-Frank Act. 

11An FMU includes ‘‘any person that manages or 

operates a multilateral system for the purpose of 

transferring, clearing, or settling payments, 

securities, or other financial transactions among 

financial institutions or between financial 

institutions and the person.’’ Section 803(6)(A) of 

the Dodd-Frank Act. 

12Section 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). 

13Under 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. 

14 76 FR at 44766. 

15See 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. 

16While Chicago Mercantile Exchange, Inc. 

(‘‘CME’’), ICE Clear Credit LLC (‘‘ICE Clear Credit’’), 

and The Options Clearing Corporation (‘‘OCC’’) are 

the CFTC-registered DCOs that were designated as 

systemically important by the Council, the CFTC is 

the Supervisory Agency only for CME and ICE Clear 

Credit, the SEC serves as OCC’s Supervisory 

Agency. 

17See Section 803(8)(A) of the Dodd-Frank Act 

(defining ‘‘Supervisory Agency’’ as the federal 

agency that has primary jurisdiction over a 

designated financial market utility under federal 

banking, securities or commodity futures laws). 

18See Section 805(a)(2) of the Dodd-Frank Act. 

The Commission notes that under section 805 of the 

Dodd-Frank Act 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 are 

engaged in activities for which the Commission is 

the appropriate financial regulator. 

19Section 752 of the Dodd-Frank Act, codified at 

15 U.S.C. 8325, provides: 

(a) In order to promote effective and consistent 

global regulation of swaps and security based 

swaps, the [CFTC], the Securities and Exchange 

Commission, and the prudential regulators (as that 

term is defined in section 1a(30) of the [CEA], as 

appropriate, shall consult and coordinate with 

foreign regulatory authorities on the establishment 

of international standards with respect to the 

regulation * * * of swaps * * * [and] swap 

entities * * *. 

(b) In order to promote effective and consistent 

global regulation of contracts of sale of a commodity 

for future delivery and options on such contracts, 

the [CFTC] shall consult and coordinate with 

foreign regulatory authorities on the establishment 

of international standards with respect to the 

regulation of contracts of a sale of a commodity for 

future delivery and on options on such contracts. 

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 

DCO must comply with in order to 

register and maintain registration with 

the Commission. The core principles 

were originally added to the CEA by the 

Commodity Futures Modernization Act 

of 2000,4 and, in 2001, the Commission 

issued guidance on DCO compliance 

with these core principles.5 However, in 

furtherance of the goals of the DoddFrank 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 final rule for Subpart A 

and Subpart B of part 39 of the 

Commission’s regulations (‘‘Subpart A’’ 

and ‘‘Subpart B,’’ respectively), the 

implementing regulations of 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 ‘‘market 

participants and the public that DCOs 

are meeting minimum risk management 

standards.’’ 8

B. Designation of DCOs as Systemically 

Important Under Title VIII of the DoddFrank Act 

Title VIII of the Dodd-Frank Act, 

entitled ‘‘Payment, Clearing, and 

Settlement Supervision Act of 2010,’’ 9

was enacted to mitigate systemic risk in 

the financial system and promote 

financial stability.10 Section 804 of the 

Dodd-Frank Act requires the Financial 

Stability Oversight Council (‘‘Council’’) 

to designate those financial market 

utilities (‘‘FMUs’’) 11 that the Council 

determines are, or are likely to become, 

systemically important.12

In determining whether an FMU is 

systemically important, the Council 

uses a detailed two-stage designations 

process, using certain statutory 

considerations 13 and other metrics to 

assesses, 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.’’ 14 On July 18, 2012, the 

Council designated eight FMUs as 

systemically important under Title 

VIII.15 Two of these designated FMUs 

are CFTC-registered DCOs 16 for which 

the Commission is the Supervisory 

Agency.17

C. Existing Standards for SIDCOs 

Section 805 of the Dodd-Frank Act 

directs the Commission to consider 

relevant international standards and 

existing prudential requirements when 

prescribing risk management standards 

governing the operations related to 

payment, clearing, and settlement 

activities for FMUs that are (1) 

designated as systemically important by 

the Council and (2) engaged in activities 

for which the Commission is the 

Supervisory Agency.18 More generally, 

Section 752 of the Dodd-Frank Act 

directs the Commission to consult and 

coordinate with foreign regulatory 

authorities on the establishment of 

consistent international standards with 

respect to the regulation of, among other 

things, swaps, futures, and options on 

futures.19

The Commission has previously 

reviewed the risk management 


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50262 Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 

20Financial Resources Requirements for 

Derivatives Clearing Organizations, 75 FR 63113, at 

63119 (Oct. 14, 2010) (notice of proposed 

rulemaking). 

21 Id. 

22See Risk Management Requirements for 

Derivatives Clearing Organizations, 76 FR 3697, 

3726–3727 (Jan. 20, 2011) (notice of proposed 

rulemaking). The proposal also implemented 

special enforcement authority over SIDCOs that, 

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

would have granted the Commission authority 

under the provisions of subsections (b) through (n) 

of section 8 of the Federal Deposit Insurance Act 

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. See 76 FR at 3727. 

23See 76 FR at 69352. 

24The 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. 

25Enhanced Risk Management Standards for 

Systemically Important Derivatives Clearing 

Organizations, (final rule published in the Federal 

Register August 15, 2013) (‘‘SIDCO Final Rule’’). 

26 Id. 

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

1(c)(2)(B). 

28Specifically, regulation 39.11 requires 

registered DCOs to maintain financial resources 

sufficient to cover a wide range of potential stress 

scenarios, which include, but are not limited to, the 

default of the participant and its affiliates that 

would potentially cause the largest aggregate credit 

exposure to the CCP in extreme but plausible 

market conditions, otherwise known as ‘‘Cover 

One.’’ 

29Financial resources sufficient to cover the 

default of the two participants creating the largest 

credit exposure in extreme but plausible 

circumstances is known as ‘‘over two.’’ See also 

infra note 70. 

standards set forth in part 39 of the 

Commission’s regulations in light of 

relevant international standards and 

existing prudential requirements to 

identify those areas in which additional 

risk management standards for SIDCOs 

would be appropriate. In 2010, the 

Commission proposed enhanced 

financial resource requirements for 

SIDCOs that would have required 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,20 and (2) only count 

the value of assessments, after a 30% 

haircut, to meet up to 20% of the 

resources required to meet obligations 

arising from a default by the clearing 

member creating the second largest 

financial exposure.21 In addition, in 

2011 the Commission proposed to 

improve system safeguards for SIDCOs 

by enhancing certain business 

continuity and disaster recovery 

procedures.22

Because efforts to finalize the PFMIs 

were ongoing at the time the 

Commission adopted certain 

amendments to part 39 applicable to 

DCOs, rules specific to SIDCOs could 

have put SIDCOs at a competitive 

disadvantage vis-a`-vis foreign central 

counterparties (‘‘CCPs’’) not yet subject 

to comparable rules. Moreover, at the 

time, because 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 General 

Provisions and Core Principles adopting 

release.23 Instead, the Commission 

decided, consistent with Section 

805(a)(1) of the Dodd-Frank Act,24 to 

monitor domestic and international 

developments concerning CCPs and 

reconsider the proposed SIDCO 

regulations in light of such 

developments. In 2013, after careful 

consideration of the comments on the 

2010 proposed SIDCO rules and in light 

of domestic and international market 

and regulatory developments, the 

Commission finalized these proposed 

regulations in a manner consistent with 

the PFMIs.25 Specifically, in the final 

rules the Commission amended part 39 

by creating a Subpart C and adding 

regulations that (1) increased the 

minimum financial resource 

requirements for SIDCOs, (2) restricted 

the use of assessments by SIDCOs in 

meeting such financial resource 

obligations, (3) enhanced the system 

safeguards requirements for SIDCOs, 

and (4) granted the Commission special 

enforcement authority over SIDCOs 

pursuant to Section 807 of the DoddFrank Act.26

D. DCO Core Principles and Regulations 

for Registered DCOs 

As noted above, in order to register 

and maintain registration status with the 

Commission, DCOs must comply with 

all of the DCO core principles set forth 

in Section 5b(c)(2) of the CEA, as 

amended by Section 725 of the DoddFrank Act, as well as all applicable 

Commission regulations. However, for 

purposes of this proposal, the 

Commission would like to highlight the 

following requirements set forth in the 

core principles and related Commission 

regulations: Core Principle B (Financial 

Resources) and regulations 39.11 and 

39.29; Core Principle D (Risk 

Management) and regulation 39.13; Core 

Principle G (Default Rules and 

Procedures) and regulation 39.16; Core 

Principle I (System Safeguards) and 

regulations 39.18 and 39.30; Core 

Principle L (Public Information) and 

regulation 39.21; Core Principle O 

(Governance Fitness Standards); Core 

Principle P (Conflicts of Interest); and 

Core Principle Q (Composition of 

Governing Boards). 

1. Core Principle B: Financial Resources 

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].’’ 27 Specifically, Core Principle B 

requires a DCO to possess financial 

resources that, at a minimum, exceed 

the total amount that would enable the 

DCO to meet its financial obligations to 

its clearing members, notwithstanding a 

default by the clearing member creating 

the largest financial exposure for the 

DCO in extreme but plausible market 

conditions and to cover its operating 

costs for a period of one year, as 

calculated on a rolling basis. Regulation 

39.11 codifies these minimum 

requirements for all DCOs.28 Pursuant to 

regulation 39.29, however, a SIDCO that 

is systemically important in multiple 

jurisdictions or that is involved in 

activities with a more-complex risk 

profile must 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.29

2. Core Principle D: Risk Management 

Core Principle D requires a DCO to 

ensure that it possesses the ability to 

manage the risks associated with 

discharging the responsibilities of the 

DCO through the use of appropriate 

tools and procedures. It further requires 

a DCO to measure its credit exposures 

to each clearing member not less than 

once each business day and to monitor 

each such exposure periodically during 

the business day. Core Principle D also 

requires a DCO to limit its exposure to 

potential losses from defaults by 

clearing members through margin 

requirements and other risk control 

mechanisms, to ensure that the DCO’s 

operations would not be disrupted and 

non-defaulting clearing members would 

not be exposed to losses that nondefaulting clearing members cannot 

anticipate or control. Finally, Core 

Principle D provides that a DCO must 

require margin from each clearing 

member sufficient to cover potential 

exposures in normal market conditions 

and that each model and parameter used 

in setting such margin requirements 

must be risk-based and reviewed on a 

regular basis. Regulation 39.13 


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30The Commission also requires that a DCO’s 

actual coverage of its initial margin requirements 

meet an established confidence level of at least 

99%, based on data from an appropriate historic 

time period. See generally 17 CFR 39.13(g)(2)(iii). 

31See Committee on Payment and Settlement 

Systems and the Technical Committee of the 

International Organization of Securities 

Commissions, Principles for Financial Market 

Infrastructures, (April 2012) available at http:// 

www.iosco.org/library/pubdocs/pdf/ 

IOSCOPD377.pdf. See also the Financial Stability 

Board June 2012 Third Progress Report on 

Implementation, available at http:// 

www.financialstabilityboard.org/publications/ 

r_120615.pdf (Noting publication of the PFMIs as 

achieving ‘‘an important milestone in the global 

development of a sound basis for central clearing 

of all standardised OTC derivatives’’). 

32 In making this determination, the Commission 

noted that ‘‘the adoption and implementation of the 

PFMIs by numerous foreign jurisdictions highlights 

the role these principles play in creating a global, 

unified set of international risk management 

standards for CCPs.’’ See SIDCO Final Rule. 

33The 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. 

34PFMIs, ¶ 1.6. 

35 Id. 

36The international standards for FMIs, prior to 

the publication of the PFMIs, included, the Core 

Principles for Systemically Important Payment 

Systems published by CPSS in 2001, the 

Recommendations for Securities Settlement 

Systems published by CPSS–IOSCO in 2001, and 

the Recommendations for Central Counterparties 

published by CPSS–IOSCO in 2004 (collectively all 

three are referred to as the ‘‘CPSS–IOSCO Principles 

and Recommendations’’). See PFMIs, ¶¶ 1.4–1.5. 

establishes the requirements that a DCO 

must meet in order to comply with Core 

Principle D, including documentation 

requirements, the methodology for the 

calculation and coverage of margin 

requirements, and the criteria and 

timing of stress tests that a DCO must 

conduct.30

3. Core Principle G: Default Rules and 

Procedures 

Core Principle G requires a DCO to 

have rules and procedures designed to 

allow for the efficient, fair, and safe 

management of events during which 

clearing members become insolvent or 

otherwise default on their obligations to 

the DCO. In addition, Core Principle G 

requires a DCO to clearly state its 

default procedures, make its default 

rules publicly available, and ensure that 

it may take timely action to contain 

losses and liquidity pressures and to 

continue meeting its obligations. 

Regulation 39.16 establishes the 

minimum requirements that a DCO 

must meet in order to comply with Core 

Principle G, including the requirements 

for the DCO’s default management plan 

and the procedures for dealing with the 

default and insolvency of a clearing 

member. 

4. Core Principle I: System Safeguards 

Core Principle I requires a DCO to 

establish and maintain a program of risk 

analysis and oversight that identifies 

and minimizes sources of operational 

risk through the development of 

appropriate controls and procedures, 

and automated systems that are reliable, 

secure, and have adequate scalable 

capacity. Core Principle I also requires 

that the emergency procedures, back-up 

facilities, and disaster recovery plans 

that a DCO is obligated to establish and 

maintain specifically allow for the 

timely recovery and resumption of the 

DCO’s operations and the fulfillment of 

each obligation and responsibility of the 

DCO. Finally, Core Principle I requires 

that a DCO periodically conduct tests to 

verify that the DCO’s back-up resources 

are sufficient to ensure daily processing, 

clearing, and settlement. Regulation 

39.18 delineates the minimum 

requirements that a DCO must satisfy in 

order to comply with Core Principle I, 

including a recovery time objective of 

the next business day. In addition, 

regulation 39.30 requires a SIDCO to 

have a business continuity and disaster 

recovery plan with a recovery time 

objective of not later than two hours 

following the disruption. Regulation 

39.30 also requires a SIDCO to have 

geographic diversity in the resources 

used to enable the SIDCO to meet its 

recovery time objective. 

5. Core Principle L: Public Information 

Core Principle L requires a DCO to 

provide market participants sufficient 

information to enable the market 

participants to identify and evaluate 

accurately the risks and costs associated 

with using the DCO’s services. More 

specifically, a DCO is required to make 

available to market participants 

information concerning the rules and 

operating and default procedures 

governing its clearing and settlement 

systems and also to disclose publicly 

and to the Commission the terms and 

conditions of each contract, agreement, 

and transaction cleared and settled by 

the DCO; each clearing and other fee 

charged to members; the DCO’s marginsetting methodology; daily settlement 

prices; and other matters relevant to 

participation in the DCO’s clearing and 

settlement activities. Regulation 39.21 

sets forth the requirements a DCO must 

meet in order to comply with Core 

Principle L and details the information 

to be disclosed to the public and 

requirements regarding the method and 

timing of such disclosure. 

6. Core Principle O: Governance Fitness 

Standards 

Core Principle O requires a DCO to 

establish transparent governing 

arrangements to both fulfill public 

interest requirements and to permit the 

consideration of the views of owners 

and participants. In addition, Core 

Principle O requires a DCO to establish 

and enforce appropriate fitness 

standards for directors, members of any 

disciplinary committee, members of the 

DCO, any other individual or entity 

with direct access to the settlement or 

clearing activities of the DCO, and 

affiliated parties. 

7. Core Principle P: Conflicts of Interest 

Core Principle P requires a DCO to 

establish and enforce rules to minimize 

conflicts of interest in the decision 

making process of the DCO. Core 

Principle P further requires a DCO to 

establish a process for resolving 

conflicts of interest. 

8. Core Principle Q: Composition of 

Governing Boards 

Core Principle Q requires a DCO to 

ensure that the composition of the 

governing board or committee of the 

DCO includes market participants. 

E. PFMIs 

1. Overview 

In the SIDCO Final Rule, the 

Commission determined that, for 

purposes of meeting its obligation 

pursuant to Section 805(a)(2)(A) of the 

Dodd-Frank Act, the PFMIs, which were 

developed by CPSS–IOSCO over a 

period of several years,31 were the 

international standards most relevant to 

the risk management of SIDCOs.32

In February 2010, CPSS–IOSCO 

launched a review of the existing sets of 

international standards for financial 

market infrastructures (‘‘FMIs’’) in 

support of a broader effort by the 

Financial Stability Board (‘‘FSB’’) 33 to 

strengthen core financial infrastructures 

and markets by ensuring that gaps in 

international standards were identified 

and addressed.34 CPSS–IOSCO 

endeavored to incorporate in the 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’’).35 The PFMIs 

replace CPSS–IOSCO’s previous 

international standards applicable to 

CCPs,36 and establish international risk 

management standards for FMIs, 

including CCPs, that facilitate clearing 


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37The 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, ¶ 1.8. 

38See id., ¶ 1.2. 

39 Id., ¶ 1.15. 

40See id., ¶ 1.19. 

41See Committee on Payment and Settlement 

Systems and the Board of the International 

Organization of Securities Commissions Principles 

for Financial Market Infrastructures: Disclosure 

Framework and Assessment Methodology (Dec. 

2012) (hereinafter ‘‘Disclosure Framework and 

Assessment Methodology’’), available at http:// 

www.iosco.org/library/pubdocs/pdf/ 

IOSCOPD396.pdf. 

42 Indeed, Subpart A and Subpart B were 

informed by the consultative report for the PFMIs. 

See generally 76 FR at 69334. 

43The PFMIs define ‘‘governance’’ as ‘‘the set of 

relationships between an FMI’s owners, board of 

directors (or equivalent), management, and other 

relevant parties, including participants, authorities, 

and other stakeholders (such as participants’ 

customers, other interdependent FMIs, and the 

broader market).’’ PFMIs at Annex H: Glossary. 44See PFMIs at Principle 2. 45 Id. at Principle 2, Key Consideration 

(hereinafter, ‘‘K.C.’’) 2. 46 Id. at Principle 2, K.C. 3, 5. 47 Id. at Principle 2, K.C. 4. 48See id. at Principle 2, K.C. 6. 49 Id. at Principle 2, K.C. 7. 

50PFMIs at Principle 3. 

51PFMIs at Principle 3, K.C. 3. 52PFMIs at Principle 3, K.C. 4. 53 Id. 54PFMIs at Principle 3, K.C. 2. 55PFMIs at Principle 3, K.C. 1. 56The 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. 

PFMIs at Annex H: Glossary. 57See PFMIs at Principle 4, K.C. 7. 58See id. 59 Id. at Principle 4, K.C. 4. 60Activities ‘‘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 Explanatory Note 

(hereinafter, ‘‘E.N.’’) 3.4.19. 

and settlement.37 In issuing the PFMIs, 

CPSS–IOSCO sought to strengthen and 

harmonize existing international 

standards and incorporate new 

specifications for CCPs clearing OTC 

derivatives.38 The objectives of the 

PFMIs are to enhance the safety and 

efficiency of FMIs and, more broadly, 

reduce systemic risk andfoster 

transparency and financial stability.39

The PFMIs set out 24 principles 

which address the risk and efficiency of 

an FMI’s operations.40 Assessments of 

observance with the PFMIs focus also 

on the ‘‘key considerations’’ set forth for 

each of the principles.41 While Subpart 

A and Subpart B incorporate the vast 

majority of the standards set forth in the 

PFMIs,42 the Commission, which is a 

member of the Board of IOSCO, intends 

to implement rules and regulations that 

are fully consistent with the standards 

set forth in the PFMIs by the end of 

2013. To that end, the Commission has 

recognized that in certain instances, the 

standards set forth in the PFMIs may not 

be fully covered by the requirements set 

forth in Subpart A and Subpart B. Thus, 

this rulemaking would revise Subpart C 

to address those gaps, specifically with 

respect to the following PFMI 

principles: Principle 2 (Governance); 

Principle 3 (Framework for the 

comprehensive management of risks); 

Principle 4 (Credit risk); Principle 6 

(Margin); Principle 7 (Liquidity risk); 

Principle 9 (Money settlements); 

Principle 14 (Segregation and 

portability); Principle 15 (General 

business risk); Principle 16 (Custody 

and investment risks); Principle 17 

(Operational risk); Principle 21 

(Efficiency and effectiveness); Principle 

22 (Communication procedures and 

standards); and Principle 23 (Disclosure 

of rules, key procedures, and market 

data). 

2. Principle 2: Governance 

Principle 2 addresses the governance 

arrangements of an FMI.43 Specifically, 

it states that the governance 

arrangements of an FMI should be 

‘‘clear and transparent, promote the 

safety and efficiency of the FMI, and 

support the stability of the broader 

financial system.’’ 44 An FMI’s 

governance arrangements must be 

documented and set forth ‘‘direct lines 

of responsibility and accountability,’’ 

which are disclosed to owners, 

regulators, clearing members and their 

customers, and the public.45 In addition, 

an FMI must clearly specify the roles 

and responsibilities of the board of 

directors and management, ensure that 

the board of directors and management 

have appropriate experience, design 

procedures to identify and resolve 

conflicts of interest for members of the 

board of directors, and regularly review 

the performance of the board of 

directors as a whole and individual 

directors.46 In order to ensure that the 

board of directors has the appropriate 

incentive to fulfill its multiple roles, the 

board must typically include nonexecutive board members.47 Further, the 

FMI’s risk management framework must 

be clear, documented and reflect the 

risk-tolerance policy, assign 

responsibility and accountability for 

risk decisions, and specify how 

decisions will be made in crises and 

emergencies.48 Finally, Principle 2 

requires the FMI’s ‘‘design, rules, 

overall strategy, and decisions to reflect 

appropriately the legitimate interests of 

its direct and indirect participants and 

other relevant stakeholders,’’ and 

requires that ‘‘major decisions’’ be 

‘‘clearly disclosed to relevant 

stakeholders’’ and to the public when 

there is ‘‘a broad market impact.’’ 49

3. Principle 3: Framework for the 

Comprehensive Management of Risks 

Principle 3 addresses an FMI’s risk 

management framework, requiring it to 

‘‘comprehensively manag[e] legal, 

credit, liquidity, operational, and other 

risks.’’ 50 In addition, as part of its risk 

management framework, an FMI ‘‘must 

regularly review’’ and develop tools to 

address ‘‘the material risks it bears from 

and poses to other entities . . . as a 

result of interdependencies,’’ 51 and 

‘‘identify scenarios that may potentially 

prevent it from being able to provide its 

critical operations and services as a 

going concern.52 Principle 3 further 

requires an FMI to ‘‘assess the 

effectiveness of a full range of options 

for recovery or orderly wind-down’’ and 

to ‘‘prepare appropriate plans for its 

recovery or orderly wind-down as a 

result of that assessment.’’ 53 An FMI is 

required to ‘‘provide incentives’’ so that 

its participants and their customers 

‘‘manage and contain the risks they pose 

to the FMI.’’ 54 Finally, Principle 3 

requires an FMI’s risk management 

framework to be periodically 

reviewed.55

4. Principle 4: Credit Risk 

Principle 4 addresses an FMI’s credit 

risk, that is, the risk that a counterparty 

to the CCP will be unable to fully meet 

its financial obligations when due.56

Generally, Principle 4 requires all FMIs 

to 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.57 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 will be repaid, and 

how an FMI will replenish its financial 

resources that it may use during a stress 

event, such as a default, so that it can 

continue to operate in a safe and sound 

manner.58 More 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.’’ 59

Additionally, Principle 4 provides that 

a CCP involved in activities with a more 

complex risk profile 60 or that is 


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61PFMIs at Principle 6. 

62 Id. at Principle 6, K.C. 1. 

63See id. at Principle 6, K.C. 2. 

64 Id. at Principle 6, K.C. 6. 

65 Id. at Principle 6, K.C. 4. 

66The PFMIs define ‘‘liquidity risk’’ as ‘‘the risk 

that a counterparty, whether a participant or other 

entity, will have insufficient funds to meet its 

financial obligations as and when expected, 

although it may be able to do so in the future.’’ Id. 

at Annex H: Glossary. 

67See PFMIs at Principle 7, K.C. 1. 

68See PFMIs at Principle 7, K.C. 2. 

69See PFMIs at Principle 7, K.C. 9. 

70PFMIs at Principle 7, K.C. 4. The term ‘‘Cover 

Two’’ refers to the requirement that a CCP 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. 

71See PFMIs at Principle 7, K.C. 5–8. 

72 Id. 

73See PFMIs at Principle 7, K.C. 3. 

74See id. 

75PFMIs at Principle 14. 

76 Id. at K.C. 1. 

77PFMIs at Principle 14, K.C. 4. 78The PFMIs define ‘‘general business risk’’ as 

‘‘any potential impairment of the FMI’s financial 

position (as a business concern) as a consequence 

of a decline in its revenues or an increase in its 

expenses, such that expenses exceed revenues and 

result in a loss that must be charged against 

capital.’’ PFMIs at Annex H: Glossary. 

79PFMIs at Principle 15. 

80 Id. at K.C. 3. Such liquid net assets used to 

support the recovery and orderly wind-down plan 

should be held in addition to the assets required to 

cover participant defaults and other risks. Id. 

81PFMIs at Principle 16. 

82 Id. 

83 Id. 

84PFMIs, ¶ 2.9. 

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. 

5. Principle 6: Margin 

Principle 6 addresses an FMI’s margin 

requirements and requires a CCP to use 

‘‘an effective margin system that is riskbased and regularly reviewed’’ to ‘‘cover 

its credit exposures to its participants 

for all products.’’ 61 Specifically, 

Principle 6 requires a CCP’s margin 

system to take into account the ‘‘risks 

and particular attributes of each 

product, portfolio and market that it 

serves’’ and be calibrated accordingly.62

Further, a CCP’s margin system must 

have reliably sourced and timely price 

data.63 A CCP’s regular reviews of its 

margin models and coverage must 

include, at minimum, (i) rigorous daily 

backtesting, (ii) monthly sensitivity 

analyses, and (iii) regular ‘‘assessment 

of the theoretical and empirical 

properties’’ of the margin models, which 

consider a wide range of possible 

market conditions ‘‘including the mostvolatile periods that have been 

experienced by the markets it serves and 

extreme changes in the correlation 

between prices.’’ 64 Principle 6 also 

states that ‘‘[a] CCP should have the 

authority and operational capacity to 

make intraday margin calls and 

payments, both scheduled and 

unscheduled, to participants.’’ 65

6. Principle 7: Liquidity risk 

Principle 7 addresses the risk that an 

FMI may not have sufficient funds to 

meet its financial obligations as and 

when due.66 Specifically, Principle 7 

provides that an FMI manage its 

liquidity risks from a variety of sources, 

including participants, settlement 

banks, custodian banks, and liquidity 

providers 67 on an ongoing and timely 

basis 68 and regularly test the sufficiency 

of liquidity resources through rigorous 

stress testing.69 Additionally, Principle 

7 provides that the minimum liquid 

resource requirement for CCPs should 

be resources that would permit Cover 

One, but a CCP that is involved in 

activities with a more complex risk 

profile or that is systemically important 

in multiple jurisdictions should 

‘‘maintain additional liquidity resources 

sufficient to cover a wider range of 

potential stress scenarios,’’ including 

resources that would permit Cover 

Two.70 Principle 7 also sets forth 

specifications for qualifying liquidity 

resources which may be used to meet 

the minimum liquid resource 

requirement.71

7. Principle 9: Money Settlements 

Principle 9 addresses money 

settlements, stating that an FMI should 

minimize and strictly control the credit 

and liquidity risk arising from the use 

of commercial bank money.72 In other 

words, an FMI should ‘‘monitor, 

manage, and limit its credit and 

liquidity risks arising from commercial 

settlement banks,’’ by (i) establishing 

and monitoring ‘‘adherence to strict 

criteria for its settlement banks that take 

into account of, among other things, 

their regulation and supervision, 

creditworthiness, capitalization, access 

to liquidity, and operational 

reliability;’’ 73 and (ii) monitoring and 

managing ‘‘the concentration credit and 

liquidity exposures to its commercial 

settlement banks.’’ 74

8. Principle 14: Segregation and 

Portability 

Principle 14 addresses segregation 

and portability, stating that ‘‘a CCP 

should have rules and procedures that 

enable the segregation and portability of 

a participant’s customers and the 

collateral provided to the CCP with 

respect to those positions.’’ 75 A CCP’s 

segregation and portability rules should, 

at a minimum, ‘‘effectively protect a 

participant’s customers’ positions and 

related collateral from the default or 

insolvency of that participant.’’ 76

Further, Principle 14 states that a CCP’s 

segregation and portability 

arrangements should be disclosed, 

including whether the protection 

provided for customer collateral is on an 

individual or omnibus basis and 

whether there are any ‘‘constraints, such 

as legal or operational constraints’’ that 

may impair its ability to segregate or 

port a participant’s customers’ positions 

and related collateral.’’ 77

9. Principle 15: General Business Risk 

Principle 15 addresses general 

business risk, the inability of an FMI to 

continue as a going concern, requiring 

an FMI to ‘‘hold sufficient liquid net 

assets funded by equity to cover 

potential general business losses.’’ 78

The liquid net assets should be 

sufficient, at all times, ‘‘to ensure a 

recovery or orderly wind-down of 

critical operations and services.’’ 79

Specifically, ‘‘an FMI should maintain a 

viable recovery or orderly wind-down 

plan’’ that is supported by ‘‘liquid net 

assets funded by equity equal to at least 

six months of current operating 

expenses.’’ 80

10. Principle 16: Custody and 

Investment Risk 

Principle 16 addresses custody and 

investment risks, stating that an FMI 

should safeguard its own assets as well 

as the assets of its participants.81

Specifically, the FMI should minimize 

the risk of loss on and delay in access 

to these assets.82 In addition, the FMI’s 

investments should be in instruments 

with minimal credit, market and 

liquidity risks.83

11. 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.84

Principle 17 states that ‘‘[b]usiness 

continuity management should aim for 

timely recovery of operations and 

fulfillment [sic] of the FMI’s obligations, 

including in the event of a wide-scale or 


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85PFMIs at Principle 17. 

86 Id. at Principle 17, K.C. 6. 

87PFMIs at Principle 21, K.C. 1. 

88 Id. at Principle 21, K.C. 2–3. 

89PFMIs at Principle 22, K.C. 1. 

90PFMIs at Principle 23. 

91See Disclosure Framework and Assessment 

Methodology, supra note 41. 

92See PFMIs at E.N. 3.23.1. 

93The BCBS is comprised of senior 

representatives of bank supervisory authorities and 

central banks from around the world including, 

Argentina, Australia, Belgium, Brazil, Canada, 

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

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

the Netherlands, Russia, Saudi Arabia, Singapore, 

South Africa, Spain, Sweden, Switzerland, Turkey, 

the United Kingdom and the United States. See 

Bank for International Settlements, Basel III: A 

Global Regulatory Framework for More Resilient 

Banks and Banking Systems, December 2010 

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

publ/bcbs189.htm. 

94See Capital Requirements for Bank Exposures 

to Central Counterparties (July 2012), available at 

www.bis.org/publ/bcbs227.pdf. The Basel CCP 

Capital Requirements are one component of Basel 

III, a framework that ‘‘is part of a comprehensive set 

of reform measures developed by the BCBS to 

strengthen the regulation, supervision and risk 

management of the international banking sector.’’ 

See Bank for International Settlement’s Web site for 

compilation of documents that form the regulatory 

framework of Basel III, available at http:// 

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

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

framework to mean a bank, banking group or other 

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

being measured. See Basel III: A Global Regulatory 

Framework, Definition of Capital, paragraph 51. The 

term ‘‘bank,’’ as used herein, also includes 

subsidiaries and affiliates of the banking group or 

other entity. The Commission notes that a bank may 

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

96See Basel CCP Capital Requirements, Annex 4, 

Section II, 6(i). 

97Trade 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. 

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. 

98See 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 methodology for 

calculating a bank’s trade exposure to a nonqualifying CCP). ‘‘A QCCP is defined as an entity 

that (i) is licensed to operate as a CCP, and is 

permitted by the appropriate regulator to operate as 

such, and (ii) is prudentially supervised in a 

jurisdiction where the relevant regulator has 

established and publicly indicated that it applies to 

the CCP on an ongoing basis, domestic rules and 

regulations that are consistent with the PFMIs.’’ See 

Section I, A: General Terms of the Basel CCP 

Capital Requirements). 

99 Id. at Section I, A: General Terms. 

100The term ‘‘client’’ as used herein refers to a 

customer of a DCO. 

101 Id. at Section IX: Central Counterparties, 

paragraphs 110 and 114. Client trade exposures are 

risk-weighted at 2% if the following two conditions 

are met: (1) The offsetting transactions are 

identified by the CCP as client transactions and 

major disruption.’’ 85 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.’’ 86

12. Principle 21: Efficiency and 

Effectiveness 

Principle 21 addresses the efficiency 

and effectiveness of an FMI. An FMI 

should be designed to meet the needs of 

its participants and the markets it 

serves, in particular, with regard to 

choice of clearing and settlement 

arrangement, operating structure, scope 

of products cleared or settled and 

integration of technology and 

procedures.87 An effective CCP reliably 

meets its obligations in a timely manner 

and achieves the public policy goals of 

safety and efficiency for participants 

and the markets it serves.88

13. Principle 22: Communication 

Procedures and Standards 

Principle 22 addresses 

communication procedures and 

standards. An FMI should use, or at a 

minimum accommodate, internationally 

accepted communication procedures 

and standards.89 These include common 

sets of rules across systems for exchange 

messages, standardized messaging 

formats, and reference data standards 

for identifying financial instruments 

and counterparties. 

14. Principle 23: Disclosure of Rules, 

Key Procedures, and Market Data 

Principle 23 addresses the disclosure 

of an FMI’s rules and procedures to 

participants and the public. An FMI 

should disclose its rules and procedures 

to participants, so that participants can 

have an ‘‘accurate understanding of the 

risks, fees, and other material costs they 

incur by participating in the FMI.’’ 90

Further, the FMI should make 

disclosures to the public regarding fees, 

basic operational information, and other 

relevant information, such as the 

responses to the Disclosure Framework 

published by CPSS–IOSCO,91 so that 

prospective participants can also assess 

the risks, fees, and other material costs 

incurred by participating in the FMI.92

F. The Role of the PFMIs in 

International Banking Standards 

The Commission notes that where a 

CCP is not prudentially supervised in a 

jurisdiction that has domestic rules and 

regulations that are consistent with the 

standards set forth in the PFMIs, the 

implementation of certain international 

banking regulations will have 

significant cost implications for that 

CCP and its market participants. 

In July of 2012, the BCBS,93 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.94

The Basel CCP Capital Requirements 

create financial incentives for banks 95

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 standards set forth in the PFMIs. 

