`[Federal Register Volume 89, Number 222 (Monday, November 18, 2024)]
[Rules and Regulations]
[Pages 91000-91059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25570]



[[Page 90999]]

Vol. 89

Monday,

No. 222

November 18, 2024

Part III





Securities and Exchange Commission





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17 CFR Part 240





Covered Clearing Agency Resilience and Recovery and Orderly Wind-Down 
Plan; Final Rule

  Federal Register / Vol. 89, No. 222 / Monday, November 18, 2024 / 
Rules and Regulations  

[[Page 91000]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-101446; File No. S7-10-23]
RIN 3235-AN19


Covered Clearing Agency Resilience and Recovery and Orderly Wind-
Down Plans

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to certain rules in the Covered Clearing Agency 
Standards (``CCA Standards'') under the Securities Exchange Act of 1934 
(``Exchange Act'') and the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act''). The amendments strengthen existing 
rules by adding new requirements related to the collection of intraday 
margin by a covered clearing agency (``CCA'') and the use of 
substantive inputs in its risk-based margin system. The Commission is 
also adopting a new rule to establish required elements of a CCA's 
recovery and orderly wind-down plan (``RWP'').

DATES: 
    Effective date: January 17, 2025.
    Compliance date: The applicable compliance dates are discussed in 
Part III.

FOR FURTHER INFORMATION CONTACT: Elizabeth Fitzgerald, Assistant 
Director, Matthew Lee, Assistant Director, Jesse Capelle, Special 
Counsel, Adam Allogramento, Special Counsel, Haley Holliday, Attorney-
Adviser, and David Li, Senior Financial Analyst, at (202) 551-5710, 
Office of Clearance and Settlement, Division of Trading and Markets; 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-7010.

SUPPLEMENTARY INFORMATION: Pursuant to section 17A of the Exchange 
Act,\1\ as well as the Payment, Clearing, and Settlement Supervision 
Act (``Clearing Supervision Act'') in Title VIII of the Dodd-Frank 
Act,\2\ the Commission is adopting amendments to 17 CFR 240.17ad-
22(e)(6) and adding new Sec.  240.17ad-26. Below is a table of 
citations to the rules referenced in this release, including all rules 
being amended or adopted:
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    \1\ 15 U.S.C. 78q-1.
    \2\ 12 U.S.C. 5461 et seq.

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          Commission reference                CFR citation (17 CFR)
------------------------------------------------------------------------
Exchange Act:
    Rule 17Ad-22.......................  Sec.   240.17ad-22.
    Rule 17Ad-22(e)(3)(ii).............  Sec.   240.17ad-22(e)(3)(ii).
    Rule 17Ad-22(e)(4).................  Sec.   240.17ad-22(e)(4).
    Rule 17Ad-22(e)(6).................  Sec.   240.17ad-22(e)(6).
    Rule 17Ad-22(e)(6)(ii).............  Sec.   240.17ad-22(e)(6)(ii).
    Rule 17Ad-22(e)(6)(iv).............  Sec.   240.17ad-22(e)(6)(iv).
    Rule 17Ad-22(e)(15)................  Sec.   240.17ad-22(e)(15).
    Rule 17Ad-22(e)(15)(ii)............  Sec.   240.17ad-22(e)(15)(ii).
    Rule 17Ad-22(e)(23)................  Sec.   240.17ad-22(e)(23).
    Rule 17Ad-22(e)(23)(i).............  Sec.   240.17ad-22(e)(23)(i).
    Rule 17Ad-22(e)(23)(ii)............  Sec.   240.17ad-22(e)(23)(ii).
    Rule 17Ad-22(e)(23)(iv)............  Sec.   240.17ad-22(e)(23)(iv).
    Rule 17Ad-25.......................  Sec.   240.17ad-25.
    Rule 17Ad-25(c)....................  Sec.   240.17ad-25(c).
    Rule 17Ad-25(i)....................  Sec.   240.17ad-25(i).
    Rule 17Ad-25(j)....................  Sec.   240.17ad-25(j).
    Rule 17Ad-26.......................  Sec.   240.17ad-26.
    Rule 17Ad-26(a)....................  Sec.   240.17ad-26(a).
    Rule 17Ad-26(a)(1).................  Sec.   240.17ad-26(a)(1).
    Rule 17Ad-26(a)(2).................  Sec.   240.17ad-26(a)(2).
    Rule 17Ad-26(a)(3).................  Sec.   240.17ad-26(a)(3).
    Rule 17Ad-26(a)(4).................  Sec.   240.17ad-26(a)(4).
    Rule 17Ad-26(a)(5).................  Sec.   240.17ad-26(a)(5).
    Rule 17Ad-26(a)(6).................  Sec.   240.17ad-26(a)(6).
    Rule 17Ad-26(a)(7).................  Sec.   240.17ad-26(a)(7).
    Rule 17Ad-26(a)(8).................  Sec.   240.17ad-26(a)(8).
    Rule 17Ad-26(a)(9).................  Sec.   240.17ad-26(a)(9).
    Rule 17Ad-26(b)....................  Sec.   240.17ad-26(b).
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    The amendments to Rule 17Ad-22(e)(6)(ii) establish new requirements 
with respect to a CCA's policies and procedures regarding the 
collection of intraday margin, specifically, to (i) include a new 
requirement to monitor intraday exposures on an ongoing basis, (ii) 
modify the preexisting reference to making intraday calls ``in defined 
circumstances'' to making intraday calls ``as frequently as 
circumstances warrant'' and identifying examples of such circumstances, 
and (iii) require that a CCA document when it determines not to make an 
intraday margin call pursuant to its written policies and procedures 
required under paragraph (e)(6)(ii). The amendments to Rule 17Ad-
22(e)(6)(iv) establish new requirements for a CCA relying upon 
substantive inputs to its risk-based margin model, including when such 
substantive inputs are not readily available or reliable.
    New Rule 17Ad-26 prescribes requirements for the contents of a 
CCA's RWP. While Rule 17Ad-22(e)(3)(ii) currently requires a CCA's 
written policies and procedures to include the CCA's RWP, Rule 17Ad-
22(e)(3)(ii) did not include requirements for the content of RWPs.\3\ 
New Rule 17Ad-26 identifies elements that a CCA's RWP must contain, 
including: (i) elements related to planning, including the 
identification and use of scenarios, triggers, tools, staffing, and 
service providers, as discussed in Parts II.C.1 through 5; (ii) timing 
and implementation of the plans,

[[Page 91001]]

as discussed in Parts II.C.6 and 7; and (iii) testing and board 
approval of the plans, as discussed in Parts II.C.8 and 9. Definitions 
included in new Rule 17Ad-26 are discussed in Part II.D.
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    \3\ 17 CFR 240.17ad-22(e)(3)(ii).
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    In developing these final rules, Commission staff has consulted 
with the Financial Stability Oversight Council (``FSOC''), the 
Commodity Futures Trading Commission (``CFTC''), the Federal Deposit 
Insurance Corporation (``FDIC''), and the Board of Governors of the 
Federal Reserve System (``FRB'').\4\
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    \4\ See, e.g., 12 U.S.C. 5464(a)(2); 5472.
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    The compliance dates for the amendments to Rule 17Ad-22(e)(6) and 
new Rule 17Ad-26 are discussed in Part III.

Table of Contents

I. Introduction
II. Discussion of Comments Received and Final Rules
    A. Collection of Intraday Margin
    1. Proposed Amendment to Rule 17Ad-22(e)(6)(ii)
    2. Discussion of Comments
    B. Inputs to Margin System
    1. Proposed Amendment to Rule 17Ad-22(e)(6)(iv)
    2. Discussion of Comments
    C. Contents of Recovery and Orderly Wind-Down Plans
    1. Core Services: Rule 17Ad-26(a)(1)
    2. Service Providers: Rule 17Ad-26(a)(2)
    3. Scenarios: Rule 17Ad-26(a)(3)
    4. Triggers: Rule 17Ad-26(a)(4)
    5. Tools: Rule 17Ad-26(a)(5)
    6. Implementation: Rule 17Ad-26(a)(6)
    7. Notification to Commission: Rule 17Ad-26(a)(7)
    8. Testing: Rule 17Ad-26(a)(8)
    9. Board Approval: Rule 17Ad-26(a)(9)
    10. Other Comments
    D. Defined Terms in Rule 17Ad-26
    1. Definition of ``Orderly Wind-Down''
    2. Other Defined Terms and Introductory Clause
III. Compliance Date
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Description of Market
    2. Overview of the Existing Regulatory Framework
    3. Current Recovery and Orderly Wind-Down Plans
    4. Current Risk-Based Margin
    C. Consideration of Benefits and Costs as Well as the Effects on 
Efficiency, Competition, and Capital Formation
    1. Final Rule 17Ad-26
    2. Amendments to Rule 17Ad-22(e)(6)
    3. Other Compliance Costs
    4. Efficiency, Competition, and Capital Formation
    D. Reasonable Alternatives to the Final Rule and Amendments
    1. Establish Precise Triggers for Implementation of RWPs Across 
All CCAs
    2. Establish Specific Scenarios and Analyses
    3. Establish Specific Rules, Policies, Procedures, Tools, and 
Resources
    4. Require the Identification of Interconnections and 
Interdependencies
    5. Establish a Specific Monitoring Frequency for Intraday Margin 
Calls
    6. Adopt Only Certain Elements of Rule 17Ad-26
    7. Focus Intraday Margin Requirements on a Subset of CCAs
V. Paperwork Reduction Act
    A. Amendments to Rule 17Ad-22(e)(6)
    B. New Rule 17Ad-26
    C. Chart of Total PRA Burdens
VI. Regulatory Flexibility Act
    A. Clearing Agencies
    B. Certification
VII. Other Matters
    Statutory Authority

I. Introduction

    CCAs are an essential part of the infrastructure of the U.S. 
securities markets.\5\ While central clearing and other important 
functions provided by clearing agencies benefit the markets they 
serve,\6\ clearing agencies can pose systemic risk to the financial 
system,\7\ due in part to the fact that such clearing functions 
concentrate risk in the clearing agency.\8\ Disruption to a clearing 
agency's operations, or failure on the part of a clearing agency to 
meet its obligations, could therefore serve as a potential source of 
contagion, resulting in significant costs not only to the clearing 
agency itself or its members but also to other market participants and 
the broader U.S. financial system.\9\ As a result, proper management of 
the risks associated with CCAs is necessary to help ensure the 
stability of the U.S. securities markets and the broader U.S. financial 
system.\10\
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    \5\ See Release No. 34-78961 (Sept. 28, 2016), 81 FR 70786, 
70789 (Oct. 13, 2016) (``CCA Standards Adopting Release''), https://www.govinfo.gov/content/pkg/FR-2016-10-13/pdf/2016-23891.pdf; see 
also 15 U.S.C. 78q-1(a)(1)(A) (finding that the prompt and accurate 
clearance and settlement of securities transactions, including the 
transfer of record ownership and the safeguarding of securities and 
funds related thereto, are necessary for the protection of investors 
and persons facilitating transactions by and acting on behalf of 
investors). CCAs are a subset of clearing agencies registered with 
the Commission. See 17 CFR 240.17ad-22(a) (defining ``covered 
clearing agency''); see also infra note 6 (explaining further the 
definition of ``covered clearing agency'' and two functions of a 
CCA).
    \6\ Two functions are that of the central counterparty (``CCP'') 
and the central securities depository (``CSD''), each of which 
constitutes a financial market infrastructure (``FMI''). A CCP is a 
clearing agency that interposes itself between the counterparties to 
securities transactions, acting functionally as the buyer to every 
seller and the seller to every buyer. 17 CFR 240.17ad-22(a). A CSD 
is a clearing agency that is a securities depository as described in 
section 3(a)(23)(A) of the Exchange Act. Id. CCAs are clearing 
agencies registered with the Commission that provide CCP or CSD 
services. See 17 CFR 240.17ad-22(a).
    \7\ CCA Standards Adopting Release, supra note 5, at 70792; see 
also 12 U.S.C. 5461-72 (setting forth provisions under the Clearing 
Supervision Act for designating a clearing agency as systemically 
important and imposing risk management standards consistent with 
international standards).
    \8\ CCA Standards Adopting Release, supra note 5, at 70793.
    \9\ Id.; see also Committee on Payment and Settlement Systems, 
International Organization of Securities Commissions (``CPMI-
IOSCO''), Principles for financial market infrastructures (Apr. 16, 
2012), http://www.bis.org/publ/cpss101a.pdf (``PFMI'') (identifying 
the risks posed by FMIs, including CCPs and CSDs, across 23 discrete 
principles). The Committee on Payment and Settlement Systems renamed 
itself the Committee on Payments and Market Infrastructures 
(``CPMI'') in 2014.
    \10\ CCA Standards Adopting Release, supra note 5, at 70788 
n.18.
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    Whether in normal or stressed market conditions, the effective 
functioning of the securities markets requires a regulatory framework 
for CCAs that can promote effective risk management, help preserve 
financial stability, and help ensure the continuity of critical CCP and 
CSD functions for the markets they serve, participants in those 
markets, and investors more generally. Since the enactment of the Dodd-
Frank Act,\11\ the Commission has adopted a series of rules designed to 
support its ongoing supervision and oversight of clearing agencies and 
to help ensure that CCAs are robust and resilient under normal market 
conditions and in periods of market stress.\12\ The potential for CCAs 
to spread contagion through the financial system, particularly in 
periods of market stress, has necessitated that the Commission continue 
to consider and adopt new rules over time to improve the regulatory 
framework for CCAs. These series of rules help ensure an effective 
regulatory response to evolving risks that could threaten the U.S. 
financial system.\13\
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    \11\ Public Law 111-203, 124 Stat. 1376 (2010).
    \12\ E.g., 17 CFR 240.17ad-22; 17 CFR 240.17ad-25; see also 
Release No. 34-9895 (Nov. 16, 2023), 88 FR 84454 (Dec. 5, 2023) 
(``CA Governance Adopting Release''), https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf; Release No. 34-88616 
(Apr. 9, 2020), 85 FR 28853 (May 14, 2020) (``CCA Definition 
Adopting Release''), https://www.govinfo.gov/content/pkg/FR-2020-05-14/pdf/2020-07905.pdf; CCA Standards Adopting Release, supra note 5; 
Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 2012), 
https://www.govinfo.gov/content/pkg/FR-2012-11-02/pdf/2012-26407.pdf.
    \13\ See infra Part II (discussing the rule amendments and new 
rules in greater detail). In addition, when designated as 
systemically important by the FSOC, CCAs are also subject to 
requirements set forth in Title VIII of the Dodd-Frank Act and rules 
thereunder. See, e.g., 12 U.S.C. 5461-72.
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    Since the Commission first adopted the CCA Standards, supervisory 
authorities, CCAs, and market participants have continued to pursue 
further consideration of several topics,

[[Page 91002]]

including the collection of margin generally, the collection of 
intraday margin specifically, the potential effects of such margin 
collection on market liquidity, and the need for some transparency into 
the margin collection process so that market participants that use or 
rely on CCAs for risk management functions can monitor and manage their 
own financial and other risks.\14\
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    \14\ E.g., CPMI-IOSCO, Streamlining Variation Margin in 
Centrally Cleared Markets--Examples of Effective Practices (Feb. 14, 
2024), https://www.bis.org/cpmi/publ/d221.pdf; CPMI-IOSCO, 
Transparency and Responsiveness of Initial Margin in Centrally 
Cleared Markets--Review and Policy Proposals (Jan. 16, 2024), 
https://www.bis.org/bcbs/publ/d568.pdf; CPMI-IOSCO, Resilience of 
Central Counterparties (CCPs): Further Guidance on the PFMIs (July 
2017), https://www.bis.org/cpmi/publ/d163.pdf (``CPMI-IOSCO 
Resilience Guidance'').
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    Although the CCA Standards adopted in 2016 included several 
provisions directed to a CCA's margin system generally,\15\ and 
specifically the modeling of financial risk and the collection of 
margin within it,\16\ the Commission has identified two areas of focus 
that support strengthening these pre-existing rules: (i) ensuring 
effective monitoring of intraday exposures and specifying particular 
circumstances for collection of margin intraday, and (ii) ensuring that 
CCAs have effective tools for margin modelling even when inputs to the 
margin system become unreliable or unavailable. Ongoing monitoring by 
the CCA is necessary to help ensure that a CCA collects sufficient 
margin to cover its exposures throughout the day, as portfolios and 
positions may change after margin is collected at the start of the day. 
This requirement should help ensure that the CCAs have the appropriate 
policies and procedures to address market events featuring large 
intraday price and position changes, such as the events in the equity 
and options markets in early 2021.\17\ In addition, establishing backup 
procedures if a substantive input to a margin model is unavailable or 
unreliable is especially relevant to ensuring that a CCA can continue 
to meet its regulatory obligations and calculate margin appropriately.
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    \15\ See, e.g., 17 CFR 240.17ad-22(e)(6).
    \16\ See 17 CFR 240.17ad-22(e)(6)(i) (regarding the setting of 
margin levels commensurate with the risks and particular attributes 
of each relevant product, portfolio, and market); (e)(6)(iii) 
(regarding the calculating of margin sufficient to cover the CCA's 
potential future exposure to its participants); (e)(6)(vi) 
(regarding the monitoring and regular review, testing, and 
verification of margin models using backtesting and sensitivity 
analysis).
    \17\ For example, a CCA may require more margin to guard against 
an increased risk of defaults, which may occur if, for example, 
buyers do not carry-through on paying for a stock that has plummeted 
or sellers do not carry-through on delivering a stock that has 
skyrocketed. See, e.g., Staff Report on Equity and Options Market 
Structure Conditions in Early 2021, at 31 (Oct. 14, 2021), https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf (describing how the National Securities 
Clearing Corporation (``NSCC'') observed unusual volatility in 
certain securities in January 2021 and imposed intraday margin calls 
in response to trading patterns in Gamestop Corp. (``GME'') and 
other equity securities).
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    Accordingly, in the RWP Proposing Release,\18\ the Commission 
proposed new requirements to ensure that CCAs monitor intraday margin 
on an ongoing basis and to facilitate intraday margin collection not 
only in ``defined'' circumstances but as frequently as circumstances 
warrant.\19\ The Commission also defined two circumstances in which a 
CCA should have policies and procedures for applying intraday margin: 
(i) when specific risk thresholds have been breached, and (ii) when the 
products cleared or markets served display elevated volatility.\20\ As 
the Commission explained in the RWP Proposing Release, these 
requirements would help ensure that the CCA has an effective process 
for monitoring margin and avoiding circumstances in which a participant 
becomes under-margined, which undermines the ability of a CCA to 
mitigate risk.\21\ In addition, with respect to the inputs into a CCA's 
margin system, the Commission proposed to expand existing requirements 
requiring timely and reliable price data beyond that limited topic to 
also encompass other substantive inputs to a CCA's risk-based margin 
system, to help ensure that mechanisms are in place to calculate margin 
during periods where inputs become unavailable, such as if a data feed 
becomes interrupted or corrupted.\22\ In Parts II.A and B, the 
Commission discusses these new requirements in greater detail, in 
addition to addressing the comments received on the proposed rules.
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    \18\ See Release No. 34-97516 (May 17, 2023), 88 FR 34708, 34708 
(May 30, 2023) (``RWP Proposing Release''), https://www.govinfo.gov/content/pkg/FR-2023-05-30/pdf/2023-10889.pdf.
    \19\ See infra Parts II.A and B (further discussing these 
amended requirements).
    \20\ See infra Part II.A (further discussing these amended 
requirements).
    \21\ RWP Proposing Release, supra note 18, at 34714.
    \22\ Id. at 34715.
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    Importantly, to be resilient in times of market stress, a CCA will 
need to monitor intraday risk on an ongoing basis and use timely and 
accurate data inputs to its margin system. Each helps ensure that a CCA 
can, in turn, calculate and collect margin in a timely manner, managing 
its exposures to its participants throughout the day. In times of 
rapidly evolving or stressed market conditions, a CCA must be able to 
monitor risk and collect margin while also effectively analyzing the 
potential impact of any intraday collections on market liquidity and 
financial stability.
    Even a robust and resilient CCA may face stressed market conditions 
or other events so extreme that the resources it has reserved for 
potential loss scenarios will prove insufficient. For example, 
depending on the markets they serve, CCAs may hold financial resources 
sufficient to withstand the default of the one or two largest 
participant families from among their clearing participants.\23\ Such 
CCAs may not have sufficient prefunded resources to withstand defaults 
beyond these,\24\ and would, in such a circumstance, be charged with 
allocating losses among their non-defaulting participants to close out 
the portfolios of its defaulting participants.\25\ CCAs may also find 
that stressed market conditions lead to liquidity shortfalls or that 
certain events drain other capital sources that impair the functioning 
of the CCA. Accordingly, to help preserve financial stability and 
ensure the continuity of critical CCP and CSD functions in periods of 
extreme stress, a resilient CCA still needs to plan effectively to 
replenish financial resources when depleted, address and allocate 
losses when they accrue, and, if the CCA is unable to allocate losses 
and replenish depleted resources, implement an orderly wind-down and 
cessation or transfer of its business. If a CCA is unable to take these 
steps in a transparent, orderly, and effective way, it will serve as a 
source of contagion, resulting in the potential for significant costs 
not only to the CCA itself or its clearing members but also to other 
market participants and the broader U.S. financial system.\26\
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    \23\ See, e.g., 17 CFR 240.17ad-22(e)(4)(i), (ii) (establishing 
requirements related to maintaining financial resources at the 
minimum to enable a CCA to cover a wide range of foreseeable stress 
scenarios that include, but are not limited to, the default of the 
one or two participant families that would potentially cause the 
largest aggregate credit exposure for the CCA in extreme but 
plausible market conditions).
    \24\ Financial Stability Board (``FSB''), Central Counterparty 
Financial Resources for Recovery and Resolution (Mar. 10, 2022), 
https://www.fsb.org/wp-content/uploads/P090322.pdf (``FSB 
Analysis'').
    \25\ See, e.g., CPMI-IOSCO, Recovery of financial market 
infrastructures (rev. July 2017), at 2.4, https://www.bis.org/cpmi/publ/d162.pdf (explaining considerations related to CCP recovery in 
circumstances where the CCP's prefunded financial resources have 
been depleted) (``CPMI-IOSCO Recovery Guidance'').
    \26\ The RWP Proposing Release discusses in greater detail the 
relationship between RWPs implemented by CCAs and the considerations 
related to orderly resolution of financial companies by the FDIC 
pursuant to Title II of the Dodd-Frank Act. RWP Proposing Release, 
supra note 18, at 34712.