Specifically, the Basel CCP Capital 

Requirements introduce new capital 

charges based on counterparty risk for 

banks conducting financial derivatives 

transactions through a CCP.96 These 

new capital charges relate to a bank’s 

trade exposure and default fund 

exposure to a CCP.97

The capital charges for trade exposure 

are based upon a function multiplying 

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 Basel CCP Capital 

Requirements varies significantly 

depending on whether or not the 

counterparty is a qualified CCP 

(‘‘QCCP’’).98 A QCCP is defined as an 

entity that (i) is licensed to operate as 

a CCP, and is permitted by the 

appropriate regulator to operate as such, 

and (ii) is prudentially supervised in a 

jurisdiction where the relevant regulator 

has established and publicly indicated 

that it applies to the CCP on an ongoing 

basis, domestic rules and regulations 

that are consistent with the PFMIs.99 If 

a bank transacts through a QCCP acting 

either as (1) a clearing member of a CCP 

for its own account or for clients 100 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 a flat 2% for purposes 

of calculating the counterparty risk.101 If 


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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 condition 1 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 jointly default or 

become jointly insolvent) but condition 2 is met, 

the banks trade exposure is risk-weighted at 4%. If 

neither condition 1 nor 2 is met, then the bank must 

capitalize its exposure to the CCP as a bilateral 

trade. Id. at paragraphs 115 and 116. 

102See BCBS, Consultative Document: 

Capitalisation of Bank Exposures to Central 

Counterparties, paragraph 28 (Nov. 2011), available 

at http://www.bis.org/publ/bcbs.206.htm. 

103See Basel CCP Capital Requirements, Annex 4, 

Section IX, paragraphs 121–125. 

104 Id. at paragraph 122. The Commission notes 

that the 1250% risk weight represents the reciprocal 

of the 8% capital ratio (which is the percentage of 

a bank’s capital to its risk-weighted assets). 

105 Id. at paragraph 125. 106 Id. at paragraph 127. 

107See discussion of QCCP status supra Section 

I.F. 

108See 76 FR at 44775 (finalizing 12 CFR 

1320.13(b), which states that ‘‘[t]he Council shall 

rescind a designation of systemic importance for a 

designated financial market utility if the Council 

determines that the financial market utility no 

longer meets the standards for systemic 

importance.’’). 

the CCP is non-qualifying, then 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% if the 

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

CCP is a corporate institution.102

With respect to default fund exposure, 

whenever a clearing member bank is 

required to maintain capital 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% risk weight 

approach.103 The risk-sensitive 

approach considers various factors in 

determining the risk weight for a bank’s 

default exposure to a QCCP such as (i) 

the size and quality of a QCCP’s 

financial resources, (ii) the counterparty 

credit risk exposures of such a CCP, and 

(iii) the application of such financial 

resources via the CCP’s loss bearing 

waterfall in the case one or more 

clearing members default.104 The 

1250% risk weight approach allows a 

clearing member bank to apply a 1250% 

risk weight to its default fund exposures 

to the QCCP, subject to an overall cap 

of 20% on the risk-weighted assets from 

all trade exposures to the QCCP.105 In 

other words, banks with exposures to 

QCCPs have a cap on the capital charges 

related to their default fund exposure. In 

contrast, a clearing member bank with 

exposures to a non-qualified CCP must 

apply a risk weight of 1250% with no 

cap for default fund exposures.106

Thus, the Basel CCP Capital 

Requirements provide incentives for 

banks, including their subsidiaries and 

affiliates, to clear derivatives through 

CCPs that are QCCPs by setting (1) lower 

capital charges for OTC derivatives 

transacted through a QCCP and (2) 

significantly higher capital charges for 

OTC derivatives transacted through 

non-qualifying CCPs. The increased 

capital charges for transactions through 

non-qualifying CCPs may have 

significant business and operational 

implications for U.S. DCOs that operate 

internationally and are not QCCPs. 

Specifically, banks faced with such 

higher capital charges may transfer their 

OTC derivatives business away from 

such DCOs to a QCCP in order to benefit 

from the preferential capital charges 

provided by Basel CCP Capital 

Requirements. Alternatively, banks may 

reduce or discontinue their OTC 

business altogether. Banks may also 

pass through the higher costs of 

transacting on a non-qualifying DCO 

that result from the higher capital 

charges to their customers. Accordingly, 

customers using such banks as 

intermediaries may transfer their 

business to an intermediary at a QCCP. 

In short, a DCO’s failure to be a QCCP 

may cause it to face a competitive 

disadvantage retaining members and 

customers. 

G. Proposed Rulemaking Applicable to 

SIDCOs and Subpart C DCOs 

As described in detail in section II 

below, this proposed rulemaking would 

create a new category of DCO, a Subpart 

C DCO. A Subpart C DCO would 

include any registered DCO that elects 

to become subject to the provisions in 

Subpart C of part 39 of the 

Commission’s regulations (‘‘Subpart 

C’’). Further, this rulemaking would 

revise Subpart C so that Subpart C 

would apply to SIDCOs and Subpart C 

DCOs, and would include new or 

revised standards for governance, 

financial resources, system safeguards, 

default rules and procedures for 

uncovered losses or shortfalls, risk 

management, disclosure, efficiency, and 

recovery and wind-down procedures. 

These requirements would address any 

remaining gaps between the 

Commission’s regulations and the PFMI 

standards. Thus, Subpart C, together 

with the provisions in Subpart A and 

Subpart B, would establish domestic 

rules and regulations that are consistent 

with the PFMIs. As such, because 

SIDCOs and Subpart C DCOs would 

have the requirements of Subpart A, 

Subpart B, and Subpart C applied to 

them on a continuing basis, SIDCOs and 

Subpart C DCOs would be QCCPs for 

purposes of the Basel CCP Capital 

Requirements.107 The Commission 

requests comment on all aspects of the 

rules proposed herein, as well as 

comment on the specific provisions and 

issues highlighted in section II, below. 

II. Discussion of Revised and Proposed 

Rules 

A. Regulation 39.2 (Definitions) 

The Commission proposes to amend 

regulation 39.2 by amending one 

definition and adding six definitions. 

First, the Commission proposes a 

technical amendment to the definition 

of ‘‘systemically important derivatives 

clearing organization.’’ The definition 

now describes a SIDCO as a registered 

DCO ‘‘which has been designated by the 

[Council] to be systemically important 

. . . .’’ The proposed definition would 

describe a SIDCO as a registered DCO 

‘‘which is currently designated . . . ’’ 

This revision is necessary to allow for 

the possibility that a systemic 

importance designation may be 

rescinded.108

Second, the Commission proposes to 

add a definition for the phrase ‘‘activity 

with a more complex risk profile,’’ to 

provide greater clarity as to the types of 

activities that would trigger a Cover 

Two financial resources requirement. 

The Commission proposes to define 

‘‘activity with a more complex risk 

profile’’ to include clearing credit 

default swaps, credit default futures, 

and derivatives that reference either 

credit default swaps or credit default 

futures, as well as any other activity 

designated as such by the Commission. 

By permitting activities to be added by 

Commission action, the proposed 

definition provides the Commission 

with flexibility to address new and 

innovative market activities. The phrase 

‘‘activity with a more complex risk 

profile’’ appears in regulation 39.29 

(Financial resources requirements), 

which this rulemaking proposes to 

revise and renumber as regulation 39.33. 

The phrase also appears in PFMI 

Principles 4 (Credit risk) and 7 

(Liquidity risk). 

The Commission also proposes to add 

a definition for the term ‘‘subpart C 


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109See also supra Section I.G. 

110See supra Section I.F. 

111As a technical matter, the Commission 

proposes to move existing paragraph (c) of 

renumbered regulation 39.30 (requiring a SIDCO to 

provide notice to the Commission in advance of any 

proposed change to its rules, procedures, or 

operations that could materially affect the nature or 

level of risks presented by the SIDCO, in 

accordance with the requirements of regulation 

40.10) to proposed new regulation 39.42. Because 

the other provisions of proposed regulation 39.30 

would pertain exclusively to the scope of Subpart 

C, it would be appropriate for existing paragraph (c) 

to be codified in a separate regulation. See infra 

Section II.N for further detail. 

112See SIDCO Final Rule (Discussion of risk 

management standards). See also Section 805(b) of 

the Dodd-Frank Act. 

113See supra Section I.E. 

114PFMIs ¶ 1.15. 

115 In Europe, the European Market Infrastructure 

Regulation and implementing technical standards 

entered into force on March 15, 2013, and establish 

standards for CCPs that are consistent with the 

PFMIs. See Commission Delegated Regulation (EU) 

No 153/2013, available at http://eur-lex.europa.eu/ 

LexUriServ/LexUriServ.do?uri=OJ:L:2013:052:0041:

0074:EN: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 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/

MASMonograph_Supervision_of_Financial_

Market_Infrastructures_in_Singapore%202.pdf. 

In addition, Australia and Canada 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/Securities-Category9/

csa_20120620_91–406_counterparty-clearing.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). 

116See discussion supra Section I.F. 

derivatives clearing organization.’’ As 

proposed, a ‘‘subpart C derivatives 

clearing organization’’ would include 

any registered DCO that is not a SIDCO 

and that has elected to become subject 

to Subpart C. 

In addition, the Commission proposes 

to add definitions for ‘‘depository 

institution,’’ ‘‘U.S. branch and agency of 

a foreign banking organization,’’ and 

‘‘trust company.’’ A ‘‘depository 

institution’’ would have the meaning set 

forth in Section 19(b)(1)(A) of the 

Federal Reserve Act (12 U.S.C. 

461(b)(1)(A)). A ‘‘U.S. branch and 

agency of a foreign banking 

organization’’ would mean the U.S. 

branch and agency of a foreign banking 

organization as defined in Section 1(b) 

of the International Banking Act of 1978 

(12 U.S.C. 3101). A ‘‘trust company’’ 

would mean a trust company that is a 

member of the Federal Reserve System, 

under Section 1 of the Federal Reserve 

Act (12 U.S.C. 221), but that does not 

meet the definition of ‘‘depository 

institution.’’ 

The Commission requests comment 

on these definitions. In particular, the 

Commission requests comment on the 

potential costs and benefits resulting 

from or arising out of the proposed 

definition of ‘‘activity with a more 

complex risk profile.’’ The Commission 

requests that, where possible, 

commenters provide both quantitative 

data and detailed analysis in their 

comments, particularly with respect to 

estimates of costs and benefits. In 

addition, the Commission requests 

comment on whether there are 

alternative definitions that would 

provide a more effective or efficient 

means for achieving consistency with 

the standards set forth by the PFMIs. 

The Commission requests that 

commenters include a detailed 

description of any such alternatives, and 

estimates of the costs and benefits of 

such alternatives. 

B. Regulation 39.30 (Scope) 

The Commission proposes to expand 

regulation 39.28 (and renumber it as 

regulation 39.30) so that Subpart C 

would apply to SIDCOs and Subpart C 

DCOs. As described above, the rules 

proposed in Subpart C address the gaps 

between Commission regulations and 

the standards set forth in the PFMIs.109

As such, a DCO that is subject to the 

requirements of Subpart A, Subpart B, 

and Subpart C should meet the 

requirements for QCCP status and 

benefit from the lower capital charges 

on clearing member banks and bank 

customers of clearing members for 

exposures resulting from derivatives 

cleared through QCCPs.110 Such a DCO 

may also be viewed more favorably by 

potential members or customers of 

members in that it would be seen to be 

held to international standards. Because 

of these potential benefits, the 

Commission proposes that a DCO that 

has not been designated to be 

systemically important should have the 

option to elect to become subject to 

Subpart C.111

With respect to SIDCOs, the 

Commission is committed to 

maintaining risk management standards 

that enhance the safety and efficiency of 

a SIDCO, reduce systemic risks, foster 

transparency and support the stability of 

the broader financial system.112 To 

support financial stability, a SIDCO 

must operate in a safe and sound 

manner. If it fails to measure, monitor, 

and manage its risks effectively, a 

SIDCO could pose significant risk to its 

participants and the financial system 

more broadly.113 The Commission 

shares the stated objectives of the 

PFMIs, namely to enhance the safety 

and efficiency of FMIs and, more 

broadly, reduce systemic risk and foster 

transparency and financial stability.114

The PFMIs have been adopted and 

implemented by numerous foreign 

jurisdictions.115 A global, unified set of 

international risk management 

standards for systemically important 

CCPs can help support the stability of 

the broader financial system and, for the 

reasons set forth in the discussion 

below, the Commission proposes that 

SIDCOs be required to comply with all 

of the requirements set forth in part 39 

of the Commission’s regulations, 

including the proposed standards set 

forth in Subpart C. 

The Commission requests comment 

on the proposed rules. Specifically, and 

in light of the potential impact that a 

SIDCO’s failure could have on the U.S. 

financial system, the Commission 

requests comment on the potential costs 

and benefits resulting from, or arising 

out of, requiring SIDCOs to comply with 

Subpart C. The Commission requests 

that, where possible, commenters 

provide quantitative data and detailed 

analysis in their comments, particularly 

with respect to estimates of costs and 

benefits. In addition, the Commission 

requests comment on whether there are 

more effective or efficient means for 

achieving consistency with the 

standards set forth by the PFMIs. The 

Commission requests that commenters 

include a detailed description of any 

such alternatives, and estimates of the 

costs and benefits of such alternatives. 

C. Regulation 39.31 (Election To Become 

Subject to the Provisions of Subpart C) 

As discussed above,116 the Basel CCP 

Capital Requirements impose 

significantly higher capital charges on 

banks (including their subsidiaries and 


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117A DCO that is subject to the obligations 

contained in Subpart A, Subpart B, and Subpart C 

would be a QCCP. 

118See, e.g., Section 5b(b) of the CEA, 7 U.S.C. 

7a–1(b) (voluntary registration as a DCO). The 

Commission recognizes that for such entities, the 

benefits of voluntary registration outweigh the costs 

of complying with the CEA and Commission 

regulations. Thus, the Commission permits such 

entities to register with it, which registration 

necessarily entails continuing supervision by the 

Commission, compliance with the CEA and 

Commission regulations, and Commission authority 

to enforce the CEA and its regulations against such 

entities. 

119See supra note 19. 

120See infra Section IV.C (Consideration of Costs 

and Benefits); see also Section 15(a)(1) of the CEA, 

7 U.S.C. 19(a)(1), stating that, ‘‘Before promulgating 

a regulation under this Act or issuing an order . . . 

the Commission shall consider the costs and 

benefits of the action of the Commission.’’ 121See discussion infra Section II.C.3. 

affiliates) that clear derivatives through 

CCPs that do not qualify as QCCPs. 

Because such charges could create 

incentives for banks to migrate their 

business to CCPs that are QCCPs or to 

avoid clearing, U.S. DCOs that operate 

internationally, but that are not QCCPs, 

may face a substantial competitive 

disadvantage. It would appear that 

DCOs that have not been designated by 

the Council as systemically important 

should have the ability to be held to 

international standards and to attain 

QCCP status.117 Accordingly, the 

Commission is proposing regulation 

39.31, which would provide a 

mechanism whereby a DCO that has not 

been designated by the Council as 

systemically important may elect to 

become subject to the provisions of 

Subpart C (i.e., may ‘‘opt’’ to become 

subject to the regulations otherwise 

applicable only to SIDCOs) and, 

thereby, attain QCCP status. The 

Commission is also proposing 

procedures for withdrawing or 

rescinding that election. 

The proposed amendments to Subpart 

C are intended to enhance the financial 

integrity and operational security of a 

SIDCO, which is critically important to 

safeguarding the stability of the U.S. 

financial system. Accordingly, the 

Commission proposes that a SIDCO 

should be subject to all of the 

requirements set forth in Subpart C. The 

Commission recognizes, however, that 

the overall balance of the costs and 

benefits of this enhanced regulatory 

regime, including the benefits accruing 

from QCCP status, and the costs 

associated with the implementation of 

Subpart C, may vary among DCOs that 

are not SIDCOs. The proposed ‘‘opt-in’’ 

regime allows DCOs that are not 

designated by the Council as 

systemically important to weigh for 

themselves the costs and benefits of 

attaining QCCP status. 

The authority provided by Sections 

5b(c)(2)(A) and 8a(5) of the CEA permits 

the Commission to establish and enforce 

regulations applicable to specified 

categories of DCOs that affirmatively 

elect to become subject to such 

regulations. Indeed, the Commission 

notes that it applies, and maintains the 

authority to enforce, regulations to 

persons and entities that voluntarily 

register in certain capacities.118

Authority for proposed regulation 

39.31 is also supported by Section 752 

of the Dodd- Frank Act,119 which, as 

described above, directs the 

Commission to consult and coordinate 

with foreign regulatory authorities on 

effective and consistent global 

regulation of swaps and futures. 

Expanding the application of Subpart C 

to include DCOs that have not been 

designated by the Council as 

systemically important, but that 

nonetheless wish to become subject to 

regulations that are fully consistent with 

the standards set forth in the PFMIs, 

helps promote the international 

consistency called for in Section 752. 

The mandate of Section 15 of the CEA 

further supports the adoption of a 

flexible approach, permitting some nonSIDCOs, but not all DCOs, to be subject 

to the additional regulations of Subpart 

C. As discussed below in more detail, 

the Commission is required by Section 

15(a)(1) to consider the costs and 

benefits of any proposed regulation 

prior to promulgating it.120 The benefits 

of enhanced financial integrity and 

operational security, the benefits 

accruing from being held to 

international standards and from QCCP 

status, and the costs associated with the 

implementation of Subpart C, may vary 

among DCOs that have not been 

designated as systemically important. 

DCOs that wish to compete 

internationally may find compliance 

with Subpart C a necessary cost to 

operate on a global stage. Similarly, 

DCOs that have banks or bank affiliates 

as members may find such compliance 

important to their membership and, in 

turn, to their own business. 

Accordingly, the Commission proposes 

that, at this time, DCOs that are not 

designated as systemically important 

should be provided with the 

opportunity to become subject to 

Subpart C based upon their assessments 

of the benefits and burdens associated 

with meeting the regulations set out in 

this Subpart C. 

The Commission emphasizes 

however, that, under the present 

proposal, once a non-SIDCO elects to 

become subject to Subpart C, that nonSIDCO would, as of the effective date of 

the election, be subject to examination 

for compliance with Subpart C and to 

enforcement action for non-compliance. 

This status would continue until such 

time, if any, as the election is properly 

vacated as set forth in proposed 

regulation 39.31(e). 

1. Regulation 39.31(a): Eligibility 

Requirements 

Proposed regulation 39.31(a) sets forth 

the two categories of entities that would 

be eligible to elect to become subject to 

the provisions in Subpart C. A DCO that 

is not a SIDCO could request such 

election using the procedures set forth 

in proposed regulation 39.31(b). An 

entity applying for registration as a DCO 

pursuant to regulation 39.3 (‘‘DCO 

Applicant’’) could request the election 

in conjunction with its application for 

registration (‘‘Registration Application’’) 

using the procedures set forth in 

proposed regulation 39.31(c). 

2. Regulation 39.31(b): Subpart C 

Election and Withdrawal Procedures for 

Registered DCOs 

Proposed regulation 39.31(b) would 

establish the procedures by which a 

DCO that is already registered could 

elect to become subject to the provisions 

of Subpart C and the procedure by 

which it could withdraw that election. 

These procedures are intended to 

provide the Commission, clearing 

members, and customers (and regulators 

of such clearing members and 

customers) with assurance that the 

electing DCO will be held to and will be 

required to meet the standards set forth 

in Subpart C and in the PFMIs. 

A DCO seeking to become subject to 

Subpart C would be required to file with 

the Commission a completed Subpart C 

Election Form, which is proposed to be 

included in part 39 of the Commission’s 

regulations as Appendix B thereto. The 

proposed Subpart C Election Form 

would include three parts: (1) General 

Instructions, (2) Elections and 

Certifications, and (3) Disclosures and 

Exhibits. As discussed below, a DCO 

Applicant requesting an election to 

become subject to Subpart C also would 

be required to file a Subpart C Election 

Form with the Commission.121

In the Elections and Certifications 

portion of the Subpart C Election Form, 

a DCO would be required to 

affirmatively elect to become subject to 

Subpart C and to specify the date upon 

which it seeks to make its election 

effective. The effective date selected by 

the DCO could be no earlier than ten 

business days after the date the Subpart 

C Election Form is filed with the 


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122The signatures required by the ‘‘Elections and 

Certifications’’ portion of the proposed Subpart C 

Election Form would be required to be the manual 

signatures of the duly authorized representatives of 

the DCO described in the instructions. If the 

Subpart C Election Form is filed by a corporation, 

the Elections and Certifications would be required 

to be signed in the name of the corporation by a 

principal officer duly authorized; if filed by a 

limited liability company, they would be required 

to be signed in the name of the limited liability 

company by a manager or member duly authorized 

to sign on the limited liability company’s behalf; if 

filed by a partnership, they would be required to 

be signed in the name of the partnership by a 

general partner duly authorized; and if filed by an 

unincorporated organization or association which is 

not a partnership, they would be required to be 

signed in the name of such organization or 

association by the managing agent (i.e., a duly 

authorized person who directs or manages or who 

participates in the directing or managing of its 

affairs). 

123See discussion infra Section II.C.5. 124This approach is consistent with the Form 

DCO that must be filed by DCO Applicants. The 

Form DCO requires DCO Applicants to submit to 

the Commission, as individual exhibits to the Form 

DCO, documents that demonstrate compliance with 

the requirements contained in Subpart B. 17 CFR 

Part. 39, Appendix A. 

125This proposed obligation is consistent with 

the obligation under proposed regulation 39.37 of 

SIDCOs and Subpart C DCOs to complete and 

publically disclose their Disclosure Framework 

responses. See discussion infra Section II.I. 

126Compliance with Section 2 and Annex A of 

the Disclosure Framework, collectively, would 

require the SIDCO or Subpart C DCO to provide ‘‘a 

comprehensive narrative disclosure for each 

applicable [PFMI] principle with sufficient detail 

and context to enable the reader to understand the 

[SIDCO’s or Subpart C DCO’s] approach to 

observing the principle. In addition, the SIDCO or 

Subpart C DCO would be required to provide: (1) 

An executive summary of the key points from the 

disclosure [responses]; (2) a summary of the major 

changes since the last update of the 

disclosure[responses]; (3) a description of the 

SIDCO or Subpart C DCO and the markets it serves, 

including basic data and performance statistics on 

its services and operations; (4) a description of the 

SIDCO’s or Subpart C DCO’s general organization 

and governance structure; (5) an overview of the 

SIDCO’s or Subpart C DCO’s legal and regulatory 

framework; (6) an explanation of the SIDCO’s or 

Subpart C DCO’s system design and operation; (6) 

a list of publicly available resources, including 

those referenced in the disclosure [responses], that 

may help a reader understand the SIDCO or Subpart 

C DCO and its approach to observing each 

applicable PFMI principle. The narrative disclosure 

for each principle would be required to provide 

sufficient detail and context ‘‘to enable a variety of 

readers with different backgrounds to understand 

the [SIDCO’s or Subpart C DCO’s] approach to 

observing the principle.’’ Id. 

127The decision to approve, to deny or to stay an 

election to become subject to Subpart C may be 

made by, and the related written notices may be 

provided by, the Director of the Division of Clearing 

and Risk pursuant to the authority delegated to him 

or her under the proposed amendment to regulation 

140.94. See infra Section II.O. 

Commission. The DCO, through its duly 

authorized representative,122 would be 

required to certify that, as of the 

effective date of its election, the DCO 

will be in compliance with Subpart C 

and will remain in compliance unless 

and until the DCO rescinds its election 

pursuant to proposed regulation 

39.31(e), discussed below.123 The DCO 

also would be required to certify, 

through its duly authorized 

representative, that all information 

contained in the Subpart C Election 

Form is ‘‘true, current and complete in 

all material respects.’’ 

In the Disclosures and Exhibits 

portion of the Subpart C Election Form, 

a DCO would be required to provide a 

regulatory compliance chart that 

separately sets forth for proposed 

Subpart C regulations 39.32 through 

39.39, citations to the relevant rules, 

policies and procedures of the DCO that 

address each such regulation and a 

summary of the manner in which the 

DCO will comply with each regulation. 

In addition, the DCO would be required 

to provide, in separate exhibits, any 

documents that demonstrate its 

compliance with proposed Subpart C 

regulations 39.32 through 39.36 and 

39.39.124 The Commission also proposes 

requiring the DCO to complete and to 

publish on the DCO’s Web site the 

DCO’s responses to the Disclosure 

Framework and to provide the 

Commission with the URL to the 

specific page where such responses can 

found.125 The Disclosure Framework 

would be required to be completed in 

accordance with section 2.0 and Annex 

A thereof 126 and would be expected to 

fully explain how the DCO complies 

with the standards set forth in the 

PFMIs. As noted in section 2.5 of the 

Disclosure Framework, CPSS–IOSCO 

are in the process of developing a set of 

criteria for the disclosure by an FMI of 

quantitative information to enable 

stakeholders to evaluate FMIs and to 

make cross-comparisons (‘‘Quantitative 

Information Disclosure’’). The 

Commission proposes requiring the 

DCO, in the event that such criteria are 

published, to publish its Quantitative 

Information Disclosure on the DCO’s 

Web site and to provide the 

Commission, on its Subpart C Election 

Form, the URL to the specific page 

where the Quantitative Information 

Disclosure may be found. 

Pursuant to proposed regulation 

39.31(b)(2), the filing of a Subpart C 

Election Form would not create a 

presumption that the Subpart C Election 

Form is materially complete or that 

supplemental information would not be 

required. The Commission could, prior 

to the effective date, request that the 

DCO provide supplemental information 

in order to process the DCO’s Subpart C 

Election Form and the DCO would be 

required to file such supplemental 

information with the Commission. 

Proposed regulation 39.31(b)(3) also 

would require the DCO to promptly 

amend its Subpart C Election Form if it 

discovers a material omission or error 

in, or if there is a material change in, the 

information provided to the 

Commission in the Subpart C Election 

Form or other information provided in 

connection with the Subpart C Election 

Form. 

Once a Subpart C Election Form is 

filed by a DCO, the Commission may 

permit the DCO’s election to become 

subject to Subpart C to take effect as set 

forth in proposed regulation 39.31(b)(4) 

or may stay or deny the election under 

proposed regulation 39.31(b)(5). If the 

Commission stays or denies the 

election, it would issue written 

notification thereof to the DCO. 

Proposed regulation 39.31(b)(4) would 

provide that, unless the Commission 

stays or denies the DCO’s election to 

become subject to Subpart C, such 

election would become effective upon 

the later of: (1)(i) The effective date 

specified by the DCO in its Subpart C 

Election Form or (ii) ten business days 

after the DCO files its Subpart C 

Election Form with the Commission or 

(2) or upon the effective date set forth 

in written notification from the 

Commission that it shall permit the 

election to take effect after a stay issued 

pursuant to proposed regulation 

39.31(b)(5). The Commission may 

provide written acknowledgement of 

receipt of the DCO’s Subpart C Election 

Form, as well as written 

acknowledgement that it has permitted 

the DCO’s election to become subject to 

Subpart C to take effect and the effective 

date of that election.127 The 

Commission emphasizes that, consistent 

with the certification required to be 

provided by a DCO as part of its Subpart 

C Election Form, a DCO, as of the date 

its election to become subject to Subpart 

C becomes effective, would be held to 

the requirements of Subpart C and the 

DCO would become subject to potential 

enforcement action by the Commission 

for failure to comply with any such 

requirements. To the extent that 

compliance with Subpart C would 

require the DCO to implement new rules 

or rule amendments, all such rules or 

rule amendments must be approved or 

permitted to take effect prior to the 

effective date. 

Proposed regulation 39.31(b)(7) would 

allow a DCO that has submitted a 

Subpart C Election Form to withdraw 

the form at any time prior to the 

effective date specified therein by filing 

a notice thereof with the Commission. 

Withdrawal, however, would not be 

permitted on or after the specified 

effective date. A DCO that wishes to 

rescind its election to become subject to 


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Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 50271 

128See discussion infra Section II.C.5. 

129The DCO Applicant would be required to: (1) 

Certify that all information contained in its Subpart 

C Election Form is ‘‘true, correct and complete in 

all material respects;’’ (2) provide a regulatory 

compliance chart that separately sets forth, for 

proposed Subpart C regulations 39.32 through 

39.39, citations to the relevant rules, policies and 

procedures of the DCO Applicant that address each 

such regulation and a summary of the manner in 

which the DCO Applicant will comply with each 

regulation; (c) provide, as separate exhibits to the 

Subpart C Election Form, any documents that 

demonstrate the DCO Applicant’s compliance with 

proposed Subpart C regulations 39.32 through 39.36 

and 39.39; (d) complete and publish on the DCO 

Applicant’s Web site, the DCO’s responses to the 

Disclosure Framework and provide the Commission 

with the URL to specific Web site page where such 

responses can found; and (e) if applicable, publish 

on the DCO Applicant’s Web site the DCO 

Applicant’s Quantitative Information Disclosure 

and provide the Commission the URL to the 

specific page where such disclosure may be found. 

130Proposed regulations 39.31(c)(3) and 

39.31(c)(4) are consistent with regulations 39.3(a)(2) 

and 39.3(a)(3) governing DCO application 

amendments and the submission of supplemental 

information in connection with a DCO application, 

respectively. 17 CFR 39.31(a)(2)–(3). 

131The decision to permit a DCO to become 

subject to Subpart C may be made by, and notice 

thereof may be provided by, the Director of the 

Division of Clearing and Risk, as set forth in 

Commission regulation 140.94, as proposed to be 

amended herein. See discussion infra Section II.O. 

132See, e.g., 17 CFR 39.3(a)(5) (setting forth those 

portions of DCO Registration Applications that are 

considered public information). 

Subpart C after the effective date would 

be permitted to do so using the 

procedures set forth in proposed 

regulation 39.31(e).128

3. Regulation 39.31(c): Election and 

Withdrawal Procedures for DCO 

Applicants 

Proposed regulation 39.31(c) sets forth 

procedures through which a DCO 

Applicant may request to become 

subject to the provisions of Subpart C at 

the time that the DCO Applicant files its 

Registration Application. These 

procedures are intended to provide the 

Commission with a basis to evaluate the 

DCO Applicant’s ability to comply with 

the provisions of Subpart C, and 

ultimately to provide the Commission, 

potential members and customers (and 

regulators of such members and 

customers) with assurance that the DCO 

Applicant will, once DCO registration 

has been granted, be held to and will, 

in fact, meet the standards set forth in 

Subpart C and in the PFMIs. 

The Commission encourages DCO 

Applicants to make their election to 

become subject to Subpart C at the time 

that their Registration Application is 

filed. The Commission anticipates 

considerable overlap between the 

information and documentation 

contained in a Registration Application 

filed by a DCO Applicant and the 

information and documentation that 

would be required to be submitted to 

the Commission as part of a Subpart C 

Election Form. It would appear that 

simultaneous filings would allow 

Commission resources to be used more 

efficiently and effectively. 

As proposed, a DCO Applicant 

requesting an election to become subject 

to Subpart C would make such request 

by attaching a Subpart C Election Form 

to the Form DCO that the DCO 

Applicant files pursuant to regulation 

39.31. The certifications, disclosures, 

and exhibits that would be required to 

be provided by a DCO Applicant in the 

Subpart C Election Form would be the 

same as those required of registered 

DCOs,129 except that the DCO Applicant 

would not specify an effective date for 

its election. Rather, the DCO Applicant 

would certify that, if the Commission 

permits its election to become subject to 

Subpart C to become effective, the DCO 

Applicant will be in compliance with 

the Subpart C regulations as of the date 

set forth in the Commission’s notice 

thereof. 

As with Subpart C Election Forms 

filed by registered DCOs, the filing of a 

Subpart C Election Form by a DCO 

Applicant would not create a 

presumption that the Subpart C Election 

Form is materially complete or that 

supplemental information would not be 

required. Under proposed regulation 

39.31(c)(3), the Commission could, at 

any time during the Commission’s 

review of the Subpart C Election Form, 

request that the DCO Applicant submit 

supplemental information in order for 

the Commission to process the DCO 

Applicant’s Subpart C Election Form or 

its Registration Application and the 

DCO Applicant would be required to 

file such supplemental information. In 

addition, the DCO Applicant would be 

required by proposed regulation 

39.31(c)(4) to promptly amend its 

Subpart C Election Form if it discovers 

a material omission or error in, or if 

there is a material change in, the 

information provided to the 

Commission in the Subpart C Election 

Form or other information provided in 

connection with the Subpart C Election 

Form.130

Under proposed regulation 

39.31(c)(2), the Commission would 

review the Subpart C Election Form as 

part of the Commission’s review of the 

DCO Applicant’s Registration 

Application and the Commission, based 

upon its review and analysis of the 

information submitted in the Subpart C 

Election Form, could permit the DCO 

Applicant’s election to take effect at the 

time it approves the Registration 

Application. The Commission would 

provide the DCO Applicant written 

notice of its determination to permit the 

election to become subject to Subpart C 

to become effective.131 The Commission 

notes that any Registration Application 

for which there is a Subpart C Election 

Form pending would be evaluated 

against the standards set forth in 

Subpart C as well as the standards set 

forth in Subpart A and Subpart B in 

order for the Commission to approve the 

Registration Application. That is, the 

Commission would not approve any 

such Registration Application if the 

Commission determines that the DCO 

Applicant’s election to become subject 

to Subpart C should not become 

effective because the DCO Applicant has 

not demonstrated its ability to comply 

with the requirements of Subpart C. The 

DCO Applicant would be permitted to 

withdraw the Subpart C Election Form 

as set forth in proposed regulation 

39.31(c)(5), however, prior to the 

Commission’s taking action on the 

Registration Application. 

Proposed regulation 39.31(c)(5) would 

permit a DCO Applicant to withdraw a 

request to become subject to Subpart C 

by filing with the Commission a notice 

of the withdrawal. The DCO Applicant 

could withdraw its Subpart C Election 

Form without withdrawing its Form 

DCO. 

4. Regulation 39.31(d)—Public 

Information 

Proposed regulation 39.31(d) would 

provide that certain portions of the 

Subpart C Election Form will be 

considered public documents that may 

routinely be made available for public 

inspection. Such portions include: The 

Elections and Certifications and 

Disclosures in the Subpart C Election 

Form, the rules of the DCO, the 

regulatory compliance chart, and any 

other part of the Subpart C Election 

Form that is not covered by a request for 

confidential treatment subject to 

regulation 145.9. This proposal is 

consistent with the transparent 

treatment typically afforded materials 

submitted in connection with 

applications to become registered with 

the Commission.132

5. Regulation 39.31(e)—Rescission 

Proposed 39.31(e) would permit a 

Subpart C DCO to rescind its election to 

comply with Subpart C by filing a notice 

of its intent to rescind the election with 

the Commission. The Commission 

proposes that DCOs that ‘‘opt-in’’ to 

Subpart C should be permitted to 

rescind, subject to certain conditions. 

These conditions are intended to 

provide the DCO’s members and 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
50272 Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 

133See 12 CFR 1320.13(b) (procedure for the 

Council to rescind a designation of systemic 

importance for a systemically important financial 

market utility). 

customers, and the regulators of such 

members and customers, notice of, and 

time to take such actions as these 

entities may deem appropriate in light 

of, the DCO’s decision to rescind its 

election. As discussed above, the 

Commission proposes that a SIDCO 

should be required to comply with the 

Subpart C provisions unless and until 

the SIDCO’s designation as systemically 

important is rescinded by the 

Council.133

As proposed, the rescission of a 

DCO’s election to become subject to 

Subpart C would become effective on 

the date specified by the Subpart C DCO 

in its notice of intent to rescind the 

Subpart C election, except that the 

rescission could not become effective 

any earlier than 90 days after the date 

the notice of intent to rescind is filed 

with the Commission. This proposed 

90-day period is necessary to provide 

banks and other entities that wish to 

limit their cleared transactions to 

clearing solely through a QCCP (e.g., 

because of the preferential Basel CCP 

Capital Requirements applicable to 

exposures to derivatives cleared through 

a QCCP) sufficient time to transfer their 

business to another Subpart C DCO or 

SIDCO. The Subpart C DCO would be 

required to comply with all of the 

provisions of Subpart C until such 

rescission is effective. The Commission 

also proposes requiring that the notice 

of intent to rescind include a 

certification that the Subpart C DCO has 

complied with and will comply with the 

notice requirements set forth in 

proposed regulation 39.31(e)(3). 

Proposed regulation 39.31(e)(3)(i) 

would require a Subpart C DCO that 

files a notice of intent to rescind to 

provide periodic notices to each of its 

clearing members, and to have rules in 

place requiring each of its clearing 

members to provide such notices to 

each of the clearing member’s 

customers. Specifically, a Subpart C 

DCO would be required to issue the 

following notices to its clearing 

members: (1) No later than the filing 

with the Commission of the notice of its 

intent to rescind its election to be 

subject to Subpart C, written notice that 

the Subpart C DCO intends to file such 

notice and the date that the rescission 

is intended to take effect, and (2) on the 

effective date of the rescission of its 

election to be subject to Subpart C, 

written notice that the rescission has 

become effective. These notices appear 

necessary to ensure that the Subpart C 

DCO’s clearing members and customers 

are afforded sufficient time to consider 

and react to the implications of the 

Subpart C DCO’s rescission of its 

election to be subject to Subpart C. 

Proposed regulation 39.31(e)(3)(ii) 

would also require a Subpart C DCO to: 

(1) No later than the date it files a notice 

of its intent to rescind its election to be 

subject to Subpart C, provide notice to 

the general public of its intent to rescind 

such election; (2) on the effective date 

of the rescission of its election to be 

subject to Subpart C, provide written 

notice to the general public that the 

rescission has become effective; and (3) 

remove all references to its Subpart C 

DCO (and QCCP) status on its Web site 

and in all other materials that it 

provides to its clearing members and 

customers, other market participants, or 

members of the public. As discussed 

herein, because of the potential capital 

impact of transacting through a 

clearinghouse that is not a QCCP, these 

public notices would appear necessary 

to ensure that market participants are 

afforded sufficient time to consider and 

react to a Subpart C DCO’s rescission of 

its election to be subject to Subpart C. 

However, the Commission proposes that 

the notices to the general public 

required by this subsection may be 

accomplished through publication on 

the Subpart C DCO’s Web site. 

In addition, the employees and 

representatives of the Subpart C DCO 

would be prohibited by proposed 

regulation 39.31(e)(3)(iii) from making 

any reference to the organization as a 

Subpart C DCO (or QCCP) on and after 

the date that the notice of its intent to 

rescind its election to become subject to 

Subpart C is filed. Because the QCCP 

recognition that accompanies Subpart C 

DCO status provides significant benefits 

to those transacting through a Subpart C 

DCO, it would be inappropriate and 

misleading to permit a DCO to hold 

itself out as a Subpart C DCO (or QCCP) 

once it has filed a notice of intention to 

rescind that status, even though the 

rescission is not immediately effective. 

Proposed regulation 39.31(e)(4) 

provides that the rescission of a DCO’s 

election to be subject to Subpart C 

would not affect the authority of the 

Commission concerning any activities 

or events occurring during the time that 

the DCO maintained its status as a 

Subpart C DCO. That is, the Subpart C 

DCO is continually obligated to, and 

would be subject to enforcement action 

for failure to, comply with the Subpart 

C provisions during the time that it was 

subject to Subpart C and maintained its 

Subpart C DCO status. 

Proposed regulation 39.31(f) would 

provide that a SIDCO that is registered 

with the Commission, but whose 

designation of systemic importance is 

rescinded by the Council, shall 

immediately be deemed to be a Subpart 

C DCO. Such Subpart C DCO would be 

subject to the Subpart C provisions 

unless and until it elects to rescind its 

status as a Subpart C DCO. 

The Commission requests comment 

on all aspects of proposed regulation 

39.31 including, without limitation, the 

following: 

(1) All aspects of the proposed 

Subpart C election eligibility 

requirements including, without 

limitation, the appropriateness of 

permitting DCO Applicants to request to 

become subject to Subpart C at the time 

of filing their Registration Applications. 

If DCO Applicants should not be 

permitted to request to become subject 

to Subpart C at the time of filing their 

Registration Applications, what would 

be the basis for such prohibition and 

what would be a suitable waiting period 

after registration with the Commission 

for making a Subpart C Election Form 

filing? 

(2) All aspects of the proposed 

Subpart C Election Form including, 

without limitation, the following: 

(a) The elections and certifications 

contained therein and the disclosures 

and exhibits required; 

(b) whether DCOs and DCO 

Applicants should be permitted to 

amend or supplement their Subpart C 

Election Form; and 

(c) possible incentives to encourage 

DCOs and DCO Applicants to file 

Subpart C Election Forms that are 

accurate and complete at the time of 

filing, in order to avoid amendments, 

supplements and withdrawals. 

(3) Whether the Commission should 

require the Subpart C Election Form 

certifications to be made under penalty 

of perjury. 

(4) All aspects of the proposed 

election and withdrawal procedures 

applicable to DCOs including, without 

limitation, the following: 

(a) The appropriateness of permitting 

a DCO to designate the effective date of 

its status as a Subpart C DCO that is 

subject to the provisions of Subpart C; 

(b) The appropriateness of the tenbusiness-day waiting period prior to a 

DCO’s status as a Subpart C DCO 

becoming effective, any suggested 

alternative time frame, and the reasons 

why such alternatives would be 

preferable; and 

(c) The circumstances under which it 

would be appropriate for the 

Commission to provide written 

acknowledgement of receipt of the 

Subpart C Election Form and/or the 

effective date of the DCO’s Subpart C 


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134 In 2010 and 2011, the Commission proposed 

regulations concerning the governance of DCOs (the 

‘‘2010/2011 Proposals’’). See Requirements for 

Derivatives Clearing Organizations, Designated 

Contract Markets, and Swap Execution Facilities 

Regarding the Mitigation of Conflicts of Interest, 75 

FR 63732 (Oct. 18, 2010); see also Governance 

Requirements for Derivatives Clearing 

Organizations, Designated Contract Markets, and 

Swap Execution Facilities, 76 FR 722 (Jan. 8, 2011). 

The Commission notes that the regulations 

contained in the 2010/2011 Proposals are the 

subject of a separate rulemaking and, as such, the 

Commission does not intend to address or include 

those regulations in this rulemaking. 

135See supra Section I.D.6. 

136PFMIs at Principle 2, K.C. 4–5. 

DCO status, and the form of such 

acknowledgment. 

(5) All aspects of the proposed 

election and withdrawal procedures 

applicable to DCO Applicants 

including, without limitation, the 

following: 

(a) The prohibition against approving 

a Registration Application if a related 

Subpart C Election Form is pending and 

the Commission has determined that the 

DCO Applicant’s request to become 

subject to Subpart C should not take 

effect; 

(b) The circumstances under which it 

may be appropriate for the Commission 

to approve a Registration Application, 

but to stay or deny an election to 

become subject to Subpart C; 

(c) If the Commission were to approve 

a Registration Application, but deny an 

election to become subject to Subpart C, 

whether the DCO Applicant should be 

required to wait a particular amount of 

time (and if so, what amount of time 

would be appropriate) before being 

permitted to elect to become subject to 

Subpart C pursuant to proposed 

39.31(b); 

(d) If an election to become subject to 

Subpart C could be stayed when a 

Registration Application is approved, 

whether the stay should be limited to a 

particular time period (and if so, what 

time period) after which the election 

must be permitted to take effect or be 

denied; and 

(e) Any incentives, including but not 

limited to any waiting period after 

registration for eligibility to elect to 

become a Subpart C DCO, to encourage 

DCO Applicants to submit their Subpart 

C Election Form with their Registration 

Applications. 

(6) The circumstances under which a 

DCO or DCO Applicant should be 

permitted to withdraw its Subpart C 

Election Form. 

(7) All aspects of the proposed 

procedures for rescinding an election to 

become subject to Subpart C including, 

without limitation, the following: 

(a) The information that must be 

contained with the notice of intent to 

rescind; 

(b) The benefits and burden of the 

mandatory 90-day waiting period 

between the filing of the notice of intent 

to rescind and the date the rescission is 

effective; 

(c) The timing, content and methods, 

and the costs and benefits, of providing 

the required notices to clearing 

members, the customers of clearing 

members, and the general public; 

(d) The requirement to remove and 

refrain from references to the DCO as a 

Subpart C DCO (and QCCP) and the 

timing thereof; 

(e) The burden of a Subpart C DCO’s 

rescission on bank clearing members 

and the bank customers of such Subpart 

C DCO’s clearing members, including 

the costs associated with unwinding 

and/or transferring positions; and 

(f) Whether any alternative or 

additional conditions should be 

required of a Subpart C DCO beyond the 

proposed 90-day waiting period (and if 

so what alternative or additional 

conditions would be appropriate). For 

example, is 90 days sufficient time for 

clearing members and their customers to 

take such action as they may deem 

appropriate in light of such rescission? 

(8) Any alternative approach to 

permitting a DCO or DCO Applicant to 

elect to become subject to Subpart C. 

(9) The provision that a SIDCO whose 

status as a designated financial market 

utility is rescinded by the Financial 

Stability Oversight Council, be 

immediately deemed to be a Subpart C 

DCO, pending an election by the former 

SIDCO to rescind Subpart C DCO status. 

(10) What additional disclosures 

should the Commission require or what 

other measures should the Commission 

take to help ensure that Subpart C DCOs 

obtain QCCP status? 

(11) The costs and potential benefits 

resulting from or arising out of, 

permitting a DCO to elect to become 

subject to the provisions of Subpart C, 

any aspect of the procedures for 

allowing such election under proposed 

regulation 39.31, and any aspect of any 

suggested alternative procedures. 

For each comment submitted, the 

Commission requests that each 

commenter please provide detailed 

rationale supporting the response, as 

well as quantitative data where 

practicable, particularly with respect to 

estimates of costs and benefits. 

D. Regulation 39.32 (Governance for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

The Commission proposes to add 

regulation 39.32 in order to implement 

DCO Core Principles O (Governance 

Fitness Standards), P (Conflicts of 

Interest), and Q (Composition of 

Governing Boards) for SIDCOs and 

Subpart C DCOs in a manner that is 

consistent with PFMI Principle 2 

(Governance).134

As discussed above, DCO Core 

Principle O states that each DCO must 

establish governance arrangements that 

are transparent to fulfill public interest 

requirements and to permit the 

consideration of the views of owners 

and participants.135 DCO Core Principle 

O also requires each DCO to establish 

and enforce appropriate fitness 

standards for (i) directors, (ii) members 

of any disciplinary committee, (iii) 

members of the DCO, (iv) any other 

individual or entity with direct access to 

the settlement or clearing activities of 

the DCO, and (v) any party affiliated 

with any entity mentioned in (i)–(v) 

above. In addition, DCO Core Principle 

P requires each DCO to establish and 

enforce rules to minimize conflicts of 

interest in the decision making process 

of the DCO, and DCO Core Principle Q 

states that each DCO must ensure that 

the composition of the governing board 

or committee of the DCO includes 

market participants. These core 

principles are substantively similar to 

PFMI Principle 2, which states that a 

CCP ‘‘should have governance 

arrangements that are clear and 

transparent, promote the safety and 

efficiency of [the CCP], and support the 

stability of the broader financial system, 

other relevant public interest 

considerations, and the objectives of 

relevant stakeholders.’’ Additionally, 

under PFMI Principle 2, a CCP should 

have procedures for managing conflicts 

of interest among board members and 

board members and managers should be 

required have ‘‘appropriate skills,’’ 

‘‘incentives,’’ and ‘‘experience.’’ 136

The governance requirements set forth 

in proposed regulation 39.32 are 

designed to enhance risk management 

and controls by promoting fitness 

standards for directors and managers, 

promoting transparency of governance 

arrangements, and making sure that the 

interests of a SIDCO’s or Subpart C 

DCO’s clearing members and, where 

relevant, customers are taken into 

account. Because of the potential impact 

that a SIDCO’s failure could have on the 

U.S. financial markets, the Commission 

is proposing these requirements for 

SIDCOs. Moreover, it would be 

beneficial to Subpart C DCOs, their 

members and customers, and the 

financial system generally to apply 

these standards to Subpart C DCOs. 


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50274 Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 

137The provisions concerning transparency 

describe which information, including the 

identities of board members, should be disclosed to 

the public and/or the Commission. 138See SIDCO Final Rule. 

Specifically, subsection (a) (General 

rules) would require a SIDCO or Subpart 

C DCO to establish governance 

arrangements that: (1) Are written, clear 

and transparent, place a high priority on 

the safety and efficiency of the SIDCO 

or Subpart C DCO, and explicitly 

support the stability of the broader 

financial system and other relevant 

public interest considerations; (2) 

ensure that the design, rules, overall 

strategy, and major decisions of the 

SIDCO or Subpart C DCO appropriately 

reflect the legitimate interests of 

clearing members, customers of clearing 

members, and other relevant 

stakeholders; and (3) disclose, to an 

extent consistent with other statutory 

and regulatory requirements on 

confidentiality and disclosure: (i) Major 

decisions of the board of directors to 

clearing members, other relevant 

stakeholders, and to the Commission, 

and (ii) major decisions of the board of 

directors having a broad market impact 

to the public.137

Subsection (b) (Governance 

arrangements) would require the rules 

and procedures of a SIDCO or Subpart 

C DCO to: (1) Describe the SIDCO’s or 

Subpart C DCO’s management structure; 

(2) clearly specify the roles and 

responsibilities of the board of directors 

and its committees, including the 

establishment of a clear and 

documented risk management 

framework; (3) clearly specify the roles 

and responsibilities of management; (4) 

establish procedures for managing 

conflicts of interest among board 

members; and (5) assign responsibility 

and accountability for risk decisions 

and for implementing rules concerning 

default, recovery, and wind-down. 

Subsection (c) (Fitness standards for 

the board of directors and management) 

would require that board members and 

managers have the appropriate 

experience, skills, incentives and 

integrity; risk management and internal 

control personnel have sufficient 

independence, authority, resources and 

access to the board of directors; and that 

the board of directors include members 

who are not executives, officers or 

employees of the SIDCO or Subpart C 

DCO or of their affiliates. 

The Commission requests comment 

on all aspects of these proposals. The 

Commission is particularly interested in 

the following: In light of the potential 

impact that a SIDCO’s failure could 

have on the U.S. financial system, 

would compliance with proposed 

regulation 39.32 reduce systemic risks? 

Would applying proposed regulation 

39.32 to SIDCOs and to Subpart C DCOs 

contribute to the goals articulated in the 

Dodd-Frank Act, particularly the goals 

of Titles VII and VIII of the Dodd-Frank 

Act? If so, in what ways? If not, why 

not? What alternatives, if any, to 

proposed regulation 39.32 would be 

more effective in reducing systemic risk 

or accomplishing the goals articulated 

in the Dodd-Frank Act? Is proposed 

regulation 39.32 consistent with the 

PFMIs? If not, what changes need to be 

made to achieve such consistency? 

What alternatives to proposed 

regulation 39.32, if any, would be more 

effective or efficient for achieving 

consistency with the standards set forth 

by the PFMIs? Can proposed regulation 

39.32 be effectively implemented and 

complied with? If not, what changes can 

be made to permit effective 

implementation and compliance? What 

are the potential benefits and costs 

resulting from, or arising out of, 

requiring SIDCOs to comply with 

regulation 39.32? The Commission also 

requests comment on the potential costs 

and benefits resulting from, or arising 

out of, requiring Subpart C DCOs to 

comply with regulation 39.32. In 

considering costs and benefits, 

commenters are requested to address the 

effect of the proposed regulation not 

only on a DCO, but also on the DCO’s 

clearing members, the customers of 

clearing members, and the financial 

system more broadly. The Commission 

requests that, where possible, 

commenters provide quantitative data in 

their comments, particularly with 

respect to estimates of costs and 

benefits. The Commission requests that 

commenters include a detailed 

description of any alternatives to 

proposed regulation 39.32 and estimates 

of the costs and benefits of such 

alternatives. 

E. Regulation 39.33 (Financial 

Resources Requirements for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

In 2013, the Commission finalized 

financial resource requirements for 

SIDCOs in a manner that parallels the 

financial resources standard in Principle 

4 of the PFMIs.138 Regulation 39.29 

requires a SIDCO that is systemically 

important in multiple jurisdictions, or 

that is involved in activities with a more 

complex risk profile, to meet a Cover 

Two requirement, i.e. 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 in 

extreme but plausible market 

conditions. Moreover, where a clearing 

member controls another clearing 

member or is under common control 

with another clearing member, 

regulation 39.29 also requires SIDCOs to 

treat affiliated clearing members as a 

single clearing member for the purposes 

of the Cover Two requirement. In 

addition, regulation 39.29 prohibits a 

SIDCO from using assessments as a 

financial resource to meet this Cover 

Two standard. 

The Commission proposes to further 

amend regulation 39.29 to enhance 

financial resources requirements for 

SIDCOs and Subpart C DCOs and to 

achieve consistency with the relevant 

provisions of the PFMIs, in particular 

Principle 4 and Principle 7. 

The Commission first proposes to 

renumber existing regulation 39.29 to 

39.33 and to apply the requirements set 

forth therein to Subpart C DCOs. The 

Commission further proposes, for 

purposes of organization, deleting from 

paragraph (a)(1) the requirement that, 

where a clearing member controls 

another clearing member or is under 

common control with another clearing 

member, a SIDCO treat affiliated 

clearing members as a single clearing 

member (the ‘‘Clearing Member 

Aggregation Requirement’’). The 

Commission proposes to include such 

language in new paragraph (a)(4) to 

clarify that the Clearing Member 

Aggregation Requirement applies when 

a SIDCO or Subpart C DCO calculates its 

financial resources requirements under 

regulation 39.33(a) as well as its 

liquidity resources requirements under 

regulation 39.33(c). 

The Commission also proposes 

amending paragraph (a) to state that the 

Commission shall, if it deems 

appropriate, determine whether a 

SIDCO or Subpart C DCO is systemically 

important in multiple jurisdictions. In 

making this determination, the 

Commission would, in order to limit 

such determinations to appropriate 

cases, review whether another 

jurisdiction had determined the SIDCO 

or Subpart C DCO to be systemically 

important according to a designations 

process that considers whether the 

foreseeable effects of a failure or 

disruption of the derivatives clearing 

organization could threaten the stability 

of each relevant jurisdiction’s financial 

system. In addition, the Commission 

proposes amending paragraph (a) to 

state that the Commission shall also 

determine, if it deems appropriate, 

whether any of the activities of a SIDCO 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 50275 

139The Commission’s proposed amendment to 

regulation 140.94(a) would delegate the authority to 

make these determinations to the Director of the 

Division of Clearing and Risk. 

140The preamble to the SIDCO Final Rule 

adopting release made clear that paragraph (b) 

applied to both Cover One and Cover Two, but the 

Commission has decided to add clarifying language 

to the regulation text. See generally SIDCO Final 

Rule. 

141As discussed above in Section I.E.6, Principle 

7, K.C. 2 requires a CCP to measure, monitor, and 

manage liquidity risk effectively. This includes the 

CCP maintaining sufficient liquid resources in all 

relevant currencies in order to effect same-day and, 

where applicable, intraday and multiday settlement 

of payment obligations in a wide range of potential 

stress scenarios, including the default of the 

participant that would create the largest aggregate 

payment obligations in extreme but plausible 

market conditions. In addition, Principle 7, K. C. 5 

limits a CCP to counting only certain qualifying 

liquid resources for the purpose of meeting its 

financial resources requirement. These resources 

include: Cash in the currency of the requisite 

obligations, held either at the central bank of issue 

or at a creditworthy commercial bank; committed 

lines of credit; or high quality, liquid, general 

obligations of a sovereign nation. In addition, 

Principle 7, K. C. 4 states that a CCP that is 

systemically important in multiple jurisdictions or 

that is involved in activities with a more complex 

risk profile should consider maintaining sufficient 

qualifying liquid resources to meet the default of 

the two participants that would create the largest 

aggregate payment obligations in such 

circumstances. Principle 7, K. C. 7 also requires a 

CCP to monitor its liquidity providers, including 

clearing members, by undertaking due diligence to 

confirm that they have sufficient information to 

understand and manage their liquidity risks and 

have the capacity to perform as required under their 

commitments to the CCP. 

142 In determining whether the liquidity resources 

that are eligible under paragraph (c)(3) are sufficient 

to meet the obligation specified under paragraph 

(c)(1) (resources that ‘‘enable’’ the DCO to meet its 

settlement obligations), it is important to avoid 

double counting. For example, one may not count 

both a committed repurchase arrangement and U.S. 

Treasury Bills that would be used to collateralize 

that arrangement. 

143Times of financial stress, and the event of the 

default of a member of the DCO are, of course, the 

times when reliable liquidity arrangements are most 

needed. 

144 It should be noted that the requirement of 

proposed paragraph (c)(4) that a SIDCO or Subpart 

C DCO consider maintaining certain types of 

collateral, like the requirement of proposed 

paragraph (c)(1)(ii), does not include a requirement 

as to the decision to be made following such 

consideration. 

or Subpart C DCO, in addition to 

clearing credit default swaps, credit 

default futures, and any derivatives that 

reference either, has a more complex 

risk profile and may take into 

consideration characteristics such as 

non-linear and discrete jump-to-default 

price changes.139 In addition and in 

light of the proposed liquidity 

provisions discussed below, the 

Commission proposes a technical 

clarification to paragraph (a)(1) to make 

clear that such a SIDCO or Subpart C 

DCO must meet its ‘‘credit exposure’’ 

(rather than ‘‘financial obligations’’) to 

its clearing members notwithstanding a 

default by the two clearing members 

creating the largest ‘‘aggregate credit’’ 

(rather than ‘‘combined financial’’) 

exposure in extreme but plausible 

market conditions. The Commission 

also proposes amending paragraph (b) to 

clarify that the prohibition on including 

assessments as a financial resource 

applies to calculating financial 

resources needed to cover the default of 

the largest and, where applicable, 

second largest clearing member, in 

extreme but plausible circumstances.140

The Commission proposes adding 

paragraphs (c), (d), and (e) to address 

the liquidity of SIDCOs’ and Subpart C 

DCOs’ financial resources. These new 

paragraphs are intended to address the 

gaps between current part 39 

requirements and standards set forth in 

Principle 7.141

Proposed paragraph (c)(1) would 

require a SIDCO or Subpart C DCO to 

maintain eligible liquidity resources 

that will enable the SIDCO or Subpart 

C DCO to meet its intraday, same-day, 

and multiday settlement obligations, as 

defined in regulation 39.14(a), with a 

high degree of confidence under a wide 

range of stress scenarios, including the 

default of the member creating the 

largest liquidity requirements under 

extreme but plausible circumstances. 

Maintaining resources that enable the 

DCO to meet these obligations will help 

prevent a SIDCO or Subpart C DCO from 

defaulting on its obligations to nondefaulting clearing members, which is 

particularly important for a SIDCO 

because of the potential impact that the 

failure of a SIDCO could have on the 

U.S. financial markets. 

Proposed paragraph (c)(2) would 

require a SIDCO or Subpart C DCO to 

maintain liquidity resources that are 

sufficient to satisfy the obligations 

required by new paragraph (c)(1) in all 

relevant currencies for which the SIDCO 

or Subpart C DCO has settlement 

obligations to its clearing members. A 

SIDCO should be able promptly to meet 

its obligations in each relevant currency. 

If a SIDCO has sufficient funds to meet 

an obligation, but the funds are not in 

the correct currency, then the SIDCO 

cannot meet that obligation in a timely 

manner, which could lead to a 

disruption of the SIDCO’s services. Such 

disruption could, in turn, have a 

significant impact on the financial 

stability of the U.S. economy. 

Proposed paragraph (c)(3) would limit 

a SIDCO or Subpart C DCO to using only 

certain types of liquidity resources to 

satisfy the minimum liquidity 

requirement set forth in proposed 

paragraph (c)(1).142 Among these 

‘‘qualifying liquidity resources’’ are 

‘‘committed lines of credit,’’ 

‘‘committed foreign exchange swaps,’’ 

and ‘‘committed repurchase 

agreements.’’ ‘‘Committed’’ is intended 

to connote a legally binding contract 

under which a liquidity provider agrees 

to provide the relevant liquidity 

resource without delay or further 

evaluation of the DCO’s 

creditworthiness, e.g., a line of credit 

that cannot be withdrawn at the election 

of the liquidity provider during times of 

financial stress, or in the event of the 

default of a member of the SIDCO or 

Subpart C DCO.143 The proposed list of 

these resources is consistent with those 

set forth in Principle 7. Also consistent 

with Principle 7, proposed paragraph 

(c)(1)(ii) would require a SIDCO or 

Subpart C DCO that is systemically 

important in multiple jurisdictions, or 

that is involved in activities with a more 

complex risk profile, to consider 

maintaining eligible liquidity resources 

that, at a minimum, will enable it to 

meet its intraday, same-day, and 

multiday settlement obligations, stress 

scenarios that include a default of the 

two clearing members creating the 

largest aggregate liquidity obligation for 

the DCO in extreme but plausible 

market conditions. The financial 

integrity of a SIDCOs and or Subpart C 

DCOs might be enhanced if it considers 

meeting this enhanced standard. 

Under proposed paragraph (c)(3)(ii), a 

SIDCO or Subpart C DCO would be 

required to take appropriate steps to 

verify that its qualifying liquidity 

arrangements do not include material 

adverse change provisions and are 

enforceable, and will be highly reliable, 

even in extreme but plausible market 

conditions. This requirement is 

consistent with Principle 7. 

Also consistent with Principle 7, 

under proposed paragraph (c)(4), if a 

SIDCO or Subpart C DCO maintains 

liquid financial resources in addition to 

those required to satisfy the Cover One 

requirement, then those resources 

should be in the form of assets that are 

likely to be saleable with proceeds 

available promptly or acceptable as 

collateral for lines of credit, swaps, or 

repurchase agreements on an ad hoc 

basis. In addition, Principle 7 provides 

and proposed paragraph 39.33(c)(4) 

requires that a SIDCO or Subpart C DCO 

should consider maintaining collateral 

with low credit, liquidity, and market 

risks that is typically accepted by a 

central bank of issue for any currency in 

which it may have settlement 

obligations, but shall not assume the 

availability of emergency central bank 

credit as a part of its liquidity plan.144


tkelley on DSK3SPTVN1PROD with PROPOSALS2
50276 Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 

145See generally Financial Stability Oversight 

Council 2012 Annual Report, Appendix A at 163 

(finding that ‘‘the contagion effect of a CME failure 

could impose material financial losses on CME’s 

clearing members and other market participants 

(such as customers) and could lead to increased 

liquidity demands and credit problems across 

financial institutions, especially those that are 

active in the futures and options markets.’’). 

146Under Section 806(a) of the Dodd-Frank Act, 

12 U.S.C. 5465(a), the Board may authorize a 

Federal Reserve Bank to establish and maintain an 

account for an FMU, which, as described above in 

Section I.B., includes a SIDCO. A SIDCO with 

access to accounts and services at a Federal Reserve 

Bank would be required to comply with related 

rules published by the Board of Governors of the 

Federal Reserve System. See generally Financial 

Market Utilities, 78 FR 14024 (Mar. 4, 2013) 

(proposal by the Board of rules to govern accounts 

held by designated FMUs). 

147This provision is consistent with PFMI 

Principle 4, K.C. 4. 148See PFMI Principle 7, K.C. 5. 

149See SIDCO Final Rule. 

150 Id. 

These provisions are designed to 

enhance the financial condition of 

SIDCOs and Subpart C DCOs and help 

reinforce stability.145

Pursuant to proposed paragraphs 

(d)(1)–(2), a SIDCO or Subpart C DCO 

would be required to monitor its 

liquidity providers in a manner 

consistent with Principle 7. Proposed 

paragraph (d)(1) would define ‘‘liquidity 

provider’’ to mean any of the following: 

(i) A depository institution, a U.S. 

branch and agency of a foreign banking 

organization, a trust company, or a 

syndicate of depository institutions, 

U.S. branches and agencies of foreign 

banking organizations, or a trust 

companies providing a line of credit, 

foreign exchange swap facility or 

repurchase facility to the SIDCO or 

Subpart C DCO; and (ii) Any other 

counterparty relied upon by a SIDCO or 

Subpart C DCO to meet its minimum 

liquidity resources requirement under 

paragraph (c) of this section. Moreover, 

under proposed paragraph (d)(5), a 

SIDCO with access to accounts and 

services at a Federal Reserve Bank is 

encouraged to use those services, where 

practical, to enhance its management of 

liquidity risk.146 In addition, proposed 

paragraph (d)(4) would require a SIDCO 

or Subpart C DCO to regularly test its 

procedures for accessing its liquidity 

resources. Finally, pursuant to new 

subsection (e) and consistent with 

Principle 4, a SIDCO or Subpart C DCO 

would be required to document its 

supporting rationale for, and have 

appropriate governance arrangements 

relating to, the amount of total financial 

resources it maintains pursuant to 

regulation 39.33(a) and the amount of 

total liquidity resources it maintains 

pursuant to regulation 39.33(c).147

The Commission requests comment 

on all aspects of proposed regulation 

39.33. The Commission is particularly 

interested in the following: 

Are the proposed considerations in 

paragraph (a)(2) for determining 

whether a DCO is systemically 

important in multiple jurisdictions and 

in paragraph (a)(3) for determining 

whether it is engaged in activities with 

a more complex risk profile workable? 

Should alternative considerations be 

used? 

In proposed paragraph (d)(4), should 

the Commission specify the frequency 

with which a SIDCO or Subpart C DCO 

must test its procedures for accessing its 

liquidity resources? In proposed 

paragraph (c)(3)(i)(E)(1) and (c)(3)(ii), 

the Commission permits highly 

marketable collateral to be used as a 

liquidity resource provided that such 

collateral is held in custody and 

investments that are readily available 

and convertible into cash with 

prearranged and highly reliable funding 

arrangements, even in extreme but 

plausible market conditions. As such, 

the Commission proposes to permit as a 

liquidity resource obligations of the 

United States Treasury or high quality, 

liquid, general obligations of a sovereign 

nation provided that such obligations 

are readily available and convertible 

into cash pursuant to prearranged and 

highly reliable funding arrangements. 

This is consistent with the language of 

the PFMIs.148 Should the requirement 

be for funding arrangements that are 

committed? The Commission requests 

comment on whether there are any 

highly reliable funding arrangements 

that meet the requirements of the 

proposed regulations that are not 

committed funding arrangements. 

In addition, in light of the potential 

impact that a SIDCO’s failure could 

have on the U.S. financial system, 

would compliance with proposed 

regulation 39.33 reduce systemic risks? 

Would proposed regulation 39.33 

contribute to the goals articulated in the 

Dodd-Frank Act, particularly the goals 

of Titles VII and VIII of the Dodd-Frank 

Act? If so, in what ways? If not, why 

not? What alternatives, if any, to 

proposed regulation 39.33 would be 

more effective in reducing systemic risk 

or accomplishing the goals articulated 

in the Dodd-Frank Act? Is proposed 

regulation 39.33 consistent with the 

PFMIs? Are there more effective or 

efficient means for achieving 

consistency with the liquidity standards 

set forth in Principle 7? If not, what 

changes need to be made to achieve 

such consistency? What alternatives to 

proposed regulation 39.33, if any, would 

be more effective or efficient for 

achieving consistency with the 

standards set forth by the PFMIs? The 

Commission requests that commenters 

include a detailed description of any 

such alternatives and estimates of the 

costs and benefits of such alternatives. 

Should regulation 39.33 provide that 

only a SIDCO can be deemed 

systemically important in multiple 

jurisdictions? Can proposed regulation 

39.33 be effectively implemented and 

complied with? If not, what changes can 

be made to permit effective 

implementation and compliance? What 

are the potential costs and benefits 

resulting from, or arising out of, 

requiring a SIDCO to comply with 

proposed regulation 39.33? What are the 

potential costs and benefits resulting 

from, or arising out of, requiring Subpart 

C DCOs to comply with proposed 

regulation 39.33? In considering costs 

and benefits, commenters are requested 

to address the effect of the proposed 

regulation not only on a DCO, but also 

on the DCO’s clearing members, the 

customers of clearing members, and the 

financial system more broadly. The 

Commission requests that, where 

possible, commenters provide 

quantitative data in their comments, 

particularly with respect to estimates of 

costs and benefits. 

F. Regulation 39.34 (System Safeguards 

for Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

In 2013, the Commission finalized 

regulation 39.30, which enhanced 

system safeguards requirements for 

SIDCOs for business continuity and 

disaster recovery, and included a twohour recovery time objective (‘‘RTO’’) 

for SIDCOs.149 As discussed in the 

adopting release, the two-hour RTO is 

consistent with Principle 17 of the 

PFMIs and increases the soundness and 

operating resiliency of the SIDCO, 

which in turn, increases the overall 

stability of the U.S. financial markets.150

The Commission proposes renumbering 

regulation 39.30 as regulation 39.34 and 

amending the regulation to cover 

SIDCOs and Subpart C DCOs as well as 

a technical correction to paragraph (b) to 

make clear that subparagraphs (1), (2), 

and (3) concern each activity necessary 

for the daily processing, clearing, and 

settlement of existing and new 

contracts. Finally, to provide flexibility 

to address the practical burdens of 

obtaining the necessary physical and 

technological resources, and of 

organizing human resources, as 

appropriate to implement a two-hour 

RTO, the Commission proposes 

amending the regulation to allow the 


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Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 50277 

151 DCO Core Principle G requires a DCO to have 

rules and procedures ‘‘designed to allow for the 

efficient, fair, and safe management of events 

during which [clearing] members or participants— 

(I) become insolvent; or (II) otherwise default on the 

obligations of the members or participants to the 

[DCO].’’ Each DCO ‘‘is required to (I) clearly state 

the default procedures on the [DCO]; (II) make 

publicly available the default rules of the [DCO]; 

and (III) ensure that the [DCO] may take timely 

action—(aa) to contain losses and liquidity 

pressures; and (bb) to continue meeting each 

obligation of the DCO.’’ See supra Section I.D.3. 

152 17 CFR 39.16(c). 

Commission to, upon application, grant 

newly designated SIDCOs and Subpart 

C DCOs up to one year to comply with 

the provisions of regulation 39.34. 

The Commission requests comment 

on all aspects of proposed regulation 

39.34. The Commission is particularly 

interested in the following: Would 

applying proposed regulation 39.34 to 

Subpart C DCOs contribute to the goals 

articulated in the Dodd-Frank Act, 

particularly the goals of Titles VII and 

VIII of the Dodd-Frank Act? If so, in 

what ways? If not, why not? What 

alternatives, if any, to proposed 

regulation 39.34 would be more 

effective in reducing systemic risk or 

accomplishing the goals articulated in 

the Dodd-Frank Act? Is proposed 

regulation 39.34 consistent with the 

PFMIs? If not, what changes need to be 

made to achieve such consistency? 