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[[Page 91003]]

    Although the CCA Standards adopted in 2016 included a requirement 
for CCAs to have policies and procedures that provide for plans for 
recovery and orderly wind-down, the Commission did not include in the 
rule the specific elements to be required as part of such plans.\27\ 
The Commission stated that, given the nature of recovery and resolution 
planning, the RWP would likely reflect the specific characteristics of 
the CCA (e.g., its ownership, organizational, and operational 
structures, as well as its size, systemic importance, global reach, 
and/or the risks inherent in the products it clears).\28\ Since that 
time, each CCA has developed an RWP pursuant to the requirement for 
such plans in Rule 17Ad-22. In addition, the Commission has, through 
its supervisory process and through its participation in the ongoing 
consideration of issues regarding CCP recovery and resolution,\29\ 
identified several elements that should be included in any RWP 
regardless of the market served or the products cleared, to help ensure 
that planning is effective, thoughtful, and thorough.
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    \27\ See 17 CFR 240.17ad-22(e)(3)(ii) (requiring ``plans for the 
recovery and orderly wind-down of the CCA necessitated by credit 
losses, liquidity shortfalls, losses from general business risk, or 
any other losses'').
    \28\ RWP Proposing Release, supra note 18, at 34709 (citing CCA 
Standards Adopting Release, supra note 5, at 70808-09).
    \29\ E.g., CPMI-IOSCO Recovery Guidance, supra note 25; FSB 
Analysis, supra note 24; FSB, Financial Resources and Tools for 
Central Counterparty Resolution (Apr. 25, 2024), https://www.fsb.org/wp-content/uploads/P250424-1.pdf (``FSB Guidance'').
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    Accordingly, in the RWP Proposing Release,\30\ the Commission 
proposed new requirements directed to establishing specific elements of 
all RWPs across CCAs, including: requirements to identify critical 
systems and service providers and related staffing that would support 
these functions, to be maintained in a recovery or wind-down scenario; 
\31\ the identification and analysis of scenarios and triggers that 
could necessitate implementation of a recovery or wind-down; \32\ the 
identification and analysis of which tools would be appropriate in 
certain scenarios in order to facilitate recovery or an orderly wind-
down; \33\ requirements for effecting implementation of the plan; \34\ 
notification to the Commission; \35\ robust annual testing with 
participants and key stakeholders, as appropriate; \36\ and provisions 
for board review and approval of the plan and any material changes 
thereto.\37\ As discussed in the RWP Proposing Release, these new 
requirements draw from existing practices at CCAs.\38\ In Parts II.C 
and D, the Commission discusses in greater detail these new 
requirements, codified in new Rule 17Ad-26, in addition to addressing 
the comments received on the proposed rules. New Rule 17Ad-26 promotes 
three important objectives: (i) bolstering the existing RWPs at CCAs; 
(ii) codifying some existing RWP elements to ensure that these elements 
remain in the plans over time; and (iii) establishing that the RWP of 
any new CCA would contain each of the elements specified in the 
rule.\39\ By advancing these objectives, new Rule 17Ad-26 helps ensure 
that, in times of extreme market stress, the recovery or wind-down of a 
CCA can preserve financial stability and ensure the continuity of 
critical CCP or CSD functions.\40\
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    \30\ See RWP Proposing Release, supra note 18, at 34715-16.
    \31\ See infra Parts II.C.1 and 2 (discussing critical services 
and service providers, respectively).
    \32\ See infra Parts II.C.3 and 4 (discussing scenarios and 
triggers, respectively).
    \33\ See infra Part II.C.5 (discussing tools).
    \34\ See infra Part II.C.6 (discussing requirements related to 
implementation).
    \35\ See infra Part II.C.7 (discussing notification to the 
Commission).
    \36\ See infra Part II.C.8 (discussing the testing requirement).
    \37\ See infra Part II.C.9 (discussing board review and approval 
of the RWP and material changes thereto, including material changes 
to the covered clearing agency's operations that would significantly 
affect the viability or execution of the RWP).
    \38\ RWP Proposing Release, supra note 18, at 34709.
    \39\ See id. at 34711.
    \40\ Id. at 34712. In April, the FSB published guidance 
describing the existing set of financial resources and tools 
available for use by resolution authorities (such as the FDIC), in a 
CCP resolution. FSB Guidance, supra note 29. The FSB Guidance is 
relevant to some of the comments received on proposed Rule 17Ad-26, 
as discussed further in Part II.
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    The Commission received comments on the RWP Proposing Release from 
CCAs, industry groups (representing both clearing agencies and their 
participants), other market participants, academics, individual 
investors, and other interested parties.\41\ Commenters were generally 
supportive of the proposal, though some commenters also expressed 
concerns regarding specific elements of the proposed rules. In Part II, 
the Commission discusses these comments in detail and the modifications 
made to the final rules to address comments received. As discussed 
further in Part II, the Commission is adopting each of the proposed 
rules, some substantially as proposed and others with certain 
modifications.
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    \41\ Comments received are available on the Commission's website 
at https://www.sec.gov/comments/s7-10-23/s71023.htm.
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    In addition, and separate from the Commission's proposed rules for 
CCAs, the CFTC also has proposed rules directed to the RWPs of 
systemically important derivatives clearing organizations (``SIDCOs'') 
under the Commodity Exchange Act.\42\ Like the Commission's final rules 
for CCAs adopted in this release, the CFTC's proposed rules are 
intended to codify certain common elements of RWPs across SIDCOs. With 
respect to some elements of final Rule 17Ad-26, the Commission has 
taken a different approach from the CFTC's proposed rule. For example, 
given the range of products cleared and markets served across CCAs, the 
Commission has not included in Rule 17Ad-26 requirements for scenarios 
at the same level of granularity as the CFTC. Nonetheless, the final 
Rule 17Ad-26 and the CFTC's proposal are aligned in their objectives 
and promote substantially similar outcomes. The differing approaches 
are discussed further in Part II.C.10.\43\
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    \42\ Derivatives Clearing Organizations Recovery and Order Wind-
Down Plans, Information for Resolution Sharing (July 3, 2023), 88 FR 
48968, 48972-73 (July 28, 2023), https://www.govinfo.gov/content/pkg/FR-2023-07-28/pdf/2023-14457.pdf.
    \43\ Commission staff communicates with the CFTC staff regularly 
on topics of mutual interest for their respective registrants, 
including RWPs, and has consulted with CFTC staff regarding RWPs.
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II. Discussion of Comments Received and Final Rules

A. Collection of Intraday Margin

1. Proposed Amendment to Rule 17Ad-22(e)(6)(ii)
    The RWP Proposing Release proposed to strengthen the preexisting 
requirements in Rule 17Ad-22(e)(6)(ii) for a CCA to have policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, among 
other things, includes the operational capacity to make intraday margin 
calls in defined circumstances.\44\ Specifically, the proposed 
amendments to Rule 17Ad-22(e)(6)(ii) required a CCA that provides CCP 
services to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to cover its credit exposures to 
establish a risk-based margin system that, among other things, includes 
the authority and operational capacity to (i) monitor intraday exposure 
on an ongoing basis, and (ii) to make intraday margin calls as

[[Page 91004]]

frequently as circumstances warrant, including when risk thresholds 
specified by the CCA are breached or when the products cleared or 
markets served display elevated volatility.\45\
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    \44\ RWP Proposing Release, supra note 18, at 34713.
    \45\ Id. at 34712-14. The preexisting requirement in Rule 17Ad-
22(e)(6)(ii) to establish written policies and procedures that 
provide for marking participant positions to market and collecting 
margin, including variation margin or equivalent charges if 
relevant, at least daily, would be unchanged under the amendments 
being adopted in this release.
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2. Discussion of Comments
a. Monitoring Intraday Exposure on an Ongoing Basis: Rule 17Ad-
22(e)(6)(ii)(B)
    When adopted in 2016, preexisting Rule 17Ad-22(e)(6)(ii) included 
the requirement that CCAs have the authority and operational capacity 
to make intraday margin calls.\46\ In the RWP Proposing Release, the 
Commission stated that the ``operational capacity'' to make intraday 
margin calls ``includes the ability to monitor intraday exposure; 
otherwise, it would be impossible for a CCA to make appropriate 
intraday margin calls if it were not monitoring its intraday 
exposure.'' \47\ Therefore, as originally adopted, Rule 17Ad-
22(e)(6)(ii) required a CCA to have some ability to monitor for 
intraday exposure and make intraday margin calls but did not include a 
specific requirement to monitor for intraday exposure or regarding the 
frequency at which to monitor intraday exposures.\48\
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    \46\ Id. at 34713.
    \47\ Id.
    \48\ Id.
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    In the RWP Proposing Release, the Commission stated its continued 
belief, consistent with its statements when adopting the CCA Standards, 
that it is essential that a CCA monitor its intraday exposures because 
the CCA faces a risk that a CCA's exposure to its participants can 
change rapidly because of intraday changes in prices, positions, or 
both.\49\ The Commission further stated that a requirement that such 
monitoring occur on an ongoing basis would contribute to ensuring that 
the CCA is sufficiently informed and situated to take appropriate 
actions to manage any intraday exposure that arises.\50\ The Commission 
also stated that being able to monitor, on an ongoing basis, any 
decrease in the margin coverage (as compared to the changes in intraday 
credit exposures in its participants' portfolios) should help a CCA 
ensure that it is able to collect margin sufficient to cover its 
participants' exposures.\51\ The Commission further stated that this 
requirement to monitor intraday exposure on an ongoing basis should 
provide each CCA with some flexibility to determine what monitoring 
frequency is appropriate in the market served by the CCA. Therefore, 
the Commission did not specify a particular time period or frequency 
for monitoring on an ongoing basis because a CCA ``should be able to 
tailor its monitoring to the particular products cleared and markets 
served.'' \52\
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    \49\ Id.
    \50\ Id.; see also CPMI-IOSCO Resilience Guidance, supra note 
14, at 5.2.2 (discussing how a CCP addresses intraday exposure in 
its margin system and stating that ``a CCP faces the risk that its 
exposure to its participants can change rapidly as a result of 
intraday changes in prices, positions, or both; ie [sic], adverse 
price movements, as well as participants building larger positions 
through new trading (and settlement of maturing trades). For the 
purposes of addressing these and other forms of risk that may arise 
intraday, a CCP should address and monitor on an ongoing basis how 
such risks affect all components of its margin system, including 
initial margin, variation margin and add-on charges.'').
    \51\ RWP Proposing Release, supra note 18, at 34713. The 
Commission also explained that a CCA ``generally should consider 
whether its intraday monitoring considers how participants' 
exposures would affect all risks faced by the CCA, including those 
that may already by contemplated by variation margin, initial 
margin, or add-on charges.'' Id.
    \52\ Id.
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    Commenters generally recognized the importance of monitoring 
intraday exposure.\53\ Several commenters agreed with the approach in 
the proposal not to prescribe a particular monitoring frequency that 
would constitute an ``ongoing basis,'' because of the need for a CCA to 
be able to tailor its monitoring to the particular products cleared and 
markets served.\54\ For example, one such commenter stated that, rather 
than the Commission prescribing a monitoring frequency, a CCA's 
monitoring ``should align with each [CCA's] scheduled settlement, 
initial margin, and variation margin practices to support financial 
stability in both normal and volatile market conditions.'' \55\
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    \53\ Letter from Megan Malone Cohen, Corporate Secretary, 
General Counsel, The Options Clearing Corporation (July 17, 2023) at 
3 (``OCC''); Letter from Timothy Cuddihy, Managing Director, Group 
Chief Risk Officer, Depository Trust & Clearing Corporation (July 
17, 2023) at 3 (``DTCC''); Letter from Ullrich Karl, Head of 
Clearing Services, International Swaps and Derivatives Association, 
and Jacqueline Mesa, Senior Vice President, Futures Industry 
Association (July 17, 2023) at 6 (``The Associations''); Letter from 
Stephen W. Hall, Legal Director and Securities Specialist, Better 
Markets, Inc. (July 17, 2023) at 7 (``Better Markets''); Letter from 
Chris Edmonds, Chief Development Officer, Intercontinental Exchange 
(July 19, 2023) at 2 (``ICE''); see also Letter from Sarah Bessin, 
Deputy General Counsel, Investment Company Institute (Sept. 26, 
2023) at 10 (``ICI'') (generally supporting the Commission's 
proposed amendments).
    \54\ OCC at 3; Letter from Global Association of Central 
Counterparties (July 17, 2023) at 2 (``CCP12''); DTCC at 3; see also 
ICE at 2 (stating that clearing agencies should continue to have the 
flexibility to determine the appropriate timeframe for intraday 
monitoring).
    \55\ CCP12 at 2.
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    By contrast, one commenter stated that the Commission should 
prescribe some particular universal, minimum monitoring frequency 
(i.e., establishing a maximum time between instances of a CCA's 
intraday monitoring of its credit exposures).\56\ This commenter 
acknowledged the benefit that would arise from deferring ongoing 
monitoring assessments to a CCA, but supported that the Commission 
include a universal, minimum monitoring frequency in this 
requirement.\57\ Specifically, this commenter stated that ``every 15 
minutes should be the absolute minimum'' for frequency of monitoring 
intraday exposures related to any possible intraday margin 
collection.\58\
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    \56\ See The Associations at 6.
    \57\ Id. at 6.
    \58\ Id.
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    The Commission is adopting the requirement to monitor intraday 
exposures on an ongoing basis as proposed.\59\ As stated in the RWP 
Proposing Release, a CCA should be able to tailor its risk monitoring 
to the particular products cleared and the markets served.\60\ 
Accordingly, the proposed requirement to monitor intraday exposures on 
an ongoing basis is designed to allow a CCA to determine what 
monitoring frequency is appropriate for its particular market.\61\ A 
CCA needs this flexibility because ``more frequent monitoring may be 
necessary for a CCA that operates in markets where intraday trading may 
be more prevalent'' (such as, for example, in the U.S. Treasury 
market),\62\ or

[[Page 91005]]

alternatively where a CCA's ``intraday exposures may tend to be larger 
because of specific features, such as the settlement process.'' \63\
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    \59\ The Commission is adding paragraph divisions to Rule 17Ad-
22(e)(6)(ii) to better delineate the sections of the rule, for 
clarity. The portion of the rule text regarding monitoring intraday 
exposure would be Rule 17Ad-22(e)(6)(ii)(B). The Commission is also 
adding ``(A)'' before the portion of the rule that relates to 
marking participant positions to market and collecting margin at 
least daily and changing the punctuation at the end of that section 
to a semi-colon, as opposed to a comma. The Commission is also 
revising the punctuation at the end of Rule 17Ad-22(e)(6)(ii)(B) to 
a semicolon, as opposed to a comma.
    \60\ RWP Proposing Release, supra note 18, at 34713.
    \61\ Id.
    \62\ See, e.g., Release No. 34-99149 (Dec. 13, 2023), 89 FR 
2714, 2782 (Jan. 16, 2024) (``Treasury Clearing Adopting Release''), 
govinfo.gov/content/pkg/FR-2024-01-16/pdf/2023-27860.pdf (``Today, 
[proprietary trading firms] actively buy and sell large volumes of 
U.S. Treasury securities on an intraday basis using high-speed and 
other algorithmic trading strategies.''); James C. Harkrader & 
Daniel J. Weitz, FEDS Notes: How Do Principal Trading Firms and 
Dealers Trade around FOMC Statement Releases? (Dec. 31, 2020), 
https://www.federalreserve.gov/econres/notes/feds-notes/how-do-principal-trading-firms-and-dealers-trade-around-fomc-statement-releases-20201231.html.
    \63\ RWP Proposing Release, supra note 18, at 34713.
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    In response to the commenter seeking a required mandatory minimum 
frequency for intraday monitoring, the Commission does not agree that 
such a requirement is necessary. Previously, the Commission stated that 
a CCA generally should consider whether its policies and procedures for 
intraday monitoring address how participants' exposures would affect 
financial risks faced by the CCA.\64\ For example, some CCA margin 
methodologies may be designed to account for some intraday price and 
position changes, which could have an impact on the appropriate 
intraday monitoring frequency. Therefore, the Commission is not 
adopting a minimum monitoring frequency. The Commission, however, would 
be able to consider whether a particular CCA's intraday monitoring 
frequency is reasonably designed to meet this requirement within the 
proposed rule change process when changes thereto are filed as a 
proposed rule change, including what the CCA has identified as the 
appropriate ongoing basis for the products cleared and the markets 
served and in light of the entirety of the CCA's margin methodology 
(that is, whether it has other components which account for some 
intraday price and position changes).\65\ More generally, whether a CCA 
has established, implemented, maintained and enforced written policies 
and procedures reasonably designed to comply with Rule 17Ad-22(e) is 
subject to examination.
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    \64\ These risks could include those that ``may already be 
contemplated by variation margin, initial margin, or add-on 
charges.'' Id.
    \65\ See infra note 84 and accompanying text.
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    When designing its intraday margin monitoring, a CCA generally 
should consider whether its monitoring encompasses all aspects of 
intraday exposures, including how such exposures affect all components 
of a CCA's margin model, including initial margin, variation margin, 
and add-on charges.\66\ A CCA also generally should consider whether 
its basis to recalculate margin intraday accounts for both position 
changes and price volatility.
---------------------------------------------------------------------------

    \66\ See, e.g., CPMI-IOSCO Resilience Guidance, supra note 14, 
at 5.2.22.
---------------------------------------------------------------------------

b. Circumstances for Intraday Margin Calls
    Preexisting Rule 17Ad-22(e)(6)(ii) also required that a CCA's 
written policies and procedures be reasonably designed to include the 
authority and operational capacity to make intraday margin calls ``in 
defined circumstances.'' \67\ However, preexisting Rule 17Ad-
22(e)(6)(ii) did not define what constitutes ``defined circumstances.'' 
\68\ In proposing the requirement regarding collecting intraday margin 
as frequently as ``circumstances warrant,'' the Commission stated that 
the proposed requirement would build upon and expand this preexisting 
requirement (i.e., to have the authority and operational capacity to 
make intraday margin calls in ``defined circumstances''). Specifically, 
the proposed requirement would identify two particular circumstances: 
(1) when risk thresholds specified by the CCA are breached or (2) when 
the products cleared or markets served display elevated volatility. The 
proposed requirement would also continue to provide flexibility to CCAs 
to make intraday margin calls as frequently as circumstances 
warrant.\69\
---------------------------------------------------------------------------

    \67\ 17 CFR 240.17ad-22(e)(6)(ii).
    \68\ Id.; see also RWP Proposing Release, supra note 18, at 
34713.
    \69\ RWP Proposing Release, supra note 18, at 34713-14.
---------------------------------------------------------------------------

    Commenters generally agreed with the need for thresholds regarding 
when a CCA would make intraday margin calls. However, commenters raised 
several concerns which are addressed below.\70\
---------------------------------------------------------------------------

    \70\ See The Associations; Better Markets; ICI; Letter from 
Thomas F. Price, Managing Director, Technology, Operations, and 
Business Continuity, SIFMA, and William C. Thum, Managing Director 
and Associate General Counsel, SIFMA Asset Management Group (Sept. 
26, 2023) (``SIFMA'').
---------------------------------------------------------------------------

i. Scheduled vs. Unscheduled Intraday Calls
    Several commenters suggested that intraday margin calls generally 
should be scheduled, with unscheduled intraday margin calls limited to 
extreme circumstances.\71\ One such commenter specified that scheduled 
intraday margin calls should be at the same time every day, in the 
early afternoon.\72\ This commenter explained that the unpredictability 
of unscheduled intraday margin calls may require a fund (which is a 
participant in a CCA) to keep a portion of its assets in lower-
yielding, highly liquid assets.\73\
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    \71\ ICI at 10-11; Letter from John P. Davidson (June 5, 2023) 
at 2, 9 (``Davidson'') (stating that intraday financial flows should 
be mandatory at a fixed scheduled time and at the same time across 
all linked CCPs, but also acknowledging ``the occasional need for an 
additional set of intraday cash and collateral movements in cases of 
truly extreme market moves'').
    \72\ SIFMA at 8.
    \73\ Id.
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    In response to these comments seeking additional requirements for 
scheduled intraday margin calls and to limit unscheduled intraday 
margin calls, the Commission recognizes that scheduled intraday margin 
calls provide certainty for market participants about when resources 
will be needed. However, there may be circumstances that arise 
intraday, such as in times of elevated volatility or significant 
position changes, where a CCA needs to manage its exposure to a 
participant through an unscheduled margin call.\74\ In such 
circumstances, scheduled intraday margin calls may not be sufficient to 
ensure that a CCA collects margin to cover its exposure to its 
participants. To ensure strong risk management in such circumstances, 
CCAs need to have the ability to make unscheduled intraday margin 
calls. It would not be appropriate to mandate that CCAs only make 
scheduled intraday margin calls, and, therefore, the Commission is not 
adopting such a requirement to require scheduled intraday margin calls.
---------------------------------------------------------------------------

    \74\ For example, if a CCA schedules intraday margin collection 
at noon every day, there may be instances when thresholds are 
triggered after that scheduled time, and the CCA would then make an 
unscheduled margin call to avoid significant exposure being carried 
overnight.
---------------------------------------------------------------------------

    However, the Commission understands the need for market 
participants to plan for the potential resources needed to meet 
intraday margin calls. To that end, the amended Rule 17Ad-
22(e)(6)(ii)(C) states that a CCA must establish policies and 
procedures regarding at least two particular circumstances in which a 
CCA would make intraday margin calls, that is, when risk thresholds 
specified by the CCA are breached and when products cleared or markets 
served display elevated volatility, as discussed in Part II.A.2.b 
infra. For example, a CCA could specify that its risk threshold is 
breached when the difference between a member's start of day margin and 
a calculation of its intraday margin based on its new positions exceeds 
a predetermined percentage or dollar amount. Thus, market participants 
should be able to plan for their potential resource needs to meet 
intraday margin calls because, as discussed in Part II.A.2.b.ii infra, 
a CCA is required to have certain transparency around its margin model. 
This transparency will allow a market participant to understand those 
specified circumstances in which a CCA would make intraday margin calls 
and would therefore allow the market participant to make arrangements 
for additional liquidity in such circumstances, such

[[Page 91006]]

as, for example, securing additional financing to cover such margin 
calls.
ii. Need for Clear Thresholds and Transparency
    Commenters also requested that the Commission revise the proposal 
to mandate that a CCA define its criteria for any unscheduled intraday 
margin call in advance of any unscheduled intraday margin call and to 
require additional disclosures regarding intraday margin calls.\75\ 
These commenters stated that requiring clear and transparent policies 
regarding the conditions under which a CCA might make an intraday 
margin call, both on a scheduled and unscheduled basis, would enhance 
participants' ability to prepare for these margin calls and understand 
any potential demands on their liquidity arising from such a call.\76\
---------------------------------------------------------------------------

    \75\ The Associations at 2; Better Markets at 8; ICI at 10-11; 
SIFMA at 9.
    \76\ The Associations at 2-3 (requesting ``clear and transparent 
policies with regards to the conditions under which a [CCA] might 
call intraday margin''); Better Markets at 8 (requesting ``full 
transparency for triggers of intraday margin calls''); SIFMA at 9 
(requesting ``published triggers and thresholds to calculate both 
start of day and intraday margin requirements''); ICI at 11 
(requesting a CCA ``communicate to market participants the 
thresholds that would trigger both scheduled and ad hoc [sic] 
intraday margin calls'').
---------------------------------------------------------------------------

    The Commission agrees with the commenters that it is essential that 
a CCA determine and clearly communicate ex ante in what circumstances 
it would make both scheduled and ad hoc intraday margin calls. However, 
as discussed further below, CCAs already are subject to such 
requirements in preexisting Rule 17Ad-22(e)(6)(ii) and (e)(23) and 17 
CFR 240.19b-4 (``Rule 19b-4''). Further, by specifying two instances in 
which CCAs must establish, implement, maintain and enforce policies and 
procedures to collect intraday margin, the amendments being adopted in 
this release will identify for clearing participants conditions under 
which a CCA would make an intraday margin call.\77\
---------------------------------------------------------------------------

    \77\ The Commission is adding paragraph divisions to Rule 17Ad-
22(e)(6)(ii) to better delineate the sections of the rule, for 
clarity. The portion of the rule text regarding the authority and 
operational capacity to make intraday margin calls is in Rule 17Ad-
22(e)(6)(ii)(C).
---------------------------------------------------------------------------

    First, with respect to the commenters' request to require that CCAs 
determine the circumstances for intraday margin calls, a CCA already is 
required, under preexisting Rule 17Ad-22(e)(6)(ii), to have certain 
policies and procedures regarding intraday margin. These policies and 
procedures are the framework that a CCA uses when determining whether 
to make intraday margin calls, and these policies and procedures must 
identify the circumstances in which a CCA would make intraday margin 
calls.\78\ This requirement will be strengthened by the amendments 
adopted in this release, which provide more specificity that the CCA 
must have policies and procedures to be able to make intraday margin 
calls as frequently as circumstances warrant and in two particular 
circumstances identified in the rule. Specifically, the amendments to 
preexisting Rule 17Ad-22(e)(6)(ii) require that a CCA have written 
policies and procedures to cover its credit exposures to its 
participants by establishing a risk-based margin system, which, among 
other things, includes the authority and operational capacity to make 
intraday margin calls ``as frequently as circumstances warrant'' 
including in two particular situations: when risk thresholds specified 
by the CCA are breached and in times of elevated volatility. This 
requirement should ensure that the CCA develops ex ante policies and 
procedures to determine risk thresholds for intraday margin and when it 
considers volatility to be elevated above typical levels in a manner 
specific to the products cleared and the markets served. Because these 
amendments would identify specific circumstances in which a CCA must 
have the authority and operational capacity to make intraday margin 
calls which would be part of a CCA's overall disclosure requirements 
regarding its margin methodology, as discussed further below,\79\ these 
amendments should improve participants' ability to understand when they 
may be subject to additional margin calls. This improved understanding 
should further allow participants to be better able to prepare to 
provide additional financial resources in anticipation of additional 
margin calls.\80\
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    \78\ This framework is not required to foreclose or prohibit the 
use of any discretion in such determinations, as discussed further 
in Part II.A.2.b.iii, infra.
    \79\ See infra notes 81-100 and accompanying text (discussing 
several Commission requirements that promote disclosure and 
transparency).
    \80\ RWP Proposing Release, supra note 18, at 34714.
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    Second, with regard to the commenters' request to clearly 
communicate ex ante the circumstances in which a CCA would make 
intraday margin calls, the Commission agrees that such ex ante 
transparency is essential for a CCA's participants, but disagrees that 
any additional requirements are necessary to achieve such transparency. 
A CCA's participants already have such transparency for several 
reasons. As a registered clearing agency, a CCA is a self-regulatory 
organization (``SRO'') under the Exchange Act,\81\ subject to the 
provisions of section 19(b) of the Exchange Act which requires public 
notice and an opportunity for public comment on any rule changes that 
an SRO seeks to adopt.\82\ In addition, a CCA potentially is a 
``designated financial market utility'' (alternatively, a 
``systemically important financial market utility'' or ``SIFMU'') 
subject to section 806(e) of the Dodd-Frank Act regarding advance 
notice of material changes to its rules, procedures, or operations that 
could materially affect the nature or level of risks presented. 
Further, the CCA Standards impose requirements related to transparency 
and disclosure to its participants.
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78c(a)(26) (``The term `self-regulatory 
organization' means any [. . .] registered clearing agency'').
    \82\ See, e.g., infra note 87 (discussing such changes that 
previously have been considered by the Commission); infra note 119 
(describing Commission rules that promote transparency regarding 
margin practices at registered clearing agencies).
---------------------------------------------------------------------------

    A CCA's margin methodology, which would include, among other 
things, the criteria used to determine whether to make intraday margin 
calls, constitutes a material aspect of its operations, meaning that it 
is part of a CCA's stated policies, practices, or interpretations under 
Exchange Act Rule 19b-4.\83\ As such, a CCA's margin methodology is 
subject to the filing obligations applicable to SROs under section 
19(b) of the Exchange Act regarding any proposed rule or proposed 
change to its rules.\84\ The proposed rule filing process provides 
transparency into an SRO's proposed changes, through notice and 
comment. An SRO is obligated to file its proposed rule changes in a 
manner consistent with the requirements in Form 19b-4, which is 
intended to elicit information necessary for the public to

[[Page 91007]]

provide meaningful comment on the proposed rule change and for the 
Commission to determine whether the proposed rule change is consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder.\85\ The Commission then publishes all proposed rule changes 
for comment. In this way, the rule filing process promotes transparency 
to market participants and the public by ensuring notice is provided 
regarding a CCA's new initiatives or changes to governance, operations, 
and risk management.\86\ With respect to a CCA's margin methodology, 
the rule filing process should provide transparency about how and when 
a CCA would calculate margin, including on an intraday basis, which is 
consistent with the requirements sought by commenters.
---------------------------------------------------------------------------

    \83\ 17 CFR 240.19b-4(a)(6)(i) (defining ``stated policy, 
practice, or interpretation'' to include, inter alia, ``[a]ny 
material aspect of the operation of the facilities of the self-
regulatory organization''). Additionally, Rule 19b-4 would also 
apply to certain statements that a CCA issues concerning its margin 
methodology. Specifically, this rule would cover any CCA statement 
``made generally available to the membership of [. . . the CCA] that 
establishes or changes any standard, limit, or guideline, with 
respect to: (a) the rights, obligations, and privileges of its 
membership; or (b) the meaning, administration, or enforcement of an 
existing rule.'' 17 CFR 240.19b-4(a)(6)(ii).
    \84\ 15 U.S.C. 78s(b)(1) (requiring each SRO to ``file with the 
Commission, in accordance with such rules as the Commission may 
prescribe, copies of any proposed rule or any proposed change in, 
addition to, or deletion from the rules of such self-regulatory 
organization''); see also 17 CFR 240.19b-4. In addition, a stated 
policy, practice, or interpretation of an SRO (e.g., written 
policies and procedures) would generally be deemed to be a proposed 
rule change. See 17 CFR 240.19b-4(c).
    \85\ See General Instructions for Form 19b-4, at Instruction B, 
https://www.sec.gov/files/form-19b4-general-instructions.pdf. The 
Form 19b-4 specifies the contents that must be included in a 
proposed rule change filing includes, among other items, a statement 
of purpose for the proposed rule change, which describes the reasons 
for adopting the proposed rule change, any problems the proposed 
rule change is intended to address, the manner in which the proposed 
rule change will operate to resolve those problems, the manner in 
which the proposed rule change will affect various persons (e.g., 
brokers, dealers, issuers, and investors), and any significant 
problems known to the SRO that persons affected are likely to have 
in complying with the proposed rule change. Id. at Information to Be 
Included in the Completed Form, Item 3(a). The SRO must also include 
in its proposed rule change the complete text of the proposed rule. 
Id. at Information to Be Included in the Completed Form, Item 1(a). 
The SRO may request confidential treatment of any portion of its 
filing, see 17 CFR 240.24b-2, but it would still have to comply with 
the requirements of Form 19b-4 with respect to describing the 
contents of the proposed rule change for public comment.
    \86\ See RWP Proposing Release, supra note 18, at 34711.
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    The Commission has considered numerous proposed rule changes 
regarding CCAs' margin methodologies. Notably, these proposed rule 
changes have addressed CCAs' intraday margin policies and procedures, 
and these proposed rule changes have identified thresholds and criteria 
that a CCA would use in determining whether to make an intraday margin 
call, similar to what the commenters have requested.\87\ The notice and 
comment process provided by section 19(b) of the Exchange Act therefore 
provides for transparency into a CCA's margin methodology, including 
input from participants.
---------------------------------------------------------------------------

    \87\ See, e.g., Notice of Filing of Amendment No. 1 and Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified 
by Amendment No. 1, To Implement Changes to the Required Fund 
Deposit Calculation in the GSD Rulebook, Release No. 34-83362 (June 
1, 2018), 83 FR 26514 (June 7, 2018) (File No. SR-FICC-2018-001) 
(approving proposed rule change to provide transparency with respect 
to GSD's existing authority under GSD Rule 4 to calculate and assess 
intraday margin amounts, by identifying the three criteria that GSD 
uses to calculate the intraday amount due ((i) the dollar threshold, 
which evaluates whether a member's intraday VaR Charge equals or 
exceeds a set dollar amount when compared to the VaR Charge that was 
included in the most recent margin collection: (ii) the percentage 
threshold, which evaluates whether the intraday VaR Charge equals or 
exceeds a percentage increase of the VaR Charge that was included in 
the most recent collection; and (iii) the coverage target, which 
evaluates whether a member is experiencing backtesting results below 
a 99% confidence level), and stating that FICC assesses intraday 
margin when all three criteria are breached and, under certain 
market conditions when the thresholds in (i) and (ii) are breached); 
FICC Important Notice GOV1244-22 (Apr. 11, 2022) (stating that, 
consistent with its Rule 4 authority, GSD will assess an Intraday 
Supplement Fund Deposit on a Netting Member if (i) a change in the 
Netting Member's Intraday VaR Charge equals or exceeds $1 million 
when compared to its most recent VaR Charge calculation, (ii) the 
Netting Member's Intraday VaR Charge equals or exceeds 100% of its 
most recent VaR Charge calculation, and (iii) the Netting Member's 
backtesting coverage is below 100%. Additionally, Netting Members 
who breached the thresholds for (i) and (ii) and have fewer than 100 
trading days in a rolling 12-month period will be assessed an 
Intraday Supplemental Fund Deposit regardless of their backtesting 
coverage); Order Approving Proposed Rule Change to Adopt Intraday 
Volatility Charge and Eliminate Intraday Backtesting Charge, Release 
No. 34-97129 (Mar. 13, 2023), 88 FR 16681 (Mar. 20, 2023) (File No. 
SR-NSCC-2022-009) (adopting an intraday volatility charge as part of 
NSCC's margin methodology that would increase the margin collected 
from members whose trading portfolios experience large and 
unexpected intraday volatility).
---------------------------------------------------------------------------

    In addition, when a CCA is a SIFMU,\88\ it is also subject to the 
regulatory framework of the Clearing Supervision Act.\89\ Once 
designated by FSOC, CCAs that are SIFMUs are required to publicly file 
60-days advance notice with the Commission of changes to rules, 
procedures, and operations that could materially affect the nature or 
level of risk presented by the designated clearing agency (``advance 
notice''), and, pursuant to the Commission's rules, the Commission 
shall provide for prompt publication of such an advance notice, and 
then the public has the opportunity to comment on such an advance 
notice.\90\ Rule 19b-4(n) defines the term ``materially affect the 
nature or level of risk presented'' to mean matters as to which there 
is a reasonable possibility that the change could affect the 
performance of essential clearing and settlement functions or the 
overall nature or level of risk presented by the designated clearing 
agency, and it further provides examples of such potential changes as 
including, among other things, changes that could materially affect 
risk management or financial resources of the designated clearing 
agency.\91\ When adopting this requirement, the Commission identified 
changes to the ``methods for making margin calculations'' as among the 
additional examples of such matters.\92\ Therefore, any changes to the 
intraday margin policies and procedures of a CCA that has been 
designated as a SIFMU could also be subject to the advance notice 
process if the changes constitute a material change to the nature or 
level of risk presented by the CCA, and the advance notice process 
would bring additional transparency into such changes.
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    \88\ Specifically, the Clearing Supervision Act provides for the 
enhanced regulation of a CCA that qualifies as a ``financial market 
utility'' that the FSOC designates as ``systemically important'' (a 
``designated financial market utility''). See 12 U.S.C. 5462(6)(A) 
(defining a ``financial market utility'' to include ``any person 
that manages or operates a multilateral system or the purpose of 
transferring, clearing, or settling payments, securities or other 
financial transactions among financial institutions or between 
financial institutions and the person'') and 12 U.S.C. 
5462(4)(defining a ``designated financial market utility'' to mean 
``a financial market utility'' that FSOC has designated as 
``systemically important''); see also 12 U.S.C. 5463 (discussing 
FSOC's ability to designate entities as ``systemically important''). 
On July 18, 2012, FSOC designated four CCAs as systemically 
important financial market utilities: The Depository Trust Company 
(``DTC''); Fixed Income Clearing Corporation (``FICC''); National 
Securities Clearing Corporation (``NSCC''); and The Options Clearing 
Corporation (``OCC''). FSOC, 2012 Annual Report: Appendix A: 
Designation of Systemically Important Financial Market Utilities 
(July 18, 2012), https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf.
    \89\ See 12 U.S.C. 5461 et seq.
    \90\ The Clearing Supervision Act defines a ``designated 
clearing entity'' to include a ``designated financial market 
utility'' that is a clearing agency registered with the Commission 
(of which a CCA is a subset). See 12 U.S.C. 5462(3). The Clearing 
Supervision Act defines the Commission as the ``Supervisory Agency'' 
for the four designated clearing agencies that are CCAs (i.e., DTC, 
NSCC, FICC, and OCC). See 12 U.S.C. 5462(8)(A)(i). The Commission 
published a final rule concerning the filing and publication of 
advance notices for designated clearing agencies in 2012. See 17 CFR 
240.19b-4(n); Release No. 34-67286 (June 28, 2012), 77 FR 41602 
(July 13, 2012) (File No. S7-44-10) (``Filing of Advance Notices''), 
https://www.govinfo.gov/content/pkg/FR-2012-07-13/pdf/2012-16233.pdf.
    \91\ 17 CFR 240.19b-4(n)(2)(i), (ii).
    \92\ See Filing of Advance Notices, supra note 90, at 41620.
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    Moreover, under the CCA Standards, a CCA is obligated to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for publicly disclosing all relevant 
rules and material procedures, including key aspects of its default 
rules and procedures.\93\ Such public disclosures generally should 
include a discussion of a CCA's margin methodology, which could include 
how the CCA determines intraday margin, and they should, in turn, allow 
a market participant to understand how a CCA calculates margin, 
including any margin add-ons

[[Page 91008]]

and cross-margin arrangements with other clearing agencies. In 
addition, under Rule 17Ad-22(e)(23)(ii), these policies and procedures 
must provide sufficient information to enable participants to identify 
and evaluate the risks, fees, and other material costs they incur by 
participating in the CCA.\94\
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    \93\ 17 CFR 240.17ad-22(e)(23)(i).
    \94\ 17 CFR 240.17ad-22(e)(23)(ii).
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    Rule 17Ad-22(e)(23)(iv) also requires that a CCA produce a 
comprehensive public disclosure that describes its material rules, 
policies, and procedures regarding its legal, governance, risk 
management, and operating framework (a ``Disclosure Framework''), 
accurate in all material respects at the time of publication, that 
includes, among other things, a standard-by-standard summary narrative 
for each applicable standard set forth in paragraphs (e)(1) through 
(23) of the CCA Standards with sufficient detail and context to enable 
a reader to understand the CCA's approach to controlling the risks and 
addressing the requirement in each standard.\95\ Therefore, a CCA must 
issue a public document addressing each of the CCA Standards, including 
those with respect to margin under Rule 17Ad-22(e)(6).\96\ A CCA 
generally should consider whether its disclosures regarding its margin 
methodology, through its Disclosure Framework and/or other publicly 
available documents, allows participants to understand how the model 
reacts to market conditions and to assess with some reasonable degree 
of certainty whether it will be subject to a margin call and in what 
amount. In addition, a CCA generally should consider whether it could 
provide a public-facing margin calculator to allow its participants, 
and market participants more generally, to understand the potential 
amount of any intraday margin calls on their portfolios, including with 
respect to add-on charges and any applicable cross-margin arrangements.
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    \95\ 17 CFR 240.17ad-22(e)(23)(iv).
    \96\ See DTC, Disclosure Framework for Covered Clearing Agencies 
and Financial Market Infrastructure (Mar. 2024), https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC-Disclosure-Framework-2024-Q1.pdf; FICC, Disclosure Framework for 
Covered Clearing Agencies and Financial Market Infrastructure (Mar. 
2024), https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC-Disclosure-Framework-Q1-2024.pdf; ICE, 
Disclosure Framework (July 31, 2023), https://www.ice.com/publicdocs/clear_credit/ICEClearCredit_DisclosureFramework.pdf; LCH, 
Comprehensive Disclosure (July 31, 2024), https://www.lch.com/system/files/media_root/LCH%20SA%20-%20Comprehensive%20Disclosure%20as%20required%20by%20SEC%20Rule%2017Ad-22%28e%29%2823%29_2022%20Q2_2024.pdf; NSCC, Disclosure Framework 
for Covered Clearing Agencies and Financial Market Infrastructure 
(Mar. 2024), https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC-Disclosure-Framework-Q1-2024.pdf; OCC, 
Disclosure Framework for Financial Market Infrastructures (July 25, 
2024), https://www.theocc.com/getmedia/4664dece-7172-42a5-8f55-5982f358b696/pfmi-disclosures.pdf.
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    In light of the existing requirements with respect to transparency 
in the SRO rule filing process, the advance notice process, and Rule 
17Ad-22(e)(23), the Commission does not believe additional mandatory 
disclosures are necessary at this time. For example, every CCAs' 
Disclosure Framework discusses the CCAs' margin methodologies.\97\ 
Several CCAs have published documents further outlining their margin 
methodologies, including the formulas used in calculating margin.\98\ A 
CCA generally should consider whether it provides such information, 
i.e., the formulas used in calculating margin, to market participants, 
such that a market participant could make such calculations on its own. 
Finally, at least one CCA has developed a public calculator to provide 
market participants with the ability to calculate potential margin 
obligations on a simulated portfolio, for given positions and market 
value, using its Value at Risk methodology.\99\ Although not a 
substitute for a market participant's ability to understand a CCA's 
margin methodology on its own, such a public calculator is a helpful 
tool for determining how a CCA's margin methodology operates, 
particularly if the calculator is able to provide information related 
to add-on charges and any applicable cross-margin arrangements. A CCA 
generally should consider whether it sufficiently identifies in its 
Disclosure Frameworks and any other documentation that it makes 
available the circumstances required under the amendments adopted to 
Rule 17Ad-22(e)(6)(ii) regarding when a CCA must collect intraday 
margin. Commenters requested that the Commission require a CCA's 
intraday margin model to be transparent such that a CCA's participants 
could anticipate a CCA's future intraday margin calls.\100\ As 
discussed above, a CCA should generally consider whether it 
sufficiently identifies when Rule 17Ad-22(e)(6)(ii) would require an 
intraday margin call. Such transparency could improve the ability of a 
CCA's participants to understand when participants may be subject to 
additional margin calls. However, participants cannot expect to be able 
to predict every intraday margin call with complete certainty, and 
being able to do so may create moral hazard that would undermine the 
CCA's ability to manage risk effectively.
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    \97\ See id.
    \98\ See, e.g., https://www.theocc.com/risk-management/margin-methodology; https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/GSD-Clearing-Fund-Methodology-Overview.pdf.
    \99\ https://www.dtcc.com/managing-risk/stress-testing-and-liquidity-risk-management/ccfl-public-calculator.
    \100\ See supra note 80 and accompanying text.
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    Finally, one commenter stated that CCAs should proactively engage 
with clearing members ahead of applying intraday margin calls to 
alleviate the potential liquidity risk for clearing members.\101\ The 
Commission acknowledges that it could be helpful for a CCA to engage 
with its clearing members regarding potential upcoming intraday margin 
calls. Given the potentially fluid nature of circumstances 
necessitating the need for an intraday margin call and the possibility 
that such engagement would not be possible in a time of market stress, 
imposing such engagement as an obligation would not be appropriate. 
However, a CCA generally should consider whether its written policies 
and procedures provide for engagement with a CCA ahead of applying an 
intraday margin call, as circumstances permit.
---------------------------------------------------------------------------