What alternatives to proposed 

regulation 39.34, if any, would be more 

effective or efficient for achieving 

consistency with the standards set forth 

by the PFMIs? The Commission requests 

that commenters include a detailed 

description of any such alternatives and 

estimates of the costs and benefits of 

such alternatives. Can proposed 

regulation 39.34 be effectively 

implemented and complied with? If not, 

what changes can be made to permit 

effective implementation and 

compliance? What are the potential 

costs and benefits resulting from, or 

arising out of, requiring a SIDCO to 

comply with proposed regulation 39.34? 

What are the potential costs and benefits 

resulting from, or arising out of, 

requiring Subpart C DCOs to comply 

with proposed regulation 39.34? In 

considering costs and benefits, 

commenters are requested to address the 

effect of the proposed regulation not 

only on a DCO, but also on the DCO’s 

clearing members, the customers of 

clearing members, and the financial 

system more broadly. The Commission 

requests that, where possible, 

commenters provide quantitative data in 

their comments, particularly with 

respect to estimates of costs and 

benefits. 

G. Regulation 39.35 (Default Rules and 

Procedures for Uncovered Credit Losses 

or Liquidity Shortfalls (Recovery) for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

The Commission is proposing 

regulation 39.35, which adds 

requirements pursuant to DCO Core 

Principle G, to address certain potential 

gaps between Commission regulations 

and Principles 4 and 7.151 In particular, 

proposed regulation 39.35 is designed to 

protect SIDCOs, Subpart C DCOs, their 

members and customers, and the 

financial system more broadly by 

requiring SIDCOs and Subpart C DCOs 

to have plans and procedures to address 

credit losses and liquidity shortfalls 

beyond their prefunded resources, thus 

promoting their ability to promptly 

fulfill their obligations and continue to 

perform their critical functions. 

Regulation 39.16 currently requires a 

DCO to adopt procedures permitting it 

to take timely action to contain losses 

and liquidity pressures and to continue 

meeting its obligations in the event of a 

default on the obligations of a clearing 

member to the DCO.152 Proposed 

regulation 39.35 would require SIDCOs 

and Subpart C DCOs to adopt additional 

procedures to address certain issues 

arising from extraordinary stress events, 

including the default of one or more 

clearing members. Specifically, 

consistent with Principle 4 of the 

PFMIs, proposed paragraph (a) would 

require a SIDCO or Subpart C DCO to 

adopt rules and procedures addressing 

the following: 

1. How the SIDCO or Subpart C DCO 

would allocate losses exceeding the financial 

resources available to the SIDCO or Subpart 

C DCO; 

2. How the SIDCO or Subpart C DCO 

would arrange for the repayment of any 

funds the SIDCO or Subpart C DCO may 

borrow; and 

3. How the SIDCO or Subpart C DCO 

would replenish any financial resources it 

may employ during such a stress event, so 

that the SIDCO or Subpart C DCO would be 

able to continue to operate in a safe and 

sound manner. 

Consistent with Principle 7 of the 

PFMIs, proposed paragraph (b) would 

require a SIDCO or Subpart C DCO to 

establish rules and procedures enabling 

it to promptly meet all of its settlement 

obligations, on a same day and, where 

appropriate, on an intraday and 

multiday basis, in the context of the 

occurrence of either or both of the 

following scenarios: (i) Following an 

individual or combined default 

involving one or more clearing 

members’ obligations to the SIDCO or 

Subpart C DCO or (ii) if there is an 

unforeseen liquidity shortfall exceeding 

the financial resources of the SIDCO or 

Subpart C DCO. Such rules and 

procedures should be established ex 

ante and may provide for the means of: 

increasing available assets (e.g. by using 

assessments) and/or reducing the size of 

liabilities (e.g. by engaging in variation 

margin haircuts or tear-ups); as well as 

obtaining liquidity from participants 

(e.g. through rules-based repurchase 

arrangements); employing a sequenced 

application of such tools; and 

replenishing any credit and liquidity 

resources that may be employed during 

a stress event. 

Proposed regulation 39.35 addresses 

significant consequences that could 

result from a clearing member’s default. 

Specifically, a DCO might not have 

sufficient financial resources following 

a clearing member’s default either to 

cover the default or to fulfill its 

settlement obligations. Similarly, a DCO 

may be unable to fulfill its settlement 

obligations due to a liquidity shortfall 

exceeding its financial resources. In 

order to avoid the negative effect on its 

clearing members, their customers, and 

on the financial system more broadly of 

a DCO’s failure promptly to meet its 

settlement obligations, it would be 

prudent for a DCO to have a recovery 

plan that addresses these scenarios and, 

given their importance to the U.S. 

financial system, it is critical for SIDCOs 

to have such plans. In addition, because 

this plan would be specified in the 

DCO’s rules and/or procedures, it would 

be disclosed to clearing members, their 

customers, and the broader public. Such 

transparency would likely help clearing 

members, their customers, and other 

market participants properly allocate 

capital and other resources as well as 

facilitate the development of their own 

recovery plans. 

The Commission requests comment 

on all aspects of these proposals. The 

Commission is particularly interested in 

the following: In light of the potential 

impact that a SIDCO’s failure could 

have on the U.S. financial system, 

would compliance with proposed 

regulation 39.35 reduce systemic risks? 

Would proposed regulation 39.35 

contribute to the goals articulated in the 

Dodd-Frank Act, particularly the goals 

of Titles VII and VIII of the Dodd-Frank 

Act? If so, in what ways? If not, why 

not? What alternatives, if any, to 

proposed regulation 39.35 would be 

more effective in reducing systemic risk 

or accomplishing the goals articulated 

in the Dodd-Frank Act? Is proposed 

regulation 39.35 consistent with the 

PFMIs? If not, what changes need to be 

made to achieve such consistency? 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
50278 Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 

153 DCO Core Principle D requires each DCO to 

possess the ability to manage the risks associated 

with discharging the responsibilities of the DCO 

through the use of appropriate tools and 

procedures. It further requires each DCO to measure 

its credit exposures to each clearing member not 

less than once during each business day and to 

monitor each such exposure periodically during the 

business day. Core Principle D also requires each 

DCO to limit its exposure to potential losses from 

defaults by clearing members, through margin 

requirements and other risk control mechanisms, to 

reduce the risk that its operations would not be 

disrupted and that non-defaulting clearing members 

would not be exposed to losses that non-defaulting 

clearing members cannot anticipate or control. 

Finally, Core Principle D requires that the margin 

that the DCO requires from each clearing member 

be sufficient to cover potential exposures in normal 

market conditions, and that each model and 

parameter used in setting such margin requirements 

be risk-based and reviewed on a regular basis. 

154See supra Section I.D.2. 

155See discussion of Principles 4 and 6 supra 

Sections I.E.4, I.E.5. 

What alternatives to proposed 

regulation 39.35, if any, would be more 

effective or efficient for achieving 

consistency with the standards set forth 

by the PFMIs? Can proposed regulation 

39.35 be effectively implemented and 

complied with? If not, what changes can 

be made to permit effective 

implementation and compliance? What 

are the potential benefits and costs 

resulting from, or arising out of, 

requiring SIDCOs to comply with 

regulation 39.35? The Commission also 

requests comment on the potential costs 

and benefits resulting from, or arising 

out of, requiring Subpart C DCOs to 

comply with regulation 39.35. In 

considering costs and benefits, 

commenters are requested to address the 

effect of the proposed regulation not 

only on a DCO, but also on the DCO’s 

clearing members, the customers of 

clearing members, and the financial 

system more broadly. The Commission 

requests that, where possible, 

commenters provide quantitative data in 

their comments, particularly with 

respect to estimates of costs and 

benefits. The Commission requests that 

commenters include a detailed 

description of any alternatives to 

proposed regulation 39.35 and estimates 

of the costs and benefits of such 

alternatives. 

H. Regulation 39.36 (Risk Management 

for Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

Proposed regulation 39.36 would 

include additional risk management 

requirements for SIDCOs and Subpart C 

DCOs. As noted above, regulation 39.13 

establishes the risk management 

requirements that a DCO would have to 

meet in order to comply with Core 

Principle D 153 including, among other 

things, specific criteria for stress tests 

that a DCO must conduct.154 For 

example, regulation 39.13(h)(3)(ii) 

requires a registered DCO to, ‘‘on a 

weekly basis, conduct stress tests with 

respect to each clearing member 

account, by house origin and by each 

customer origin, and each swap 

portfolio...under extreme but plausible 

market conditions.’’ However, pursuant 

to this provision, a DCO has reasonable 

discretion in determining the 

methodology used to conduct such 

stress tests. 

The Commission is proposing 

regulation 39.36 to address certain 

differences between Commission 

regulations and Principles 4, 6, 7, and 

9.155 In particular, proposed regulation 

39.36 would require a SIDCO or Subpart 

C DCO to enhance its stress testing 

procedures in ways that will make it 

more likely that the SIDCO or Subpart 

C DCO will be able to understand the 

risks posed by its members, so that it 

can ensure that the relationship between 

its resources and obligations enables it 

to meet its obligations promptly. 

Specifically, and consistent with 

Principle 4, proposed regulation 

39.36(a)(1) would require a SIDCO or 

Subpart C DCO to perform stress testing, 

on a daily basis, of its financial 

resources using predetermined 

parameters and assumptions. In 

addition, proposed regulation 

39.36(a)(2) would require a SIDCO or 

Subpart C DCO to perform 

comprehensive analyses of stress testing 

scenarios and underlying parameters to 

ascertain that they are appropriate for 

determining the SIDCO’s or Subpart C 

DCO’s required level of financial 

resources in current and evolving 

market conditions. Proposed regulation 

39.36(a)(3) would also require a SIDCO 

or Subpart C DCO to perform the 

analyses in proposed regulation 

39.36(a)(2) ‘‘at least monthly when 

products cleared or markets served 

display high volatility, become less 

liquid, or when the size or 

concentration of positions held by 

clearing members increases 

significantly.’’ A SIDCO or Subpart C 

DCO would also be required to 

‘‘evaluate [its] stress testing scenarios, 

models, and underlying parameters 

more frequently than once a month,’’ 

where appropriate. For purposes of the 

analyses in proposed regulation 

39.36(a)(1) and proposed regulation 

39.36(a)(2), proposed regulation 

39.36(a)(4) would require a SIDCO or 

Subpart C DCO to include the following 

stress scenarios for both defaulting 

clearing members’ positions and 

possible price changes in liquidation 

periods: (i) Relevant peak historic price 

volatilities; (ii) shifts in other market 

factors including, as appropriate, price 

determinants and yield curves; (iii) 

multiple defaults over various time 

horizons; (iv) simultaneous pressures in 

funding and asset markets; and (v) a 

range of forward-looking stress 

scenarios in a variety of extreme but 

plausible market conditions. Moreover, 

proposed regulation 39.36(a)(5) would 

require each SIDCO and Subpart C DCO 

to establish procedures for reporting 

stress test results to its risk management 

committee or board of directors, as 

appropriate, and for using the results to 

assess the adequacy of, and to adjust the 

SIDCO’s or Subpart C DCO’s total 

financial resources. Finally, proposed 

regulation 39.36(a)(6) would require 

each SIDCO and Subpart C DCO to use 

the results of its financial resources 

stress testing to help make sure it meets 

the minimum financial resources 

requirement set forth in proposed 

regulation 39.33(a). 

In addition, and consistent with 

Principle 7, the Commission is 

proposing stress testing requirements for 

liquidity resources that are analogous to 

the stress testing requirements for 

financial resources in proposed 

regulation 39.36(a), with the exception 

that the stress testing scenarios required 

by proposed regulation 39.36(c)(5) 

should consider the following: (i) All 

entities that might pose material 

liquidity risks to the DCO, including 

settlement banks, permitted 

depositories, liquidity providers, and 

other entities; (ii) intraday and multiday 

scenarios, where appropriate; (iii) interlinkages between its clearing members 

and the multiple roles that they may 

play in in the SIDCO’s or Subpart C 

DCO’s risk management (e.g., scenarios 

where a clearing member or its affiliate 

is also a liquidity provider); and (iv) the 

probability of multiple failures and 

contagion effect among clearing 

members. 

Proposed regulation 39.36(c)(7) would 

require a SIDCO or Subpart C DCO to 

use the results of such stress tests to 

make certain that it meets the financial 

resources requirement set forth in 

regulation 39.33(a), and the liquidity 

resources requirements set forth in 

regulation 39.33(c). In addition, each 

SIDCO and Subpart C DCO would be 

required to perform, on an annual basis, 

a full validation of its financial risk 

management model and its liquid risk 

management model. 

Proposed paragraphs (a), (c), (d), and 

(e) are important because stress testing 

scenarios, underlying risk factors that 

constitute such scenarios, and the 

relationship between different risk 


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156See supra Section I.E.5. 

157See supra Section II.E (discussing ‘‘Cover 

Two’’ in connection with revised regulation 39.33 

(financial resources)). See generally PFMIs at E.N. 

3.6.17. 

158See discussion of Principle 9 supra Section 

I.E.7. 159See PFMIs at E.N. 3.9.5, 3.9.6. These issues 

could be avoided by a SIDCO to the extent it uses 

Federal Reserve Bank accounts and services 

pursuant to proposed regulation 39.33(d)(5). 

factors are dynamic, and need to be 

updated due to changing market 

conditions. For example, use of relative, 

instead of absolute, changes in interest 

rates may be sufficient in a normal 

interest rate environment, but can lead 

to nonsensical estimates during low rate 

periods. In other words, changes in a 

particular risk factor during unusually 

volatile periods may be more extreme 

than any in the existing scenarios. In 

addition, it is important for SIDCOs and 

Subpart C DCOs to stress test both their 

financial resources and liquidity 

resources. While stress testing financial 

resources helps SIDCOs and Subpart C 

DCOs make sure they have the right 

amount, SIDCOs and Subpart C DCOs 

need access to liquid assets subject to 

arrangements in which they can 

promptly be convertible to cash to fulfill 

their obligations in a timely manner. As 

such, stress testing liquidity resources is 

a critical exercise for SIDCOs and 

Subpart C DCOs as such testing will 

help ensure that SIDCOs and Subpart C 

DCOs have enough resources to cover 

their obligations at the time and on the 

day that such obligations are due. 

Moreover, given the significant role 

SIDCOs play in the U.S. financial 

markets, it would appear that obtaining 

an in-depth understanding of potential 

liquidity needs through comprehensive 

stress testing under a broad range of 

scenarios is critical for a SIDCO’s 

effective risk management. 

As noted above, Principle 6 requires 

a CCP’s margin system to take into 

account the ‘‘risks and particular 

attributes of each product, portfolio and 

market that it serves’’ and be calibrated 

accordingly.156 In particular, Principle 6 

requires a CCP to conduct a ‘‘sensitivity 

analysis’’ of its margin system at least 

monthly, and, more frequently, when 

appropriate. Accordingly, consistent 

with the standards set forth in Principle 

6, paragraph (c) of proposed regulation 

39.36 would require a SIDCO or Subpart 

C DCO to conduct a sensitivity analysis 

of its margin model at least monthly to 

analyze and monitor model performance 

and overall margin coverage. Moreover, 

paragraph (c) would require the 

sensitivity analysis to involve reviewing 

a wide range of parameter settings and 

assumptions that reflect possible market 

conditions in order to understand how 

the level of margin coverage might be 

affected by highly stressed market 

conditions. The parameters and 

assumptions used by a SIDCO or 

Subpart C DCO would be expected to 

capture a variety of historical and 

hypothetical conditions, including the 

most volatile periods that have been 

experienced by the markets served by 

the SIDCO or Subpart C DCO and 

extreme changes in the correlations 

between prices. In addition, the 

sensitivity analysis would be conducted 

on both actual and hypothetical 

positions, and would include testing of 

the abilities of the models or model 

components to produce accurate results 

using actual or hypothetical datasets 

and assessing the impact of different 

model parameter settings. The SIDCO or 

Subpart C DCO would also be required 

to evaluate potential losses in clearing 

members’ proprietary positions and, 

where appropriate, customer positions. 

With respect to SIDCOs and Subpart C 

DCOs that are involved in activities 

with a more complex risk profile, the 

Commission proposes requiring such 

SIDCOs and Subpart C DCOs to take 

into consideration parameter settings 

that reflect the potential impact of the 

simultaneous default of two clearing 

members and consider the underlying 

credit instruments.157 Proposed 

regulation 39.36(d) would require a 

SIDCO or Subpart C DCO regularly to 

conduct an assessment of the theoretical 

and empirical properties of its margin 

model for all products it clears, and 

proposed regulation 39.36(e) would 

require a SIDCO or Subpart C DCO to 

perform, on an annual basis, a full 

validation of its financial risk 

management model and its liquid risk 

management model. Moreover, under 

proposed paragraph (f), and consistent 

with Principle 16, custody and 

investment arrangements for a 

systemically important derivatives 

clearing organization’s and subpart C 

derivatives clearing organization’s own 

funds and assets would be subject to the 

same requirements as those specified in 

§ 39.15 of this chapter for funds and 

assets of clearing members. This 

includes establishing standards and 

procedures that are designed to protect 

and ensure safety as specified in 

§ 39.15(a), custody arrangements that 

minimize the risk of loss or of delay in 

access by the DCO as specified in 

§ 39.15(c), and limitation of investments 

to instruments with minimal credit, 

market, and liquidity risks as specified 

in § 39.15(e). 

It is vitally important that all DCOs 

obtain an in-depth understanding of 

their exposure to credit risk. As 

financial derivatives markets expand 

globally and counterparty credit risk 

increases in size and complexity, a 

DCO’s ability to assess its exposure to 

credit risk becomes even more critical. 

These proposed regulations are 

intended to enhance the ability of 

SIDCOs and Subpart C DCOs to manage 

their risk exposure. Because a SIDCO 

plays a significant role in the financial 

markets, accurate and dynamic risk 

management is critical not only to the 

SIDCO, but also to the stability of the 

broader U.S. financial system. 

Under proposed paragraph (g), and 

consistent with Principle 9, a SIDCO or 

Subpart C DCO would be required to 

monitor, manage, and limit its credit 

and liquidity risks arising from its 

settlement banks.158 Specifically, a 

SIDCO or Subpart C DCO would be 

required to establish, and monitor 

adherence to, strict criteria for its 

settlement banks that take account of, 

among other things, their regulation and 

supervision, creditworthiness, 

capitalization, access to liquidity, and 

operational reliability. In addition, a 

SIDCO or Subpart C DCO would be 

required to monitor and manage the 

concentration of credit and liquidity 

exposures to its settlement banks. In 

order to mitigate both the probability of 

being exposed to a settlement bank’s 

failure and the potential losses and 

liquidity pressures to which it would be 

exposed in the event of such a failure, 

each SIDCO and Subpart C DCO should, 

where reasonable and practicable, use 

multiple settlement banks instead of one 

and consider using different settlement 

banks for different functions, such as 

depositing funds, investing funds or 

holding liquidity resources.159

The Commission requests comment 

on all aspects of proposed regulation 

39.36. The Commission is particularly 

interested in the following: In light of 

the potential impact that a SIDCO’s 

failure could have on the U.S. financial 

system, would compliance with 

proposed regulation 39.36 reduce 

systemic risks? Would proposed 

regulation 39.36 contribute to the goals 

articulated in the Dodd-Frank Act, 

particularly the goals of Titles VII and 

VIII of the Dodd-Frank Act? If so, in 

what ways? If not, why not? What 

alternatives, if any, to proposed 

regulation 39.36 would be more 

effective in reducing systemic risk or 

accomplishing the goals articulated in 

the Dodd-Frank Act? Is proposed 

regulation 39.36 consistent with the 

PFMIs? If not, what changes need to be 

made to achieve such consistency? 

What alternatives to proposed 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
50280 Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 

160Public disclosure requirements for all 

registered DCOs are set forth in Regulation 39.21, 

which implements DCO Core Principle L (Public 

Information), and requires DCOs to provide to 

market participants sufficient information to enable 

them to identify and evaluate accurately the risks 

and costs associated with using the services of the 

DCO. 

161Available at: http://www.bis.org/publ/ 

cpss106.pdf. 

162See supra section II.C.2. for a discussion of the 

Quantitative Information Disclosure (referencing 

section 2.5 of the CPSS–IOSCO Disclosure 

Framework). 

163See PFMIs at E.N. 3.14.1. 

regulation 39.36, if any, would be more 

effective or efficient for achieving 

consistency with the standards set forth 

by the PFMIs? Can proposed regulation 

39.36 be effectively implemented and 

complied with? If not, what changes can 

be made to permit effective 

implementation and compliance? What 

are the potential benefits and costs 

resulting from, or arising out of, 

requiring SIDCOs to comply with 

regulation 39.36? The Commission also 

requests comment on the potential costs 

and benefits resulting from, or arising 

out of, requiring Subpart C DCOs to 

comply with regulation 39.36. In 

considering costs and benefits, 

commenters are requested to address the 

effect of the proposed regulation not 

only on a DCO, but also on the DCO’s 

clearing members, the customers of 

clearing members, and the financial 

system more broadly. The Commission 

requests that, where possible, 

commenters provide quantitative data in 

their comments, particularly with 

respect to estimates of costs and 

benefits. The Commission requests that 

commenters include a detailed 

description of any alternatives to 

proposed regulation 39.36 and estimates 

of the costs and benefits of such 

alternatives. 

I. Regulation 39.37 (Additional 

Disclosure for Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

The Commission is proposing 

regulation 39.37 to set forth additional 

public disclosure requirements for 

SIDCOs and Subpart C DCOs.160 These 

requirements are intended to address 

differences between current 

requirements and PFMI Principles 14 

and 23. In particular, proposed 

regulation 39.37 is designed to enable 

members of SIDCOs and Subpart C 

DCOs, their customers, and the general 

public to understand the risk of 

exposures to such DCOs, and to promote 

their ability to evaluate the quality of 

such DCOs, thereby enhancing 

competition and market discipline. 

Specifically, proposed regulation 

39.37 would require SIDCOs and 

Subpart C DCOs to disclose certain 

information to the public and to the 

Commission. First, consistent with 

Principle 23, a SIDCO or Subpart C DCO 

would be required to disclose its 

responses to the CPSS–IOSCO 

Disclosure Framework, discussed in 

section II.C.2, above. Further, a SIDCO 

or Subpart C DCO would be required to 

review and update at least every two 

years and following material changes to 

the SIDCO’s or Subpart C DCO’s system 

or its environment, its responses to the 

Disclosure Framework to ensure the 

continued accuracy and usefulness of 

the responses.161 A material change to 

the SIDCO’s or Subpart C DCO’s system 

or environment is a change that would 

significantly change the accuracy and 

usefulness of the SIDCO’s or Subpart C 

DCO’s existing responses. Proposed 

regulation 39.37 would also require a 

SIDCO or Subpart C DCO to disclose, 

publicly and to the Commission, 

relevant basic data on transaction 

volume and values. This requirement is 

intended to be consistent with the 

Quantitative Information Disclosure that 

CPSS–IOSCO are in the process of 

developing.162

Also under proposed regulation 39.37, 

a SIDCO or Subpart C DCO would be 

required, consistent with Principle 14, 

to publish its rules, policies, and 

procedures describing whether 

customer funds are protected on an 

individual or omnibus basis and 

whether customer funds are subject to 

any legal or operational constraints that 

may impair the ability of the SIDCO or 

Subpart C DCO to segregate or port the 

positions and related collateral of a 

clearing member’s customers. This 

additional transparency, particularly 

with respect to information regarding 

the protection of customer positions and 

related collateral, is important for the 

safe and effective transfer of positions 

and collateral in a default, resolution or 

insolvency scenario.163 The 

Commission notes that the ability to 

transfer customer positions and 

associated collateral may reduce the 

need to liquidate positions, which 

liquidation could create substantial 

losses for customers and further disrupt 

the stability of the financial markets 

during times of market stress. In 

addition, these proposed additional 

disclosures will help regulators and 

market participants assess SIDCOs and 

Subpart C DCOs, particularly with 

respect to a SIDCO’s or Subpart C DCO’s 

compliance with the PFMIs. Because of 

a SIDCO’s importance to the U.S. 

financial markets, it would appear that 

such public assessment will help 

provide comfort to market participants, 

which could prove to be a stabilizing 

force in times of severe market stress. 

The Commission requests comment 

on all aspects of these proposals. The 

Commission is particularly interested in 

the following: In light of the potential 

impact that a SIDCO’s failure could 

have on the U.S. financial system, 

would compliance with proposed 

regulation 39.37 reduce systemic risks? 

Would proposed regulation 39.37 

contribute to the goals articulated in the 

Dodd-Frank Act, particularly the goals 

of Titles VII and VIII of the Dodd-Frank 

Act? If so, in what ways? If not, why 

not? What alternatives, if any, to 

proposed regulation 39.37 would be 

more effective in reducing systemic risk 

or accomplishing the goals articulated 

in the Dodd-Frank Act? Is proposed 

regulation 39.37 consistent with the 

PFMIs? If not, what changes need to be 

made to achieve such consistency? 

What alternatives to proposed 

regulation 39.37, if any, would be more 

effective or efficient for achieving 

consistency with the standards set forth 

by the PFMIs? Can proposed regulation 

39.37 be effectively implemented and 

complied with? If not, what changes can 

be made to permit effective 

implementation and compliance? What 

are the potential benefits and costs 

resulting from, or arising out of, 

requiring SIDCOs to comply with 

regulation 39.37? The Commission also 

requests comment on the potential costs 

and benefits resulting from, or arising 

out of, requiring Subpart C DCOs to 

comply with regulation 39.37. In 

considering costs and benefits, 

commenters are requested to address the 

effect of the proposed regulation not 

only on a DCO, but also on the DCO’s 

clearing members, the customers of 

clearing members, and the financial 

system more broadly. The Commission 

requests that, where possible, 

commenters provide quantitative data in 

their comments, particularly with 

respect to estimates of costs and 

benefits. The Commission requests that 

commenters include a detailed 

description of any alternatives to 

proposed regulation 39.37 and estimates 

of the costs and benefits of such 

alternatives. 

J. Regulation 39.38 (Efficiency for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Cearing Organizations) 

Consistent with Principle 21, 

proposed regulation 39.38 would 

require a SIDCO or Subpart C DCO to 

design efficiently and effectively its 

clearing and settlement arrangements, 


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164See PFMIs at E.N. 3.21.1. 

165PFMIs at E.N. 3.21.2. 

166PFMIs at E.N. 3.21.5. 

167PFMIs at E.N. 3.21.1. 

168See supra Section I.E.3. 

169See supra Section I.E.9. 

170See id. 

171See supra Section I.D.1–4. 

operating structure and procedures, 

product scope, and use of technology. In 

addition, a SIDCO or Subpart C DCO 

would be required to establish clearly 

defined goals and objectives that are 

measurable and achievable, including 

goals with regards to minimum service 

levels, risk management expectations, 

and business priorities. Moreover, a 

SIDCO or Subpart C DCO would be 

required to facilitate efficient payment, 

clearing, and settlement by 

accommodating internationally 

accepted communication procedures 

and standards. The explanatory notes to 

Principle 21 provide that an efficient 

CCP has the required resources to 

perform its functions 164 and the 

efficiency of the CCP depends on the 

choice of clearing and settlement 

arrangement, operating structure, scope 

of products cleared or settled, and 

integration of technology and 

procedures.165 In addition, the 

explanatory notes state that an effective 

CCP reliably meets its obligations in a 

timely manner and achieves the public 

policy goals of safety and efficiency for 

participants and the markets it 

serves.166 Finally, consistent with 

Principle 22, proposed regulation 

39.38(d) would require each SIDCO and 

Subpart C DCO to facilitate efficient 

payment, clearing, and settlement by 

accommodating internationally 

accepted communication procedures 

and standards. 

It would appear to be prudent for 

SIDCOs and Subpart C DCOs to comply 

with such international standards of 

efficiency and effectiveness. A SIDCO or 

Subpart C DCO that is inefficient or 

ineffective could distort financial 

activity and market structure, increasing 

financial and other risks to the SIDCO’s 

or Subpart C DCO’s participants.167

Although there is no DCO Core 

Principle specifically directed at 

efficiency and effectiveness, furthering 

these goals would improve compliance 

with Core Principle D (requiring, in 

part, that a DCO ensure it has the ability 

to manage the risks associated with 

discharging its responsibilities through 

the use of appropriate tools and 

procedures) and Core Principle G 

(requiring, in part, that a DCO have 

rules and procedures designed to allow 

for the efficient, fair, and safe 

management of events during which 

members or participants become 

insolvent or other default). 

The Commission requests comment 

on all aspects of these proposals. The 

Commission is particularly interested in 

the following: In light of the potential 

impact that a SIDCO’s failure could 

have on the U.S. financial system, 

would compliance with proposed 

regulation 39.38 reduce systemic risks? 

Would proposed regulation 39.38 

contribute to the goals articulated in the 

Dodd-Frank Act, particularly the goals 

of Titles VII and VIII of the Dodd-Frank 

Act? If so, in what ways? If not, why 

not? What alternatives, if any, to 

proposed regulation 39.38 would be 

more effective in reducing systemic risk 

or accomplishing the goals articulated 

in the Dodd-Frank Act? Is proposed 

regulation 39.38 consistent with the 

PFMIs? If not, what changes need to be 

made to achieve such consistency? 

What alternatives to proposed 

regulation 39.38, if any, would be more 

effective or efficient for achieving 

consistency with the standards set forth 

by the PFMIs? Can proposed regulation 

39.38 be effectively implemented and 

complied with? If not, what changes can 

be made to permit effective 

implementation and compliance? What 

are the potential benefits and costs 

resulting from, or arising out of, 

requiring SIDCOs to comply with 

regulation 39.38? The Commission also 

requests comment on the potential costs 

and benefits resulting from, or arising 

out of, requiring Subpart C DCOs to 

comply with regulation 39.38. In 

considering costs and benefits, 

commenters are requested to address the 

effect of the proposed regulation not 

only on a DCO, but also on the DCO’s 

clearing members, the customers of 

clearing members, and the financial 

system more broadly. The Commission 

requests that, where possible, 

commenters provide quantitative data in 

their comments, particularly with 

respect to estimates of costs and 

benefits. The Commission requests that 

commenters include a detailed 

description of any alternatives to 

proposed regulation 39.38 and estimates 

of the costs and benefits of such 

alternatives. 

K. Regulation 39.39 (Recovery and 

Wind-Down For Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

The Commission is proposing 

regulation 39.39 to require a SIDCO or 

Subpart C DCO to maintain viable plans 

for recovery and orderly wind-down. In 

particular, regulation 39.39 is designed 

to protect the members of such DCOs 

and their customers, as well as the 

financial system more broadly from the 

consequences of a disorderly failure of 

such a DCO. 

As noted above, Principle 3 requires 

a CCP to have a sound risk management 

framework for comprehensively 

managing legal, credit, liquidity, 

operational, and other risks.168 Under 

Principle 3, such a framework would 

include identifying scenarios that may 

prevent the CCP from providing critical 

operations and services as a going 

concern and would assess the 

effectiveness of a full range of options 

for recovery or orderly wind-down. 

Similarly, Principle 15 requires a CCP to 

identify, monitor, and manage its 

general business risk and hold sufficient 

liquid net assets funded by equity to 

cover potential general business losses 

so that the CCP can continue operations 

and services as a going concern if those 

losses materialize.169 Further, these 

liquid net assets should, at all times, be 

sufficient to allow for recovery or 

orderly wind-down of critical 

operations and services.170 Although 

there is no Core Principle that pertains 

directly to the establishment of a 

recovery and wind-down plan, 

proposed regulation 39.37 promotes 

concepts set forth in Core Principles B 

(Financial Resources), D (Risk 

Management), G (Default Rules and 

Procedures), and I (System 

Safeguards).171

Accordingly, proposed regulation 

39.39 requires a SIDCO or Subpart C 

DCO to develop additional plans that 

specifically address ‘‘recovery’’ and 

‘‘wind-down.’’ The Commission 

proposes defining ‘‘recovery’’ as the 

actions of a SIDCO or Subpart C DCO, 

consistent with its rules, procedures, 

and other ex-ante contractual 

arrangements, to address any uncovered 

credit loss, liquidity shortfall, capital 

inadequacy, or business, operational or 

other structural weakness, including the 

replenishment of any depleted prefunded financial resources and liquidity 

arrangements, as necessary to maintain 

the SIDCO’s or Subpart C DCO’s 

viability as a going concern so that it 

can continue to provide its critical 

services without requiring the 

commencement of an insolvency 

proceeding or the use of resolution 

powers by the Federal Deposit 

Insurance Corporation or any other 

relevant resolution authority. The 

Commission proposes defining ‘‘winddown’’ as the actions of a SIDCO or 

Subpart C DCO to effect the permanent 

cessation or sale or transfer of one or 

more services. The Commission is also 

proposing to add a definition for 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
50282 Federal Register / Vol. 78, No. 159 / Friday, August 16, 2013 / Proposed Rules 

172Thus, the requirements of proposed 

§ 39.39(d)(2) and existing § 39.11(a)(2) are 

overlapping, rather than alternative. A SIDCO or 

Subpart C DCO whose plan pursuant to 

§ 39.39(b)(2) anticipates completion of wind-down 

in three months would nonetheless be held to the 

requirement of one year of operating costs specified 

in § 39.11(a)(2). 

173This is consistent with the approach taken in 

§ 39.11(b)(3). 

‘‘general business risk,’’ which would 

mean any potential impairment of a 

SIDCO’s or Subpart C DCO’s financial 

position, as a business concern, as a 

consequence of a decline in its revenues 

or an increase in its expenses, such that 

expenses exceed revenues and result in 

a loss that the SIDCO or Subpart C DCO 

must charge against capital. In addition, 

the Commission proposes defining 

‘‘operational risk’’ to mean the risk that 

deficiencies in information systems or 

internal processes, human errors, 

management failures or disruptions 

from external events will result in the 

reduction, deterioration, or breakdown 

of services provided by a SIDCO or 

Subpart C DCO. Finally, the 

Commission is proposing to define 

‘‘unencumbered liquid financial assets’’ 

to include cash and highly liquid 

securities. These proposed definitions 

are designed to be consistent with the 

meaning of such terms in the PFMIs. 

The Commission requests comment as 

to whether these definitions are 

appropriate. Specifically, the 

Commission requests comment on 

whether the definition of ‘‘recovery’’ is 

appropriate in light of emerging 

international consensus. 

The Commission is proposing to 

require each SIDCO and Subpart C DCO 

to maintain viable plans for: (i) 

Recovery or orderly wind-down, 

necessitated by credit losses or liquidity 

shortfalls; and (ii) recovery or orderly 

wind-down, necessitated by general 

business risk, operational risk, or any 

other risk that threatens the SIDCO’s or 

Subpart C DCO’s viability as a going 

concern. The Commission also proposes 

requiring that the recovery and winddown plans of SIDCOs and Subpart C 

DCOs meet certain standards, set forth 

in proposed subsection (c). Specifically, 

the Commission proposes requiring a 

SIDCO or Subpart C DCO to identify 

scenarios that may potentially prevent it 

from being able to provide its critical 

operations and services as a going 

concern and assess the effectiveness of 

a full range of options for recovery or 

orderly wind-down. The SIDCO’s or 

Subpart C DCO’s plans should also 

include procedures for informing the 

Commission, as soon as practicable, 

when the recovery plan is initiated or 

wind-down is pending, as well as 

procedures for providing the 

Commission and any other relevant 

authorities (e.g., the Federal Deposit 

Insurance Corporation) with 

information necessary for resolution 

planning. 