    \101\ SIFMA at 9. This commenter also suggested that the 
Commission should require that a CCA provide the Commission (and to 
the extent possible, its clearing participants) with an explanation 
for any discretionary intraday margin calls. Id. at 10.
---------------------------------------------------------------------------

iii. Determinations by CCAs To Collect Intraday Margin
    Several commenters addressed the role of discretion in the proposed 
requirement for a CCA to have the authority and operational capacity to 
make intraday margin calls as frequently as circumstances warrant, 
including when risk thresholds specified by the CCA are breached or 
when the products cleared or markets served display elevated 
volatility.\102\ Specifically, while generally supportive of the 
proposal, several commenters sought confirmation that a CCA could use 
discretion when deciding to issue intraday margin calls.\103\ These

[[Page 91009]]

commenters stated that such discretion was necessary to allow the CCA 
to consider the potential procyclical impacts of an intraday margin 
call and/or any financial stability impacts.\104\ In this context, 
procyclicality refers to ``changes in risk-management practices that 
are positively correlated with market, business, or credit cycle 
fluctuations and cause or exacerbate financial instability.'' \105\ For 
example, margin calls during periods of declining asset prices may 
cause participants to sell assets, putting further negative pressure on 
asset prices and the market.\106\ Such events could negatively affect 
other CCA participants, as well as other CCAs and their markets.\107\
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    \102\ See DTCC; ICE; OCC; CCP12.
    \103\ DTCC at 4 (requesting additional clarity regarding a CCA's 
discretion and flexibility and stating that a CCA must maintain the 
discretion and flexibility to determine if intraday margin calls are 
required based on the totality of all circumstances the CCA may 
consider relevant and appropriate); ICE at 2 (stating that a CCA 
should be allowed the discretion on when and how to use its 
authority to make intraday margin calls under the particular 
circumstances); OCC at 4 (seeking explicit confirmation that a CCA 
may ``exercise judgment when determining whether and when to 
actually make intraday margin calls, based on all relevant 
circumstances and using predefined criteria); CCP12 at 2 (supporting 
the proposed approach to intraday margin, but also stating that a 
CCA needs the ability to exercise discretion when issuing intraday 
margin calls, including the ability to tailor [its] intraday margin 
call processes to the characteristics of the market it clears (e.g., 
market structure)); see also Davidson at 11. But see id. at 9 
(explaining that a CCA would only have an ``occasional need'' for an 
unscheduled intraday margin call'' for only ``truly extreme market 
moves''); and 10 (warning that unfettered issuances of intraday 
margin calls could become ``liquidity sinks'' and ``absorb[ ] 
liquidity like a giant sponge'').
    \104\ DTCC at 4 (stating discretion is necessary when 
considering issuing an intraday market call to consider various 
factors, such as persistent exposure to a participant during normal 
market conditions, general market conditions, and any possible 
procyclical effects a margin collection may trigger); ICE at 2 
(stating that discretion is needed for a CCA to consider the 
procyclical effects of any possible intraday margin call, such as 
``exacerbating credit and liquidity concerns with clearing 
members,'' or ``in extreme cases[,] causing market participant 
defaults); OCC at 4 (stating that, among other things, a CCA's 
discretion should include considerations related to anti-
procyclicality (by maximizing predictability of liquidity demands) 
and financial market stability); CCP12 at 2 (stating that this 
discretion would allow a CCA to consider any potential intraday 
margin call's ``negative procyclical effects'' and/or ``impacts to 
the stability of the financial system'').
    \105\ PFMI, supra note 9, at 47; see also Committee on the 
Global Financial System, The role of margin requirements and 
haircuts in procyclicality (Mar. 23, 2010) at 8 (defining 
procyclicality as ``the mutually reinforcing interactions between 
the financial and real sectors of the economy that tend to amplify 
business cycle fluctuations and cause or exacerbate financial 
instability''), https://www.bis.org/publ/cgfs36.pdf.
    \106\ See infra Part IV.C.2.a (discussing the relationship 
between procyclicality and intraday margin calls).
    \107\ Id.
---------------------------------------------------------------------------

    As discussed above, a CCA's margin methodology includes the 
criteria that a CCA uses to determine whether to make intraday margin 
calls.\108\ Because a CCA's margin methodology constitutes aspects of 
the CCA's stated policies, practices, or interpretations under Rule 
19b-4, a CCA is required to file a proposed rule change when the CCA 
revises its margin methodology (including, for example, revisions 
related to how its risk management concerns may affect a CCA's 
determination to issue an intraday margin call).\109\ In such a filing, 
the CCA would describe how any such revisions are consistent with the 
requirements of Exchange Act and the rules thereunder, including Rule 
17Ad-22(e)(6).
---------------------------------------------------------------------------

    \108\ See supra note 83 and accompanying text.
    \109\ Id.
---------------------------------------------------------------------------

    The Commission agrees with these commenters that a CCA's policies 
and procedures regarding intraday margin generally should be, under 
Rule 17Ad-22(e)(6)(ii), reasonably designed to address such risk 
management concerns, such as procyclicality. The Commission confirms 
that a CCA's consideration of such concerns (and more generally, of a 
CCA's understanding of its participants' activity and overall market 
conditions) in its policies and procedures regarding intraday margin 
(including a CCA's decision to collect or not collect margin in 
response to such consideration) is permissible and consistent with the 
requirements of both preexisting Rule 17Ad-22(e)(6)(ii) and the 
amendments being adopted in this release. The requirement to adopt 
policies and procedures that include the authority and operational 
capacity to make intraday margin calls as frequently as circumstances 
warrant, including when risk thresholds specified by the CCA are 
breached or when the products cleared or markets served display 
elevated volatility,\110\ should ensure that a CCA establishes the 
criteria and thresholds that it would consider when determining whether 
to make an intraday margin call. Such criteria are subject to the 
transparency and disclosure requirements discussed above in Part 
II.A.2.b.ii, and as an SRO, a CCA is obligated to follow its own rules. 
But the CCA's criteria and thresholds are not required to be inflexible 
or self-executing. A CCA generally should consider how its policies and 
procedures specify what factors the CCA would consider when determining 
when to make an intraday margin call when thresholds are breached or 
there is elevated volatility.\111\
---------------------------------------------------------------------------

    \110\ See supra Part II.A.2.ii (discussing elevated volatility 
under Rule 17Ad-22(e)(6)(ii) as when a CCA considers volatility to 
be elevated above typical levels in a manner specific to the 
products cleared and the markets served); contra CCA Standards 
Adopting Release, supra note 5, at 70815 (stating that what would 
constitute ``high volatility [. . .] may vary across asset 
classes'').
    \111\ As discussed above, supra note 101, one commenter sought 
for the Commission to require disclosure to the Commission and, if 
practicable, a CCA's participants, of the explanation for any 
``discretionary'' intraday margin calls. SIFMA at 10. However, such 
disclosure is not necessary because these policies and procedures 
should clearly indicate when the CCA would make an intraday margin 
call. By contrast, the Commission is requiring that a CCA document 
when it determines not to make an intraday margin call when its 
policies and procedures would otherwise indicate as such. See infra 
note 118 and accompanying text.
---------------------------------------------------------------------------

    The Commission is adopting this requirement as proposed.\112\ A 
CCA's determination to issue intraday margin calls, consistent with its 
ex ante policies and procedures, should improve risk management 
outcomes by enabling a CCA to apply its risk management expertise to 
changing intraday circumstances, such as the extreme price volatility 
or significant position changes recently experienced in January 
2021.\113\ A CCA should be better positioned to respond to a market 
event more effectively by developing policies and procedures that 
provide a clear framework for the timing and collection of intraday 
margin, but that also allows for the CCA to use its expertise (in 
specific products and markets) to analyze the particular facts and 
circumstances related to the market event and the affected market 
participants.
---------------------------------------------------------------------------

    \112\ The Commission is making several clarifying changes to 
Rule 17Ad-22(e)(6)(ii)(C): (1) capitalizing the first word of the 
rule text to read ``Monitors''; (2) adding after the word 
``including'' the language ``in the following circumstances'', 
followed by a semi-colon; (3) adding (1) and (2) to separate the two 
circumstances described in the rule text; and (4) adding the word 
``and'' following the text of the rule.
    \113\ See supra note 17 and accompanying text (further 
discussing the response to heightened volatility in GME and other 
equity securities).
---------------------------------------------------------------------------

    Commenters observed the importance of avoiding procyclicality in 
margin calls generally and the importance of considering the impact an 
intraday margin call may have on a CCA's participant.\114\ The 
Commission agrees that a CCA generally should consider these issues 
when determining whether to issue an intraday margin call, consistent 
with the applicable regulatory requirement to consider, and produce 
margin levels commensurate with, the risks and particular attributes of 
each relevant product, portfolio, and market, and to calculate margin 
sufficient to cover its potential future exposure to participants in 
the interval between the last margin collection and the close out of 
positions following a participant default.\115\
---------------------------------------------------------------------------

    \114\ SIFMA at 8-9.
    \115\ 17 CFR 240.17ad-22(e)(6)(i), (iii).
---------------------------------------------------------------------------

    Therefore, in this analysis, a CCA generally should consider, 
consistent with its policies and procedures, how its approach to 
intraday margin aligns with broader systemic objectives, such as 
minimizing potential procyclical effects and avoiding liquidity drains 
on

[[Page 91010]]

its participants. For example, a CCA may choose not to issue an 
intraday margin call triggered by the thresholds set forth in its 
policies and procedures (i.e., when risk thresholds specified by the 
CCA are breached or when the products cleared or markets served display 
elevated volatility) if, in the CCA's judgment, the intraday call is 
not required to effectively manage the risks posed to the CCA. A CCA's 
decision not to issue an intraday margin call could, therefore, avoid 
unnecessarily worsening market conditions by fostering procyclicality, 
and drawing on its members' capital more than needed (i.e., avoiding 
``liquidity sinks'').\116\
---------------------------------------------------------------------------

    \116\ See infra notes 559-563 and accompanying text (further 
discussing the economic impact of procyclical margin calls and 
considerations that a CCA may undertake in evaluating when to make 
or not make a call).
---------------------------------------------------------------------------

    A commenter also stated that the Commission should require that a 
CCA provide to the Commission, and to the extent possible, its clearing 
members, an explanation of the reasons for discretionary intraday 
margin calls because such explanation would allow for an evaluation of 
whether the need to make such a call might have been averted by 
improved procedures.\117\ The Commission does not agree that, as the 
commenter suggests, an obligation to provide an explanation and 
disclosure is necessary when a CCA makes an intraday margin call, 
because its policies and procedures already must identify and document 
the circumstances in which such a call would be made. However, a CCA 
should be subject to an obligation to document when it, consistent with 
its policies and procedures, determines not to make an intraday margin 
call in circumstances identified in such policies and procedures. A 
requirement to document when a CCA determines not to make such an 
intraday margin call, pursuant to its written policies and procedures, 
is broadly consistent with the goal identified by the commenter: that 
the CCA should be able to evaluate the implementation of its policies 
and procedures with respect to intraday margin. By keeping a record of 
such instances in which a CCA determines not to make an intraday margin 
call, pursuant to its written policies and procedures, it should be 
easier for a CCA to review its determination not to make an intraday 
margin call and to determine whether a breach of the thresholds that 
triggered an intraday call could have been averted by changed 
procedures. It also should better allow the CCA to holistically 
consider the procyclical impacts of intraday margin calls, which, as 
commenters stated, should be considered as part of a CCA's analysis 
about such calls.
---------------------------------------------------------------------------

    \117\ SIFMA at 9, 10.
---------------------------------------------------------------------------

    Therefore, the Commission is further amending Rule 17Ad-
22(e)(6)(ii) to add paragraph (e)(6)(ii)(D) to require that a CCA's 
risk-based margin system ``[d]ocuments when the covered clearing agency 
determines not to make an intraday margin call pursuant to its written 
policies and procedures required under paragraph (e)(6)(ii)(C)''.\118\
---------------------------------------------------------------------------

    \118\ See supra note 111.
---------------------------------------------------------------------------

    A CCA generally should review, on a regular basis, any 
documentation created pursuant to this requirement of Rule 17Ad-
22(e)(6)(ii)(D). Such documentation can be used to identify the CCA's 
rationale for not making an intraday margin call. In addition, a CCA 
generally should consider whether (and how) to disclose the information 
required under this documentation requirement to its participants, to 
provide additional transparency to its participants about when a CCA 
chooses not to make intraday margin calls, including whether such 
disclosure is necessary pursuant to Rule 17Ad-25(j), which requires 
that the CCA establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to require the board of 
directors to solicit, consider, and document its consideration of the 
views of participants and other relevant stakeholders of the registered 
clearing agency regarding material developments in its risk management 
and operations on a recurring basis.\119\ Consistent with this 
obligation under Rule 17Ad-25(j), a CCA generally should consider how 
best to solicit the views of participants and other relevant 
stakeholders regarding intraday margin calls, which could include how 
they were applied in the past by the CCA.
---------------------------------------------------------------------------

    \119\ 17 CFR 240.17ad-25(j).
---------------------------------------------------------------------------

c. Other Comments
    The Commission proposed requirements related to monitoring for 
intraday exposure and providing further specificity as to the 
circumstances when an intraday margin call could be made. However, one 
commenter addressed three additional issues related to more granular 
details within the calculation of an intraday margin call. First, this 
commenter addressed the nature of an intraday margin call, stating that 
any margin determination, including any intraday determination, should 
be made with respect to a clearing member's current positions and the 
current value of those positions, to the extent practicable.\120\ A CCA 
generally should determine margin based on its participants' positions, 
including a participant's total portfolio (that is, not just positions 
at end of day or intraday).\121\
---------------------------------------------------------------------------

    \120\ SIFMA at 9. The Commission understands this commenter to 
be referring to the difference between initial margin, which is 
typically collected to cover potential changes in the value of each 
participant's position (that is, potential future exposure) over the 
appropriate close-out period in the event that the participant 
defaults, as compared to variation margin, which is collected and 
paid out to reflect current exposures resulting from actual changes 
in market prices and is typically calculated by marking open 
positions to current market prices. See, e.g., PFMI, supra note 9, 
at 51. The commenter stated that an intraday call should clearly 
separate the initial margin and variation margin components of such 
a call. SIFMA at 9.
    \121\ See, e.g., CPMI-IOSCO Resilience Guidance, supra note 14, 
sec. 5.2.22 (``A CCP faces the risk that its exposure to its 
participants can change rapidly as a result of intraday changes in 
prices, positions, or both; ie adverse price movements, as well as 
participants building larger positions through new trading (and 
settlement of maturing trades). For the purposes of addressing these 
and other forms of risk that may arise intraday, a CCP should 
address and monitor on an ongoing basis how such risks affect all 
components of its margin system . . .'').
---------------------------------------------------------------------------

    Second, this commenter also requested that a CCA net against each 
other any amounts owing to a clearing member from, on the one hand, 
initial margin and, on the other hand, variation margin.\122\ Third, 
this commenter also requested that intraday margin calls be 
bidirectional to return margin cash or collateral to a CCA's 
participants.\123\
---------------------------------------------------------------------------

    \122\ SIFMA at 9.
    \123\ Id. at 7-8, 10; Davidson at 2, 11 (stating that such a 
bidirectional flow would allow the participants to avoid 
``unnecessary liquidity timing gaps''); see also The Associations at 
2 (requesting prompt return of margin to clearing members and 
clients to alleviate liquidity constraints).
---------------------------------------------------------------------------

    In response to these points, the Commission reiterates that the 
circumstances that could give rise to intraday margin calls at a CCA 
may vary significantly (e.g., intraday volatility, large changes in 
participant positions), and may present varied challenges. Accordingly, 
although there may be circumstances where it would be appropriate for a 
CCA to take the approach suggested by the commenter, the Commission's 
approach to Rule 17Ad-22(e) is to provide flexibility to CCAs, subject 
to their obligations and responsibilities as SROs under the Exchange 
Act, to design and structure their policies and procedures to take into 
account the differences among clearing agencies and the markets and 
products it clears. Accordingly, the Commission is not adopting any 
requirements in response to this commenter.
    This commenter also stated that the establishment of intraday 
margin

[[Page 91011]]

procedures cannot be viewed separately from the establishment of margin 
procedures as a whole, and that the reduction of ``surprises'' with 
respect to intraday margin depends on having transparent margin 
procedures generally and on having the start of day margin be as near 
correct as possible (meaning that the margin collected at the 
established start of day time period, as opposed to an intraday margin 
call, should be as accurate as possible).\124\ The commenter provided 
several suggestions regarding the calculation of margin more 
generally.\125\ The Commission proposed requirements related to 
monitoring for intraday exposure and providing further specificity as 
to when the CCA must consider an intraday margin call. The suggestions 
provided by the commenter relate to granular details within the 
calculation of margin. Rule 17Ad-22(e)(6) already contains requirements 
related to these issues raised by the commenter, most notably, that the 
CCA's risk-based margin system must consider, and produce margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market, and calculate margin sufficient to 
cover its potential future exposure to participants between the last 
margin collection and the close out of positions following a 
participant default, and use an appropriate method for measuring credit 
exposure that accounts for relevant product risk factors and portfolio 
effects across products.\126\ Although there may be circumstances where 
it would be appropriate for a CCA to incorporate policies and 
procedures such as those suggested by the commenter, the Commission's 
approach to Rule 17Ad-22(e) is to provide flexibility to CCAs, subject 
to their obligations and responsibilities as SROs under the Exchange 
Act, to design and structure their policies and procedures to take into 
account each clearing agency's unique characteristics. In addition, the 
transparency requirements discussed in Part II.A.2.b.ii apply to all 
components of a CCA's margin model, including those discussed by the 
commenter.
---------------------------------------------------------------------------

    \124\ SIFMA at 7.
    \125\ Id. at 7-8 (discussing the development and maintenance of 
margin models; accurate, robust pricing; margin period of risk; 
calibration scenarios/lookback periods; margin add-ons, such as 
concentration and liquidity risks; offsets; anti-procyclicality 
measures; margin returns; and interoperability).
    \126\ 17 CFR 240.17ad-22(e)(6)(i), (iii), (v).
---------------------------------------------------------------------------

    One commenter recommended that the Commission require a CCA to 
disclose particular aspects of its risk models used in the calculation 
of initial margin.\127\ As discussed supra in Part II.A.2.b.ii, CCAs 
are already required to provide disclosure of key aspects of their 
margin models under Exchange Act Rule 17Ad-22(e)(23)(iv) and to file 
their rules as part of the SRO and/or SIFMU rule filing processes, 
which further provides transparency.\128\ Therefore, additional 
disclosure requirements are not required because of the current 
requirements that a CCA must disclose key aspects of its margin model.
---------------------------------------------------------------------------

    \127\ The Associations at 3.
    \128\ 17 CFR 240.17ad-22(e)(23)(iv).
---------------------------------------------------------------------------

    Another commenter stated that a CCA should be required to publish 
regular statistics in a consistent format as to the performance of 
margin requirements, including how many clearing members were subject 
to margin calls of what size, did clearing members go into a margin 
deficit, and how frequently.\129\ However, CCAs already include, as 
part of their public disclosures under Rule 17Ad-22(e)(23)(iv)(C), a 
description of basic data and performance statistics on their services 
and operations, such as basic volume and value statistics by product 
type, average aggregate intraday exposures to its participants, and 
statistics on the CCA's operational reliability.\130\ As such, the 
Commission is not adopting any additional disclosure requirements. 
However, CCAs generally provide such public information regarding their 
margin models' performance as part of their periodic disclosures.\131\ 
For example, these disclosures include, with respect to margin, 
identification of the number of times over the past 12 months that 
margin coverage held against any account fell below the actual mark-to-
market exposure of that member account based on daily backtesting 
results and, in the event of a breach of initial margin coverage, a 
report on the size of the uncovered exposure, both of which are data 
points consistent with the commenter's request to identify whether 
clearing members went into a margin deficit and how frequently.\132\ 
Accordingly, the Commission is not adopting additional requirements. 
However, a CCA generally should consider what disclosures regarding its 
policies and procedures for margin collection can be useful to market 
participants to facilitate their understanding of the performance of 
its margin model.
---------------------------------------------------------------------------

    \129\ SIFMA at 10.
    \130\ See supra note 96 and accompanying text.
    \131\ Id.
    \132\ See, e.g., DTCC, ``Fixed Income Clearing Corporation and 
National Securities Clearing Corporation Public Quantitative 
Disclosures for Central Counterparties: Q2 2024'' (Aug. 29, 2024) at 
13, https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/CPMI-IOSCO-Public-Quantitative-Disclosures-Q2-2024.pdf.
---------------------------------------------------------------------------

B. Inputs to Margin System

1. Proposed Amendment to Rule 17Ad-22(e)(6)(iv)
    In the RWP Proposing Release, the Commission proposed to amend Rule 
17Ad-22(e)(6)(iv) to strengthen its requirements that a CCA have 
policies and procedures reasonably designed to cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, among other things, uses reliable sources for its price 
data and uses procedures for addressing circumstances in which price 
data are not readily available or reliable.\133\ Specifically, the 
Commission proposed expanding the rule's scope beyond price data to 
also include other substantive inputs to a CCA's risk-based margin 
system,\134\ meaning that the CCA's procedures would also have to 
address when such a substantive input is not readily available or 
reliable.\135\ The unavailability or unreliability of any substantive 
input to a CCA's margin system could potentially affect the CCA's 
ability to calculate margin.\136\ Citing as justification the current 
requirement of ``reliable sources'' of price data,\137\ the Commission 
stated that there is a need to use reliable sources for substantive 
inputs other than price data.\138\ In response, the Commission proposed 
to expand this requirement to substantive inputs other than price 
data.\139\ The Commission stated that this proposal ``should help 
ensure that the CCA can continue to calculate and collect margin'' 
pursuant to its obligations under Rule 17Ad-22(e)(6).\140\
---------------------------------------------------------------------------

    \133\ RWP Proposing Release, supra note 18, at 34713.
    \134\ See id. at 34715 (stating that ``substantive'' refers to 
``any inputs used by the covered clearing agency that are necessary 
for the risk-based margin system to calculate margin'').
    \135\ Id. at 34714.
    \136\ Id.
    \137\ Id. (explaining that a reliable source of timely price 
data was necessary because a CCA's ``margin system needs such data 
to operate with a high degree of accuracy and reliability, given the 
risks that the CCA's size, operation, and importance pose to U.S. 
securities markets'').
    \138\ Id.
    \139\ Id. at 34714-15 (``The Commission is therefore proposing 
to amend Rule 17Ad-22(e)(6)(iv) to expand its scope beyond price 
data to encompass other substantive inputs to its risk-based margin 
system and to impose requirements on a [CCA] to have procedures when 
such substantive inputs are not readily available or reliable'').
    \140\ Id. at 34714.
---------------------------------------------------------------------------

    The Commission also proposed two new requirements on a CCA's backup 
procedures when price data and other

[[Page 91012]]

substantive inputs are not readily available or reliable. First, the 
Commission proposed these procedures to help ensure that the CCA can 
meet its obligations under Rule 17Ad-22(e)(6).\141\ Second, the 
Commission proposed that these procedures must include either: (i) the 
use of price data or other substantive input from an alternate source; 
or (ii) the use of an alternate risk-based margin system that does not 
similarly rely on the same unavailable or unreliable substantive 
input.\142\
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    \141\ Id. at 34715.
    \142\ Id.
---------------------------------------------------------------------------

    In proposing this amendment, the Commission included the following 
guidance: an alternate source ``generally should meet the same level of 
reliability of the primary source;'' and an ``alternate risk-based 
system needs to be an alternate margin model that does not rely on the 
same data source that is unavailable or unreliable'' to ensure to 
compliance with Rule 17Ad-22(e)(6).\143\ The Commission also stated 
that an alternate risk-based margin system would be subject to the 
requirements of 17 CFR 240.17ad-22(e)(6)(vi) and (vii), with respect to 
monitoring, review, testing, verification, and model validation.\144\ 
Additionally, the Commission stated that a CCA should ``consider its 
reliance on any third party sources for purposes of its risk-based 
margin system and consider whether an alternate system or source of 
data or other inputs that is internal to the CCA, and does not rely 
upon any third party provider, would be appropriate.'' \145\
---------------------------------------------------------------------------

    \143\ Id.
    \144\ Id.
    \145\ Id.
---------------------------------------------------------------------------

    The Commission is adopting the requirement as proposed, with minor 
modifications discussed in Part II.B.2 below. The Commission is also 
making clarifying technical changes.\146\
---------------------------------------------------------------------------

    \146\ Specifically, the Commission is: (1) adding paragraph 
markers (in the form of capital letters) to separate the clauses of 
the rule text into (A), (B), and (C); (2) changing the punctuation 
from a comma to a semi-colon and deleting the word ``and'' at the 
end of paragraph (e)(6)(iv)(A); (2) adding parenthesis around the 
text ``and, with respect to price data, sound valuation models'', 
deleting the comma at the end of that language, and changing the 
period to a semi-colon at the end of paragraph (e)(6)(iv)(B); (3) 
adding additional paragraph markers (1) and (2) to paragraph 
(e)(6)(iv)(C) before each of the two alternatives listed in this 
paragraph (i.e., ``the use of price data or substantive inputs from 
an alternate source; or'' and ``if it does not use an alternate 
source, the use of a risk-based margin system that does not rely on 
the unavailable or unreliable substantive input;'') and capitalizing 
the first word in each new paragraphs (e)(6)(iv)(C)(1) and (2) 
(``The'' and ``If'', respectively); (4) adding a clarifying, 
internal cross-reference (``such procedures under paragraph 
(e)(6)(iv)(B)'') in paragraph (e)(6)(iv)(C); and (5) replacing the 
word ``shall'' in new Rule 17Ad-22(e)(6)(iv)(C) (i.e., ``Such 
procedure under paragraph (e)(6)(iv)(B) of this section shall'') 
with ``must'' to use more plain language.
---------------------------------------------------------------------------

2. Discussion of Comments
a. Inclusion and Definition of Substantive Inputs
    As discussed above, the Commission proposed expanding the scope of 
Rule 17Ad-22(e)(6)(iv) beyond price data to also include substantive 
inputs to a CCA's margin methodology.\147\ Based on its supervisory 
experience, the Commission understands that such substantive inputs 
could include: (i) portfolio size; (ii) volatility, (iii) sensitivity 
to various risk factors that are likely to influence security prices; 
(iv) duration; (v) convexity; and/or (vi) the results of models run by 
third parties.\148\
---------------------------------------------------------------------------

    \147\ In addition, to improve clarity and consistency of terms, 
the Commission proposed technical edits standardizing references to 
``price data'' in Rule 17Ad-22(e)(6)(iv), which currently refers to 
both ``price data'' and ``pricing data,'' to refer only to price 
data. The Commission previously used the two words interchangeably 
in preexisting Rule 17Ad-22(e)(6)(ii). RWP Proposing Release, supra 
note 18, at 34714 n.59. The Commission received no comments on this 
proposed technical change of ``pricing data'' to ``price data'' in 
this provision and is adopting as proposed.
    \148\ RWP Proposing Release, supra note 18, at 34714.
---------------------------------------------------------------------------

    Several commenters addressed this proposed modification to Rule 
17Ad-22(e)(6)(iv).\149\ One commenter agreed generally with the 
proposed extension of the rule's scope to include ``substantive 
inputs.'' \150\ The commenter supported extending the requirement for 
``reliable sources'' to include substantive inputs because a CCA's 
margin systems need ``to operate with a high degree of accuracy and 
reliability, given the risk that [its] size, operation, and importance 
posed to the securities market.'' \151\
---------------------------------------------------------------------------

    \149\ See Better Markets at 8-9; CCP12 at 2; DTCC at 5; The 
Associations at 8.
    \150\ See Better Markets at 8-9.
    \151\ Id. at 8.
---------------------------------------------------------------------------

    Several commenters requested that the Commission provide more 
guidance regarding its statement about what inputs may be 
``substantive.'' \152\ One commenter requested that ``the term 
`substantive' as used in this context be further refined to avoid 
confusion over the inputs that are `necessary' and those that are `non-
consequential.' '' \153\ In addition, several commenters stated that 
the CCA should determine what constitutes a substantive input.\154\ One 
such commenter also stated that, if the Commission prescribed a 
definition of ``substantive input,'' a CCA may be forced to ``obtain, 
often at great expense, alternate data sources for inputs with limited 
utility and minimal or no impact on margin calculations.'' \155\
---------------------------------------------------------------------------

    \152\ See DTCC at 5; CCP12 at 2; The Associations at 8.
    \153\ DTCC at 5.
    \154\ Id.; CCP12 at 2.
    \155\ CCP12 at 2.
---------------------------------------------------------------------------

    However, another commenter stated that the Commission's rules 
around substantive inputs should be principles based, identifying one 
such principle that ``every input that affects margin requirements by 
[x]% is deemed substantive.'' \156\
---------------------------------------------------------------------------

    \156\ The Associations at 8.
---------------------------------------------------------------------------

    The Commission is not making any amendments to define what 
constitutes a substantive input. A CCA is responsible for developing 
its own policies and procedures, including its margin methodology, and 
it is best positioned to determine what constitutes a substantive input 
into its margin methodology. As stated in the RWP Proposing Release, 
``substantive'' for the purposes of Rule 17Ad-22(e)(6)(iv), ``refers to 
any inputs used by the CCA that are necessary for the risk-based margin 
system to calculate margin'' and ``is meant to distinguish from other 
potential inputs that may not be consequential to the calculation of 
margin.'' \157\ Accordingly, as requested by some commenters, the 
Commission confirms that a CCA has the discretion to determine what is 
a ``substantive'' input, based on its knowledge of its risk-based 
margin system, as compared to those that it determines to be non-
consequential.\158\ When establishing and maintaining its risk-based 
margin system, each CCA must have the ability to consider its own 
unique characteristics and circumstances, as well as those of the 
market it serves.\159\ Rather than have the Commission define the term 
``substantive'' prescriptively for each CCA, this discretion 
corresponds with the Commission's principles-based approach in Rule 
17Ad-22(e), which helps each CCA effectively meet the evolving risks 
and challenges in the markets that each CCA serves.\160\ Therefore, no 
further clarifications or guidance are necessary to distinguish a 
substantive input from those inputs that are non-consequential.
---------------------------------------------------------------------------

    \157\ RWP Proposing Release, supra note 18, at 34715.
    \158\ See DTCC at 5; CCP12 at 2; The Associations at 8.
    \159\ See CCA Standards Adopting Release, supra note 5, at 
70800-01.
    \160\ See id. at 70800.
---------------------------------------------------------------------------

    Further, the Commission is not adopting any amendments to Rule 
17Ad-22(e)(6)(iv) to incorporate the principle that ``every input that 
affects margin requirements by [x]% is deemed substantive.'' \161\ This 
type of requirement would not be principles-

[[Page 91013]]

based and instead would prescribe a particular scope of what 
constitutes ``substantive,'' which the Commission does not seek to do. 
Based on its supervisory experience, the Commission understands that a 
wide range of margin models exists among the CCAs. This wide range of 
margin models exists due to each CCA's different participants, 
different products cleared, and different markets served. Given these 
distinctions among the CCAs, and consistent with the principles-based 
approach in Rule 17Ad-22(e) more generally, the Commission believes it 
would be inappropriate to include in Rule 17Ad-22(e)(6)(iv) a 
quantitative threshold defining those inputs that would be 
``substantive.'' Such a specific percentage threshold likely would fail 
to identify all the inputs for all CCAs' margin models that are 
necessary to ensure every CCA's margin model can meet the requirements 
of Rule 17Ad-22(e)(6) (i.e., covering its credit exposures to its 
participants). Therefore, the Commission is not adopting modifications 
responsive to the commenter requesting ``substantive'' to correspond to 
a percentage impact on margin requirements.
---------------------------------------------------------------------------

    \161\ The Associations at 8.
---------------------------------------------------------------------------

b. Use of an Alternate Source or an Alternate Risk-Based Margin System
    As proposed, the changes to Rule 17Ad-22(e)(6)(iv) required that 
the procedures for when price data or substantive inputs are not 
readily available or reliable must include the use of price data or 
substantive inputs from an alternate source or, if it does not use an 
alternate source, the use of an alternate risk-based margin system 
(that does not similarly rely on the unavailable or unreliable 
substantive input).\162\
---------------------------------------------------------------------------

    \162\ RWP Proposing Release, supra note 18, at 34715.
---------------------------------------------------------------------------

    One commenter expressed support for this proposed requirement,\163\ 
and other commenters acknowledged the importance of ensuring that a 
CCA's risk-based margin system be able to perform even when certain 
sources of pricing data or other inputs become unavailable.\164\
---------------------------------------------------------------------------

    \163\ Better Markets at 9 (stating that this proposed 
requirement would ensure that the backup procedures available to a 
CCA ``are sufficiently distinct from the impaired data source that 
they will serves as reliable alternatives'').
    \164\ See OCC at 4; ICE at 2; CCP12 at 2.
---------------------------------------------------------------------------

    However, several commenters disagreed with the requirement of a 
sole means of contingency (that is, the use of alternate sources) and 
stated that CCAs should have the flexibility to develop their own 
backup procedures and/or appropriate substitutions for unavailable 
inputs in their margin models, depending on the products cleared and 
the markets served.\165\ These commenters stated that it may not always 
be possible to have a ``like-for-like'' substitution of an alternate 
source.\166\ One commenter stated that the Commission should not 
restrict choices in an emergency situation by requiring that an 
alternate source be independent of the third-party provider, and that 
CCAs should simply have a ``credible fallback'' in the event of 
unavailable price data or substantive inputs.\167\ Another such 
commenter recommended that the proposal be modified to allow for 
``substantive inputs from an alternate source, and/or of appropriate 
alternate inputs.'' \168\
---------------------------------------------------------------------------

    \165\ DTCC at 4 (stating that a CCA should have ``the 
flexibility to develop reasonable backup procedures and contingency 
plans for these types of circumstances, which will depend on the 
cleared products and market structure at issue, and may not in all 
cases include the use of third-party secondary vendors or data 
sources''); OCC at 5 (stating that a CCA should be permitted to use 
its informed judgment to determine the appropriate substitutions for 
unavailable inputs in its margin system, which would ensure that 
CCAs have sufficient flexibility to address the need for alternative 
data sources in a manner that addresses the Commission's policy 
objectives, is tailored to the markets served and products cleared 
by the [CCA], and is not unnecessarily burdensome).
    \166\ DTCC at 4-5 (stating that requiring an alternate source 
would not always be the most practical or effective means to ensure 
a CCA meets its participants' credit obligations under Exchange Act 
Rule 17Ad-22(e)(4), due to the possible absence of an alternate 
source of pricing data or other substantive inputs (e.g., because of 
industry consolidation among vendors), and the inability to use 
discretion to develop a solution to unavailable price data or other 
substantive input); OCC at 4 (stating that alternate sources may not 
exist, or may be prohibitively expensive or technically difficult to 
implement when compared to the impact of the input on the margin 
model). One such commenter suggested that a CCA may find it 
appropriate if its policies and procedures incorporated the use of 
an alternative pricing vendor, where applicable, or in the absence 
of such an alternative provider, pursuant to the CCA's policies and 
procedures to ensure that timely pricing data is applied, with such 
procedures including, for example, recording ``the last available 
price'' in the CCA's pricing database with such price consumable to 
applicable participants (citing to its recent update to its Clearing 
Agencies' Securities Valuation Framework). Id. at 5.
    \167\ The Associations at 9.
    \168\ OCC at 5.
---------------------------------------------------------------------------

    In response to the commenters who sought revisions to the proposed 
requirement's obligation to use an alternate source, the requirement of 
an alternate source does not mean that such an alternate source must be 
external to a CCA or that the alternate source must be of the same 
nature as the original substantive input (that is, the alternate source 
need not be a ``like-for-like'' substitute). As stated in the RWP 
Proposing Release, ``alternate source[s] generally should meet the same 
level of reliability of the primary source, whether that alternate is 
sourced from an external provider or created internally.'' \169\ By 
acknowledging that an alternate source may be created internally, the 
Commission recognized that an alternate source means, simply, an 
alternate to the primary input and does not require an entirely 
independent, third-party source to provide the same input. Similarly, 
the recognition that the alternate source may be created internally 
means that the Commission also recognized that the alternate source 
may, in fact, be the result of internal policies and procedures that 
the CCA designs to develop an internal alternate source and meet the 
needs of its margin methodology.
---------------------------------------------------------------------------

    \169\ RWP Proposing Release, supra note 18, at 34715 (emphasis 
added).
---------------------------------------------------------------------------

    Further, in response to the commenters seeking flexibility to 
develop their own backup procedures, this requirement does not prevent 
a CCA from using its discretion to determine the most appropriate 
substitution for any price data or substantive input to its risk-based 
margin system.\170\ This requirement also does not preclude the use of 
policies and procedures that establish a methodology or approach to 
determine the appropriate price,\171\ so long as, as discussed in Part 
II.B.2.c infra, the CCA can still meet the obligations of Rule 17Ad-
22(e)(6), including meeting its credit obligations to its 
participants.\172\ Therefore, revisions to or deletion of the rule text 
regarding alternate sources, including those suggested by one commenter 
to allow for ``substantive inputs from an alternate source, and/or of 
appropriate alternate inputs,\173\ are not necessary, as the rule text 
does not require an externally provided alternate source.
---------------------------------------------------------------------------

    \170\ Id.
    \171\ For example, one CCA commenter stated that its existing 
policy provided that backup pricing may more accurately be sourced 
from an alternative pricing vendor or may also be determined, in the 
absence of an alternative pricing vendor, pursuant to the CCA's 
applicable policies and procedures to ensure that timely pricing 
data is applied, with such procedures including, for example, using 
the last available price which is consumable to applicable 
participants. DTCC at 5.
    \172\ RWP Proposing Release, supra note 18, at 34715.
    \173\ See OCC at 5.
---------------------------------------------------------------------------

    One commenter stated that the Commission should ``refocus[ ]'' the 
final rule on policies and procedures, as opposed to requiring policies 
and procedures that include an alternate source or risk-based margin 
system.\174\ The Commission agrees that the

[[Page 91014]]

requirement should allow for flexibility in how CCAs address the 
unavailability or unreliability of an input to their margin model. The 
requirement being adopted does not mandate that a specific alternate 
source be used, but rather that the CCAs have policies and procedures 
to ensure that some alternate source is available, even if that source 
is determined internally by the CCA.
---------------------------------------------------------------------------

    \174\ CCP12 at 2.
---------------------------------------------------------------------------

    With respect to the requirement of a potential alternate risk-based 
margin system, one commenter stated that requiring CCAs to develop and 
maintain an entire alternate risk-based margin system would be 
prohibitively expensive and operationally burdensome.\175\ However, the 
Commission disagrees with the commenter's characterization that such 
costs are necessary because the proposed rule does not require the 
development and maintenance of a second risk-based margin system 
separate from its current risk-based margin system, as discussed 
below.\176\ Another commenter suggested that the Commission should 
remove the requirement of a potential alternate risk-based margin 
system from the rule text.\177\ The Commission disagrees that the 
proposed rule requires a second risk-based margin system separate from 
a CCA's current risk-based margin system, and the Commission is 
modifying the term ``alternate risk-based margin system'' to make this 
point clear.\178\ Specifically, the proposed requirement for backup 
procedures when substantive inputs ``are not readily available or 
reliable'' should help a CCA ensure it ``can continue to calculate and 
collect margin commensurate with, the risks and particular attributes 
of each relevant product, portfolio, and market, as required under Rule 
17Ad-22(e)(6)(i).'' \179\
---------------------------------------------------------------------------

    \175\ OCC at 5.
    \176\ See infra notes 178 and 186 and accompanying text.
    \177\ ICE at 2-3.
    \178\ See infra note 187 and accompanying text.
    \179\ Id.
---------------------------------------------------------------------------

    Similarly, another commenter disagreed with the proposed additional 
requirement that a CCA have advance plans ``to use an alternate risk-
based margin system because of the unavailability or unreliability of a 
particular input,'' which ``would impose a significant burden on a 
[CCA] solely for the purpose of addressing a problem with an input that 
may be transitory.'' \180\ The commenter stated that it ``is not aware 
of circumstances where a [CCA] has been unable to address a problem 
with an input price through its normal business practices and 
procedures.'' \181\ The commenter also stated that it ``does not 
believe that the Commission has articulated a problem (other than a 
theoretical one)'' that the proposal is designed to address and ``has 
not recognized the considerable costs to'' CCAs, clearing firms, and 
other market participants ``that would be required to develop and 
implement alternate margin models to address a remote and theoretical 
problem with price or other data inputs.'' \182\ The commenter 
suggested that this clause be removed from the rule text.\183\ In 
addition, one commenter requested that the Commission confirm that any 
final rule does not create an expectation that CCAs should develop an 
alternate risk-based margin system.\184\
---------------------------------------------------------------------------