Proposed regulation 39.39(d) requires 

that the recovery and wind-down plans 

of a SIDCO or Subpart C DCO be 

supported by certain resources. 

Specifically, in evaluating the resources 

available to cover any uncovered credit 

losses or liquidity shortfalls as part of its 

recovery or wind-down plans 

necessitated by credit losses of liquidity 

shortfalls, a SIDCO or Subpart C DCO 

would be permitted to consider, among 

other things, assessments of additional 

resources provided for under its rules 

that it reasonably expects to collect from 

non-defaulting members. In addition, a 

SIDCO or Subpart C DCO would be 

required to maintain sufficient 

unencumbered liquid financial assets, 

funded by the equity of its owners, to 

implement its recovery or wind-down 

plans necessitated by general business 

risk, operational risk, or any other risk 

that threatens the SIDCO’s or Subpart C 

DCO’s viability as a going concern. 

Moreover, while the resources required 

by regulation 39.11(a)(2) may be 

sufficient to maintain a SIDCO’s or 

Subpart C DCO’s recovery or winddown plans necessitated by general 

business risk, operational risk, or any 

other risk that threatens the SIDCO’s or 

Subpart C DCO’s viability as a going 

concern, a SIDCO or Subpart C DCO 

would be required to (i) analyze such 

plans, including the particular 

circumstances and risks associated with 

the SIDCO or Subpart C DCO, and (ii) 

maintain any additional resources that 

may be necessary to implement such 

plans.172 A SIDCO or Subpart C DCO 

would be required to comply with 

regulation 39.11(e)(2) in allocating 

sufficient financial resources to 

implement its recovery or wind-down 

plans necessitated by general business 

risk, operational risk, or any other risk 

that threatens the SIDCO’s or Subpart C 

DCO’s viability as a going concern. 

Moreover, such plans would need to 

include evidence and analysis to 

support the conclusion that the amount 

considered necessary is, in fact, 

sufficient to implement them. 

Proposed regulation 39.39(d)(3) 

would prohibit counting the resources 

maintained to meet the requirements of 

regulations 39.11(a)(1) and 39.33 as 

available, in whole or in part, for uses 

other than addressing the default of one 

or more clearing members. Further, 

proposed regulation 39.39(d)(3) would 

prohibit a SIDCO or Subpart C DCO 

from counting the same resources as 

available to address both its recovery or 

orderly wind-down, necessitated by 

credit losses or liquidity shortfalls; and 

its recovery or orderly wind-down, 

necessitated by general business risk, 

operational risk, or any other risk that 

threatens the SIDCO’s or Subpart C 

DCO’s viability as a going concern. In 

other words, if a SIDCO or Subpart C 

DCO allocates resources, in whole or in 

part, to execute its recovery plans 

required by proposed regulation 

39.39(b)(1), it may not allocate those 

same resources, in whole or in part, to 

satisfy the requirements of proposed 

regulation 39.39(b)(2).173 In addition, 

resources may be allocated only to the 

extent the use of that resource is not 

otherwise limited by the CEA, 

Commission regulations, the SIDCO’s or 

Subpart C DCO’s rules, or any 

contractual arrangements to which the 

SIDCO or Subpart C DCO is a party. 

Finally, under 39.39(e), a SIDCO or 

Subpart C DCO would be required to 

maintain viable plans for raising 

additional financial resources, 

including, where appropriate, capital, in 

a scenario in which it is unable, or 

virtually unable, to comply with any 

financial resource requirements set forth 

in part 39. These plans would also have 

to be approved by the SIDCO’s or 

Subpart C DCO’s board of directors and 

be updated regularly. 

These proposed regulations are 

intended to address certain differences 

between existing Commission 

regulations and the standards set forth 

in the PFMIs. In addition, it would 

appear to be necessary for a SIDCO to 

maintain and regularly update a 

recovery and wind-down plan so as to 

reduce or attempt to control the 

potential impact a failure or disruption 

of the SIDCO’s operations would have 

on the stability of the U.S. financial 

markets. 

The Commission requests comment 

on all aspects of these proposals. The 

Commission is particularly interested in 

the following: In light of the potential 

impact that a SIDCO’s failure could 

have on the U.S. financial system, 

would compliance with proposed 

regulation 39.39 reduce systemic risks? 

Would proposed regulation 39.39 

contribute to the goals articulated in the 

Dodd-Frank Act, particularly the goals 

of Titles VII and VIII of the Dodd-Frank 

Act? If so, in what ways? If not, why 

not? What alternatives, if any, to 

proposed regulation 39.39 would be 

more effective in reducing systemic risk 

or accomplishing the goals articulated 

in the Dodd-Frank Act? Is proposed 

regulation 39.39 consistent with the 

PFMIs? If not, what changes need to be 


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174See SIDCO Final Rule. 

175See supra Section II.B and note 111. 

176The Commission promulgated this provision 

as part of the SIDCO Final Rule. 

177See supra Section II.B. (discussing proposed 

revised regulation 39.28, renumbered as regulation 

39.30). 

178For example, CME Clearing has three 

independent guaranty funds and financial 

safeguards: one for interest rate swap contracts (IRS 

Contracts), one for credit default swap contracts 

(CDS Contracts), and one for futures and cleared 

OTC products, other than IRS or CDS (the Base 

Guaranty Fund). See Rule 802.A of the CME 

Rulebook in respect of the Base Guaranty Fund, 

Rule 8G802.A of the CME Rulebook in respect of 

IRS Contracts, and Rule 8H802.A of the CME 

Rulebook in respect of CDS Contracts, each of 

which is available at http://www.cmegroup.com/ 

rulebook/CME/. 

made to achieve such consistency? 

What alternatives to proposed 

regulation 39.39, if any, would be more 

effective or efficient for achieving 

consistency with the standards set forth 

by the PFMIs? Can proposed regulation 

39.39 be effectively implemented and 

complied with? If not, what changes can 

be made to permit effective 

implementation and compliance? What 

are the potential benefits and costs 

resulting from, or arising out of, 

requiring SIDCOs to comply with 

regulation 39.39? The Commission also 

requests comment on the potential costs 

and benefits resulting from, or arising 

out of, requiring Subpart C DCOs to 

comply with regulation 39.39. In 

considering costs and benefits, 

commenters are requested to address the 

effect of the proposed regulation not 

only on a DCO, but also on the DCO’s 

clearing members, the customers of 

clearing members, and the financial 

system more broadly. The Commission 

requests that, where possible, 

commenters provide quantitative data in 

their comments, particularly with 

respect to estimates of costs and 

benefits. The Commission requests that 

commenters include a detailed 

description of any alternatives to 

proposed regulation 39.39 and estimates 

of the costs and benefits of such 

alternatives. 

L. Regulation 39.40 (Consistency With 

the PFMIs) 

Proposed regulation 39.40 would 

make clear that Subpart C is intended to 

establish regulations that, together with 

Subpart A and Subpart B, are consistent 

with the DCO Core Principles set forth 

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

PFMIs. Specifically, to the extent of any 

ambiguity, the Commission intends to 

interpret the regulations set forth in part 

39 in a manner that is consistent with 

the standards set forth in the PFMIs. 

Such consistency would appear to 

promote international harmonization 

and is intended to allow the bank 

clearing members and bank customers 

of SIDCOs and Subpart C DCOs to 

receive the more favorable capital 

treatment under the Basel CCP Capital 

Requirements. 

The Commission requests comment 

on all aspects of these proposals. 

Specifically, the Commission requests 

comment on whether there are more 

effective or efficient means for achieving 

consistency with the standards set forth 

by the PFMIs. The Commission requests 

that commenters include a detailed 

description of any such alternatives and 

estimates of the costs and benefits of 

any such alternatives. 

M. Regulation 39.41 (Special 

Enforcement Authority for Systemically 

Important Derivatives Clearing 

Organizations) 

In 2013, the Commission adopted 

regulation 39.31, which implemented 

special enforcement authority over 

SIDCOs granted to the Commission 

under section 807(c) of the Dodd-Frank 

Act.174 The Commission is not 

proposing any changes to regulation 

39.31 other than to renumber it as 

regulation 39.41. 

N. Regulation 39.42 (Advance Notice of 

Material Risk-Related Rule Changes by 

Systemically Important Derivatives 

Clearing Organizations) 

The Commission proposes moving 

existing paragraph (c) of regulation 

39.30 (Scope) to proposed regulation 

39.42.175 This provision instructs a 

SIDCO to provide advance notice to the 

Commission of any proposed change to 

its rules, procedures, or operations that 

could materially affect the nature or 

level of risks presented by the SIDCO, 

in accordance with regulation 40.10.176

Because the other provisions of 

proposed revised regulation 39.28 

(renumbered as regulation 39.30) 

pertain to the scope of Subpart C,177 it 

would be appropriate for paragraph (d) 

to be codified in a separate regulation. 

No substantive change is intended. 

O. Regulation 140.94 (Delegation of 

Authority to the Director of the Division 

of Clearing and Risk) 

The Commission proposes amending 

regulation 140.94 so that certain 

Commission functions contained in 

these proposed regulations would be 

delegated to the Director of the Division 

of Clearing and Risk and to such staff 

members as the Director may designate. 

Specifically, the Commission proposes 

to delegate all functions reserved to the 

Commission in proposed regulation 

39.31 including, for example, the 

authority to request that a DCO provide 

information supplementing a Subpart C 

Election Form that it has filed with the 

Commission; to determine whether an 

election to be subject to Subpart C 

should be permitted to become effective, 

stayed or denied; and to provide any 

notices regarding the foregoing. The 

Commission also proposes to delegate to 

the Director of the Division of Clearing 

and Risk and to his or her designees the 

decision described in regulation 

39.34(d) (whether to grant a SIDCO or a 

Subpart C DCO up to one year to 

comply with any provision of regulation 

39.34). 

P. Regulation 190.09 (Member Property) 

Certain of the proposed requirements 

for SIDCOs and Subpart C DCOs 

necessitate certain clarifications to part 

190 of the Commission’s regulations. 

Specifically, proposed regulation 

39.35(a) would require a SIDCO or 

Subpart C DCO to ‘‘adopt explicit rules 

and procedures that address fully any 

loss arising from any individual or 

combined default relating to any 

clearing members’ obligations to the 

SIDCO or Subpart C DCO.’’ Proposed 

regulation 39.37(b) would require a 

SIDCO or Subpart C DCO to maintain 

viable plans for recovery and orderly 

wind-down. In addition, SIDCOs and 

Subpart C DCOs must comply with Core 

Principle R, which require all registered 

DCOs to ‘‘have a well-founded, 

transparent, and enforceable legal 

framework for each aspect of the 

activities of the DCO.’’ 

The Commission notes that the risk 

management practices of DCOs vary 

depending, in part, on the types of 

assets that the DCO clears. For example, 

some DCOs ring-fence mutualized 

default resources related to certain asset 

classes separately from resources related 

to other such classes, in part, because of 

the different risk profiles associated 

with those asset classes and a desire 

among members to avoid exposure to 

contributions to mutualized resources 

for asset classes in which such members 

do not participate. In such cases, the 

DCOs have updated their financial 

safeguards arrangements to 

accommodate these differences.178

Recognizing the diversity of financial 

safeguard arrangements among DCOs, it 

would appear to be prudent to clarify 

certain language in part 190 to 

materially aid compliance with Core 

Principle R and the proposed 

regulations specified above. 

Specifically, regulation 190.09 defines 

the scope of ‘‘member property’’ in the 

context of a DCO bankruptcy. The 

Commission notes that when regulation 


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179See 35 U.S.C. 3501(2) and (3). 

190.09(b) was first proposed and 

adopted in the early 1980s, DCOs did 

not hold specific and independent 

guaranty funds for different product 

classes within a single legal entity. As 

such, the definition of ‘‘member 

property’’ in regulation 190.09(b) does 

not expressly address the treatment of 

independent guaranty fund deposits in 

the context of a DCO bankruptcy. Thus, 

to avoid interference with the rules of a 

DCO governing the operation of such 

funds, the Commission proposes the 

clarifications discussed below. 

Therefore, the Commission proposes 

amending paragraph (b) of regulation 

190.09 to clarify that the scope of 

member property will be determined 

based on the by-laws and rules of the 

relevant DCO. Specifically, this 

amendment would clarify that the 

inclusion of guaranty fund contributions 

and other property as ‘‘member 

property’’ in the context of a DCO 

bankruptcy would be subject to the bylaws or rules of the DCO. Thus, under 

proposed regulation 190.09(b), the 

Commission proposes that a DCO’s 

distinct guaranty funds, which are 

established for separate product classes 

by the DCO’s by-laws or rules, shall be 

treated separately from one another to 

the extent required by the DCO’s bylaws or rules. 

The Commission requests comment 

on all aspects of this proposal. 

Specifically, the Commission requests 

comment on whether the amendments 

to regulation 190.09 will impose any 

costs on DCOs, clearing members, or 

other market participants, and whether 

there are more effective or efficient 

means for recognizing the diversity of 

financial safeguard arrangements among 

DCOs in a bankruptcy. The Commission 

requests that commenters include a 

detailed description of any such 

alternatives and estimates of the costs 

and benefits of such alternatives. 

III. Effective Date 

Revised regulation 190.09 would take 

effect upon publication of the final 

rulemaking in the Federal Register. 

Proposed regulations 39.31 and 140.94 

would take effect on December 13, 2013. 

All of the other revised and proposed 

regulations set forth herein would take 

effect on December 31, 2013, in 

accordance with the Commission’s goal 

of implementing DCO regulations 

consistent with the PFMIs by the end of 

calendar year 2013. 

IV. Related Matters 

A. Paperwork Reduction Act 

The Paperwork Reduction Act 

(‘‘PRA’’), 44 U.S.C. 3501 et seq., 

provides that an agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a valid 

control number from the Office of 

Management and Budget (‘‘OMB’’). This 

rulemaking contains recordkeeping and 

reporting requirements that are 

collections of information within the 

meaning of the PRA. In particular, 

although the Commission does not 

anticipate that more than ten persons 

will respond initially to this collection 

of information, the term ‘‘ten or more 

persons,’’ which triggers PRA 

compliance, has been deemed to apply 

to ‘‘[a]ny recordkeeping, reporting, or 

disclosure requirement contained in a 

rule of general applicability.’’ 5 CFR. 

1320.3(c)(4). The Commission will 

submit an information collection 

request in the form of an amendment to 

existing OMB control number 3038– 

0081. 

This rulemaking contains many 

provisions that would qualify as 

collections of information, for which the 

Commission has already sought and 

obtained a control number from OMB. 

The burden hours associated with those 

provisions are not replicated here 

because the Commission is obligated to 

account for PRA burden once, and the 

PRA encourages multiple applications 

of a single collection.179 Accordingly, 

the burdens associated with the 

collections contained in this proposed 

rulemaking, and the information 

collection request that will be submitted 

to OMB, have been estimated only to the 

extent that the proposed rulemaking 

imposes collections of information that 

OMB has not yet reviewed and 

approved. 

It should be noted that among the 

thirteen DCOs presently registered with 

the Commission, only two are SIDCOs. 

Moreover, not all remaining DCOs or all 

DCO Applicants are likely to elect to 

become Subpart C DCOs (for example, 

DCOs that are based outside of the U.S. 

may seek to obtain QCCP status through 

regulation by their home country 

regulator). Thus, the burden 

calculations herein are based on an 

estimate of how many DCOs are SIDCOs 

and how DCOs and DCO Applicants are 

likely to elect to become Subpart C 

DCOs. Additionally, many of the 

collections herein, in particular those 

related to electing Subpart C DCO 

status, are expected to be one-time 

events for a DCO. It is anticipated that 

three DCOs will elect to become subject 

to Subpart C in the year following the 

adoption of final rules, with possibly 

one or two additional elections 

thereafter. 

Finally, it is not possible to precisely 

estimate the reporting and 

recordkeeping burden for the SIDCOs 

and Subpart C DCOs that will be 

affected by the collections contained in 

this rulemaking, as the actual burden 

will be dependent on the operations and 

staffing of each particular SIDCO and 

Subpart C DCO and the manner in 

which they choose to implement 

compliance with certain requirements. 

Therefore, the burden estimates below 

are meant to be a composite of the 

burdens that will be absorbed across all 

SIDCOs and Subpart C DCOs, to the 

extent that the provisions for which 

information collection burdens are 

applicable. 

1. Collections Only Applicable to 

Subpart C DCOs 

Proposed regulations 39.31(b) and 

39.31(c) would establish the process 

whereby DCO and DCO Applicants, 

respectively, may elect to become 

Subpart C DCOs subject to the 

provisions of Subpart C. The election 

involves filing the proposed Subpart C 

Election Form that would be contained 

in proposed appendix B to part 39 

(including completing the certifications 

therein, providing proposed exhibits A 

through G, and drafting and publishing 

the DCO’s responses to the Disclosure 

Framework, and, when applicable, the 

DCO’s Quantitative Information 

Disclosure). Additionally, paragraphs 

(b)(2) and (c)(3) of proposed regulation 

39.31 provide for Commission requests 

for supplemental information from 

those requesting Subpart C DCO status; 

paragraphs (b)(3) and (c)(4) require 

amendments to the Subpart C Election 

Form in the event that a DCO or DCO 

Applicant, respectively, discovers a 

material omission or error in, or if there 

is a material change in, the information 

provided in the Subpart C Election 

Form; paragraphs (b)(7) and (c)(5) 

permit a DCO or DCO Applicant, 

respectively, to submit a notice of 

withdrawal to the Commission in the 

event the DCO or DCO Applicant 

determines not to seek Subpart C DCO 

status prior to such status becoming 

effective; and paragraph (e) establishes 

the procedures by which a Subpart C 

DCO may rescind its Subpart C DCO 

status after it has been permitted to take 

effect. Each of these requirements 

implies recordkeeping that would be 

produced by a DCO to the Commission 

on an occasional basis to demonstrate 

compliance with the proposed rules. 

It is estimated presently that it is 

likely that only three DCOs will elect to 

become Subpart C DCOs, but it has been 


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conservatively estimated below that, 

collectively, five DCOs or DCO 

Applicants may elect to become Subpart 

C DCOs. It is unlikely that any DCO or 

DCO Applicant will withdraw its 

election to become subject to Subpart C 

prior to such election becoming 

effective, but an estimate of compliance 

with the withdrawal procedures by one 

DCO has been included below. It is 

estimated presently that it is likely that 

none of the Subpart C DCOs will elect 

to rescind its election, but it has been 

conservatively estimated below that one 

Subpart C DCO may rescind its election. 

Consequently, the burden hours for the 

proposed collection of information in 

this rulemaking have been estimated as 

follows: 

Reporting—Certifications—Subpart C 

Election Form 

Estimated number of reporters: 5 

Estimated number of reports per 

reporter: 1 

Average number of hours per report: 

25 

Estimated gross annual reporting 

burden: 125 

Reporting—Exhibits A through G— 

Subpart C Election Form 

Estimated number of reporters: 5 

Estimated number of reports per 

reporter: 1 

Average number of hours per report: 

155 

Estimated gross annual reporting 

burden: 775 

Reporting—Preparing and Publishing 

Disclosure Framework Responses 

Estimated number of reporters: 5 

Estimated number of reports per 

reporter: 1 

Average number of hours per report: 

200 

Estimated gross annual reporting 

burden: 1,000 

Reporting—Preparing Quantitative 

Information Disclosures 

Estimated number of reporters: 5 

Estimated number of reports per 

reporter: 1 

Average number of hours per report: 

80 

Estimated gross annual reporting 

burden: 400 

Reporting—Requests for Supplemental 

Information 

Estimated number of reporters: 5 

Estimated number of reports per 

reporter: 5 

Average number of hours per report: 

45 

Estimated gross annual reporting 

burden: 1,125 

Reporting—Amendments to Subpart C 

Election Form 

Estimated number of reporters: 5 

Estimated number of reports per 

reporter: 3 

Average number of hours per report: 

8 

Estimated gross annual reporting 

burden: 120 

Reporting—Withdrawal Notices 

Estimated number of reporters: 1 

Estimated number of reports per 

reporter: 1 

Average number of hours per report: 

2 

Estimated gross annual reporting 

burden: 2 

Reporting—Rescission Notices 

Estimated number of reporters: 1 

Estimated number of reports per 

reporter: 75 

Average number of hours per report: 

3 

Estimated gross annual reporting 

burden: 225 

Recordkeeping 

Estimated number of recordkeepers: 5 

Estimated number of records per 

recordkeeper: 82 

Average number of hours per record: 

1 

Estimated gross annual recordkeeping 

burden: 410 

2. Collections Applicable Both to 

SIDCOs and Subpart C DCOs 

Proposed regulations 39.32(a) and (b) 

establish governance requirements 

applicable to each SIDCO and Subpart 

C DCO, including specific provisions 

requiring written and disclosed 

governance arrangements and the 

disclosure of certain decisions on 

particular, not regularly scheduled, 

occasions, to the Commission, the 

SIDCO or Subpart C DCO’s clearing 

members, other relevant stakeholders 

and/or the public. Proposed regulation 

39.33(d) requires a SIDCO or Subpart C 

DCO to conduct due diligence on its 

liquidity providers and to conduct 

periodic testing with respect to its 

access to liquidity resources. Proposed 

regulation 39.33(e) establishes 

documentation requirements with 

respect to the supporting rationale for 

the financial and liquidity resources it 

maintains pursuant to proposed 

regulations 39.33(a) and 39.33(c), 

respectively. 

Proposed regulation 39.36(c)(6) 

requires each SIDCO and Subpart C 

DCO to report stress test results to its 

risk management committee or board of 

directors. Proposed regulation 39.37(a) 

requires each SIDCO and Subpart C 

DCO to complete and to publicly 

disclose its responses to the Disclosure 

Framework and, when applicable, to 

complete and disclose a Quantitative 

Information Disclosure. As described 

above and as accounted for in the 

previous portion of this PRA burden 

estimate, these tasks will be conducted 

by Subpart C DCOs as part of their 

election to become subject to Subpart C. 

SIDCOs and DCOs also are required to 

update their Disclosure Framework 

responses and Quantitative Information 

Disclosure every two years. Proposed 

regulations 39.37(c) and (d) require each 

SIDCO or Subpart C DCO to disclose, 

publicly and to the Commission, certain 

data on transaction volume and values 

and their rules, policies, and procedures 

related to the segregation and the 

portability of customers’ positions and 

funds. 

Proposed regulation 39.38 requires 

each SIDCO or Subpart C DCO to 

establish a process to review the 

efficiency and effectiveness of its 

clearing and settlement arrangements, 

operating structure and procedures, 

scope of products cleared and use of 

technology. Finally, proposed 

regulations 39.39(b) and (c) require each 

SIDCO and Subpart C DCO to develop 

and maintain viable plans for the 

recovery or wind-down of the SIDCO or 

Subpart C DCO necessitated by certain 

circumstances. Each of these 

requirements implies recordkeeping that 

would be produced by the SIDCO or 

Subpart C DCO to the Commission on 

an occasional basis to demonstrate 

compliance with the proposed rules. 

It is not possible to estimate with 

precision how many DCOs may, in the 

future, be determined to be SIDCOs and 

how many may elect to become Subpart 

C DCOs, but it conservatively has been 

estimated below that, collectively, a 

total of seven DCOs may be determined 

to be SIDCOs or may opt to become 

Subpart C DCOs. Presently, there are 

two SIDCOs and is has been estimated 

that five DCOs will elect to become 

Subpart C DCOs. Consequently, the 

burden hours for the proposed 

collection of information in this 

rulemaking have been estimated as 

follows: 

Reporting—Governance Requirements— 

Written Governance Arrangements 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 1 

Average number of hours per report: 

200 

Estimated gross annual reporting 

burden: 1,400 

Reporting—Governance Requirements— 

Required Disclosures 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 6 

Average number of hours per report: 

3 

Estimated gross annual reporting 

burden: 126 


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180 5 U.S.C. 601 et seq. 

Reporting—Financial and Liquidity 

Resource Documentation 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 1 

Average number of hours per report: 

120 

Estimated gross annual reporting 

burden: 840 

Reporting—Stress Test Results 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 16 

Average number of hours per report: 

14 

Estimated gross annual reporting 

burden: 1,568 

Reporting—Preparing and Publishing 

Disclosure Framework Responses 

(SIDCOs only) 

Estimated number of reporters: 2 

Estimated number of reports per 

recordkeeper: 1 

Average number of hours per report: 

200 

Estimated gross annual reporting 

burden: 400 

Reporting—Updating and Republishing 

Disclosure Framework Responses 

(SIDCOs and Subpart C DCOs) 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 1 

Average number of hours per report: 

80 

Estimated gross annual reporting 

burden: 560 

Reporting—Preparing and Publishing 

Quantitative Information 

Disclosures (SIDCOs only) 

Estimated number of reporters: 2 

Estimated number of reports per 

reporter: 1 

Average number of hours per report: 

80 

Estimated gross annual reporting 

burden: 160 

Reporting—Updating and Republishing 

Quantitative Information 

Disclosures (SIDCOs and Subpart C 

DCOs) 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 1 

Average number of hours per report: 

35 

Estimated gross annual reporting 

burden: 245 

Reporting—Transaction, Segregation, 

Portability Disclosures 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 2 

Average number of hours per report: 

35 

Estimated gross annual reporting 

burden: 490 

Reporting—Efficiency and Effectiveness 

Review 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 1 

Average number of hours per report: 

3 

Estimated gross annual reporting 

burden: 21 

Reporting—Recovery and Wind-Down 

Plan 

Estimated number of reporters: 7 

Estimated number of reports per 

recordkeeper: 1 

Average number of hours per report: 

480 

Estimated gross annual reporting 

burden: 3,360 

Recordkeeping—Liquidity Resource Due 

Diligence and Testing 

Estimated number of recordkeepers: 7 

Estimated number of records per 

recordkeeper: 4 

Average number of hours per record: 

10 

Estimated gross annual recordkeeping 

burden: 280 

Recordkeeping—Financial and Liquidity 

Resources, Excluding Due Diligence 

and Testing 

Estimated number of recordkeepers: 7 

Estimated number of records per 

recordkeeper: 4 

Average number of hours per record: 

10 

Estimated gross annual recordkeeping 

burden: 280 

Recordkeeping—Generally 

Estimated number of recordkeepers: 7 

Estimated number of records per 

recordkeeper: 28 

Average number of hours per record: 

10 

Estimated gross annual recordkeeping 

burden: 1960 

3. Information Collection Comments 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the proposed 

information collection requirements 

discussed above. Pursuant to 44 

U.S.C.3506(c)(2)(B), the Commission 

will consider public comments on such 

proposed requirements in: 

• Evaluating whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have a 

practical use; 

• Evaluating the accuracy of the 

estimated burden of the proposed 

information collection requirements, 

including the degree to which the 

methodology and the assumptions that 

the Commission employed were valid; 

• Enhancing the quality, utility, and 

clarity of the information proposed to be 

collected; and 

• Minimizing the burden of the 

proposed information collection 

requirements on SIDCOs and Subpart C 

DCOs, including through the use of 

appropriate automated, electronic, 

mechanical, or other technological 

information collection techniques, e.g., 

permitting electronic submission of 

responses. 

Copies of the submission from the 

Commission to OMB are available from 

the CFTC Clearance Officer, 1155 21st 

Street NW., Washington, DC 20581, 

(202) 418–5160 or from http:// 

RegInfo.gov. Organizations and 

individuals desiring to submit 

comments on the proposed information 

collection requirements should send 

those comments to: 

• The Office of Information and 

Regulatory Affairs, Office of 

Management and Budget, Room 10235, 

New Executive Office Building, 

Washington, DC 20503, Attn: Desk 

Officer of the Commodity Futures 

Trading Commission; 

• (202) 395–6566 (fax); or 

• OIRAsubmissions@omb.eop.gov 

(email). 

Please provide the Commission with 

a copy of submitted comments so that 

all comments can be summarized and 

addressed in the final rulemaking, and 

please refer to the ADDRESSES section of 

this rulemaking for instructions on 

submitting comments to the 

Commission. OMB is required to make 

a decision concerning the proposed 

information collection requirements 

between thirty (30) and sixty (60) days 

after publication of the NPRM in the 

Federal Register. Therefore, a comment 

to OMB is best assured of receiving full 

consideration if OMB (as well as the 

Commission) receives it within thirty 

(30) days of publication of this NPRM. 

The time frame for commenting on the 

PRA does not affect the deadline 

established by the Commission on the 

proposed rules, provided in the DATES

section of this rulemaking. 

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.180 The rules proposed by the 

Commission will only affect DCOs. The 

Commission has previously established 

certain definitions of ‘‘small entities’’ to 

be used by the Commission in 

evaluating the impact of its regulations 

on small entities in accordance with the 


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181Policy Statement and Establishment of 

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

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

1982). 

182See 66 FR at 45609. 

183 7 U.S.C. 19(a). 

184See supra Section I.G. 

185See supra Section II.C (discussing proposed 

regulation 39.31). 

186 DCO General Provisions and Core Principles, 

76 FR 69334 (Nov. 8, 2011) (final rule). 

RFA.181 The Commission has previously 

determined that DCOs are not small 

entities for the purpose of the RFA.182

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. 

C. Consideration of Costs and Benefits 

1. Introduction 

Section 15(a) requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders.183

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. 

2. Background 

As discussed above, this proposed 

rulemaking would: Address gaps 

between part 39 of the Commission’s 

regulations and the standards set forth 

in the PFMIs; provide a procedure for 

Subpart C DCOs to elect to become 

subject to the provisions of Subpart C; 

and make related technical amendments 

to regulation 190.09. As proposed, 

revised Subpart C, together with 

Subpart A and Subpart B, would 

establish regulations that are consistent 

with the PFMIs.184

3. Costs and Benefits of the Proposed 

Rules 

a. Costs 

The Commission does not have 

quantification or estimation of the costs 

associated with the proposed 

regulations. However, in qualitative 

terms, the Commission recognizes that 

the proposed regulations are 

comprehensive and, compared to the 

status quo, may impose important costs 

on SIDCOs and Subpart C DCOs 

depending, in particular, on the 

SIDCO’s or Subpart C DCO’s current 

financial and liquid resources, and risk 

management framework. In particular, 

these proposed regulations may require 

SIDCOs and Subpart C DCOs to 

undertake a comprehensive review and 

analysis of their current policies, 

procedures, and systems in order to 

determine where it may be necessary to 

design and implement additional or 

alternative policies, procedures, and 

systems. Such costs may increase 

operational, administrative, and 

compliance costs for a SIDCO or 

Subpart C DCO. The Commission 

requests comment on the potential costs 

of the proposed regulations on SIDCOs 

and Subpart C DCOs, including, where 

possible, quantitative data. In addition, 

the Commission requests comment on 

the competitive impact, the costs as well 

as benefits, resulting from, or arising out 

of, requiring SIDCOs to comply with the 

provisions set forth in Subpart C, while 

permitting other registered DCOs to 

elect to become subject to these 

requirements (or to forego such 

election). 

In addition to the costs for SIDCOs 

and Subpart C DCOs, the Commission 

has considered the costs the proposed 

regulations would impose upon market 

participants and the public. To the 

extent costs increase, the Commission 

notes that higher trading prices for 

market participants (i.e., increased 

clearing fees, guaranty fund 

contributions, and margin fees, etc.) 

may discourage market participation 

and result in decreased liquidity and 

reduced price discovery. 

i. Regulation 39.31 (Election To Become 

Subject to the Provisions of Subpart C) 

As discussed above, proposed 

regulation 39.31 would set forth the 

procedures a DCO would be required to 

follow to elect to become subject to the 

provisions of Subpart C.185 Proposed 

paragraph (b) would require a registered 

DCO to file a completed Subpart C 

Election Form with the Commission. 

The form appears in proposed 

Appendix B to Subpart C and is 

modeled after Form DCO, which the 

Commission promulgated in 2011 as 

part of the DCO General Provisions and 

Core Principles final rule.186 Proposed 

paragraph (c) would require the same of 

a DCO that applies for registration with 

the Commission and that wants to be 

subject to the provisions of Subpart C as 

of the date the DCO is registered with 

the Commission. The Subpart C Election 

Form would include disclosures and 

exhibits wherein the DCO would be 

required to provide the following: a 

regulatory compliance chart; citations to 

the relevant rules, policies, and 

procedures of the DCO that addresses 

each Subpart C regulation; and a 

summary of the manner in which the 

DCO would comply with each 

regulation. In addition, the DCO would 

be required to provide, in separate 

exhibits, all documents that 

demonstrate the DCO’s compliance with 

proposed regulations 39.32 through 

39.36 and proposed regulation 39.39. A 

DCO would also be required to complete 

responses to the Disclosure Framework 

and publish a copy of its responses on 

its Web site. 

The Commission notes that proposed 

regulation 39.31 would only apply to a 

DCO that the Council has not designated 

to be systemically important and that 

elects to become subject to the 

provisions of Subpart C. Proposed 

regulation 39.31, by providing an opt-in 

procedure and a procedure to rescind 

such election offers the benefit of 

permitting a DCO that is not 

systemically important may weigh (i) (1) 

the cost of preparing a comprehensive 

and complete Subpart C Election Form 

in accordance with the requirements set 

forth in proposed regulation 39.31 and 

(2) the costs associated with the 

requirements set forth in Subpart C 

against (ii) the benefit of attaining QCCP 

status, and, thus, to decide for itself 

whether to become subject to Subpart C. 

As discussed below, a Subpart C 

DCO’s compliance with the provisions 

of Subpart C would cause the Subpart 

C DCO to incur certain costs. Some of 

these costs may then be incurred, 

indirectly, by the Subpart C DCO’s 

clearing members and their customers. 

The Commission requests comments 

concerning examples of such costs. If a 

clearing member or its customer would 

incur greater costs by clearing through 

a Subpart C DCO rather than through a 

DCO that has not opted-in to Subpart C, 

then that clearing member or customer 

may decide not to clear through a 

Subpart C DCO. The Commission 

requests comment as to how these 

indirect costs may be mitigated. The 

Commission also requests comment 

concerning the extent to which a DCO’s 

analysis of whether the costs of being a 

Subpart C DCO may outweigh the 

benefits could be affected by the 

possibility that some of the costs may be 

incurred indirectly by clearing members 

and their customers. 

In addition to the requests for 

comment set forth above, the 

Commission requests comment 

concerning the costs associated with the 

Subpart C Election Form, including 

without limitation, the election and 


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187See supra Section I.F (discussing the treatment 

for non-QCCP clearing members under the Basel 

CCP Capital Requirements). 188See supra Section II.D (discussing proposed 

regulation 39.32). 189 Id. 

190See supra Section II.E (discussing proposed 

revised regulation 39.33). 

191All Subpart C DCOs would bear the 

administrative cost of determining whether they 

meet either of the criteria. 