    \180\ ICE at 2.
    \181\ Id. at 3.
    \182\ Id.
    \183\ Id.
    \184\ CCP12 at 3 (stating that the development of such an 
alternate system would require a CCA to effectively maintain two 
very distinct margin systems, which is likely very resource 
intensive and time consuming).
---------------------------------------------------------------------------

    The Commission disagrees with the commenter that the failure of a 
CCA's margin model (i.e., its risk-based margin system) due to an 
unavailable or unreliable input is a ``theoretical'' problem. Rather, 
the unavailability or unreliability of a substantive input could impact 
a CCA's ability to establish, implement, maintain, and enforce a risk-
based margin system that Rule 17Ad-22(e)(6) requires. Moreover, 
contrary to the commenter's assertion, the Commission is not requiring 
that CCAs develop and implement alternate margin models, but rather, is 
requiring that the CCA establish, implement, maintain and enforce 
written policies and procedures to address particular issues that could 
affect the functioning of its margin model. The requirement also allows 
for the use of an alternate source in the existing risk-based margin 
system, and a CCA may determine the alternate source using its own 
policies and procedures.\185\ An alternate source from a third-party 
provider is not required. More generally, this requirement is designed 
to expand the scope of the preexisting rule and ensure that a CCA 
establishes, implements, maintains and enforces written policies and 
procedures to address the unavailability of a substantive input to its 
margin model and meet its obligations under Rule 17Ad-22(e)(6). As 
stated in the RWP Proposing Release, when substantive inputs are 
unavailable or unreliable, CCAs must be able to continue to calculate 
and collect margin commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market.\186\ 
Additionally, the Commission analyzed the costs of the requirement in 
Part IV, infra, and in the RWP Proposing Release. Given the analysis, 
the Commission disagrees with the commenter's suggestion to remove the 
clause from the proposal.
---------------------------------------------------------------------------

    \185\ RWP Proposing Release, supra note 18, at 34715.
    \186\ Id. at 34714.
---------------------------------------------------------------------------

    The Commission is making several technical changes to the rule text 
to clarify that an alternate risk-based margin system is not required 
in all instances. Specifically, the Commission deletes the word 
``alternate'' from ``an alternate risk-based margin system'' in Rule 
17Ad-22(e)(6)(iv)(C)(2) (and changes ``an'' to ``a'' before ``risk-
based margin system'' for grammatical reasons). This revision responds 
to commenters' concerns that the rule requires that a CCA develop an 
alternate risk-based margin system separate from a CCA's current risk-
based margin system.\187\ The rule does not include such a requirement. 
The Commission is also adding the term ``either'' after ``must 
include'' to clarify that satisfying either paragraph (e)(6)(iv)(C)(1) 
or (2) fulfills paragraph (e)(6)(iv)(C)'s requirement.\188\
---------------------------------------------------------------------------

    \187\ See supra notes 175, 184 and 177 and accompanying text.
    \188\ The Commission also removes from Rule 17Ad-22(e)(6)(iv)(C) 
the word ``similarly'' from between the words ``not'' and ``rely'' 
(i.e., ``the use of a risk-based margin system that does not rely on 
the unavailable or unreliable substantive input'') to remove 
redundancy (as the word ``similarly'' was unnecessary to convey the 
meaning that the prohibited reliance was on the unavailable or 
unreliable substantive input in question). The Commission also 
revises the reference to ``the unavailable or unreliable substantive 
input'' to ``substantive inputs that are unavailable or reliable'' 
for the same reasons.
---------------------------------------------------------------------------

c. Obligation To Meet a CCA's Obligations Under Rule 17Ad-22(e)(6)
    The proposed amendment to Rule 17Ad-22(e)(6)(iv) also provided that 
the procedures discussed in Part II.B.2.b must ensure that the CCA is 
able to meet its obligation to cover credit exposures to its 
participants under Rule 17Ad-22(e)(6).\189\ In the RWP Proposing 
Release, the Commission explained that, by specifying how these 
procedures must perform (i.e., to allow a CCA to continue to cover its 
credit exposures), this proposed amendment helps ensure that a CCA 
adopts sufficiently robust procedures.\190\ As such, this proposed 
amendment would, with respect to both

[[Page 91015]]

price data and other substantive inputs, require that such procedures 
should address circumstances in which price data or substantive inputs 
are not readily available or reliable, in order to ensure that the CCA 
be able to meet its requirements under Rule 17Ad-22(e)(6) and cover its 
credit exposures to its participants.\191\
---------------------------------------------------------------------------

    \189\ RWP Proposing Release, supra note 18, at 34715.
    \190\ Id.
    \191\ Id.
---------------------------------------------------------------------------

    The Commission received no comments on this requirement and is 
adopting as proposed.

C. Contents of Recovery and Orderly Wind-Down Plans

    The Commission received several overarching comments on proposed 
Rule 17Ad-26 that were generally supportive of the approach, 
particularly the addition of new and more specific requirements 
applicable to a CCA's RWP. One commenter stated that a detailed RWP is 
essential, as the inability of a CCA to recover from severe losses, or 
the disorderly wind-down of a CCA, could have significant repercussions 
not only for the sector in which the CCA operates but for the markets 
and the economy as a whole.\192\ The commenter also stated that CCAs 
must have comprehensive RWPs because even sound risk management may not 
prevent a CCA's default in extreme circumstances.\193\ The commenter 
continued by stating the obvious strength of recovery and orderly wind-
down planning is the ex ante development of a strategy to maintain as a 
going concern the critical operations of the CCA, even in the face of 
losses that would otherwise have caused its insolvency, or to ensure 
the orderly transfer of functions.\194\ The commenter stated that not 
aligning RWPs to uniform requirements introduces risk, and that the 
proposed rule mitigates that risk by requiring all RWPs to incorporate 
at least nine specific elements.\195\ Another commenter explained that 
CCAs face no meaningful competitive pressure when they are the sole 
clearing agency for the products they clear and can be a source of 
systemic risk.\196\ The commenter stated that, in such cases, to 
improve CCAs, regulatory mandates must effectively codify existing best 
practices to enhance resiliency and create a level playing field for 
resiliency, and that such improvements will only occur if the 
Commission imposes specific regulatory requirements.\197\
---------------------------------------------------------------------------

    \192\ Better Markets at 10.
    \193\ Id.
    \194\ Id.
    \195\ Id.
    \196\ SIFMA at 10-11.
    \197\ Id.
---------------------------------------------------------------------------

    One commenter cautioned that the proposed upgrades and focus on RWP 
design and testing may create unrealistic expectations and over-
reliance on RWPs. The commenter also stated that care is needed to 
ensure that confidence in such plans is well grounded and that the 
efficient implementation of RWPs is properly stressed, accounting for 
rapidly evolving market risk and for the ever-increasing speed of 
market-moving data.\198\ In the Commission's view, effective planning 
can help preserve financial stability and ensure the continuity of 
critical CCP and CSD functions for the markets served by CCAs, and the 
availability of tools and resources in the RWP generally reserved for 
recovery and wind-down scenarios would not lead to an ``over-reliance'' 
on such tools in practice. In practical terms, default management, 
recovery, and wind-down exist as distinct points across a spectrum from 
normal market conditions to highly stressed market conditions. As such, 
a CCA would deploy its RWP either (i) in a default scenario, only after 
its business-as-usual default management tools had failed to close out 
any defaulting portfolios and, likely, after the CCA had fully 
exhausted its prefunded resources, or (ii) in a non-default scenario, 
after resources set aside for business risk (e.g., six months of 
operating expenses) or for other purposes had been exhausted. 
Commission rules impose a high standard for resilience in normal and 
stressed market conditions across both default and non-default loss 
scenarios, consistent with the international standards set forth in the 
PFMI, of which planning for recovery and orderly wind-down is but one 
part of a multi-part and comprehensive regulatory framework. Given this 
dynamic, CCAs would not have incentives to ``activate'' their RWPs 
early.
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    \198\ Letter from Erkki Liikanen, Co-Chair, and Simon Johnson, 
Co-Chair, CFA Institute Systemic Risk Council (Aug. 30, 2023) 
(``CFA'') at 5.
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    More generally, the Commission agrees with commenters expressing 
the view that thoughtful recovery and wind-down planning is necessary, 
even when effective risk-management measures are in place, because of 
the potential systemic risk implications of the failure of a CCA. Given 
the evolving nature of recovery and orderly wind-down planning, as well 
as the annual review and testing requirements included in Rule 17Ad-26, 
the concern that adding more robust requirements for development and 
testing of RWPs will lead to ``over-reliance'' on RWPs is misplaced. 
Effective RWPs, with robust consideration of scenarios, triggers, and 
processes for testing and board approval, help promote recovery. Such 
planning for recovery is essential because, as other commenters have 
stated, the wind-down of systemic functions often would not leave 
alternative providers of clearance and settlement services to support 
continued market function.\199\ To reach the stage where a CCA would 
consider implementing its RWP, in the context of a default loss, the 
CCA would have to incur default losses greater than the financial 
resources maintained pursuant to policies and procedures required by 
Rule 17Ad-22(e)(4),\200\ or in a non-default loss context, incur losses 
greater than the liquid net assets funded by equity held pursuant to 
the policies and procedures required by Rule 17Ad-22(e)(15)(ii) to 
cover potential business losses.\201\ As such, neither CCAs nor market 
participants are in danger of ``over-reliance'' on the policies and 
procedures that undergird RWPs. In addition, although many systemic 
functions are not currently offered by alternative providers, RWPs can, 
in establishing robust policies and procedures for orderly wind-down, 
help facilitate the orderly transfer of systemic functions to a new 
entity to maintain clearance and settlement services for the market 
served.
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    \199\ See, e.g., Davidson at 1. This concern regarding the 
feasibility or advisability of wind-down in the context of CCAs is 
discussed further in Part II.D.1.c.
    \200\ See 17 CFR 240.17ad-22(e)(4)(i) (requiring a CCA to 
maintain sufficient financial resources to cover its credit exposure 
to each participant fully with a high degree of confidence); see 
also 17 CFR 240.17ad-22(e)(4)(ii) (requiring a CCA that provides CCP 
services and is either systemically important in multiple 
jurisdictions or a clearing agency involved in activities with a 
more complex risk profile to maintain additional financial resources 
at the minimum to enable it to cover a wide range of foreseeable 
stress scenarios that include, but are not limited to, the default 
of the two participant families that would potentially cause the 
largest aggregate credit exposure for the CCA in extreme but 
plausible market conditions); 17 CFR 240.17ad-22(e)(4)(iii) 
(requiring a CCA that is not subject to Rule 17Ad-22(e)(4)(ii) to 
maintain additional financial resources at the minimum to enable it 
to cover a wide range of foreseeable stress scenarios that include, 
but are not limited to, the default of the participant family that 
would potentially cause the largest aggregate credit exposure for 
the CCA in extreme but plausible market conditions).
    \201\ See 17 CFR 240.17ad-22(e)(15)(ii) (requiring a CCA, at a 
minimum, to hold liquid net assets funded by equity equal to the 
greater of either six months of the CCA's current operating 
expenses, or the amount determined by the board of directors to be 
sufficient to ensure a recovery or orderly wind-down of the CCA).

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[[Page 91016]]

    Another commenter stated that the RWP Proposing Release has not met 
the burden of proof required by the Administrative Procedure Act. More 
specifically, the commenter stated that the Commission has not 
demonstrated that the rule amendments are necessary or in the public 
interest because the proposed amendments are to existing rules that 
already more than adequately cover the areas in question, and there 
have been no examples of CCAs or clearing agency participants that 
failed or of CCAs that executed recovery plans or parts thereof. \202\ 
The commenter further explains that the existing SRO rules of the CCAs 
relating to RWPs have been approved by the Commission, and that the 
Commission has conducted multiple examinations of CCAs under those 
rules, where any deficiencies found have been subject to, or are in the 
process of, review and remediation.
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    \202\ Davidson at 1-3.
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    Although rare, CCPs both in the U.S. and abroad have experienced 
highly stressed market conditions that led to participant defaults, and 
CCP failures have occurred outside the U.S. Examples of such 
participant defaults include three CCP failures in other jurisdictions 
in recent history, as well as the market stress that CCPs faced in 
response to the 1987 market break and in response to the beginning of 
the COVID-19 pandemic in 2020.\203\ These defaults and failures could 
happen again and underscore the importance of the Commission's ongoing 
efforts to ensure effective supervision and regulation of CCAs 
following the enactment of the Dodd-Frank Act, as discussed in Part 
I.\204\ These examples also reinforce the possibility that even a 
robust and resilient CCA holding a sizeable pool of prefunded resources 
and other liquid resources may experience stressed market conditions or 
other events so extreme that the resources it has reserved for 
potential loss scenarios will prove insufficient, potentially 
necessitating actions beyond ``business-as-usual'' default management. 
By establishing requirements related to core services and service 
providers, the identification of scenarios, triggers, and tools for 
recovery and orderly wind-down, and robust processes for 
implementation, notification, testing and board review and approval, 
new Rule 17Ad-26 helps ensure that CCAs can successfully plan for, and 
navigate highly stressed or extreme market conditions, where events may 
occur or conditions deteriorate rapidly.\205\
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    \203\ See, e.g., Staff Report on the Regulation of Clearing 
Agencies (Oct. 1, 2020) at 18, n.93, https://www.sec.gov/files/regulation-clearing-agencies-100120.pdf (describing recent examples 
of participant defaults); Bank for International Settlements 
(``BIS''), CCP Failure: A Rare but Present Danger (Dec. 16, 2018), 
https://www.bis.org/publ/qtrpdf/r_qt1812z.htm (describing three CCP 
failures over the last 50 years); ``The October 1987 Market Break, A 
Report by the Division of Market Regulation'' (Feb. 1988), https://www.sechistorical.org/collection/papers/1980/1988_0201_MarketBreak_01.pdf (describing the market stress 
associated with the 1987 market crash and the stress it placed on 
CCPs at the time).
    \204\ See supra Part I and notes 5-13, 23-40, and accompanying 
text (discussing the rationale for the proposed rules and the 
statutory authority for the regulation of clearing agencies).
    \205\ See RWP Proposing Release, supra note 18, at 34709.
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    Pursuant to the Exchange Act, the Commission is directed to 
facilitate the ongoing development of the national system for clearance 
and settlement, which includes ensuring effective risk management at 
CCAs. As discussed throughout the RWP Proposing Release, and in this 
release, the Commission has proposed and is now adopting new Rule 17Ad-
26 to codify certain elements that have emerged across some RWPs that 
must be included in all RWPs to help ensure a CCA can effectively 
allocate uncovered losses, manage liquidity shortfalls, and address 
capital shortfalls arising from other causes. As such, new Rule 17Ad-26 
sets forth these elements. While existing RWPs at CCAs may contain 
several of these elements, new Rule 17Ad-26 requires each CCA to have 
every element in its RWP. As previously discussed,\206\ new Rule 17Ad-
26 also promotes three important objectives consistent with its 
statutory mandates: (i) bolstering the existing RWPs at CCAs; (ii) 
codifying some existing RWP elements to ensure that these elements 
remain in the plans over time; and (iii) establishing that the RWP of 
any new CCA would contain each of the elements specified in the rule. 
In so doing, the Commission is establishing a higher minimum standard 
for the quality and effectiveness of RWPs, designed to help ensure that 
planning for recovery and orderly wind-down is effective and can 
promote financial stability in periods of market stress. The Commission 
will continue to review rule filings and advance notices submitted by 
CCAs under the rules adopted in this release to help ensure the 
regulatory framework is an effective tool that can advance the evolving 
process of recovery and resolution planning for CCPs and other CCAs.
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    \206\ See supra note 39 and accompanying text.
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    Below the Commission addresses comments regarding specific elements 
of proposed Rule 17Ad-26.\207\
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    \207\ The Commission is making one technical edit to the 
preamble language for Rule 17Ad-26, replacing ``shall'' with 
``must'' to use more plain language, as well as align with the 
approaches in other recently adopted rules for clearing agencies at 
17 CFR 240.17ad-25 and 240.17ad-27.
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1. Core Services: Rule 17Ad-26(a)(1)
    Proposed Rule 17Ad-26(a)(1) required a CCA to identify and describe 
in its RWP the CCA's critical payment, clearing, and settlement 
services and address how the CCA would continue to provide such 
critical services in the event of a recovery and during an orderly 
wind-down, including the identification of the staffing necessary to 
support such critical services and analysis of how such staffing would 
continue in the event of a recovery and during an orderly wind-down.
    In the RWP Proposing Release, the Commission explained that the 
first step in effective recovery and orderly wind-down planning must be 
identification of the critical services provided to market participants 
because market participants rely on these services to facilitate 
payment, clearing, and settlement in the U.S. securities markets. The 
Commission also stated that such planning helps ensure that RWPs focus 
on a CCA's ability to provide these services on an ongoing basis, even 
under stress.\208\ Furthermore, the Commission stated its belief that 
the CCA generally should consider the impact that any interruption to 
particular services would have on the CCA's participants and the smooth 
functioning of the market it serves, as well as whether the service is 
available from any substitute provider. In the proposed rule, 
``critical'' referred to the importance of the service to participants 
and to the proper functioning of the markets, where an inability to 
provide the service would implicate financial stability concerns. As 
such, the Commission also proposed definitions of ``recovery'' and 
``orderly wind-down'' focused on the need to continue to provide the 
critical payment, clearance, and settlement services provided by a CCA 
through the recovery or wind-down event.\209\
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    \208\ RWP Proposing Release, supra note 18, at 34718.
    \209\ See proposed Rule 17Ad-26(b).
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    Several commenters generally supported the requirement to identify 
the critical payment, clearance, and settlement services provided by a 
CCA and address how the CCA would continue to provide such critical 
services.\210\
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    \210\ See SIFMA at 14 (``strongly supports the requirement that 
Clearing Agencies ensure that they are able to maintain access to 
services''); ICE at 3 (``supports the requirement to identify 
critical payment, clearing, and settlement services and to address 
continued use of such services during a recovery or wind-down''); 
OCC at 6 (``agrees that identification of critical services and 
planning for their continuation in a recovery or orderly wind-down 
should be the core content of a CCA's RWP'').

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[[Page 91017]]

a. Replacing ``Critical'' With ``Core''
    The Commission is modifying the final rule to refer to ``core 
payment, clearance, and settlement services'' rather than ``critical 
payment, clearance, and settlement services'' (hereinafter, referred to 
as ``core services'') to improve clarity and consistency with 
terminology in other rules, such as Rule 17Ad-25(i),\211\ which 
concerns the governance of ``service providers for core services.'' 
Furthermore, the use of ``core'' as opposed to ``critical'' helps 
distinguish a CCA's obligations under Rule 17Ad-26 from those under 17 
CFR 242.1000 through 242.1007 (``Regulation SCI''), which addresses, in 
the context of clearing agencies subject to the rule, ``critical 
systems'' that support clearance and settlement.\212\
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    \211\ 17 CFR 240.17ad-25(i).
    \212\ See 17 CFR 242.1000 (defining ``Critical SCI systems''); 
see also RWP Proposing Release, supra note 18, at 34719 
(acknowledging there would likely be some connection between what a 
CCA identifies as its critical services for purposes of inclusion in 
its RWP and what it identifies as ``critical SCI systems'' for 
purposes of Regulation SCI, but inclusion of a critical service in a 
CCA's RWP would have no impact on the CCA's obligations under 
Regulation SCI).
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    Use of the descriptive term ``core'' rather than ``critical'' does 
not affect the Commission's guidance stated in the RWP Proposing 
Release on identifying those services.\213\ Accordingly, when 
identifying a core service, the CCA generally should consider the 
impact that any interruption to a particular service would have on the 
CCA's participants and the smooth functioning of the markets that it 
serves, as well as whether the service is available from any substitute 
provider.\214\
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    \213\ RWP Proposing Release, supra note 18, at 34718.
    \214\ Id.
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b. Modification to ``Staffing'' Element
    Several commenters stated that identifying staffing or staffing 
resources is a necessary part of addressing how a CCA may continue 
providing its core services.\215\ One of those commenters stated that 
it is not necessary to identify specific personnel or positions 
required to be maintained, and a CCA should have flexibility to 
determine the staff needed in a particular situation, including taking 
into consideration the availability and willingness of personnel to 
perform services at the time of a recovery or wind-down.\216\ The 
commenter suggested the proposed rule be amended to clarify that the 
CCA is not required to identify specific personnel or positions 
required to be maintained.\217\ Similarly, another commenter stated 
that lists of specific employees may become dated quickly due to a 
shift in responsibility or normal attrition.\218\ Another commenter 
stated, given the volume of employee turnover and new initiatives, 
personnel designations likely change with regularity, making specific 
identification of personnel in the RWP superfluous.\219\
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    \215\ OCC at 6 (agreeing that any consideration of how a CCA 
will continue its core services necessarily requires consideration 
of how to plan to retain the necessary staff for such efforts); ICE 
at 3 (recognizing that it is necessary to identify staffing 
resources to implement RWPs); The Associations at 13 (agreeing that 
emphasis should be placed on determining staffing requirements); 
SIFMA at 14 (strongly supporting the requirement that CCAs ensure 
that they are able to maintain access to services, including 
personnel services, in a default scenario).
    \216\ ICE at 3.
    \217\ Id.
    \218\ OCC at 6.
    \219\ Davidson at 6.
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    The Commission agrees with the commenters that identifying specific 
personnel or employees is not necessary in planning and recognizes that 
changes may occur in the staffing at a CCA. However, it is important 
for planning purposes to identify those positions, roles, or personnel 
functions that are necessary for the continuation of core services, 
regardless of who or how many staff fills the role in ordinary 
circumstances, to avoid unnecessary disruptions. As such, the 
Commission is modifying the final rule from the proposal to refer to 
the identification of ``staffing roles'' instead of ``staffing,'' the 
latter of which could have been interpreted as requiring the 
identification of specific individuals.
    Several commenters responded to the clause requiring ``analysis of 
how such staffing would continue in the event of a recovery and during 
an orderly wind-down.'' One commenter stated that the process for 
preparing to retain and incentivize critical employees under adverse 
circumstances is the critical piece of information necessary for the 
CCA and its supervisory and resolution authorities.\220\ The commenter 
stated that what is most important in this aspect of planning are the 
retention tools the CCA uses, how it considers retention when setting 
and negotiating employment terms with essential personnel, and how it 
tracks the terms of each such employee's employment.\221\ The commenter 
suggested a minor wording change to proposed Rule 17Ad-26(a)(1) to 
state ``analysis of how the CCA prepares for such staffing to continue 
in the event of a recovery and during an orderly wind-down.'' \222\ 
Another commenter stated that it is important to have sufficient going 
concern resources to allow a CCA to retain its key personnel, claiming 
that the inability to keep personnel from leaving after a prior high 
profile insolvency event in the 2008 financial crisis contributed to 
large losses.\223\ Another commenter stated that not even the most 
lucrative employment agreements can be sufficient to retain highly in-
demand skilled employees on a ``sinking ship,'' and furthermore stated 
that certain CCAs have organized labor agreements in place with many 
employees that would require time consuming renegotiation to satisfy 
this clause in the proposed rule.\224\
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    \220\ OCC at 6.
    \221\ Id.
    \222\ Id.
    \223\ SIFMA at 14.
    \224\ Davidson at 6.
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    To address the above concerns regarding the potentially 
unpredictable or evolving circumstances of employment during a recovery 
or wind-down event, the Commission is modifying the clause related to 
analyzing the continuation of staffing roles in a recovery and during 
an orderly wind-down. The clause has been modified in the final rule to 
state ``analyzing how such staffing roles necessary to support such 
core services would continue in the event of a recovery and during an 
orderly wind-down.'' \225\ In response to commenters generally focused 
on concerns that a CCA could not guarantee the circumstances of 
employment during a recovery or wind-down event, the rule only requires 
that a CCA conduct an analysis, through which it would be able to 
identify potential challenges and potential ways to address those 
challenges. The final rule does not require the CCA to guarantee or 
compel specific staff or personnel to remain in place. Rather, the 
requirement promotes preparation for recovery and wind-down events, 
helping to ensure that from a staffing perspective the necessary roles 
or functions have been identified and established so that core services 
can continue uninterrupted. As one commenter stated, there may be 
organized labor agreements in place with employees. Pursuant to the 
final rule, to address such circumstances, a CCA is required in its RWP 
to analyze any such arrangements to see whether and how they might 
impact staffing during a recovery or an orderly wind-

[[Page 91018]]

down, consistent with the terms of the rule requirement. The rule does 
not require a CCA to renegotiate such arrangements.
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    \225\ To eliminate extraneous words and align the text 
grammatically, the Commission has replaced the phrase ``analysis 
of'' with ``analyze.'' See infra note 228 and accompanying text 
(describing other grammatical changes to the rule text).
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    In addition, and separate from the requirements in Rule 17Ad-
26(a)(1), a CCA is required by Rule 17Ad-22(e)(15)(ii) to have written 
policies and procedures to cover potential general business losses by 
holding liquid net assets funded by equity equal to the greater of 
either six months of the covered clearing agency's current operating 
expenses, or the amount determined by the board of directors to be 
sufficient to ensure a recovery or orderly wind-down of critical 
operations and services of the covered clearing agency.\226\ As such, a 
CCA generally should estimate the potential costs associated with 
ensuring its core services, which could include the staffing necessary 
to support those services, to ensure that it can meet the requirements 
in Rule 17Ad-22(e)(15) related to implementing the recovery or orderly 
wind-down of critical operations and core services.
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    \226\ Pursuant to Rule 17Ad-22(e)(15)(iii), these liquid assets 
are in addition to resources held by the CCA to cover participant 
defaults or other risks covered by Rules 17Ad-22(e)(4)(i) through 
(iii), as applicable, and to cover the liquidity risks identified in 
Rules 17Ad-22(e)(7)(i) and (ii).
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    One commenter suggested a ``process'' approach to retain employees 
with an associated wording change in the rule.\227\ By focusing on 
``roles'' in the final rule, the modified rule text achieves the same 
result. In addition to the substantive change from ``staffing'' to 
``staffing roles necessary to support such core services'' discussed 
above, the Commission has made technical edits to the rule text to add 
paragraph markers (i) and (ii), aligning the text grammatically.\228\
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    \227\ OCC at 6.
    \228\ Specifically, the phrase ``the identification of'' has 
become ``by: identifying'' and ``analysis of'' has become 
``analyzing.'' See supra note 225 (describing other grammatical 
changes to the rule text).
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2. Service Providers: Rule 17Ad-26(a)(2)
    Proposed Rule 17Ad-26(a)(2) required the RWP of a CCA to identify 
and describe any service providers upon which the CCA relies to provide 
the services identified in paragraph (a)(1) of proposed Rule 17Ad-26, 
specify to what services such service providers are relevant and 
address how the CCA would ensure that such service providers would 
continue to perform in the event of a recovery and during an orderly 
wind-down, including consideration of contractual obligations with such 
service providers and whether those obligations are subject to 
alteration or termination as a result of initiation of the recovery and 
orderly wind-down plan.
    The Commission, based on its supervisory experience, has observed 
that CCAs rely upon some service providers to deliver core 
services.\229\ For those service providers that are necessary for the 
provision of core services, the failure of those service providers to 
perform could pose significant operational risks and have substantial 
effects on a CCA's ability to provide core services. In a recovery or 
wind-down event, the continued performance of such a service provider 
would be essential for the continuity of core services. Thus, the 
Commission proposed to require a CCA to identify and describe the 
subset of its service providers necessary to ensure the continued 
delivery of core services throughout a recovery or wind-down event.
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    \229\ RWP Proposing Release, supra note 18, at 34719.
---------------------------------------------------------------------------

    Final Rule 17Ad-26(a)(2) refers to ``its written agreements'' 
instead of ``contractual obligations'' for the reasons discussed in the 
modifications to the definition of ``service provider for core 
services'' in final Rule 17Ad-26(b) in Part II.D.2, infra.\230\ The 
Commission is also making technical changes to Rule 17Ad-26(a)(2) by 
adding paragraph markers to separate the clauses of the rule text into 
paragraphs (a)(2)(i) and (ii).
---------------------------------------------------------------------------

    \230\ The Commission is also modifying in final Rule 17Ad-
26(a)(2) the clause ``and whether those obligations'' to ``and 
whether the obligations under those written agreements'' for 
consistency with the written agreements modification.
---------------------------------------------------------------------------

    The Commission received comments on proposed Rule 17Ad-26(a)(2) and 
is making the modifications to the rule discussed below.
a. Identify and Describe Service Providers for Core Services
    One commenter, agreeing with the Commission that continued 
performance of a service provider as part of the RWP would be 
essential, stated that the requirements of proposed Rule 17Ad-26(a)(2) 
and the related proposed definition of ``service provider'' in proposed 
Rule 17Ad-26(b) are circular in nature and overly broad, resulting in 
too many service providers being captured and the requirement being 
overly burdensome.\231\ Specifically, the commenter stated that the 
phrases ``. . . upon which the covered clearing agency relies to 
provide the services identified in paragraph (a)(1) of this section . . 
.'' in proposed Rule 17Ad-26(a)(2) and ``. . . in any way related to 
the provision of critical services, as identified by the covered 
clearing agency in paragraph (a)(1) of this section . . .'' in the 
definition of ``service provider'' in proposed Rule 17Ad-26(b) are 
superfluous and unnecessary, and thus, both are not needed.\232\ The 
commenter further stated that by including the term ``in any way'' as 
well as ``relies'' in these two sections of the proposed rules, the 
Commission broadened the scope of ``service provider'' to a point that 
renders the term functionally useless for identifying those service 
providers that are critical to the business operations of a CCA.\233\ 
By contrast, another commenter stated that the term as used in proposed 
Rule 17Ad-26(a)(2) appears to limit the subset of providers to be 
addressed in the RWP.\234\
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    \231\ DTCC at 5-6.
    \232\ Id. at 5.
    \233\ Id. at 6.
    \234\ OCC at 6.
---------------------------------------------------------------------------

    Commenters differed in their interpretation of these phrases in 
proposed Rule 17Ad-26(a)(2) and the definition of ``service provider'' 
in proposed Rule 17Ad-26(b). The phrase ``upon which the covered 
clearing agency relies to provide the services identified in paragraph 
(a)(1) of this section'' has been deleted in final Rule 17Ad-26(a)(2) 
to avoid any duplication of, or inconsistency with, the definition of 
``service providers for core services'' in final Rule 17Ad-26(b).\235\ 
Along with the modifications to the definition of ``service provider 
for core services'' in final Rule 17Ad-26(b) discussed in Part II.D.2 
infra, the scope of service providers captured is appropriate for 
recovery and orderly wind-down planning purposes.
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    \235\ To improve grammar and clarity, the Commission has also 
modified the phrase ``specify to what services such service 
providers are relevant'' to ``specifying which core services each 
service provider supports'' in final Rule 17Ad-26(a)(2).
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b. Ensure Continued Performance of Service Providers for Core Services
    One commenter disagrees that CCAs can reasonably ``ensure'' that 
there will be continuation of services by service providers.\236\ The 
commenter stated that it interprets Rule 17Ad-22(e)(15)(ii) to require 
a CCA to have sufficient resources to continue to pay service providers 
through the entirety of an execution of a CCA's RWP, and therefore 
states that this existing requirement should adequately address

[[Page 91019]]

the Commission's goals for this aspect of the proposal and recommends 
that the Commission revise proposed Rule 17Ad-26(a)(2) by removing any 
requirement that a CCA ``ensure'' continuation of services.\237\ 
Alternatively, the commenter requested that the Commission adopt a 
standard that acknowledges these limitations of a CCA to ensure 
continued performance of service providers and that requires a CCA to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to facilitate considerations of 
contractual provisions with service providers that, subject to 
continued payment by the CCA (or successor) obligates them to continue 
to perform in the event of a recovery or during an orderly wind-
down.\238\
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    \236\ DTCC at 8-9 (The commenter stated that the proposed 
requirement ``overestimates the negotiating leverage that CCAs have 
when entering contracts with service providers or assumes that CCAs 
would be able to unilaterally require service providers to continue 
performance during a recovery or orderly wind-down.'').
    \237\ DTCC at 9.
    \238\ Id.
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    Another commenter stated it ``does not believe it is possible for a 
CCA to `ensure' that a service provider would perform.'' The commenter 
also stated that a CCA can and should analyze whether a service 
provider has any termination rights or other contractual basis for not 
performing in a recovery or wind-down situation. The commenter also 
stated that a CCA should assess and document how it would handle the 
situation where a service provider has a right to terminate or 
otherwise not perform in a recovery or wind-down situation.\239\ 
Accordingly, the commenter suggested that proposed Rule 17Ad-26(a)(2) 
be modified to require a CCA evaluate whether the service provider 
would continue to perform in the event of a recovery or orderly wind-
down and address how the CCA would handle any termination or 
alternation of performance by the service provider.
---------------------------------------------------------------------------

    \239\ ICE at 4.
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    The Commission acknowledges that, while a CCA can, and generally 
should, include provisions in its written agreements so that it can 
contractually require that a service provider for core services 
continues to perform during a recovery or wind-down, a CCA may not be 
able to compel a service provider to continue to perform in all 
circumstances. However, as proposed, Rule 17Ad-26(a)(2) addresses 
planning for a recovery or wind-down scenario by requiring written 
policies and procedures reasonably designed to address how a CCA would 
ensure that service providers for core services would continue to 
perform in the event of a recovery and during an orderly wind-
down.\240\ Thus, even though a CCA may not be able to compel a service 
provider to continue performing in all circumstances, such planning and 
any related contractual provisions designed to continue performance 
under the contract help limit the potential for abrupt or unanticipated 
disruptions in services during a recovery or wind-down event.\241\ 
Achieving this requirement would likely involve an evaluation of 
whether the service provider would continue to perform in the event of 
a recovery or orderly wind-down and address how the CCA would handle 
any termination or alteration of performance by the service provider. 
As previously discussed above, a CCA generally should consider when and 
how to include provisions in its written agreements with service 
providers that acknowledge and help ensure that service providers can 
continue to perform their services during a recovery or wind-down event 
to avoid potential disruptions in core services. In so doing, a CCA 
generally should consider the terms to which its service providers may 
be willing or unwilling to agree, so that the CCA can evaluate its 
options effectively and develop its written agreement accordingly. As 
this requirement concerns actions taken at the planning stage and does 
not require a CCA to compel another entity to act, the Commission is 
not making further modifications to Rule 17Ad-26(a)(2).
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    \240\ The requirements of Rule 17Ad-26 lay out necessary 
elements of a RWP, while the requirement for the RWP itself resides 
in Rule 17Ad-22(e)(3)(ii), which requires reasonably designed 
written policies and procedures.
    \241\ A CCA designated systemically important generally should 
consider also whether and how such agreements may be impacted by the 
resolution or transfer of services conducted by the resolution 
authority pursuant to Title II.
---------------------------------------------------------------------------

    One commenter, while agreeing that proposed Rule 17Ad-26(a)(2) 
identifies a key component of planning for recovery and orderly wind-
down, stated that the Commission would best accomplish its objective of 
ensuring continued performance by service providers for core services 
by amending the proposed rule to focus on the CCA's relevant processes 
for third-party engagement and management rather than on conditions at 
a snapshot point in time, as the nature of a CCA's relationship with a 
service provider, the services provided, and the roster of relevant 
service providers necessarily evolves over time.\242\ The commenter 
recommended slightly altering the language of the relevant portion of 
proposed Rule 17Ad-26(a)(2) to state the following:
---------------------------------------------------------------------------

    \242\ OCC at 6.

. . . address the process by which how the CCA seeks to would ensure 
that service providers would continue to provide such critical 
services in the event of a recovery and during an orderly wind-down, 
including consideration and tracking of contractual obligations with 
such service providers and whether those obligations are subject to 
alteration or termination as a result of initiation of the recovery 
and orderly winddown plan.'' \243\
---------------------------------------------------------------------------

    \243\ Id. at 7.

    As stated by the commenter, a CCA's roster of service providers for 
core services evolves over time as does the relationship with each such 
service provider and the services provided by it. However, a CCA is not 
required to outline any process or other means it uses to track 
relationships with service providers for core services in its RWP. 
Accordingly, final Rule 17Ad-26(a)(2) requires only the identification 
and description of such service providers, and a CCA has discretion on 
how to address any changes or updates to the service providers, which 
could be addressed in the reviews of a CCA's RWP required by final Rule 
17Ad-26(a)(9).\244\
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    \244\ In addition, board oversight of service provider 
relationships is subject to the requirements of Rule 17Ad-25(i), 17 
CFR 240.17ad-25(i), which can also help ensure that relationships 
continue without sudden disruption in the event of a recovery or 
wind-down scenario.
---------------------------------------------------------------------------

    One commenter raised the possible interaction with the U.S. 
Bankruptcy Code in connection with the transfer of critical services to 
another legal entity as part of an orderly wind-down strategy.\245\ The 
commenter stated that the Bankruptcy Code would stay any vendors from 
terminating their agreements subject to getting paid, which could allow 
for an assignment to the other legal entity.\246\ According to the 
commenter, this effectively would address the concern without an 
unnecessary and overly prescriptive rule.\247\
---------------------------------------------------------------------------

    \245\ DTCC at 9.
    \246\ Id.
    \247\ Id.
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    The Commission agrees that, in a scenario involving the transfer of 
services from a CCA to another legal entity, bankruptcy proceedings may 
facilitate continuity of services by, for example, staying any vendors 
from terminating their agreements. The Commission also acknowledges 
that, during a recovery or wind-down, service providers, affected 
participants, or other stakeholders in the CCA may attempt to initiate 
bankruptcy proceedings themselves for any number of reasons. 
Ultimately, the requirements in Rule 17Ad-26 are designed to promote 
effective planning for a recovery or

[[Page 91020]]

orderly wind-down, and the possibility of bankruptcy proceedings do not 
reduce a CCA's obligations to plan effectively.
3. Scenarios: Rule 17Ad-26(a)(3)
    Proposed Rule 17Ad-26(a)(3) required a CCA's RWP to identify and 
describe scenarios that may potentially prevent the CCA from being able 
to provide its critical payment, clearing, and settlement services 
identified in proposed Rule 17Ad-26(a)(1) as a going concern, including 
uncovered credit losses (as described in paragraph (e)(4)(viii) of 17 
CFR 240.17ad-22), uncovered liquidity shortfalls (as described in 
paragraph (e)(7)(viii) of 17 CFR 240.17ad-22), and general business 
losses (as described in paragraph (e)(15) of 17 CFR 240.17ad-22).
    Commenters differed on the level of granularity that was 
appropriate in the rule. One commenter stated that it supported the 
proposed rule, agreed that appropriate scenarios will vary across 
different CCAs serving different markets, and stated that the 
Commission has provided appropriate discretion to a CCA to identify the 
scenarios most appropriate to its unique circumstances.\248\ The 
commenter also stated that the Commission should not identify 
particular scenarios for a CCA to address in its RWP.\249\ The 
Commission agrees with this commenter, and reiterates that the risks 
that may potentially prevent a CCA from being able to provide its core 
services vary across different types of CCAs and even across CCAs of 
the same type, resulting in identified scenarios that differ from CCA 
to CCA.\250\
---------------------------------------------------------------------------

    \248\ OCC at 8.
    \249\ Id.
    \250\ RWP Proposing Release, supra note 18, at 34721.
---------------------------------------------------------------------------

    Another commenter stated that the enumerated list of scenarios in 
Request for Comment No. 22 in the RWP Proposing Release \251\ is 
comprehensive and in line with international standard setting guidance 
and further stated that the list should be considered a minimum, and 
supported a more granular list of scenarios that a CCA should 
consider.\252\ The Commission is not including such a further list of 
specific scenarios in final Rule 17Ad-26(a)(3). The rule requires a CCA 
to identify and describe scenarios for uncovered credit losses, 
uncovered liquidity shortfalls, and general business losses.\253\ Under 
these broad categories, each CCA must identify scenarios considering 
the unique circumstances of CCA, including the market served and 
products cleared. Furthermore, a more granular list of scenarios may 
not be appropriately applied to all CCAs, considering the variance in 
the circumstances each individual CCA faces, and such a prescriptive 
approach with a granular list of scenarios would be contrary to the 
principles-based approach to Rule 17Ad-22(e), which contains the 
requirement for a CCA to have a RWP.\254\ The commenter also stated 
that it could be a worthwhile analysis to see if plans would still be 
viable under a combination of scenarios, as there is potential for 
simultaneous shocks to occur.\255\ A CCA, considering the unique 
circumstances faced by it, may identify combinations of scenarios in 
its analysis to achieve the requirements of final Rule 17Ad-26(a)(3). 
The discretion to consider combinations of scenarios arising from the 
potential of simultaneous shocks best remains with a CCA in its 
planning for a recovery or orderly wind-down. In addition, the 
commenter recommended that the Commission consider greater transparency 
around the distinction between default and non-default losses and the 
tools used under these scenarios.\256\ However, information available 
in current rulebooks of the CCAs and through the SRO rule filing and 
advance notice processes provides transparency on the RWPs of CCAs, 
including how a CCA would address a default or non-default loss and the 
tools available in such scenarios.\257\ As a result, additional 
mechanisms to promote transparency are not necessary, as a clearing 
member or market participant may obtain from these publicly available 
documents a general understanding of the scenarios a CCA has identified 
for default and non-default losses and the tools that could be used 
under such scenarios.
---------------------------------------------------------------------------

    \251\ Id. at 34725.
    \252\ The Associations at 15 (citing CPMI-IOSCO Recovery 
Guidance, supra note 25, at 2.4.5).
    \253\ See generally, PFMI, supra note 9, at 3.15.1 (describing. 
as a general matter, the commonly understood meaning of ``general 
business risk'' in the context of FMIs, as follows: ``General 
business risk refers to the risks and potential losses arising from 
an FMI's administration and operation as a business enterprise that 
are neither related to participant default nor separately covered by 
financial resources under the credit or liquidity risk principles. 
General business risk includes 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. Such impairment can be caused by a variety of 
business factors, including poor execution of business strategy, 
negative cash flows, or unexpected and excessively large operating 
expenses. Business-related losses also may arise from risks covered 
by other principles, for example, legal risk (in the case of legal 
actions challenging the FMI's custody arrangements), investment risk 
affecting the FMI's resources, and operational risk (in the case of 
fraud, theft, or loss).'').
    \254\ See CCA Standards Adopting Release, supra note 5, at 
70800.
    \255\ The Associations at 15.
    \256\ Id.; see also ICI at 6, 8 (similarly requesting clear 
delineation between default and non-default loss scenarios).
    \257\ See, e.g., RWP Proposing Release, supra note 18, at 34712 
n.41; see also supra notes 81-100 (discussing the provisions of the 
SRO rule filing and advance notice processes, as well as other 
Commission rules that facilitate disclosure to clearing 
participants).
---------------------------------------------------------------------------