192For Subpart C DCOs that are not deemed 

systemically important in multiple jurisdictions or 

that do not clear products with a more complex risk 

profile, the Cover One financial resources 

requirement would continue to apply, and 

therefore, these Subpart C DCOs would not face 

increased opportunity costs associated with the 

proposed regulation. 

193 In the event that these additional resources 

would need to be raised by the Subpart C DCO, as 

opposed to reallocated, this cost would be the 

funding cost for raising these additional resources. 

withdrawal procedures set forth in 

proposed regulation 39.31, as well as 

the requirements surrounding 

completion and publication of 

responses to the Disclosure Framework. 

The Commission also requests that each 

commenter provide quantitative data 

where practicable, as well as a detailed 

rationale supporting the response. 

The Commission notes that pursuant 

to proposed paragraph (e), a Subpart C 

DCO would be permitted, subject to a 90 

day notice period, to rescind its election 

to become subject to the provisions of 

Subpart C. As a result of the rescission, 

the DCO would no longer be considered 

a QCCP, which would likely create 

important costs for bank clearing 

members and the bank customers of a 

DCO’s clearing members due to the 

higher capital costs that they would 

incur as a result of clearing transactions 

through the DCO that is no longer a 

QCCP.187 Alternatively, clearing 

members and their customers may 

choose to end their clearing activities 

and transact through another DCO that 

is a QCCP, with either choice imposing 

costs on those clearing members and 

their customers. 

As discussed in section II.C., above, 

the Commission requests comments on 

the potential costs to a Subpart C DCO 

to comply with all aspects of proposed 

regulation 39.32, including the cost of 

the opting-in process (including but not 

limited to the completion of the Subpart 

C Election Form) and the process for 

rescinding such an opting-in (including 

the notices required) and any costs that 

would be imposed on other market 

participants or the financial system 

more broadly. 

ii. Regulation 39.32 (Governance for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

As discussed above, proposed 

regulation 39.32 establishes governance 

requirements for SIDCOs and Subpart C 

DCOs that are consistent with the PFMIs 

and establish rules and procedures 

concerning conflicts of interest, 

compensation policies, organizational 

structure, and fitness standards for 

directors and officers.188 Specifically, 

SIDCOs and Subpart C DCOs would be 

required to have written governance 

arrangements that are clear and 

transparent, that place a high priority on 

the safety and efficiency of the SIDCO 

or Subpart C DCOs, and that explicitly 

support the stability of the broader 

financial system and other relevant 

public interest considerations of 

clearing members, customers of clearing 

members, and other relevant 

stakeholders. In addition, these 

governance arrangements would be 

required to reflect the legitimate 

interests of clearing members, customers 

of clearing members, and other relevant 

stakeholders. To an extent consistent 

with other statutory and regulatory 

requirements on confidentiality and 

disclosure, SIDCO’s and Subpart C 

DCOs would also be required to disclose 

major decisions of the board.189

Proposed regulation 39.32 would 

require the rules and procedures of 

SIDCOs and Subpart C DCOs to: (1) 

Describe the SIDCO’s or Subpart C 

DCO’s management structure; (2) clearly 

specify the roles and responsibilities of 

the board of directors and its 

committees, including the establishment 

of a clear and documented risk 

management framework; (3) clearly 

specify the roles and responsibilities of 

management; (4) establish appropriate 

compensation policies; (5) establish 

procedures for managing conflicts of 

interest among board members; and (6) 

assign responsibility and accountability 

for risk decisions and for implementing 

rules concerning default, recovery, and 

wind-down. Finally, proposed 

regulation 39.32 would require that the 

board members and managers of SIDCOs 

and Subpart C DCOs have the 

appropriate experience, skills, 

incentives and integrity; risk 

management and internal control 

personnel have sufficient independence, 

authority, resources and access to the 

board of directors; and that the board of 

directors include members who are not 

executives, officers or employees of the 

SIDCO or Subpart C DCO or of their 

affiliates. 

To the extent these requirements 

affect the behavior of a DCO, costs could 

arise from additional hours a DCO’s 

employees might need to spend 

analyzing the compliance of the DCO’s 

rules and procedures with these 

requirements, designing and drafting 

new or amended rules and procedures 

where the analysis indicates that these 

are necessary, and implementing these 

new or amended rules and procedures. 

These costs are difficult for the 

Commission to assess in the abstract 

because the proposed regulation grants 

a DCO a certain amount of discretion in 

determining which rules and 

procedures should be adopted to 

comply with the proposed regulation. 

As discussed in section II.D., above, the 

Commission requests comments on the 

potential costs to a SIDCO or Subpart C 

DCO to comply with all aspects of 

proposed regulation 39.32, and any 

costs that would be imposed on other 

market participants or the financial 

system more broadly. As noted above, 

the Commission specifically requests 

comment on alternative means to 

establish governance requirements 

consistent with the PFMIs, and the costs 

(or cost savings) associated with such 

alternatives. 

iii. Regulation 39.33 (Financial 

Resources for Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

(a.) Regulation 39.33(a): Cover Two 

As discussed above, proposed 

amended regulation 39.33(a) would 

require a Subpart C DCO to comply with 

the Cover Two minimum financial 

resource standard for all of its activities 

if the Subpart C DCO: (1) Is involved in 

activities with a more complex risk 

profile or (2) is systemically important 

in multiple jurisdictions. This 

requirement currently applies to all 

SIDCOs.190

The cost of the Cover Two 

requirement for a Subpart C DCO that 

meets either or both of the two criteria 

described above 191 includes the 

opportunity cost 192 of the additional 

financial resources needed to satisfy the 

guaranty fund requirements for the risk 

of loss resulting from the default of the 

clearing member creating the second 

largest credit exposure.193 In addition, 

the possibility exists that some market 

participants will port their positions 

from a Subpart C DCO that either (1) is 

deemed systemically important in 

multiple jurisdictions or (2) clears 

products of a more complex risk profile 

to another DCO for which neither (1) 

nor (2) applies because the value of the 

Cover Two protection to these market 

participants is less than the price at 

which that protection is being offered. 

These market participants will transact 

with SIDCOs or Subpart C DCOs that 


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194See supra Section II.E (discussing proposed 

revised regulation 39.33). 

195 Id. 

196 Id. 

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 or Subpart C DCOs. 

However, the potential cost to a SIDCO 

or a Subpart C DCO subject to the Cover 

Two requirement and to the goal of 

systemic risk reduction would likely be 

mitigated because: (a) Not every product 

offered by a SIDCO or Subpart C DCO 

would be available at other DCOs and 

(b) a SIDCO or Subpart C DCO may offer 

benefits not available to a DCO does not 

elect to become subject to the provisions 

of Subpart C, that is not designated as 

systemically important, and/or that does 

not clear products with a more complex 

risk profile. This would therefore reduce 

the likelihood that market participants 

would port their positions to other 

DCOs. As indicated in section II.E. 

(description of proposed regulation 

39.33), above, the Commission requests 

comment on these costs, including 

quantitative data, if available. 

(b.) Regulation 39.33(b): Valuation of 

Financial Resources 

Proposed amended regulation 

39.33(b) would prohibit SIDCOs and 

Subpart C DCOs from including 

assessments as part of their calculation 

of the financial resources available to 

cover the default of the clearing member 

creating the largest credit exposure and, 

where applicable, the default of the two 

clearing members creating the largest 

aggregate credit exposure, in extreme 

but plausible circumstances, i.e., Cover 

One or Cover Two.194 This requirement 

currently applies to all SIDCOs and 

would be expanded to include Subpart 

C DCOs. The costs associated with the 

prohibition on the use of assessments by 

a Subpart C DCO in calculating its 

obligations under regulation 39.33(a) 

would include the opportunity cost of 

the additional pre-funded financial 

resources needed to replace the value of 

such assessments, which may require an 

infusion of additional capital. In 

addition, as with the Cover Two 

requirement, market participant demand 

may shift from a SIDCO or a Subpart C 

DCO subject to the Cover Two 

requirement to a DCO with a lower 

capitalization requirement. As indicated 

in Section II.E, above, the Commission 

requests comment on these costs, 

including quantitative data, if available. 

(c.) Regulation 39.33(c), (d) and (e): 

Liquidity 

Proposed regulation 39.33(c) would 

require a SIDCO and a Subpart C DCO 

to maintain eligible liquidity resources 

that will enable it to meet its intraday, 

same-day and multiday settlement 

obligations, in all relevant currencies, 

with a high degree of confidence under 

a wide range of stress scenarios 

notwithstanding a default by the 

clearing member creating the largest 

aggregate liquidity obligation. Eligible 

resources are limited to cash in the 

currency of the requisite obligation, 

held at the central bank of issue or a 

creditworthy commercial bank, certain 

highly marketable collateral, subject to 

certain prearranged and highly reliable 

funding arrangements, and various 

committed liquidity arrangements. 

These arrangements must be reliable 

and enforceable in extreme but 

plausible market conditions, and must 

not contain material adverse change 

clauses. 

In addition, a SIDCO or Subpart C 

DCO that is systemically important in 

multiple jurisdictions or that is involved 

in activities with a more complex risk 

profile would be required to consider 

maintaining liquidity resources that 

would enable it to meet the default of 

the two clearing members creating the 

largest aggregate payment obligation. If 

a SIDCO or Subpart C DCO maintains 

liquid financial resources in addition to 

those required to satisfy the minimum 

financial resources requirement set forth 

in regulations 39.11(a)(1) and 39.33(a), 

then those resources should be in the 

form of assets that are likely to be 

saleable or acceptable as collateral for 

lines of credit, swaps, or repurchase 

agreements on an ad hoc basis.195

Proposed regulation 39.33(d) would 

impose a duty on SIDCOs and Subpart 

C DCOs to perform due diligence on 

their liquidity providers in order to 

determine their ability to perform 

reliably their commitments to provide 

liquidity. Finally, proposed regulation 

39.33(e) would require SIDCOs and 

Subpart C DCOs to document their 

supporting rationale for the amount of 

financial resources they maintain 

pursuant to proposed regulation 

39.33(a) and the amount of liquidity 

resources they maintain pursuant to 

proposed regulation 39.33(c).196

Proposed regulations 39.33(c)-(e) may 

result in additional costs for a SIDCO or 

Subpart C DCO with respect to 

analyzing and measuring intra-day, 

same-day, and multiday liquidity 

requirements in all relevant currencies, 

developing plans to meet those 

requirements, obtaining eligible 

liquidity resources and making eligible 

liquidity arrangements, reviewing and 

monitoring each liquidity provider’s 

risks and reliability (including through 

periodic testing of access to liquidity), 

and documenting the DCO’s basis for 

conclusions with respect to its financial 

resources and liquidity resources 

requirements. These proposed 

regulations also will require stress 

testing and other analysis of such 

resources as compared with the DCO’s 

liquidity needs. Specifically, with 

regards to proposed regulation 39.33(c), 

there may be costs involved in obtaining 

cash in the relevant currencies or 

arranging for qualifying liquidity 

commitments, such as a committed line 

of credit, to satisfy the minimum 

financial resources requirement set forth 

in regulation 39.11(a)(1)(i.e., Cover 

One). Obtaining these committed 

financial resources would involve 

administrative expenses such as the 

negotiation and drafting of committed 

arrangements, as well as costs arising 

from the payment of fees to liquidity 

providers. In addition, there may be 

operational costs involved in calculating 

the liquidity resources requirements at 

the Cover One level on an intraday, 

same-day, and multiday basis over the 

course of a default. This calculation may 

require undertaking a complex analysis 

of the SIDCO’s or Subpart C DCO’s 

exposures and processes, including 

various models, and, where appropriate, 

designing and implementing changes to 

either create or modify existing internal 

processes. While this analysis may 

involve costs, it would appear that it 

will improve the SIDCO’s or Subpart C 

DCO’s financial condition, as described 

below in section 2.b.iii. of the benefits 

section. 

Proposed regulation 39.33(d) may 

increase administrative costs to the 

extent that a SIDCO or a Subpart C DCO 

is required to review and monitor its 

liquidity provider’s capacity and 

reliability to perform its liquidity 

obligations to the DCO. In addition, 

proposed regulation 39.33(e) may 

impose an administrative cost to 

document the SIDCO or Subpart C 

DCO’s rationale for the financial 

resources it maintains. 

As discussed in section II.E., above, 

the Commission requests comments on 

the potential costs to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.33 

and any costs that would be imposed on 

other market participants or the 

financial system more broadly. As noted 

above, the Commission specifically 


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197See supra Section II.F (discussing proposed 

regulation 39.34). 

198See supra Section II.G (discussing proposed 

regulation 39.35). 

199See supra Section II.H (discussing proposed 

regulation 39.36). 

200See supra Section II.I (discussing proposed 

regulation 39.37). 

requests comment on alternative means 

to establish financial resources and 

liquidity requirements consistent with 

the PFMIs (including, e.g., through 

alternative definitions of terms), and the 

costs (or cost savings) associated with 

such alternatives. 

iv. Regulation 39.34 (System Safeguards 

for Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

As discussed above, proposed 

amended regulation 39.34 would 

require SIDCOs and Subpart C DCOs to 

comply with enhanced system 

safeguards requirements.197 While 

SIDCOs are already subject to these 

requirements, the Commission proposes 

expanding this regulation to include 

Subpart C DCOs. The proposed 

regulation could increase operational 

costs for Subpart C DCOs by requiring 

additional resources, including with 

respect to personnel, technology (e.g., 

hardware and software) and the 

purchase or rental of premises in order 

to achieve geographic dispersal of 

resources. In particular, the costs of 

moving from a next-day RTO, the 

minimum standard established by the 

DCO core principles and current 

regulation 39.18, to a two-hour RTO as 

required by proposed regulation 39.34, 

may be significant. Additionally, the 

implementation of a two-hour RTO may 

impose one-time costs to establish the 

enhanced resources and recurring costs 

to operate the additional resources. As 

discussed in section II.F. above, the 

Commission requests comments on the 

potential costs to a Subpart C DCO in 

complying with all aspects of proposed 

regulation 39.34, and any costs that 

would be imposed on other market 

participants or the financial system 

more broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

establish, for Subpart C DCOs, system 

safeguards requirements consistent with 

the PFMIs and the costs (or cost savings) 

associated with such alternatives. 

v. Regulation 39.35 (Default Rules and 

Procedures for Uncovered Losses or 

Shortfalls (Recovery) for Systemically 

Important Derivatives Clearing 

Organizations and Subpart C Derivatives 

Clearing Organizations) 

Proposed regulation 39.35 would 

require SIDCOs and Subpart C DCOs to 

adopt policies and procedures to 

address certain issues arising from 

extraordinary stress events, including 

the default of one or more clearing 

members.198 The costs associated with 

these default rules and procedures may 

include administrative costs to: review 

and analyze current policies and 

procedures; design and draft new or 

amended policies and procedures; and 

implement the new or amended policies 

and procedures. Such default rules and 

procedures must sufficiently (1) allocate 

uncovered credit losses and (2) enable a 

SIDCO or Subpart C DCO to promptly 

meet all of its obligations in the event 

of a default by one or more clearing 

members or an unforeseen liquidity 

shortfall exceeding the financial 

resources of the SIDCO or Subpart C 

DCO. As discussed in section II.G. 

above, the Commission requests 

comments on the potential costs to a 

SIDCO or a Subpart C DCO in 

complying with all aspects of proposed 

regulation 39.35, and any costs that 

would be imposed on other market 

participants or the financial system 

more broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

establish requirements, in a manner 

consistent with the PFMIs, for adopting 

rules and procedures for uncovered 

losses or shortfalls, and the costs (or 

cost savings) associated with such 

alternatives. 

vi. Regulation 39.36 (Risk Management 

for Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

Proposed regulation 39.36 would 

impose enhanced risk management 

requirements for a SIDCO or Subpart C 

DCO, including, but not limited to, 

specific criteria for stress tests of 

financial resources, specific criteria for 

sensitivity analysis of margin models, 

specific criteria for stress tests of 

liquidity resources, requirements 

surrounding the monitoring and 

management of credit and liquidity risks 

arising out of settlement banks, and 

requirements surrounding the custody 

and investment of a SIDCO’s or Subpart 

C DCO’s own funds and assets.199

Complying with this regulation could 

involve operational costs to perform the 

required testing, monitoring and 

analyses, which may include: A 

comprehensive analysis of existing 

stress testing scenarios; the design of 

new and/or alternative stress testing 

scenarios; and the design of a sensitivity 

analysis; the creation of a system for 

comprehensively monitoring, managing 

and limiting credit and liquidity risks 

arising out of settlement banks; and the 

implementation of controls surrounding 

the custody and investment of a 

SIDCO’s or Subpart C DCO’s own funds 

and assets. In addition, there may be 

costs associated with the modification 

and/or creation of processes necessary 

to support the enhanced risk 

management requirements in the 

proposed regulation. There would also 

be ongoing costs to conduct such risk 

management, analyze the results, and 

take action based on such results. In 

particular, to the extent that the 

analyses and monitoring reveal the need 

for additional financial or liquidity 

resources, there would be costs 

associated with obtaining such 

resources. In addition, there may be 

administrative and other costs 

associated with the management of a 

SIDCO’s or Subpart C DCO’s settlement 

bank exposures. As discussed in section 

II.H., above, the Commission requests 

comments on the potential costs to a 

SIDCO or a Subpart C DCO in 

complying with all aspects of proposed 

regulation 39.36, and any costs that 

would be imposed on other market 

participants or the financial system 

more broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

establish risk management requirements 

consistent with the PFMIs, and the costs 

(or cost savings) associated with such 

alternatives. 

vii. Regulation 39.37 (Additional 

Disclosure for Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

Proposed regulation 39.37 would set 

forth additional public disclosure 

requirements for a SIDCO and Subpart 

C DCO, including the disclosure of, and 

updates to, the DCO’s responses to the 

Disclosure Framework for FMIs.200

Complying with this regulation may 

impose administrative costs to conduct 

a comprehensive analysis of the SIDCO 

or Subpart C DCO’s policies, procedures 

and systems as well as the costs 

associated with the design, drafting and 

implementation of any new or modified 

policies, procedures and systems that 

would be necessary to comply with the 

proposed regulation. As discussed in 

section II.I. above, the Commission 

requests comments on the potential 

costs to a SIDCO or a Subpart C DCO in 

complying with all aspects of proposed 

regulation 39.37, and any costs that 

would be imposed on other market 

participants or the financial system 


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201See supra Section II.J (discussing proposed 

regulation 39.38). 

202PFMIs, E.N. 1.1. 

203See http://www.treasury.gov/initiatives/fsoc/ 

designations/Pages/default.aspx (describing the 

designations of CME and ICE Clear Credit to be 

systemically important financial market utilities) 

and see supra Section I.C. 

more broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

establish disclosure requirements 

consistent with the PFMIs, and the costs 

(or cost savings) associated with such 

alternatives. 

viii. Regulation 39.38 (Efficiency for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

Proposed regulation 39.38 would 

require a SIDCO or a Subpart C DCO to 

comply with certain efficiency 

standards regarding its clearing and 

settlement arrangements, operating 

structure and procedures, product 

scope, and use of technology. In 

addition, a SIDCO or Subpart C DCO 

would be required to establish clearly 

defined goals and objectives that are 

measureable and achievable, including 

minimum service levels, risk 

management expectations, and business 

priorities.201 SIDCOs and Subpart C 

DCOs would also be required to 

facilitate efficient payment, clearing and 

settlement by accommodating 

internationally accepted communication 

procedures and standards. The costs 

associated with the proposed regulation 

may include the administrative costs of 

conducting a comprehensive review and 

analysis of the SIDCO’s or Subpart C 

DCO’s policies, procedures and systems, 

and where appropriate, the design, 

drafting and implementation of new or 

modified policies, procedures and 

systems to establish the goals and 

objectives necessary to comply with this 

regulations. There may also be 

administrative costs associated with 

establishing a mechanism to review the 

DCO’s compliance with the proposed 

regulation, as well as operational costs 

associated with designing and 

implementing processes to 

accommodate internationally accepted 

communications standards. As 

discussed in section II.J. above, the 

Commission requests comments on the 

potential costs to a SIDCO or a Subpart 

C DCO in complying with all aspects of 

proposed regulation 39.38, and any 

costs that would be imposed on other 

market participants or the financial 

system more broadly. As noted above, 

the Commission specifically requests 

comment on alternative means to 

establish a requirement for efficiency 

standards consistent with the PFMIs, 

and the costs (or cost savings) associated 

with such alternatives. 

ix. Regulation 39.39 (Recovery and 

Wind-Down for Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

Proposed regulation 39.37 would 

require a SIDCO or Subpart C DCO to 

maintain viable plans for recovery and 

orderly wind-down, in cases 

necessitated by (1) credit losses or 

liquidity shortfalls and (2) general 

business risk, operational risk, or any 

other risk that threatens the DCO’s 

viability as a going concern. This would 

require the DCO to identify scenarios 

that may prevent a SIDCO or Subpart C 

DCO from being able to provide its 

critical operations and services as a 

going concern and to assess the 

effectiveness of a full range of options 

for recovery or orderly wind-down. 

The proposed regulation would also 

require a SIDCO or Subpart C DCO to 

evaluate the resources available to meet 

the plan to cover credit losses and 

liquidity shortfalls, and to maintain 

sufficient unencumbered liquid 

financial assets to implement the plan to 

cover other risks. The latter point 

requires a SIDCO or Subpart C DCO to 

analyze whether its particular 

circumstances and risks require it to 

maintain liquid net assets to fund the 

plan that are in addition to those 

resources currently required by 

regulation 39.11(a)(2). 

This proposed regulation may impose 

costs on a SIDCO or Subpart C DCO to 

the extent it will be necessary to 

undertake a comprehensive qualitative 

and quantitative analysis of the credit, 

liquidity, general business, operational 

and other risks that may threaten the 

DCO’s ability to provide its critical 

operations and services as a going 

concern, to design and draft plans to 

mitigate and address those risks, to 

analyze whether the DCO’s resources 

allocated to recovery and/or wind-down 

are sufficient to implement those plans. 

This analysis may lead to the design of 

alternative and/or additional scenarios 

to be included in stress testing, the 

drafting of new or revised policies for a 

recovery and/or wind-down plan, and 

potentially the necessity of maintaining 

additional resources or procedures to 

obtain such resources in the event they 

are needed. Moreover, the regulation 

prohibits the double counting of 

available resources—that is, resources 

considered as available to meet the 

recovery and orderly wind-down plan 

for credit losses and liquidity shortfalls 

cannot be considered as available to 

meet the recovery and orderly winddown plan for general business risk, 

operational risk, and other risks (or viceversa). This may result in the need to 

maintain a larger quantum of total 

resources to meet both plans which, 

depending on the resources maintained, 

may involve costs arising from factors 

such as greater use of capital by the 

DCO, or greater capital charges for 

clearing members arising out of their 

commitments to contribute default 

resources. 

As discussed in section II.K. above, 

the Commission requests comments on 

the potential costs to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.39, 

and any costs that would be imposed on 

other market participants or the 

financial system more broadly. As noted 

above, the Commission specifically 

requests comment on alternative means 

to establish, consistent with the PFMIs, 

a requirement for the adoption of a 

recovery and wind-down plan, and the 

costs (or cost savings) associated with 

such alternatives. 

b. Benefits 

As explained in the subsections that 

follow, this proposed rule would hold 

SIDCOs and Subpart C DCOs to 

enhanced regulatory standards, which 

are designed to promote the financial 

strength, operational integrity, security, 

and reliability of these organizations 

and to reduce the likelihood of their 

disruption or failure. This would then 

increase the overall stability of the U.S. 

financial markets. As the PFMIs note, 

FMIs, including CCPs (i.e. DCOs), play 

a critical role in fostering financial 

stability.202 This is particularly the case 

with respect to SIDCOs. The Council 

has determined that the failure of or a 

disruption to the functioning of a SIDCO 

could create or increase the risk of 

significant liquidity or credit problems 

spreading among financial institutions 

or markets and thereby threaten the 

stability of the U.S. financial system.203

In addition, the proposed regulations 

would help ensure that SIDCOs and 

Subpart C DCOs are held to 

international standards in order to 

provide them with the opportunity to 

gain QCCP status. As discussed above, 

attaining QCCP status would provide 

clearing members that are banks, as well 

as banks that are customers of clearing 

members, with the benefit of complying 

with less onerous capital requirements, 

pursuant to the Basel CCP Capital 

Requirements, than if the SIDCO or 


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204See supra Section I.F. 205See supra Section I.F (discussing QCCP status 

and the Basel CCP Capital Requirements); see also 

supra Section II.C. (discussing proposed regulation 

39.31). 

206See supra Section II.D (discussing proposed 

regulation 39.32). 

207See supra Section II.E (discussing proposed 

revised regulation 39.33). 

Subpart C DCO were not a QCCP.204 In 

turn, this may increase a SIDCO or 

Subpart C DCO’s competitiveness vis-a`- 

vis non-U.S. clearing organizations that 

demonstrate compliance with 

international standards and are QCCPs. 

i. Regulation 39.31 (Election To Become 

Subject to the Provisions of Subpart C) 

The procedures set forth in proposed 

regulation 39.31, together with the 

proposed Subpart C Election Form, are 

intended to promote the protection of 

market participants and the public. 

These proposed procedures would 

require the Commission’s staff to 

conduct a comprehensive and thorough 

review of a DCO that elects to become 

subject to the provisions of Subpart C. 

In addition, 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 nonqualifying CCPs. These proposed 

regulations are consistent with the 

international standards set forth in the 

PFMIs and address the remaining 

divergences between part 39 of the 

Commission’s regulations and the 

PFMIs, which will provide an 

opportunity for a Subpart C DCO to gain 

QCCP status. 

Without regulation 39.31, a DCO that 

is not designated by the Council as 

being systemically important would not 

have the opportunity to gain QCCP 

status, thereby potentially putting such 

a DCO at a significant competitive 

disadvantage compared to SIDCOs and 

non-U.S. clearing organizations. This 

would ultimately be to the detriment of 

such a DCO’s clearing members and 

their customers.205 The Commission 

also notes that by clearing through a 

Subpart C DCO, a clearing member and 

its customers would be afforded the 

benefits of clearing through a DCO 

subject to enhanced risk management, 

operational, and other standards. The 

Commission requests comment 

concerning the extent to which clearing 

members and their customers would 

benefit from the additional standards to 

which a Subpart C DCO and SIDCO 

would be subject. 

Proposed regulation 39.31 would 

provide a benefit to a Subpart C DCO by 

allowing the Subpart C DCO to weigh 

for itself the costs and benefits of 

maintaining QCCP status. The notice 

requirements would provide important 

benefits to clearing members of the 

rescinding Subpart C DCO (and their 

customers), particularly those that are 

banks or bank affiliates, by providing 

them with advance notice to permit 

them to assess their options and take 

any actions they deem appropriate with 

respect to clearing at a DCO that has 

acted to rescind its election to be held 

to the standards of Subpart C (and thus 

to renounce status as a QCCP). 

In addition to the requests for 

comments detailed above, the 

Commission invites public comment on 

its cost-benefit considerations. 

Specifically, the Commission seeks 

comment, including quantitative data, if 

available, concerning the costs and 

benefits associated with having an optin process for DCOs that have not been 

designated as systemically important by 

the Council to elect to be subject to 

Subpart C, the proposed process for that 

election, and the costs and benefits that 

may be incurred and realized by the 

clearing members and customers of a 

Subpart C DCO that rescinds its election 

to become subject to the provisions of 

Subpart C. In addition, the Commission 

seeks comment on whether the notice 

requirements, the 90 day notice period 

and the requirements set forth in 

proposed regulation 39.31(e)(3)(iii) are 

sufficient to mitigate the costs 

associated with a Subpart C DCO’s 

ability to rescind its election. 

Commenters are also invited to submit 

with their comment letters any data or 

other information that they may have 

quantifying or qualifying the costs and 

benefits of the proposed regulations. 

ii. Regulation 39.32 (Governance for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

The requirements set forth in 

proposed regulation 39.32 would appear 

to be beneficial to the extent that they 

cause a SIDCO or Subpart C DCO to 

internalize and/or more appropriately 

allocate certain costs that would 

otherwise be borne by clearing 

members, customers of clearing 

members, and other relevant 

stakeholders. Such requirements would 

also appear to promote market stability 

because the governance arrangements of 

SIDCOs and Subpart C DCOs would be 

required to explicitly support the 

stability of the financial system and 

other relevant public interest 

considerations of clearing members, 

customers of clearing members, and 

other relevant stakeholders,206 and 

reflect the legitimate interests of 

clearing members, customers of clearing 

members, and other relevant 

stakeholders. Finally, the governance 

arrangements required by proposed 

regulation 39.32 would promote a more 

efficient, effective, and reliable DCO risk 

management and operating structure. 

As discussed in section II.D. above, 

the Commission requests comments on 

the potential benefits to a SIDCO and a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.32, 

and any benefits that would be realized 

by other market participants (including 

members of such a DCO and their 

customers) or the financial system more 

broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

address these issues, and the benefits 

associated with such alternatives. 

iii. Regulation 39.33 (Financial 

Resources for Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

As described above, proposed 

regulation 39.33(a), as revised, would be 

expanded to include Subpart C DCOs 

and require those Subpart C DCOs that 

engage in an activity with a more 

complex risk profile (e.g., clearing credit 

default swaps or credit default futures), 

or that are systemically important in 

multiple jurisdictions, to comply with 

the Cover Two minimum financial 

resources requirement.207 This 

regulation currently applies to SIDCOs. 

Proposed regulation 39.33(a) would 

increase the financial stability of 

Subpart C DCOs that are engaged in 

activities with a more complex risk 

profile or that are systemically 

important in multiple jurisdictions 

because it would require such Subpart 

C DCOs to comply with enhanced 

minimum financial resource 

requirements. Compliance with such 

standards, in turn, could increase the 

overall stability of the U.S. financial 

markets because enhancing a Subpart C 

DCO’s financial resources requirements 

from the minimum of Cover One to a 

more stringent Cover Two standard 

helps to ensure the affected Subpart C 

DCO will have greater financial 

resources to meet its obligations to 

market participants, including in the 

case of defaults by multiple clearing 

members. These added financial 

resources lessen the likelihood of the 


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208See supra Section I.B. 

Subpart C DCO’s failure which, in times 

of market turmoil, could increase the 

risk to the stability of the U.S. financial 

system.208 By bolstering certain Subpart 

C DCO’s resources, regulation 39.33(a) 

contributes to the financial integrity of 

the financial markets and reduces the 

likelihood of systemic risk from 

spreading through the financial markets 

due to the Subpart C DCO’s failure or 

disruption. In addition, the approach of 

obtaining resources in such low-stress 

periods avoids the need to call for 

additional resources from clearing 

members during less stable, more 

volatile times, which would have procyclical effects on the U.S. financial 

markets. 

As described above, proposed 

regulation 39.33(a)(2) would provide the 

Commission with the ability to 

determine that a SIDCO or a Subpart C 

DCO is systemically important in 

multiple jurisdictions, considering 

whether the DCO is a SIDCO and 

whether the DCO has been determined 

to be systemically important by one or 

more foreign jurisdictions pursuant to a 

designation process that considers 

whether the foreseeable effects of a 

failure or disruption of the SIDCO or 

Subpart C DCO could threaten the 

stability of each relevant jurisdiction’s 

financial system. Moreover, proposed 

regulation 39.33(a)(3) would provide the 

Commission with the ability to expand 

the definition of ‘‘activity with a more 

complex risk profile’’ beyond clearing 

credit default swaps or credit default 

futures. These provisions give the 

Commission the flexibility to determine, 

under appropriate circumstances, what 

particular SIDCOs or Subpart C DCOs 

(or DCOs that engage in certain 

activities) would need to maintain 

Cover Two default resources. Such a 

decision would help to ensure that the 

affected SIDCO or Subpart C DCO 

would have greater financial resources 

to meet its obligations to market 

participants, including in the case of 

defaults by multiple clearing members. 

These added financial resources would 

decrease the likelihood that the SIDCO 

or Subpart C DCO would fail, thus 

contributing to the integrity and 

stability of the financial markets. 

Proposed regulation 39.33 would also 

prohibit a Subpart C DCO from using 

assessments to meets its default 

resource obligations, i.e., those under 

regulations 39.11(a)(1) and 39.33(a). 

This prohibition currently applies to 

SIDCOs. Prohibiting the use of 

assessments by a Subpart C DCO in 

meeting its default resource requirement 

would appear to increase the financial 

stability of the Subpart C DCO, which in 

turn, would increase the overall stability 

of the U.S. financial markets. 

Assessment powers are more likely to 

be exercised during periods of financial 

market stress. If, during such a period, 

a clearing member defaults and the loss 

to the Subpart C DCO is sufficiently 

large to deplete (1) the collateral posted 

by the defaulting clearing member, (2) 

the defaulting clearing member’s 

guaranty fund contribution, and (3) the 

remaining pre-funded default fund 

contributions, a Subpart C DCO’s 

exercise of assessment powers over the 

non-defaulting clearing members may 

exacerbate a presumably already 

weakened financial market. The 

demand by a Subpart C DCO for more 

capital from its clearing members could 

force one or more additional clearing 

members into default because they 

cannot meet the assessment. The 

inability to meet the assessment could 

lead clearing members and/or their 

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

their positions) in falling asset markets, 

which further drives down asset prices 

and may result in clearing members 

and/or their customers defaulting on 

their obligations to each other and/or to 

the Subpart C DCO. In such extreme 

circumstances, assessments could 

trigger a downward spiral and lead to 

the destabilization of the financial 

markets. Prohibiting the use of 

assessments by a Subpart C DCO in 

meeting default resources requirements 

is intended to require the Subpart C 

DCO to retain more financial resources 

upfront, i.e., to prefund its financial 

resources requirement to cover its 

potential exposure. 

The increase in prefunding of 

financial resources by a Subpart C DCO 

may increase costs to clearing members 

of that Subpart C DCO (e.g., requiring 

clearing members to post additional 

funds with the Subpart C DCO), but it 

also reduces the likelihood that the 

Subpart C DCO will require additional 

capital infusions during a time of 

financial stress when raising such 

additional capital is expensive relative 

to market norms. By increasing 

prefunded financial resources, a Subpart 

C DCO becomes less reliant on the 

ability of its clearing members to pay an 

assessment, more secure in its ability to 

meets its obligations, and more viable in 

any given situation, even in the case of 

multiple defaults of clearing members. 

Accordingly, proposed regulation 

39.33(b) would increase the financial 

security and reliability of the Subpart C 

DCO, which will, therefore, further 

increase the overall stability of the U.S. 

financial markets. 

As described above, proposed 

regulation 39.33(c) would require a 

SIDCO or Subpart C DCO to maintain a 

minimum level of eligible liquidity 

resources that would permit the DCO to 

satisfy its intraday, same-day, and 

multi-day settlement obligations in all 

relevant currencies. Proposed regulation 

39.33(d) would require a SIDCO or 

Subpart C DCO to undertake due 

diligence to confirm that each liquidity 

provider upon which the DCO relies has 

the capacity to perform its commitments 

to provide liquidity (and to regularly 

test its own procedures for accessing its 

liquidity resources) and would require a 

SIDCO with access to accounts and 

services at a Federal Reserve Bank to 

use such services where practical. 

Proposed regulation 39.33(e) would 

require a SIDCO or Subpart C DCO to 

document its supporting rationale for, 

and to have adequate governance 

arrangements relating to, the amount of 

total financial resources it maintains 

and the amount of total liquidity 

resources it maintains. 

These requirements would increase 

the likelihood that a SIDCO or Subpart 

C DCO would promptly meet its 

settlement obligations in a variety of 

market conditions. In determining the 

resources that would be necessary to 

meet the qualifying liquid resources 

requirements, a SIDCO or Subpart C 

DCO may need to undertake a complex 

analysis of the SIDCO’s or Subpart C 

DCO’s exposures and processes, 

including various models, and, where 

appropriate, designing and 

implementing changes to either create 

or modify existing internal processes 

and documenting the rationale for the 

amount of total financial and total 

liquidity resources the SIDCO or 

Subpart C DCO maintains. These efforts 

are likely to contribute to a better ex 

ante understanding by the SIDCO’s or 

Subpart C DCO’s management of the 

liquidity risks the DCO is likely to face 

in a stress scenario, resources that are 

calculated to enable the DCO to 

completely meets its settlement 

obligations on a prompt basis despite 

the default of a clearing member, and 

better assurance of its ability to rely on 

the commitments of its liquidity 

providers. 

The result of this analysis and these 

enhanced resources is likely to be better 

preparation to meet liquidity challenges 

promptly, and a greater likelihood that 

the DCO would efficiently and 

effectively meet its obligations promptly 

in a default scenario. This improved 

preparation and enhanced likelihood of 

the SIDCO or Subpart C DCO’s prompt 

meeting of its own obligations will 

benefit the DCO’s clearing members and 


tkelley on DSK3SPTVN1PROD with PROPOSALS2
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194See supra Section II.F (discussing proposed 

regulation 39.34). 

210See supra Section II.G (discussing proposed 

regulation 39.35). 

211See supra Section II.H (discussing proposed 

regulation 39.36). 

their customers by avoiding an inability 

to meet settlement obligations that 

might cause knock-on liquidity 

problems to such clearing members and 

their customers. The harm to clearing 

members and customers from a failure 

of a SIDCO or Subpart C DCO to meet 

its obligations promptly would be 

especially serious in a time of general 

financial stress. The assurance of the 

DCO meeting its settlement obligations 

promptly would also redound to the 

benefit of the larger financial system by 

mitigating systemic risk. 

As discussed in section II.E. above, 

the Commission requests comments on 

the potential benefits to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.33, 

and any benefits that would be realized 

by other market participants or the 

financial system more broadly. As noted 

above, the Commission specifically 

requests comment on alternative means 

to address these issues, and the benefits 

associated with such alternatives. 

iv. Regulation 39.34 (System Safeguards 

for Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

As discussed above, proposed 

amended regulation 39.34 would 

require SIDCOs and Subpart C DCOs to 

comply with enhanced system 

safeguards requirements.209 While 

SIDCOs are already subject to these 

requirements, the Commission proposes 

expanding this regulation to include 

Subpart C DCOs. A two-hour RTO in a 

Subpart C DCO’s BC–DR plan would 

increase the soundness and operating 

resiliency of the Subpart C DCO. The 

two-hour RTO ensures that even in the 

event of a wide-scale disruption, the 

potential negative effects upon U.S. 

financial markets would be minimized 

because the affected Subpart C DCO 

would recover rapidly and resume its 

critical market functions. This would 

allow other market participants to 

process their transactions, including 

those participants in locations not 

directly affected by the disruption. The 

two-hour RTO would increase a Subpart 

C DCO’s resiliency by requiring the 

Subpart C DCO to have the resources 

and technology necessary to resume 

operations promptly. This resiliency, in 

turn, would increase the overall stability 

of the U.S. financial markets. 

As discussed in section II.F. above, 

the Commission requests comments on 

the potential benefits to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.34, 

and any benefits that would be realized 

by other market participants or the 

financial system more broadly. As noted 

above, the Commission specifically 

requests comment on alternative means 

to address these issues, and the benefits 

associated with such alternatives. 

v. Regulation 39.35 (Default Rules and 

Procedures for Uncovered Losses or 

Shortfalls (Recovery) for Systemically 

Important Derivatives Clearing 

Organizations and Subpart C Derivatives 

Clearing Organizations) 

As discussed above, proposed 

regulation 39.35 would require SIDCOs 

and Subpart C DCOs to adopt explicit 

rules and procedures for: (i) Allocating 

uncovered credit losses and (ii) meeting 

all settlement obligations in a variety of 

market conditions.210 The analysis 

SIDCOs and Subpart C DCOs would 

need to perform to create these rules 

and procedures are likely to contribute 

to a better ex ante understanding by the 

SIDCO or Subpart C DCO of the 

scenarios that would lead to uncovered 

credit losses or liquidity shortfalls. This 

analysis would also enable the SIDCO or 

Subpart C DCO to more effectively and 

efficiently meet its obligations 

promptly, thereby avoiding harm to 

clearing members and their customers 

from a default. In addition, requiring 

SIDCOs and Subpart C DCOs to have 

clear rules and procedures addressing 

such scenarios would be beneficial for 

clearing members and their customers 

in that these rules and procedures 

would provide clearing members with a 

better understanding of the members’ 

own obligations, and the extent to 

which the SIDCO or Subpart C DCO 

would perform its obligations to its 

clearing members during periods of 

market stress. This understanding 

would, in turn, contribute to the ability 

of clearing members and their customers 

to tailor their own contingency plans to 

address those circumstances. Improved 

preparation by SIDCOs, Subpart C 

DCOs, and their clearing members will 

also redound to the benefit of the larger 

financial system by mitigating systemic 

risk. 

As discussed in section II.G. above, 

the Commission requests comments on 

the potential benefits to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.35, 

and any benefits that would be realized 

by other market participants or the 

financial system more broadly. As noted 

above, the Commission specifically 

requests comment on alternative means 

to address these issues, and the benefits 

associated with such alternatives. 

vi. Regulation 39.36 (Risk Management 

for Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

As discussed above, the enhanced risk 

management requirements set forth in 

proposed regulation 39.36 are designed 

to help SIDCOs and Subpart C DCOs 

manage their risk exposure.211 For 

example, the proposed provisions 

would require SIDCOs and Subpart C 

DCOs to stress test their financial 

resources, stress test their liquidity 

resources, and conduct regular 

sensitivity analyses of their margin 

methodologies. The analyses performed 

under the proposed requirements would 

appear to increase the DCO’s ability to 

mitigate and address credit risks, and to 

create proper incentives for members 

with respect to the exposures they 

create to the SIDCO or Subpart C DCO 

by enabling the DCO to tie risk 

exposures to margin requirements. In 

addition, proposed regulation 39.36 

would require a SIDCO or Subpart C 

DCO to monitor, manage and limit its 

credit and liquidity risks arising from its 

settlement banks, as well invest its own 

funds and assets in instruments with 

minimal credit, market, and liquidity 

risks. This provision would also appear 

to increase the SIDCO’s or Subpart C 

DCO’s ability to mitigate and address 

the probability of being exposed to a 

settlement bank’s failure and the 

potential losses and liquidity pressures 

to which the SIDCO or Subpart C DCO 

would be exposed in the event of such 

a failure. This, in turn, would benefit 

members of such DCOs and their 

customers, as discussed above. It would 

also appear that by enhancing the 

reliability and stability of SIDCOs and 

Subpart C DCOs, the overall stability of 

the U.S. financial markets will be 

strengthened. 

As discussed in section II.H. above, 

the Commission requests comments on 

the potential benefits to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.36, 

and any benefits that would be realized 

by members of such DCOs and their 

customers, as well as other market 

participants or the financial system 

more broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

address these issues, and the benefits 

associated with such alternatives. 


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212See supra Section II.I (discussing proposed 

regulation 39.37). 

213See supra Section II.K (discussing proposed 

regulation 39.39). 

vii. Regulation 39.37 (Additional 

Disclosure for Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

The disclosure requirements set forth 

in proposed regulation 39.37 212 would 

be beneficial to clearing members of 

SIDCOs and Subpart C DCOs, as well as 

to customers of clearing members, 

because they would provide 

transparency and certainty concerning 

the processes, operations and exposures 

of these DCOs. In particular, proposed 

paragraph (d) would require a SIDCO or 

Subpart C DCO to publicly disclose its 

policies and procedures concerning the 

segregation and portability of customers’ 

positions and funds. These disclosures 

would enable clearing members and 

their customers to better understand 

their respective exposures to the SIDCO 

or Subpart C DCO, to better choose a 

DCO that fits their needs, and, in turn, 

to create incentives for safe and effective 

operations of SIDCOs and Subpart C 

DCOs. 

As discussed in section II.I. above, the 

Commission requests comments on the 

potential benefits to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.37, 

and any benefits that would be realized 

by members of such DCOs and their 

customers, as well as other market 

participants or the financial system 

more broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

address these issues, and the benefits 

associated with such alternatives. 

viii. Regulation 39.38 (Efficiency for 

Systemically Important Derivatives 

Clearing Organizations and Subpart C 

Derivatives Clearing Organizations) 

The efficiency requirements set forth 

in proposed regulation 39.38 would be 

beneficial to clearing members of 

SIDCOs and Subpart C DCOs, as well as 

to customers of clearing members, 

because they would require these DCOs 

to regularly endeavor to improve their 

clearing and settlement arrangements, 

operating structures and procedures, 

product offerings, and use of 

technology. In addition, SIDCOs and 

Subpart C DCOs would be required to 

facilitate efficient payment, clearing and 

settlement by accommodating 

internationally accepted communication 

procedures and standards, which could 

result in operational efficiency for 

market participants. As a result, 

members of such DCOs and their 

customers, as well as the marketplace 

more broadly, may be offered more 

efficient clearing services that may be 

easier to access at an operational level. 

As discussed in section II.J. above, the 

Commission requests comments on the 

potential benefits to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.38, 

and any benefits that would be realized 

by members of such DCOs, their 

customers, as well as other market 

participants or the financial system 

more broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

address these issues, and the benefits 

associated with such alternatives. 

ix. Regulation 39.39 (Recovery and 

Wind-Down for Systemically Important 

Derivatives Clearing Organizations and 

Subpart C Derivatives Clearing 

Organizations) 

As discussed above, proposed 

regulation 39.39 would require a SIDCO 

and Subpart C DCO to maintain viable 

plans for recovery and orderly winddown, in cases necessitated by (1) credit 

losses or liquidity shortfalls and (2) 

general business risk, operational risk, 

or any other risk that threatens the 

derivatives clearing organization’s 

viability as a going concern. This would 

require the DCO to identify scenarios 

that may prevent a SIDCO or Subpart C 

DCO from being able to provide its 

critical operations and services as a 

going concern and to assess the 

effectiveness of a full range of options 

for recovery or orderly wind-down. 

The proposed regulation would also 

require a SIDCO or Subpart C DCO to 

evaluate the resources available to meet 

the plan to cover credit losses and 

liquidity shortfalls, and to maintain 

sufficient unencumbered liquid 

financial assets to implement the plan to 

cover other risks. The latter point 

requires a SIDCO or Subpart C DCO to 

analyze whether its particular 

circumstances and risks require it to 

maintain liquid net assets to fund the 

plan that are in addition to those 

resources currently required by 

regulation 39.11(a)(2).213

The complex analysis and plan 

preparation that a SIDCO or Subpart C 

DCO would undertake to comply with 

the proposed regulation, including 

designing and implementing changes to 

existing plans, are likely to contribute to 

a better ex ante understanding by the 

SIDCO’s or Subpart C DCO’s 

management of the challenges the DCO 

would face in a recovery or wind-down 

scenario, and thus better preparation to 

meet those challenges. This improved 

preparation would help reduce the 

possibility of market disruptions and 

financial losses to clearing members and 

their customers. By maintaining and 

regularly updating recovery and winddown plans, and maintaining resources 

and arrangements designed to meet the 

requirements of such plans, the DCO 

will better be able to mitigate the impact 

that a threat to, or a disruption of, a 

SIDCO’s or Subpart C DCO’s operations 

would have on customers, clearing 

members, and, more broadly, the 

stability of the U.S. financial markets. 

By reducing the possibility that a DCO 

would default in a disorganized fashion, 

the proposed regulation would also help 

to reduce the likelihood of a failure by 

the DCO to meet its obligations to its 

members, thereby enhancing protection 

for members of such a DCO and their 

customers, as well as helping to avoid 

the systemic effects of DCO failure. 

As discussed in section II.K. above, 

the Commission requests comments on 

the potential benefits to a SIDCO or a 

Subpart C DCO in complying with all 

aspects of proposed regulation 39.39, 

and any benefits that would be realized 

by members of such DCOs and their 

customers, as well as other market 

participants or the financial system 

more broadly. As noted above, the 

Commission specifically requests 

comment on alternative means to 

address these issues, and the benefits 

associated with such alternatives. 

4. Section 15(a) Factors 

i. Protection of Market Participants and 

the Public 

The proposed regulations create 

additional standards for compliance 

with the CEA, which include 

governance standards, enhanced 

financial resources and liquidity 

resource requirements, system safeguard 

requirements, special default rules and 

procedures for uncovered losses or 

shortfalls, enhanced risk management 

requirements, additional disclosure 

requirements, efficiency standards, and 

standards for recovery and wind-down 

procedures. They also include 

procedures for Subpart C DCOs to elect 

to be held to such additional standards, 

and procedures to rescind such election. 

These standards and procedures would 

further the protection of members of 

SIDCOs and Subpart C DCOs, customers 

of such members, as well as other 

market participants and the public by 

increasing the financial stability and 

operational security of SIDCOs and 

Subpart C DCOs. These proposed 

regulations could, more broadly, 

increase the stability of the U.S. 


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214As mentioned above, this proposed 

rulemaking would extend to Subpart C DCOs the 

system safeguards requirements currently 

applicable to SIDCOs. See supra Section II.F 

(discussing proposed revised regulation 39.34 

(system safeguards)). 

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 proposed rule are 

designed to help ensure that SIDCOs 

continue to function even in extreme 

circumstances, including multiple 

defaults by clearing members and widescale disruptions. While there may be 

increased costs associated with the 

implementation of the proposed rules, 

the increased costs associated with the 

implementation of the proposed rules 

for Subpart C DCOs would be borne 

only by those DCOs that have not been 

designated systemically important 

under Title VIII and that elect to become 

subject to the provisions of Subpart C. 

Some of those costs would ultimately be 

borne by clearing members of such 

Subpart C DCOs, and by customers of 

such clearing members. 

The costs of this rulemaking would be 

mitigated by the countervailing benefits 

of stronger resources, improved design, 

more efficient and effective processes, 

and enhanced planning that would lead 

to increased safety and soundness of 

SIDCOs and the reduction of systemic 

risk, which protect market participants 

and the public from the adverse 

consequences that would result from a 

SIDCO’s failure or a disruption in its 

functioning. Similarly, the proposed 

regulations would increase the safety 

and soundness of Subpart C DCOs so 

that they may continue to operate even 

in extreme circumstances, which would, 

in turn, better protect members of such 

DCOs, their customers, and also market 

participants and the public, particularly 

during time of severe market stress. 

ii. Efficiency, Competitiveness, and 

Financial Integrity 

The regulations set forth in this 

proposed rulemaking would promote 

the financial strength and stability of 

SIDCOs and Subpart C DCOs, as well as, 

more broadly, efficiency and greater 

competition in the global markets. 

Proposed regulation 39.38 expressly 

promotes efficiency in the design of a 

SIDCO’s or Subpart C DCO’s settlement 

and clearing arrangements, operating 

structure and procedures, scope of 

products cleared, and use of technology. 

The proposed regulation also requires 

SIDCOs and Subpart C DCOs to 

accommodate internationally accepted 

communication procedures and 

standards to facilitate efficient payment, 

clearing, and settlement. In addition, the 

proposed regulations promote efficiency 

insofar as SIDCOs and Subpart C DCOs 

that operate with enhanced financial 

and liquidity resources, enhanced risk 

management requirements, increased 

system safeguards, and wind-down or 

recovery plans are more secure and are 

less likely to fail. 

The proposed regulations would also 

promote competition because they are 

consistent with the international 

standards set forth in the PFMIs and 

will help to ensure that SIDCOs are held 

to international standards and thus are 

enabled to gain QCCP status and 

accordingly avoid an important 

competitive disadvantage relative to 

similarly situated foreign CCPs that 

meet international standards and are 

QCCPs. Moreover, by allowing other 

DCOs to elect to become subject to the 

provisions of Subpart C and thus the 

opportunity to meet international 

standards and to gain QCCP status, the 

proposed regulations promote 

competition among registered DCOs, 

and between registered DCOs and 

foreign CCPs that meet international 

standards and are QCCPs. Conversely, 

the Commission notes that these 

enhanced financial resources and risk 

management standards are also 

associated with additional costs and to 

the extent that SIDCOs and Subpart C 

DCOs pass along the additional costs to 

their clearing members and, indirectly, 

those clearing members’ customers, 

participation in the affected markets 

may decrease and have a negative 

impact on price discovery. However, it 

would appear that such higher 

transactional costs should be offset by 

the lower capital charges granted to 

clearing members and customers for 

exposures resulting from transactions 

that are cleared through SIDCOs and 

Subpart C DCOs that are also QCCPs. 

Additionally, enhanced risk 

management and operational standards 

would promote financial integrity by 

leading to SIDCOs and Subpart C DCOs 

to be more secure and less likely to fail. 

By increasing the stability and strength 

of the SIDCOs and Subpart C DCOs, the 

proposed regulations would help 

SIDCOs and Subpart C DCOs to meet 

their obligations in extreme 

circumstances and be able to resume 

operations even in the face of wide-scale 

disruption, which contributes to the 

financial integrity of the financial 

markets. Moreover, in requiring (1) more 

financial resources to be pre-funded by 

expanding the potential losses those 

resources are intended to cover and 

restricting the means for satisfying those 

resource requirements, and (2) requiring 

greater liquidity resources, the 

requirements of these proposed 

regulations seek to lessen the incidence 

of pro-cyclical demands for additional 

resources and, in so doing, promote 

both financial integrity and market 

stability. These efforts would redound 

to the benefit of clearing members and 

their customers, as well as the financial 

system more broadly. 

iii. Price Discovery 

The regulations in this proposed 

rulemaking would enhance financial 

resources, liquidity resources, risk 

management standards, disclosure 

standards, and recovery planning for 

SIDCOs and Subpart C DCOs which may 

result in increased public confidence, 

which, in turn, might lead to expanded 

participation in the affected markets 

(including markets with products with a 

more complex risk profile). The 

expanded participation in these markets 

(i.e., greater transactional volume) may 

have a positive impact on price 

discovery. Conversely, the Commission 

notes that these proposed regulations 

are also associated with additional costs 

and to the extent that SIDCOs and 

Subpart C DCOs pass along the 

additional costs to their clearing 

members and, indirectly, to their 

clearing members’ customers, 

participation in the affected markets 

may decrease and have a negative 

impact on price discovery. However, it 

is the Commission’s belief that such 

higher transactional costs should be 

offset by the lower capital charges 

granted to clearing members and 

customers with exposures resulting 

from transactions cleared through 

SIDCOs and Subpart C DCOs that are 

deemed QCCPs. 

iv. Sound Risk Management Practices 

The regulations in this proposed 

rulemaking contribute to the sound risk 

management practices of SIDCOs and 

Subpart C DCOs because the 

requirements would promote the safety 

and soundness of SIDCOs and Subpart 

C DCOs by: (1) Enhancing the financial 

resources requirements and liquidity 

resource requirements; (2) enhancing 

understanding of credit and liquidity 

risks and related governance 

arrangements; (3) enhancing system 

safeguards to facilitate the continuous 

operation and rapid recovery of 

activities; 214 (4) enhancing risk 

management standards by creating new 

stress testing and sensitivity analysis 


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215See supra Section II.H (discussing proposed 

regulation 39.36). 

216See supra Section II.G (discussing proposed 

regulation 39.35); see also supra Section II.K 

(discussing proposed regulation 39.39). 

217See Section 802(a)(4) of the Dodd-Frank Act 

(Congressional Findings). 

requirements; (5) promoting the active 

management of credit and liquidity risks 

arising from settlement banks; 215 and 

(6) enhancing risk management by 

establishing rules and procedures 

addressing uncovered credit losses or 

liquidity shortfalls, and recovery and 

wind-down planning for credit risks and 

for business continuity and operational 

risks.216 In addition, by strengthening 

financial and liquidity resource 

requirements, enhancing risk 

management standards, and enhancing 

disclosure and recovery planning 

requirements, these proposed 

regulations would provide greater 

certainty for clearing members of such 

DCOs, their customers, and other market 

participants that obligations of the 

SIDCOs and Subpart C DCOs will be 

honored, and provide certainty and 

security to market participants that 

potential disruptions will be reduced 

and, by extension, the risk of loss of 

capital and liquidity will be reduced. 

v. 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 proposed 

rulemaking, SIDCOs and Subpart C 

DCOs that are held to international 

standards and that gain QCCP status 

might hold a competitive advantage in 

the financial markets by, inter alia, 

helping bank clearing members and 

bank customers avoid the much higher 

capital charges imposed by the Basel 

CCP Capital Requirements on exposures 

to non-QCCPs. Moreover, because 

‘‘enhancements to the regulation and 

supervision of systemically important 

financial market utilities . . . are 

necessary . . . to support the stability of 

the broader financial system,’’ 217

adopting these proposed rules would 

promote the public interest in a more 

stable broader financial system. 

List of Subjects in 17 CFR Part 39 

Commodity futures, Risk 

management, Settlement procedures, 

Default rules and procedures, System 

safeguards. 

For the reasons stated in the 

preamble, the Commission proposes to 

amend 17 CFR part 39 as follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

■ 1. The authority citation for part 39 is 

amended to read as follows: 

Authority: 7 U.S.C. 2, 7a–1, and 12a; 12 

U.S.C. 5464; 15 U.S.C. 8325. 

■ 2. Revise § 39.2 to read as follows: 

§ 39.2 Definitions. 

For the purposes of this part: Activity 

with a more complex risk profile 

includes: 

(1) Clearing credit default swaps, 

credit default futures, or derivatives that 

reference either credit default swaps or 

credit default futures and 

(2) Any other activity designated as 

such by the Commission pursuant to 

§ 39.33(a)(3). 

Back test means a test that compares 

a derivatives clearing organization’s 

initial margin requirements with 

historical price changes to determine 

the extent of actual margin coverage. 

Customer means a person trading in 

any commodity named in the definition 

of commodity in section 1a(9) of the Act 

or in § 1.3 of this chapter, or in any 

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

Act or in § 1.3 of this chapter; Provided, 

however, an owner or holder of a house 

account as defined in this section shall 

not be deemed to be a customer within 

the meaning of section 4d of the Act, the 

regulations that implement sections 4d 

and 4f of the Act and § 1.35, and such 

an owner or holder of such a house 

account shall otherwise be deemed to be 

a customer within the meaning of the 

Act and §§ 1.37 and 1.46 of this chapter 

and all other sections of these rules, 

regulations, and orders which do not 

implement sections 4d and 4f of the Act. 

Customer account or customer origin 

means a clearing member account held 

on behalf of customers, as that term is 

defined in this section, and which is 

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

of the Act. 

Depository institution has the 

meaning set forth in section 19(b)(1)(A) 

of the Federal Reserve Act (12 U.S.C. 

461(b)(1)(A)). 

House account or house origin means 

a clearing member account which is not 

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

Act. 

Key personnel means derivatives 

clearing organization personnel who 

play a significant role in the operations 

of the derivatives clearing organization, 

the provision of clearing and settlement 

services, risk management, or oversight 

of compliance with the Act and 

Commission regulations and orders. Key 

personnel include, but are not limited 

to, those persons who are or perform the 

functions of any of the following: Chief 

executive officer; president; chief 

compliance officer; chief operating 

officer; chief risk officer; chief financial 

officer; chief technology officer; and 

emergency contacts or persons who are 

responsible for business continuity or 

disaster recovery planning or program 

execution. 

Stress test means a test that compares 

the impact of potential extreme price 

moves, changes in option volatility, 

and/or changes in other inputs that 

affect the value of a position, to the 

financial resources of a derivatives 

clearing organization, clearing member, 

or large trader, to determine the 

adequacy of the financial resources of 

such entities. 

Subpart C derivatives clearing 

organization means any derivatives 

clearing organization, as defined in 

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

this chapter, which: 

(1) Is registered as a derivatives 

clearing organization under section 5b 

of the Act; 

(2) Is not a systemically important 

derivatives clearing organization; and 

(3) Has become subject to the 

provisions of this Subpart C, pursuant to 

§ 39.31. 

Systemically important derivatives 

clearing organization means a financial 

market utility that is a derivatives 

clearing organization registered under 

section 5b of the Act, which is currently 

designated by the Financial Stability 

Oversight Council to be systemically 

important and for which the 

Commission acts as the Supervisory 

Agency pursuant to 12 U.S.C. 5462(8). 

U.S. branch and agency of a foreign 

banking organization means the U.S. 

branch and agency of a foreign banking 

organization as defined in section 1(b) 

of the International Banking Act of 1978 

(12 U.S.C. 3101). 

Trust company means a trust 

company that is a member of the 

Federal Reserve System, under section 1 

of the Federal Reserve Act (12 U.S.C. 

221), but that does not meet the 

definition of depository institution. 

■ 3. In Subpart B, add and reserve 

§§ 39.28 and 39.29. 

■ 4. Revise Subpart C to read as follows: 

Subpart C—Provisions Applicable to 

Systemically Important Derivatives Clearing 

Organizations and Derivatives Clearing 

Organizations That Elect To Be Subject to 

the Provisions of Subpart C 

Sec. 

39.30 Scope. 

39.31 Election to become subject to the 

provisions of subpart C. 

39.32 Governance for systemically 

important derivatives clearing 

organizations and subpart C derivatives 

clearing organizations. 


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39.33 Financial resources for systemically 

important derivatives clearing 

organizations and subpart C derivatives 

clearing organizations. 

39.34 System safeguards for systemically 

important derivatives clearing 

organizations and subpart C derivatives 

clearing organizations. 

39.35 Default rules and procedures for 

uncovered losses or shortfalls (recovery) 

for systemically important derivatives 

clearing organizations and subpart C 

derivatives clearing organizations. 

39.36 Risk management for systemically 

important derivatives clearing 

organizations and subpart C derivatives 

clearing organizations. 

39.37 Additional disclosure for 

systemically important derivatives 

clearing organizations and subpart C 

derivatives clearing organizations. 

39.38 Efficiency for systemically important 

derivatives clearing organizations and 

subpart C derivatives clearing 

organizations. 

39.39 Recovery and wind-down for 

systemically important derivatives 

clearing organizations and subpart C 

derivatives clearing organizations. 

39.40 Consistency with the Principles for 

Financial Market Infrastructures. 

39.41 Special enforcement authority for 

systemically important derivatives 

clearing organizations. 

39.42 Advance notice of material riskrelated rule changes by systemically 

important derivatives clearing 

organizations. 

Appendix A to Part 39—Form DCO 

Derivatives Clearing Organization 

Application for Registration 

Appendix B to Part 39—Subpart C Election 

Form 

Subpart C—Provisions Applicable to 

Systemically Important Derivatives 

Clearing Organizations and Derivatives 

Clearing Organizations That Elect To 

Be Subject to the Provisions of 

Subpart C 

§ 39.30 Scope. 

(a) The provisions of this subpart C 

apply to each of the following: A 

subpart C derivatives clearing 

organization, a systemically important 

derivatives clearing organization, and 

any derivatives clearing organization, as 

defined under section 1a(15) of the Act 

and § 1.3(d) of this chapter, seeking to 

become a subpart C derivatives clearing 

organization pursuant to § 39.31. 

(b) A systemically important 

derivatives clearing organization is 

subject to the provisions of subparts A 

and B of this part in addition to the 

provisions of this subpart. 

(c) A subpart C derivatives clearing 

organization is subject to the provisions 

of subparts A and B of this part in 

addition to the provisions of this 

subpart except for §§ 39.41 and 39.42 of 

this subpart. 

§ 39.31 Election to become subject to the 

provisions of subpart C. 

(a) Election eligibility. (1) A 

derivatives clearing organization that is 

registered with the Commission and that 

is not a systemically important 

derivatives clearing organization may 

elect to become a subpart C derivatives 

clearing organization subject to the 

provisions of this subpart, using the 

procedures set forth in paragraph (b) of 

this section. 

(2) An applicant for registration as a 

derivatives clearing organization 

pursuant to § 39.3 may elect to become 

a subpart C derivatives clearing 

organization subject to the provisions of 

this subpart as part of its application for 

registration using the procedures set 

forth in paragraph (c) of this section. 

(b) Election and withdrawal 

procedures applicable to registered 

derivatives clearing organizations. (1) 

Election. A derivatives clearing 

organization that is registered with the 

Commission and that is not a 

systemically important derivatives 

clearing organization may request that 

the Commission accept its election to 

become a subpart C derivatives clearing 

organization by filing with the 

Commission a completed Subpart C 

Election Form. The Subpart C Election 

Form shall include the election and all 

certifications, disclosures and exhibits, 

as provided in appendix B to this part 

and any amendments or supplements 

thereto filed with the Commission 

pursuant to paragraphs (b)(2) and (b)(3) 

of this section. 

(2) Submission of supplemental 

information. The filing of a Subpart C 

Election Form does not create a 

presumption that the Subpart C Election 

Form is materially complete or that 

supplemental information will not be 

required. The Commission, at any time 

prior to the effective date, as provided 

in paragraph (b)(4) of this section, may 

request that the derivatives clearing 

organization submit supplemental 

information in order for the Commission 

to process the Subpart C Election Form, 

and the derivatives clearing 

organization shall file such 

supplemental information with the 

Commission. 

(3) Amendments. A derivatives 

clearing organization shall promptly 

amend its Subpart C Election Form if it 

discovers a material omission or error 

in, or if there is a material change in, the 

information provided to the 

Commission in the Subpart C Election 

Form or other information provided in 

connection with the Subpart C Election 

Form. 

(4) Effective date. A derivatives 

clearing organization’s election to 

become a subpart C derivatives clearing 

organization shall become effective: 

(i) Upon the later of the following, 

provided the Commission has neither 

stayed nor denied such election as set 

forth in paragraph (b)(5) of this section. 

(A) The effective date specified by the 

derivatives clearing organization in its 

Subpart C Election Form; or 

(B) Ten business days after the 

derivatives clearing organization files its 

Subpart C Election Form with the 

Commission; 

(ii) Or upon the effective date set forth 

in written notification from the 

Commission that it shall permit the 

election to take effect after a stay issued 

pursuant to paragraph (b)(5) of this 

section. 

(5) Stay or denial of election. Prior to 

the effective date set forth in paragraph 

(b)(4)(i) of this section, the Commission 

may stay or deny a derivatives clearing 

organization’s election to become a 

subpart C derivatives clearing 

organization by issuing a written 

notification thereof to the derivatives 

clearing organization. 

(6) Commission acknowledgement. 

The Commission may acknowledge, in 

writing, that it has received a Subpart C 

Election Form filed by a derivatives 

clearing organization and that it has 

permitted the derivatives clearing 

organization’s election to become 

subject to the provisions of this subpart 

C to take effect, and the effective date of 

such election. 

(7) Withdrawal of election. A 

derivatives clearing organization that 

has filed a Subpart C Election Form may 

withdraw an election to become subject 

to the provisions of this subpart C at any 

time prior to the date that the election 

is permitted to take effect by filing with 

the Commission a notice of the 

withdrawal of election. 

(c) Election and withdrawal 

procedures applicable to applicants for 

registration as derivatives clearing 

organization—(1) Election. An applicant 

for registration as a derivatives clearing 

organization that requests an election to 

become subject to the provisions of this 

subpart C may make that request by 

attaching a completed Subpart C 

Election Form to the Form DCO that it 

files pursuant to § 39.3. The Subpart C 

Election Form shall include the election 

and all certifications, disclosures and 

exhibits, as provided in appendix B to 

part 39, and any amendments or 

supplements thereto filed with the 

Commission pursuant to paragraphs 

(c)(3) or (c)(4) of this section. 

(2) Election review and effective date. 

The Commission shall review the 

applicant’s Subpart C Election Form as 

part of the Commission’s review of its 


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application for registration pursuant to 

§ 39.3(a). The Commission may permit 

the applicant’s election to take effect at 

the time it approves the applicant’s 

application for registration by providing 

written notice thereof to the applicant. 

The Commission shall not approve any 

application for registration filed 

pursuant to § 39.3(a) for which a 

Subpart C Election Form is pending, if 

the Commission determines that the 

applicant’s election to become subject to 

Subpart C should not become effective 

because the applicant has not 

demonstrated its ability to comply with 

the applicable provisions of this 

subpart. 

(3) Submission of supplemental 

information. The filing of a Subpart C 

Election Form does not create a 

presumption that the Subpart C Election 

Form is materially complete or that 

supplemental information will not be 

required. At any time during the 

Commission’s review of the Subpart C 

Election Form, the Commission may 

request that the applicant submit 

supplemental information in order for 

the Commission to process the Subpart 

C Election Form and the applicant shall 

file such supplemental information with 

the Commission. 

(4) Amendments. An applicant for 

registration as a derivatives clearing 

organization shall promptly amend its 

Subpart C Election Form if it discovers 

a material omission or error in, or if 

there is a material change in, the 

information provided to the 

Commission in the Subpart C Election 

Form or other information provided in 

connection with the Subpart C Election 

Form. 

(5) Withdrawal of election. An 

applicant for registration as a 

derivatives clearing organization may 

withdraw an election to become subject 

to the provisions of this subpart C by 

filing with the Commission a notice of 

the withdrawal of its Subpart C Election 

Form at any time prior to the date that 

the Commission approves its 

application for registration as a 

derivatives clearing organization. The 

applicant may withdraw its Subpart C 

Election Form without withdrawing its 

Form DCO. 

(d) Public information. The following 

portions of the Subpart C Election Form 

will be public: The Elections and 

Certifications and Disclosures in the 

Subpart C Election Form, the rules of 

the derivatives clearing organization, 

the regulatory compliance chart, and 

any other portion of the Subpart C 

Election Form not covered by a request 

for confidential treatment complying 

with the requirements of § 145.9 of this 

chapter. 

(e) Rescission of election—(1) Notice 

of intent to rescind. A subpart C 

derivatives clearing organization may 

rescind its election to be subject to the 

provisions of this subpart C and 

terminate its status as a subpart C 

derivatives clearing organization by 

filing with the Commission a notice of 

its intent to rescind such election. The 

notice of intent to rescind the election 

shall include: 

(i) The effective date of the rescission; 

and 

(ii) A certification signed by the 

relevant duly authorized representative 

of the subpart C derivatives clearing 

organization, as specified in paragraph 

three of the General Instructions to the 

Subpart C Election Form, stating that 

the subpart C derivatives clearing 

organization: 

(A) Has provided the notice to its 

clearing members required by paragraph 

(e)(3)(i)(A) of this section; 

(B) Will provide the notice to its 

clearing members required by paragraph 

(e)(3)(i)(B) of this section; 

(C) Has provided the notice to the 

general public required by paragraph 

(e)(3)(ii)(A) of this section; 

(D) Will provide notice to the general 

public required by paragraph 

(e)(3)(ii)(B) of this section; and 

(E) Has removed all references to the 

organization as a subpart C derivatives 

clearing organization and a qualifying 

central counterparty on its Web site and 

in all other material that it provides to 

its clearing members and customers, 

other market participants or members of 

the public, as required by paragraph 

(e)(3)(ii)(C) of this section. 

(2) Effective date. The rescission of 

the election to be subject to the 

provisions of this subpart C shall 

become effective on the date set forth in 

the notice of intent to rescind the 

election filed by the subpart C 

derivatives clearing organization 

pursuant to § 39.31(e)(1), provided that 

the rescission may become effective no 

earlier than 90 days after the notice of 

intent to rescind the election is filed 

with the Commission. The subpart C 

derivatives clearing organization shall 

continue to comply with all of the 

provisions of this subpart C until such 

effective date. 

(3) Additional notice requirements. 

(i) A subpart C derivatives clearing 

organization shall provide the following 

notices, at the following times, to each 

of its clearing members and shall have 

rules in place requiring each of its 

clearing members to provide the 

following notices to each of the clearing 

member’s customers: 

(A) No later than the filing of a notice 

of its intent to rescind its election to be 

subject to the provisions of this subpart 

C, written notice that it intends to file 

such notice with the Commission and 

the effective date thereof; and 

(B) On the effective date of the 

rescission of its election to be subject to 

the provisions of this subpart C, written 

notice that the rescission has become 

effective. 

(ii) A subpart C derivatives clearing 

organization shall: 

(A) No later than the filing of a notice 

of its intent to rescind its election to be 

subject to the provisions of this subpart 

C, provide notice to the general public, 

displayed prominently on its Web site, 

of its intent to rescind its election to be 

subject to the provisions of this subpart 

C; 

(B) On and after the effective date of 

the rescission of its election to be 

subject to the provisions of this subpart 

C, provide notice to the general public, 

displayed prominently on its Web site, 

that the rescission has become effective; 

and 

(C) Prior to the filing of a notice of its 

intent to rescind its election to become 

subject to the provisions of this subpart 

C, remove all references to the 

derivatives clearing organization’s status 

as a subpart C derivatives clearing 

organization and a qualifying central 

counterparty on its Web site and in all 

other materials that it provides to its 

clearing members and customers, other 

market participants, or the general 

public. 

(iii) The employees and 

representatives of a derivatives clearing 

organization that has filed a notice of its 

intent to rescind its election to be 

subject to the provisions of this subpart 

C shall refrain from referring to the 

organization as a subpart C derivatives 

clearing organization and a qualifying 

central counterparty on and after the 

date that the notice of intent to rescind 

the election is filed. 

(4) Effect of rescission. The rescission 

of a subpart C derivatives clearing 

organization’s election to be subject to 

the provisions of this subpart C shall not 

affect the authority of the Commission 

concerning any activities or events 

occurring during the time that the 

derivatives clearing organization 

maintained its status as a subpart C 

derivatives clearing organization. 

(f) Loss of designation as a 

systemically important derivatives 

clearing organization. A systemically 

important derivatives clearing 

organization whose designation of 

systemic importance is rescinded by the 

Financial Stability Oversight Council, 

shall immediately be deemed to be a 

subpart C derivatives clearing 

organization and shall continue to 


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comply with the provisions of this 

subpart C unless such derivatives 

clearing organization elects to rescind 

its status as a subpart C derivatives 

clearing organization in accordance 

with the requirements of paragraph (e) 

of this section. 

(g) All forms and notices required by 

this § 39.31 shall be filed electronically 

with the Secretary of the Commission in 

the format and manner specified by the 

Commission. 

§ 39.32 Governance for systemically 

important derivatives clearing organizations 

and subpart C derivatives clearing 

organizations. 

(a) General rules. (1) Each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall 

have governance arrangements that: 

(i) Are written; 

(ii) Are clear and transparent; 

(iii) Place a high priority on the safety 

and efficiency of the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization; and 

(iv) Explicitly support the stability of 

the broader financial system and other 

relevant public interest considerations 

of clearing members, customers of 

clearing members, and other relevant 

stakeholders. 

(2) The board of directors shall make 

certain that the systemically important 

derivatives clearing organization’s or 

subpart C derivatives clearing 

organization’s design, rules, overall 

strategy, and major decisions 

appropriately reflect the legitimate 

interests of clearing members, customers 

of clearing members, and other relevant 

stakeholders. 

(3) To an extent consistent with other 

statutory and regulatory requirements 

on confidentiality and disclosure: 

(i) Major decisions of the board of 

directors should be clearly disclosed to 

clearing members, other relevant 

stakeholders, and to the Commission; 

and 

(ii) Major decisions of the board of 

directors having a broad market impact 

should be clearly disclosed to the 

public; 

(b) Governance arrangements. Each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall 

have governance arrangements that: 

(1) Are clear and documented; 

(2) To an extent consistent with other 

statutory and regulatory requirements 

on confidentiality and disclosure, are 

disclosed, as appropriate, to the 

Commission and to other relevant 

authorities, to clearing members and to 

customers of clearing members, to the 

owners of the systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization, and to the public; 

(3) Describe the structure pursuant to 

which the board of directors, 

committees, and management operate; 

(4) Include clear and direct lines of 

responsibility and accountability; 

(5) Clearly specify the roles and 

responsibilities of the board of directors 

and its committees, including the 

establishment of a clear and 

documented risk management 

framework; 

(6) Clearly specify the roles and 

responsibilities of management; 

(7) Describe procedures for 

identifying, addressing, and managing 

conflicts of interest involving members 

of the board of directors; 

(8) Describe procedures pursuant to 

which the board of directors oversees 

the chief risk officer, risk management 

committee, and material risk decisions; 

(9) Assign responsibility and 

accountability for risk decisions, 

including in crises and emergencies; 

and 

(10) Assign responsibility for 

implementing the: 

(i) Default rules and procedures 

required by §§ 39.16 and 39.35; 

(ii) System safeguard rules and 

procedures required by §§ 39.18 and 

39.34; and 

(iii) Recovery and wind-down plans 

required by § 39.39. 

(c) Fitness standards for board of 

directors and management. Each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall 

maintain policies to make certain that: 

(1) The board of directors consists of 

suitable individuals having appropriate 

skills and incentives; 

(2) The board of directors includes 

individuals who are not executives, 

officers or employees of the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization or an affiliate 

thereof; 

(3) The performance of the board of 

directors and the performance of 

individual directors are reviewed on a 

regular basis; 

(4) Managers have the appropriate 

experience, skills, and integrity 

necessary to discharge operational and 

risk management responsibilities; and 

(5) Risk management and internal 

control personnel have sufficient 

independence, authority, resources, and 

access to the board of directors so that 

the operations of the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization are consistent with 

the risk management framework 

established by the board of directors. 

§ 39.33 Financial resources requirements 

for systemically important derivatives 

clearing organizations and subpart C 

derivatives clearing organizations. 

(a) General rule. (1) Notwithstanding 

the requirements of § 39.11(a)(1), each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization that, in 

either case, is systemically important in 

multiple jurisdictions or is involved in 

activities with a more complex risk 

profile shall maintain financial 

resources sufficient to enable it to meet 

its credit exposure to its clearing 

members notwithstanding a default by 

the two clearing members creating the 

largest aggregate credit exposure for the 

derivatives clearing organization in 

extreme but plausible market 

conditions. 

(2) The Commission shall, if it deems 

appropriate, determine whether a 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization is 

systemically important in multiple 

jurisdictions. In determining whether a 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization is 

systemically important in multiple 

jurisdictions, the Commission shall 

consider whether the derivatives 

clearing organization: 

(i) Is a systemically important 

derivatives clearing organization, as 

defined by § 39.2; or 

(ii) Has been determined to be 

systemically important by one or more 

jurisdictions other than the United 

States pursuant to a designation process 

that considers whether the foreseeable 

effects of a failure or disruption of the 

derivatives clearing organization could 

threaten the stability of each relevant 

jurisdiction’s financial system. 

(3) The Commission shall, if it deems 

appropriate, determine whether any of 

the activities of a systemically important 

derivatives clearing organization or a 

subpart C derivatives clearing 

organization, in addition to clearing 

credit default swaps, credit default 

futures, and any derivatives that 

reference either credit default swaps or 

credit default futures, has a more 

complex risk profile. In determining 

whether an activity has a more complex 

risk profile, the Commission will 

consider characteristics such as discrete 

jump-to-default price changes or high 

correlations with potential participant 

defaults as factors supporting (though 


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not necessary for) a finding of a more 

complex risk profile. 

(4) For purposes of this section 39.33, 

if a clearing member controls another 

clearing member or is under common 

control with another clearing member, 

such affiliated clearing members shall 

be deemed to be a single clearing 

member. 

(b) Valuation of financial resources. 

Notwithstanding the provisions of 

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

guaranty fund contributions (i.e., 

guaranty fund contributions that are not 

pre-funded) shall not be included in 

calculating the financial resources 

available to meet a systemically 

important derivatives clearing 

organization’s or subpart C derivatives 

clearing organization’s obligations 

under paragraph (a) of this section or 

§ 39.11(a)(1). 

(c) Liquidity resources—(1) Minimum 

amount of liquidity resources. 

(i) Notwithstanding the provisions of 

§ 39.11(e)(1)(ii), each systemically 

important derivatives clearing 

organization and subpart C derivatives 

clearing organization shall maintain 

eligible liquidity resources that, at a 

minimum, will enable it to meet its 

intraday, same-day, and multiday 

obligations to perform settlements, as 

defined in § 39.14(a)(1), with a high 

degree of confidence under a wide range 

of stress scenarios that should include, 

but not be limited to, a default by the 

clearing member creating the largest 

aggregate liquidity obligation for the 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization in 

extreme but plausible market 

conditions. 

(ii) A systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization that is subject to 

§ 39.33(a)(1) shall consider maintaining 

eligible liquidity resources that, at a 

minimum, will enable it to meet its 

intraday, same-day, and multiday 

obligations to perform settlements, as 

defined in § 39.14(a)(1), with a high 

degree of confidence under a wide range 

of stress scenarios that should include, 

but not be limited to, a default of the 

two clearing members creating the 

largest aggregate liquidity obligation for 

the systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization in 

extreme but plausible market 

conditions. 

(2) Satisfaction of settlement in all 

relevant currencies. Each systemically 

important derivatives clearing 

organization and subpart C derivatives 

clearing organization shall maintain 

liquidity resources that are sufficient to 

satisfy the obligations required by 

paragraph (c)(1) of this section in all 

relevant currencies for which the 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization has 

obligations to perform settlements, as 

defined in § 39.14(a)(1), to its clearing 

members. 

(3) Qualifying liquidity resources. (i) 

Only the following liquidity resources 

are eligible for the purpose of meeting 

the requirement of paragraph (c)(1) of 

this section: 

(A) Cash in the currency of the 

requisite obligations, held either at the 

central bank of issue or at a 

creditworthy commercial bank; 

(B) Committed lines of credit; 

(C) Committed foreign exchange 

swaps; 

(D) Committed repurchase 

agreements; or 

(E) (1) Obligations of the United States 

Treasury or high quality, liquid, general 

obligations of a sovereign nation. 

(2) The assets described in paragraph 

(c)(3)(i)(E)(1) of this section must be 

readily available and convertible into 

cash pursuant to prearranged and highly 

reliable funding arrangements. 

(ii) With respect to the arrangements 

described in paragraph (c)(3)(i) of this 

section, the systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization must take appropriate steps 

to verify that such arrangements do not 

include material adverse change 

provisions and are enforceable, and will 

be highly reliable, in extreme but 

plausible market conditions. 

(4) Additional liquidity resources. If a 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization 

maintains financial resources in 

addition to those required to satisfy 

paragraph (c)(1) of this section, then 

those resources should be in the form of 

assets that are likely to be saleable with 

proceeds available promptly or 

acceptable as collateral for lines of 

credit, swaps, or repurchase agreements 

on an ad hoc basis. A systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization should consider 

maintaining collateral with low credit, 

liquidity, and market risks that is 

typically accepted by a central bank of 

issue for any currency in which it may 

have settlement obligations, but shall 

not assume the availability of 

emergency central bank credit as a part 

of its liquidity plan. 

(d) Liquidity providers. (1) For the 

purposes of this paragraph, a liquidity 

provider means: 

(i) A depository institution, a U.S. 

branch and agency of a foreign banking 

organization, a trust company, or a 

syndicate of depository institutions, 

U.S. branches and agencies of foreign 

banking organizations, or trust 

companies providing a line of credit, 

foreign exchange swap facility or 

repurchase facility to a systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization; 

(ii) Any other counterparty relied 

upon by a systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization to meet its minimum 

liquidity resources requirement under 

paragraph (c) of this section. 

(2) In fulfilling its obligations under 

paragraph (c) of this section, each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall 

undertake due diligence to confirm that 

each of its liquidity providers, whether 

or not such liquidity provider is a 

clearing member, has: 

(i) Sufficient information to 

understand and manage the liquidity 

provider’s liquidity risks; and 

(ii) The capacity to perform as 

required under its commitments to 

provide liquidity to the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization. 

(3) Where relevant to a liquidity 

provider’s ability reliably to perform its 

commitments with respect to a 

particular currency, the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization may take into 

account the liquidity provider’s access 

to the central bank of issue of that 

currency. 

(4) Each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization shall regularly test its 

procedures for accessing its liquidity 

resources under paragraph (c)(3)(i) of 

this section, including testing its 

arrangements under paragraph (c)(3)(ii) 

and its relevant liquidity provider(s) 

under paragraph (d)(1) of this section. 

(5) A systemically important 

derivatives clearing organization with 

access to accounts and services at a 

Federal Reserve Bank, pursuant to 

section 806(a) of the Dodd-Frank Act, 12 

U.S.C. 5465(a), shall use these services, 

where practical. 

(e) Documentation of financial 

resources and liquidity resources. Each 


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systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall 

document its supporting rationale for, 

and have appropriate governance 

arrangements relating to, the amount of 

total financial resources it maintains 

pursuant to paragraph (a) of this section 

and the amount of total liquidity 

resources it maintains pursuant to 

paragraph (c) of this section. 

§ 39.34 System safeguards for 

systemically important derivatives clearing 

organizations and subpart C derivatives 

clearing organizations. 

(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 and 

subpart C 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 systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization to recover its 

operations and resume daily processing, 

clearing, and settlement no later than 

two hours following the disruption, for 

any disruption including a wide-scale 

disruption. 

(b) To facilitate its ability to achieve 

the recovery time objective specified in 

paragraph (a) of this section in the event 

of a wide-scale disruption, each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization must 

maintain a degree of geographic 

dispersal of physical, technological and 

personnel resources consistent with the 

following for each activity necessary for 

the daily processing, clearing, and 

settlement of existing and new 

contracts: 

(1) Physical and technological 

resources (including a secondary site), 

sufficient to enable the entity to meet 

the recovery time objective after 

interruption of normal clearing by a 

wide-scale disruption, must be located 

outside the relevant area of the physical 

and technological resources the 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization 

normally relies upon to conduct that 

activity, and must not rely on the same 

critical transportation, 

telecommunications, power, water, or 

other critical infrastructure components 

the entity normally relies upon for such 

activities; 

(2) Personnel, who live and work 

outside that relevant area, sufficient to 

enable the entity to meet the recovery 

time objective after interruption of 

normal clearing by a wide-scale 

disruption affecting the relevant area in 

which the personnel the entity normally 

relies upon to engage in such activities 

are located; 

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

apply to these resource requirements. 

(c) Each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization must conduct regular, 

periodic tests of its business continuity 

and disaster recovery plans and 

resources and its capacity to achieve the 

required recovery time objective in the 

event of a wide-scale disruption. The 

provisions of § 39.18(j) apply to such 

testing. 

(d) The Commission may, upon 

application, grant an entity, which has 

been designated as a systemically 

important derivatives clearing 

organization or that has elected to 

become subject to subpart C, up to one 

year to comply with any provision of 

this section. 

§ 39.35 Default rules and procedures for 

uncovered credit losses or liquidity 

shortfalls (recovery) for systemically 

important derivatives clearing organizations 

and subpart C derivatives clearing 

organizations. 

(a) Allocation of uncovered credit 

losses. Each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization shall adopt explicit rules 

and procedures that address fully any 

loss arising from any individual or 

combined default relating to any 

clearing members’ obligations to the 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization. Such 

rules and procedures shall address how 

the systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization would: 

(1) Allocate losses exceeding the 

financial resources available to the 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization; 

(2) Repay any funds it may borrow; 

and 

(3) Replenish any financial resources 

it may employ during such a stress 

event, so that the systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization can continue to operate in 

a safe and sound manner. 

(b) Allocation of uncovered liquidity 

shortfalls. (1) Each systemically 

important derivatives clearing 

organization and subpart C derivatives 

clearing organization shall establish 

rules and/or procedures that enable it 

promptly to meet all of its settlement 

obligations, on a same day and, as 

appropriate, intraday and multiday 

basis, in the context of the occurrence 

of either or both of the following 

scenarios: 

(i) An individual or combined default 

involving one or more clearing 

members’ obligations to the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization; or 

(ii) A liquidity shortfall exceeding the 

financial resources of the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization. 

(2) The rules and procedures 

described in paragraph (b)(1) of this 

section shall: 

(i) Enable the systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization promptly to meet its 

payment obligations in all relevant 

currencies; 

(ii) Be designed to enable the 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization to 

avoid unwinding, revoking, or delaying 

the same-day settlement of payment 

obligations; and 

(iii) Address the systemically 

important derivatives clearing 

organization’s or subpart C derivatives 

clearing organization’s process to 

replenish any liquidity resources it may 

employ during a stress event so that it 

can continue to operate in a safe and 

sound manner. 

§ 39.36 Risk management for systemically 

important derivatives clearing organizations 

and subpart C derivatives clearing 

organizations. 

(a) Stress tests of financial resources. 

In addition to conducting stress tests 

pursuant to § 39.13(h)(3), each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall 

conduct stress tests of its financial 

resources in accordance with the 

following standards and practices: 

(1) Perform, on a daily basis, stress 

testing of its financial resources using 

predetermined parameters and 

assumptions; 

(2) Perform comprehensive analyses 

of stress testing scenarios and 

underlying parameters to ascertain their 

appropriateness for determining the 

systemically important derivatives 

clearing organization’s or subpart C 

derivatives clearing organization’s 

required level of financial resources in 

current and evolving market conditions; 


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(3) Perform the analyses required by 

paragraph (a)(2) of this section at least 

monthly and when products cleared or 

markets served display high volatility or 

become less liquid, when the size or 

concentration of positions held by 

clearing members increases 

significantly, or as otherwise 

appropriate, evaluate the stress testing 

scenarios, models, and underlying 

parameters more frequently than once a 

month; 

(4) For the analyses required by 

paragraph (a)(1) and paragraph (a)(2) of 

this section, include a range of relevant 

stress scenarios, in terms of both 

defaulting clearing members’ positions 

and possible price changes in 

liquidation periods. The scenarios 

considered shall include, but are not 

limited to, the following: 

(i) Relevant peak historic price 

volatilities; 

(ii) Shifts in other market factors 

including, as appropriate, price 

determinants and yield curves; 

(iii) Multiple defaults over various 

time horizons; 

(iv) Simultaneous pressures in 

funding and asset markets; and 

(v) A range of forward-looking stress 

scenarios in a variety of extreme but 

plausible market conditions. 

(5) Establish procedures for: 

(i) Reporting stress test results to its 

risk management committee or board of 

directors, as applicable; and 

(ii) Using the results to assess the 

adequacy of, and to adjust, its total 

amount of financial resources; and 

(6) Use the results of stress tests to 

support compliance with the minimum 

financial resources requirement set forth 

in § 39.33(a). 

(b) Sensitivity analysis of margin 

model. 

(1) Each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization shall, at least monthly and 

more frequently as appropriate, conduct 

a sensitivity analysis of its margin 

models to analyze and monitor model 

performance and overall margin 

coverage. Sensitivity analysis shall be 

conducted on both actual and 

hypothetical positions. 

(2) For the purposes of this paragraph 

(b), a sensitivity analysis of a margin 

model includes: 

(i) Reviewing a wide range of 

parameter settings and assumptions that 

reflect possible market conditions in 

order to understand how the level of 

margin coverage might be affected by 

highly stressed market conditions. The 

range of parameters and assumptions 

should capture a variety of historical 

and hypothetical conditions, including 

the most volatile periods that have been 

experienced by the markets served by 

the systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization and 

extreme changes in the correlations 

between prices. 

(ii) Testing of the ability of the models 

or model components to produce 

accurate results using actual or 

hypothetical datasets and assessing the 

impact of different model parameter 

settings. 

(iii) Evaluating potential losses in 

clearing members’ proprietary positions 

and, where appropriate, customer 

positions. 

(3) A systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization involved in activities with 

a more complex risk profile shall take 

into consideration parameter settings 

that reflect the potential impact of the 

simultaneous default of clearing 

members and, where applicable, the 

underlying credit instruments. 

(c) Stress tests of liquidity resources. 

Each systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall 

conduct stress tests of its liquidity 

resources in accordance with the 

following standards and practices: 

(1) Perform, on a daily basis, stress 

testing of its liquidity resources using 

predetermined parameters and 

assumptions; 

(2) Perform comprehensive analyses 

of stress testing scenarios and 

underlying parameters to ascertain their 

appropriateness for determining the 

systemically important derivatives 

clearing organization’s or subpart C 

derivatives clearing organization’s 

required level of liquidity resources in 

current and evolving market conditions; 

(3) Perform the analyses required by 

paragraph (c)(2) of this section at least 

monthly and when products cleared or 

markets served display high volatility or 

become less liquid, when the size or 

concentration of positions held by 

clearing members increases 

significantly, or as otherwise 

appropriate, evaluate its stress testing 

scenarios, models, and underlying 

parameters more frequently than once a 

month; 

(4) For the analyses required by 

paragraph (c)(1) and paragraph (c)(2) of 

this section, include a range of relevant 

stress scenarios, in terms of both 

defaulting clearing members’ positions 

and possible price changes in 

liquidation periods. The scenarios 

considered shall include, but are not 

limited to, the following: 

(i) Relevant peak historic price 

volatilities; 

(ii) Shifts in other market factors 

including, as appropriate, price 

determinants and yield curves; 

(iii) Multiple defaults over various 

time horizons; 

(iv) Simultaneous pressures in 

funding and asset markets; and 

(v) A range of forward-looking stress 

scenarios in a variety of extreme but 

plausible market conditions. 

(5) For the scenarios enumerated in 

paragraph (c)(4) of this section, consider 

the following: 

(i) All entities that might pose 

material liquidity risks to the 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization, 

including settlement banks, permitted 

depositories, liquidity providers, and 

other entities, 

(ii) Multiday scenarios as appropriate, 

(iii) Inter-linkages between its clearing 

members and the multiple roles that 

they may play in the systemically 

important derivatives clearing 

organization’s or subpart C derivatives 

clearing organization’s risk 

management; and 

(iv) The probability of multiple 

failures and contagion effect among 

clearing members. 

(6) Establish procedures for: 

(i) Reporting stress test results to its 

risk management committee or board of 

directors, as applicable; and 

(ii) Using the results to assess the 

adequacy of, and to adjust its total 

amount of liquidity resources. 

(7) Use the results of stress tests to 

support compliance with the liquidity 

resources requirement set forth in 

§ 39.33(c). 

(d) Each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization shall regularly conduct an 

assessment of the theoretical and 

empirical properties of its margin model 

for all products it clears. 

(e) Each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization shall perform, on an 

annual basis, a full validation of its 

financial risk management model and 

its liquid risk management model. 

(f) Custody and investment risk. 

Custody and investment arrangements 

of a systemically important derivatives 

clearing organization’s and subpart C 

derivatives clearing organization’s own 

funds and assets shall be subject to the 

same requirements as those specified in 

§ 39.15 of this chapter for the funds and 

assets of clearing members, and shall 

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organization’s own funds and assets to 

the same extent as if such funds and 

assets belonged to clearing members. 

(g) Settlement banks. Each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall: 

(1) Monitor, manage, and limit its 

credit and liquidity risks arising from its 

settlement banks; 

(2) Establish, and monitor adherence 

to, strict criteria for its settlement banks 

that take account of, among other things, 

their regulation and supervision, 

creditworthiness, capitalization, access 

to liquidity, and operational reliability; 

and 

(3) Monitor and manage the 

concentration of credit and liquidity 

exposures to its settlement banks. 

§ 39.37 Additional disclosure for 

systemically important derivatives clearing 

organizations and subpart C derivatives 

clearing organizations. 

In addition to the requirements of 

§ 39.21, each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization shall: 

(a) Complete and publicly disclose its 

responses to the Disclosure Framework 

for Financial Market Infrastructures 

published by the Committee on 

Payment and Settlement Systems and 

the Board of the International 

Organization of Securities Commissions; 

(b) Review and update its responses 

disclosed as required by paragraph (a) of 

this section at least every two years and 

following material changes to the 

systemically important derivatives 

clearing organization’s or subpart C 

derivatives clearing organization’s 

system or the environment in which it 

operates. A material change to the 

systemically important derivatives 

clearing organization’s or subpart C 

derivatives clearing organization’s 

system or the environment in which it 

operates is a change that would 

significantly change the accuracy and 

usefulness of the existing responses; 

(c) Disclose, publicly and to the 

Commission, relevant basic data on 

transaction volume and values; and 

(d) Disclose, publicly and to the 

Commission, rules, policies, and 

procedures concerning segregation and 

portability of customers’ positions and 

funds, including whether each of: 

(1) Futures customer funds, as defined 

in § 1.3(jjjj) of this chapter; 

(2) Cleared Swaps Customer 

Collateral, as defined in § 22.1 of this 

chapter; or 

(3) Foreign futures or foreign options 

secured amount, as defined in § 1.3(rr) 

of this chapter is: 

(i) Protected on an individual or 

omnibus basis or 

(ii) Subject to any constraints, 

including any legal or operational 

constraints that may impair the ability 

of the systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization to segregate or transfer the 

positions and related collateral of a 

clearing member’s customers. 

§ 39.38 Efficiency for systemically 

important derivatives clearing organizations 

and subpart C derivatives clearing 

organizations. 

(a) General rule. In order to meet the 

needs of clearing members and markets, 

each systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization should 

efficiently and effectively design its: 

(1) Clearing and settlement 

arrangements; 

(2) Operating structure and 

procedures; 

(3) Scope of products cleared; and 

(4) Use of technology. 

(b) Review of efficiency. Each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization should 

establish a mechanism to review, on a 

regular basis, its compliance with 

paragraph (a) of this section. 

(c) Clear goals and objectives. Each 

systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization should 

have clearly defined goals and 

objectives that are measurable and 

achievable, including in the areas of 

minimum service levels, risk 

management expectations, and business 

priorities. 

(d) Each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization shall facilitate efficient 

payment, clearing and settlement by 

accommodating internationally 

accepted communication procedures 

and standards. 

§ 39.39 Recovery and wind-down for 

systemically important derivatives clearing 

organizations and subpart C derivatives 

clearing organizations. 

(a) Definitions. For purposes of this 

section: 

(1) General business risk means any 

potential impairment of a systemically 

important derivatives clearing 

organization’s or subpart C derivatives 

clearing organization’s financial 

position, as a business concern, as a 

consequence of a decline in its revenues 

or an increase in its expenses, such that 

expenses exceed revenues and result in 

a loss that the derivatives clearing 

organization must charge against 

capital. 

(2) Wind-down means the actions of a 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization to 

effect the permanent cessation or sale or 

transfer or one or more services. 

(3) Recovery means the actions of a 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization, 

consistent with its rules, procedures, 

and other ex-ante contractual 

arrangements, to address any uncovered 

credit loss, liquidity shortfall, capital 

inadequacy, or business, operational or 

other structural weakness, including the 

replenishment of any depleted prefunded financial resources and liquidity 

arrangements, as necessary to maintain 

the systemically important derivatives 

clearing organization’s or subpart C 

derivatives clearing organization’s 

viability as a going concern. 

(4) Operational risk means the risk 

that deficiencies in information systems 

or internal processes, human errors, 

management failures or disruptions 

from external events will result in the 

reduction, deterioration, or breakdown 

of services provided by a systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization. 

(5) Unencumbered liquid financial 

assets include cash and highly liquid 

securities. 

(b) Recovery and wind-down plan. 

Each systemically important derivatives 

clearing organization and subpart C 

derivatives clearing organization shall 

maintain viable plans for: 

(1) Recovery or orderly wind-down, 

necessitated by uncovered credit losses 

or liquidity shortfalls; and, separately, 

(2) Recovery or orderly wind-down 

necessitated by general business risk, 

operational risk, or any other risk that 

threatens the derivatives clearing 

organization’s viability as a going 

concern. 

(c) (1) In developing the plans 

specified in paragraph (b) of this 

section, the systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization shall identify scenarios 

that may potentially prevent it from 

being able to meet its obligations, 

provide its critical operations and 

services as a going concern and assess 

the effectiveness of a full range of 

options for recovery or orderly winddown. The plans shall include 

procedures for informing the 

Commission, as soon as practicable, 

when the recovery plan is initiated or 

wind-down is pending, 


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(2) A systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization shall have procedures for 

providing the Commission and the 

Federal Deposit Insurance Corporation 

with information needed for purposes of 

resolution planning. 

(d) Financial resources to support the 

recovery and wind-down plan. 

(1) In evaluating the resources 

available to cover an uncovered credit 

loss or liquidity shortfall as part of its 

recovery plans pursuant to paragraph 

(b)(1) of this section, a systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization may consider, 

among other things, assessments of 

additional resources provided for under 

its rules that it reasonably expects to 

collect from non-defaulting clearing 

members. 

(2) Each systemically important 

derivatives clearing organization and 

subpart C derivatives clearing 

organization shall maintain sufficient 

unencumbered liquid financial assets, 

funded by the equity of its owners, to 

implement its recovery or wind-down 

plans pursuant to paragraph (b)(2) of 

this section. In general, the financial 

resources required by § 39.11(a)(2) may 

be sufficient, but the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization shall analyze its 

particular circumstances and risks and 

maintain any additional resources that 

may be necessary to implement the 

plans. In allocating sufficient financial 

resources to implement the plans, the 

systemically important derivatives 

clearing organization or subpart C 

derivatives clearing organization shall 

comply with § 39.11(e)(2). The plan 

shall include evidence and analysis to 

support the conclusion that the amount 

considered necessary is, in fact, 

sufficient to implement the plans. 

(3) Resources counted in meeting the 

requirements of §§ 39.11(a)(1) and 39.33 

may not be allocated, in whole or in 

part, to the recovery plans required by 

paragraph (b)(2) of this section. Other 

resources may be allocated, in whole or 

in part, to the recovery plans required 

by either paragraph (b)(1) or paragraph 

(b)(2) of this section, but not both 

paragraphs, and only to the extent the 

use of such resources is not otherwise 

limited by the Act, Commission 

regulations, the systemically important 

derivatives clearing organization’s or 

subpart C derivatives clearing 

organization’s rules, or any contractual 

arrangements to which the systemically 

important derivatives clearing 

organization or subpart C derivatives 

clearing organization is a party. 

(e) Plan for raising additional 

financial resources. All systemically 

important derivatives clearing 

organizations and subpart C derivatives 

clearing organizations shall maintain 

viable plans for raising additional 

financial resources, including, where 

appropriate, capital, in a scenario in 

which the systemically important 

derivatives clearing organization or 

subpart C derivatives clearing 

organization is unable, or virtually 

unable, to comply with any financial 

resources requirements set forth in this 

part. This plan shall be approved by the 

board of directors and be updated 

regularly. 

§ 39.40 Consistency with the Principles for 

Financial Market Infrastructures. 

This subpart C is intended to establish 

standards which, together with subparts 

A and B of this part, are consistent with 

section 5b(c) of the Act and the 

Principles for Financial Market 

Infrastructures published by the 

Committee on Payment and Settlement 

Systems and the Board of the 

International Organization of Securities 

Commissions and should be interpreted 

in that context. 

§ 39.41 Special enforcement authority for 

systemically important derivatives clearing 

organizations. 

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. 

§ 39.42 Advance notice of material riskrelated rule changes by systemically 

important derivatives clearing 

organizations. 

A systemically important derivatives 

clearing organization shall provide 

notice to the Commission in advance of 

any proposed change to its rules, 

procedures, or operations that could 

materially affect the nature or level of 

risks presented by the systemically 

important derivatives clearing 

organization, in accordance with the 

requirements of § 40.10 of this chapter. 

■ 5. Redesignate the Appendix to Part 

39 as Appendix A to Part 39. 

■ 6. Add appendix B to Part 39 to read 

as follows: 

Appendix B to Part 39—Subpart C 

Election Form 

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BILLING CODE 6351–01–C 

PART 140—ORGANIZATION, 

FUNCTIONS AND PROCEDURES OF 

THE COMMISSION 

■ 7. The authority citation for part 140 

continues to read as follows: 

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

■ 8. Amend § 140.94 to add new 

paragraphs (c)(12), (c)(13) and (c)(14) as 

follows: 

§ 140.94 Delegation of authority to the 

Director of the Division of Clearing and 

Risk. 

* * * * * 

(c) * * * 

(12) All functions reserved to the 

Commission in § 39.31 of this chapter; 

and 

(13) The authority to approve the 

application described in § 39.34(d) of 

this chapter. 

* * * * * 

PART 190—BANKRUPTCY 

■ 9. The authority citation for part 190 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 

7a, 12, 19, and 24, and 11 U.S.C. 362, 546, 

548, 556, and 761–766, unless otherwise 

noted. 

■ 10. In § 190.09, revise paragraph (b) to 

read as follows: 

§ 190.09 Member property. 

* * * * * 

(b) Scope of member property. 

Member property shall include all 

money, securities and property 

received, acquired, or held by a clearing 

organization to margin, guarantee or 

secure, on behalf of a clearing member, 

the proprietary account, as defined in 

§ 1.3 of this chapter, any account not 

belonging to a foreign futures or foreign 

options customer pursuant to the 

proviso in § 30.1(c), and any Cleared 

Swaps Proprietary Account, as defined 

in § 22.1: Provided, however, that any 

guaranty deposit or similar payment or 

deposit made by such member and any 

capital stock, or membership of such 

member in the clearing organization 

shall also be included in member 

property after payment in full, in each 

case in accordance with the by-laws or 

rules of the clearing organization, of that 

portion of: 

(1) The net equity claim of the 

member based on its customer account; 

and 

(2) Any obligations due to the clearing 

organization which may be paid 

therefrom, including any obligations 

due from the clearing organization to 

the customers of other members. 

Issued in Washington, DC on August 12, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Appendix to Notice of Proposed 

Rulemaking on Derivatives Clearing 

Organizations and International 

Standards—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. 2013–19845 Filed 8–15–13; 8:45 am] 

BILLING CODE 6351–01–P 


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