    One commenter stated that the requirement of explicit consideration 
in the recovery plan of what might lead to each scenario coming into 
being and how the scenario might take shape (including prerequisite 
contemplated market conditions) imposes a small burden on compliance 
and risk functions in the entity while creating greatly-enhanced 
transparency to investors and regulators around how, how quickly, and 
under what conditions the entity may fail to meet obligations.\258\ The 
Commission agrees that explicit consideration of what might lead to a 
scenario coming into being and how the scenario might take shape are 
important elements of identifying and describing scenarios, and 
accordingly, Rule 17Ad-26(a)(3) requires a CCA to both identify and 
describe such scenarios.\259\ In identifying and formulating the 
description of such scenarios, the CCA can share information and 
analysis with its participants and other key stakeholders to develop 
its own

[[Page 91021]]

understanding, as well as the understanding of its participants and 
other key stakeholders, regarding the potential causes of recovery and 
wind-down scenarios. Various mechanisms under other Commission rules 
may facilitate this process, such as those requiring testing of its 
RWP,\260\ consideration by its risk management committee of matters 
related to the RWP,\261\ and general solicitation of stakeholder 
viewpoints regarding risk management topics.\262\ As discussed further 
in Part IV.C.1 and V.B, the burden associated with such planning is 
appropriate considering the risks associated with the potential failure 
of a CCA.
---------------------------------------------------------------------------

    \258\ Letter from Muth, dated June 10, 2023 (``Muth'') at 3.
    \259\ RWP Proposing Release, supra note 18, at 34721 (explaining 
that the set of scenarios would include scenarios arising from a 
participant default and from events not related to a participant 
default, and that potential scenarios not related to a participant 
default could include the realization of investment or custody 
losses, the failure of a third party, such as a settlement bank, to 
perform a critical function for the covered clearing agency, or 
scenarios caused by a systems compliance and integrity (SCI) event 
or other significant operational disruption, such as a significant 
cybersecurity incident); id. (explaining that each scenario 
generally should be analyzed individually in the recovery plan, with 
the analysis including: a description of the scenario; the events 
that are likely to trigger the scenario; the covered clearing 
agency's process for monitoring such events; the market conditions, 
operational and financial issues, and other relevant circumstances 
that are likely to result from the scenario; the potential financial 
and operational impact of the scenario on the covered clearing 
agency and its participants, internal and external service 
providers, and relevant affiliated companies, both in an orderly and 
stressed market (e.g., where markets are unavailable or there are 
limited solvent counterparties); and the specific steps that the 
covered clearing agency would expect to take if the scenario occurs 
or appears likely to occur, including, without limitation, any 
governance or other procedures that may be necessary to implement 
the relevant tools or use the relevant resources and to ensure that 
such implementation occurs in sufficient time to achieve the 
intended effect).
    \260\ See infra Part II.C.8 (further discussing the requirements 
for RWP testing in new Rule 17Ad-26(a)(8)).
    \261\ See infra note 366 (further discussing requirements 
related to the risk management committee in Rule 17Ad-25(d)(2)).
    \262\ See infra note 367 (further discussing requirements for 
soliciting stakeholder viewpoints in Rule 17Ad-25(j)).
---------------------------------------------------------------------------

    Consistent with the above discussion, the Commission is adopting 
Rule 17Ad-26(a)(3) as proposed, except that it has replaced the term 
``critical payment, clearing, and settlement services'' with ``core 
services'' consistent with the modifications to uses of ``critical'' 
services as discussed in Part II.C.1.
4. Triggers: Rule 17Ad-26(a)(4)
    Proposed Rule 17Ad-26(a)(4) required a CCA's RWP to identify and 
describe criteria that would trigger the implementation of the recovery 
and orderly wind-down plans and the process that the CCA uses to 
monitor and determine whether the criteria have been met, including the 
governance arrangements applicable to such process.
    One commenter proposed that the Commission provide a list of 
triggers that are required to be covered in the RWP and another list of 
triggers that a CCA should consider for inclusion in the RWP.\263\ In 
contrast, another commenter stated that prescribing bright line, 
quantitative triggers that would apply to all CCAs, irrespective of 
their unique structures and the features of the markets they serve and 
products they clear, would run the risk of creating market instability 
by potentially forcing a CCA to initiate its RWP even when the CCA has 
not yet made the determination that it is necessary.\264\ For that 
reason, the commenter stated that it supports the Commission's 
determination to allow CCAs to identify appropriate triggers for their 
individual circumstances.\265\ The Commission is not specifying a list 
of triggers in the rule for inclusion in an RWP. As stated in the RWP 
Proposing Release, for some circumstances, the trigger is obvious 
(e.g., uncovered default losses),\266\ and the Commission is not 
explicitly including such triggers in the final rule because it has 
already required in Rule 17Ad-26(a)(3) that CCAs identify and describe 
scenarios based on the most obvious types of triggers (e.g., uncovered 
default losses, as well as uncovered liquidity shortfalls and general 
business losses) and also included each of these triggers in the 
definitions of ``recovery'' and ``orderly wind-down'' to ensure that 
CCAs consider these types of circumstances throughout the development 
of their RWPs.\267\ For other circumstances, as the Commission stated 
in the RWP Proposing Release, a CCA may have to employ more judgment to 
develop appropriate triggers,\268\ and discretion should be afforded to 
a CCA in the planning process to develop these triggers instead of 
having the Commission delineate a list of triggers that a CCA should 
consider. This view generally aligns with the latter commenter, in that 
the final rule provides for a CCA to identify appropriate triggers for 
its individual circumstances.\269\ The Commission further agrees with 
the latter commenter that the risk of having bright-line triggers could 
result in forcing a CCA to initiate its RWP even when the CCA has not 
yet made the determination that it was necessary, which could lead to 
market instability.
---------------------------------------------------------------------------

    \263\ The Associations at 17.
    \264\ OCC at 8.
    \265\ Id.
    \266\ RWP Proposing Release, supra note 18, at 34721.
    \267\ See infra Part II.D (further explaining the definitions of 
``recovery'' and ``orderly wind-down'').
    \268\ Id.
    \269\ See supra note 264.
---------------------------------------------------------------------------

    Regarding CCA discretion to trigger the RWP, one commenter proposed 
that the general assumption should be that triggers are automatic, 
unless the CCA makes the determination that discretion is appropriate 
for a certain trigger.\270\ The Commission disagrees and is not 
requiring in the rule that triggers execute automatically. As suggested 
by the commenter,\271\ automatically triggering a RWP without 
discretion could adversely affect market stability. In the RWP 
Proposing Release, the Commission stated that the identification of 
triggers does not mean that such triggers should be self-executing; 
instead, the importance of identifying triggers lies in ensuring that a 
CCA considers and identifies ex ante when it would initiate its 
RWP.\272\ The Commission also stated that it believes that the RWP must 
identify and describe the process that the CCA uses to monitor and 
determine whether the criteria have been met, including the governance 
arrangements applicable to such process.\273\ The final rule provides a 
CCA with discretion to consider this guidance and to identify and 
describe triggers appropriate to its RWP and whether any such triggers 
are automatic or discretionary.
---------------------------------------------------------------------------

    \270\ The Associations at 18.
    \271\ See supra note 264.
    \272\ RWP Proposing Release, supra note 18, at 34721.
    \273\ Id.
---------------------------------------------------------------------------

    The Commission is replacing the word ``would'' with ``could'' in 
final Rule 17Ad-26(a)(4) to avoid any presumption that triggers are 
self-executing and to reiterate the Commission's statement in the RWP 
Proposing Release that the identification of triggers ``does not mean 
that such triggers should be self-executing.'' \274\
---------------------------------------------------------------------------

    \274\ Id.
---------------------------------------------------------------------------

5. Tools: Rule 17Ad-26(a)(5)
    Proposed Rule 17Ad-26(a)(5) required the RWP of a CCA to identify 
and describe the rules, policies, procedures, and any other tools or 
resources the CCA would rely upon in a recovery or orderly wind-down. 
The Commission is adopting Rule 17Ad-26(a)(5) as proposed.\275\
---------------------------------------------------------------------------

    \275\ To improve grammar and clarity, the Commission is adopting 
a technical amendment to the final rule text. Specifically, the 
Commission is removing use of the word ``upon,'' and adding the 
phrase ``on which,'' such that final Rule 17Ad-26(a)(5) states: 
``Identify and describe the rules, policies, procedures, and any 
other tools or resources on which the covered clearing agency would 
rely in a recovery or orderly wind-down.''
---------------------------------------------------------------------------

    In the RWP Proposing Release, the Commission stated that the 
proposed requirement to describe rules, policies, procedures, and any 
other tools or resources that may be used in advance for certain 
situations would provide some level of predictability in such a 
situation and avoid unexpected actions because it would allow 
participants to understand the potential of tools or resources that 
could be used, including whether any of the tools would require 
participant involvement or resources (such as a cash call).\276\ While 
stating that rules, policies, procedures, and any other tools or 
resources should address shortfalls arising from the stress scenarios 
identified by the CCA, the Commission declined to prescribe particular 
tools, such as tear-up or margin haircutting, that a CCA would be

[[Page 91022]]

required to include in its RWP.\277\ The Commission stated its belief 
that this proposed requirement preserved discretion for each CCA to 
consider the full range of available recovery tools and select those 
most appropriate for the circumstances of the CCA, including the 
products cleared and the markets served.\278\
---------------------------------------------------------------------------

    \276\ Id. at 34722.
    \277\ Id.
    \278\ Id.
---------------------------------------------------------------------------

a. Discretion for CCAs in Selection of Tools
    One commenter stated that the rule should preserve discretion for 
each CCA to consider the full range of available recovery tools and 
select those most appropriate for the circumstances of the CCA.\279\ 
Another commenter agreed with the Commission's decision not to mandate 
or prescribe the use of tools in certain situations and ``believes that 
[CCAs] should have the discretion to determine the appropriate mix of 
tools to be used.'' \280\ Another commenter ``believe[s] that the 
clearing agency should be free to select the right or most appropriate 
tools for the markets and products it clears without any regulation 
constraints.'' \281\ The Commission generally agrees with these 
commenters and is adopting the rule as proposed, which allows for 
discretion by a CCA in the selection of tools that are most appropriate 
for the circumstances of the CCA.
---------------------------------------------------------------------------

    \279\ OCC at 8. The commenter added that ``a robust dialogue 
between CCAs, industry participants, and international standard-
setting bodies concerning resolution tools is ongoing, and the 
Commission should avoid preempting with prescriptive rulemaking the 
development of consensus and common understanding that can emerge 
from such a dialogue.'' OCC at 9.
    \280\ ICC at 4.
    \281\ The Associations at 16.
---------------------------------------------------------------------------

    One commenter stated that the proposal would continue to provide 
CCAs with ``unbridled authority to inappropriately allocate default 
losses to non-defaulting customers through tools such as partial tear-
ups (PTUs) or variation margin gains haircutting (VGMH).'' \282\ The 
commenter further stated that the Commission should prescribe the tools 
that a CCA must use during recovery or wind-down, claiming that 
specifying the tools a CCA must deploy in those scenarios would be most 
effective at protecting non-defaulting customers' assets, a critical 
priority of an RWP in the commenter's view.\283\ The commenter added 
that ``[u]nfortunately, the proposals continue to provide broad 
discretion to a clearing entity to determine its recovery and orderly 
wind-down tools, which effectively sanctions the use of tools that may 
result in the inappropriate allocation of non-defaulting customers' 
assets.'' \284\
---------------------------------------------------------------------------

    \282\ ICI at 7.
    \283\ Id. at 3, 6-7.
    \284\ Id. at 6.
---------------------------------------------------------------------------

    A CCA does not have ``unbridled authority'' to select the tools in 
its RWP. The selection of tools in each RWP has been and is subject to 
the SRO rule filing process, which provides for public comment and 
Commission review and approval before inclusion of a tool in the 
RWP.\285\ Under section 19(b)(2)(C) of the Exchange Act,\286\ the 
Commission will approve, and has approved,\287\ proposed rule changes 
concerning the availability of a tool where the Commission finds that 
the proposed rule change is consistent with the requirements of the 
Exchange Act and the applicable rules and regulations thereunder.
---------------------------------------------------------------------------

    \285\ See RWP Proposing Release, supra note 18, at 34712, n. 41.
    \286\ 15 U.S.C. 78s(b)(2)(C).
    \287\ See, e.g., Release 34-83916 (Aug. 23, 2018), 83 FR 44076 
(Aug. 29, 2018) (SR-OCC-2017-020) (finding that the proposed rule 
change concerning OCC's recovery tools was consistent with section 
17A(b)(3)(F) of the Exchange Act and Rules 17Ad-22(e)(2)(i), (iii), 
and (v), (e)(4)(viii) and (ix), (e)(13), and (e)(23)(i) and (ii) 
thereunder).
---------------------------------------------------------------------------

    The Commission also disagrees that prescribing the tools a CCA must 
deploy in recovery and wind-down scenarios would be most effective at 
protecting non-defaulting customers' assets. As the Commission has 
previously explained, a ``one-size-fits-all'' approach specifying 
recovery and orderly wind-down tools is not productive, and it is not 
possible to assess the utility of a particular tool in isolation 
without considering the context of RWP as a whole and the particular 
circumstances of a CCA.\288\ Furthermore, the discretion afforded a CCA 
in developing the tools available for use in its RWP would not enable 
the CCA to engage in the ``inappropriate'' allocation of non-defaulting 
customers' assets. Instead, tools included in its RWP to allocate 
losses to non-defaulting customers may be necessary to prevent the 
potential transmission of systemic risk, and the planning facilitated 
by the RWP helps the CCA weigh the strengths and weaknesses of 
respective tools. In this way, the CCA has considered ex ante the set 
of tools that will be the most appropriate to address different 
scenarios.\289\ Accordingly, when a CCA has determined to allocate 
losses to non-defaulting customers, it has likely passed the point 
where other resources or tools are available to address the loss. 
Although a certain tool may appear drastic in the way that it allocates 
losses, such allocation may be appropriate to prevent the systemic 
transmission of risk in extreme circumstances.
---------------------------------------------------------------------------

    \288\ CCA Standards Adopting Release, supra note 5, at 70809.
    \289\ Id.
---------------------------------------------------------------------------

b. Safeguards, Prescriptions, and Limitations on Tools and Resources
    One commenter stated that ``recovery tools and provisions should be 
designed in a way that allows clearing participants to limit their 
liability to the CCA and to ensure that recovery tools can only be used 
in a limited manner (in time and dollar value) to ensure that the 
impact of such tools is predictable and reliable during stress, and do 
not further destabilize the market.'' \290\ The commenter further 
stated that ``limited use of recovery tools under regulatory oversight, 
in the interest of the whole market'' warrants codification.\291\ 
Another commenter stated that certain recovery tools and procedures 
involve allocating losses to its clearing members or market 
participants, and therefore the tools must be transparent, predictable, 
and implemented with appropriate limitations and oversight so that the 
tools do not inappropriately assign losses to clearing members and 
market participants in a way that is destabilizing.\292\ The commenter 
continued that it is important to ensure that loss allocation 
procedures appropriately balance the incentives of a CCA's owners and 
market participants to manage risk effectively and prevent a crisis 
from occurring.\293\ The commenter stated loss allocation procedures 
should be well defined and that a CCA should not have autonomy to 
allocate losses away from its shareholders.\294\
---------------------------------------------------------------------------

    \290\ The Associations at 5. The commenter added that RWPs need 
to ensure that clearing participants' liability is limited and that 
certain tools can be used within monetary and time limits. Id. at 
10.
    \291\ Id. at 12.
    \292\ SIFMA at 12.
    \293\ Id.
    \294\ Id.
---------------------------------------------------------------------------

    As discussed in the prior section, certain tools may appear drastic 
in the way that they allocate losses. Because of this, the Commission 
agrees with commenters that transparency and predictability regarding 
the use of tools for recovery and wind-down is important. However, the 
Commission disagrees that additional rule text changes are necessary 
because transparency regarding the tools that may be used in a recovery 
or wind-down scenario, and a level of predictability regarding the use 
of such tools, are already provided through existing rules.\295\ When a 
CCA proposes

[[Page 91023]]

to add or modify the tools available in its RWP, such modifications are 
subject to Commission review and approval, pursuant to the SRO rule 
filing and advance notice processes, which includes public notice and 
an opportunity for public comment and, if approved, an approval order 
describing how the modifications are consistent with the Exchange 
Act.\296\ Furthermore, to achieve compliance with existing Rule 17Ad-
22(e)(23), a CCA is obligated to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to provide 
for publicly disclosing all relevant rules and material procedures, 
including key aspects of its default rules and procedures, and provide 
sufficient information to enable participants to identify and evaluate 
the risks, fees, and other material costs they incur by participating 
in the CCA.\297\ Such policies and procedures should provide 
participants with relevant rules and procedures to evaluate the risks, 
fees, and other material costs that participants could incur in a 
recovery or wind-down scenario. In addition, new requirements in Rule 
17Ad-26 related to scenarios, triggers, tools, testing, and 
implementation of the RWP also help ensure that the CCA is providing 
transparency to its participants and others as to whether and when 
certain tools may be used, based on the scenarios developed by the CCA 
and in a way that is informed by periodic testing of the RWP, which 
includes participation by a subset of clearing participants and other 
relevant stakeholders.
---------------------------------------------------------------------------

    \295\ See supra notes 81-100 and accompanying text (discussing 
in further detail these Commission rules and processes facilitating 
input from and transparency to clearing participants and other key 
stakeholders).
    \296\ See id. (discussing these processes in further detail); 
see also RWP Proposing Release, supra note 18, at 34712 n.41 
(providing citations to existing RWPs approved by the Commission, 
which includes the current set of tools in each).
    \297\ 17 CFR 240.17ad-22(e)(23)(i), (ii).
---------------------------------------------------------------------------

    Regarding the limitations sought by certain commenters, any 
appropriate limitations on tools proposed for inclusion in a CCA's RWP 
would be addressed through the SRO rule filing process, where specific 
tools would be subject to Commission review and approval, as well as 
public comment. Furthermore, to approve the addition of such tools, the 
proposed rule change must be consistent with the requirements of the 
Exchange Act and any advance notice must also be consistent with the 
standard for advance notices set forth in the Dodd-Frank Act.\298\ 
Among the rules and regulations applicable to a CCA is Rule 17Ad-
22(e)(2)(vi), which requires a CCA to establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
consider the interests of participants' customers, securities issuers 
and holders, and other relevant stakeholders of the CCA.\299\ To the 
extent that participants oppose the use of a tool either as a general 
matter or under certain conditions, a CCA would be obligated under Rule 
17Ad-22(e)(2)(vi) to consider those concerns when modifying its RWP to 
include such a tool. Such required considerations, which would include 
input from clients of clearing participants, securities issuers, 
transfer agents, and other market infrastructure to which the CCA is 
linked, generally should help ensure that a CCA considers and includes 
limitations on certain tools included in the RWP where appropriate and 
consistent with its obligations under the Exchange Act. Ultimately, 
whether limitations on specific tools will be appropriate depends on 
the circumstances in which the tools would be deployed, and so the 
Commission is not adopting limitations as to specific tools in this 
release.
---------------------------------------------------------------------------

    \298\ See supra notes 81-100 and accompanying text (discussing 
in further detail these Commission rules and processes facilitating 
input from and transparency to clearing participants and other key 
stakeholders).
    \299\ 17 CFR 240.17ad-22(e)(2)(vi).
---------------------------------------------------------------------------

    Regarding the comment related to a CCA having the ``autonomy'' to 
allocate losses away from its shareholders, as explained above, 
whenever a CCA seeks to add or modify a tool available in its RWP, the 
CCA must obtain prior Commission approval for any tools that it may 
deploy in a recovery or wind-down scenario through the previously 
described SRO rule filing and advance notice processes, which provide 
for public notice and comment. In those processes, a CCA is attempting 
to gain approval of tools to have in place in advance of a recovery or 
wind-down scenario to prevent the losses incurred by the CCA from 
becoming a transmission mechanism for systemic risk. This necessarily 
requires the CCA to seek an appropriate balance between affording 
participants predictability and certainty, on one hand, and ensuring 
that the CCA can effectively manage risk to continue its risk 
mitigating function within the broader financial system, on the 
other.\300\ While a CCA will retain discretion consistent with its 
rules, policies, and procedures regarding the ways to implement its RWP 
if a recovery or wind-down scenario arises, the CCA's discretion to 
allocate losses to its participants will always be limited by the 
requirements of the Exchange Act and Commission rules and regulations 
thereunder. Accordingly, a CCA would not have complete autonomy to 
allocate losses away from its shareholders.
---------------------------------------------------------------------------

    \300\ See CCA Standards Adopting Release, supra note 5, at 
70829.
---------------------------------------------------------------------------

c. Specific Limitations or Bans on Certain Tools
    Several commenters requested the Commission place limitation on or 
ban certain recovery tools. Two commenters generally stated that 
partial tear-ups should be subject to appropriate limitations and 
restrictions.\301\ One commenter stated that forced allocation should 
be completely barred.\302\ For variation margin gains haircutting, 
commenters generally stated that the Commission should place 
restrictions on the time and amount, and that this tool should only be 
deployed with regulatory approval.\303\ Commenters generally requested 
that the Commission ban initial margin haircutting.\304\ For 
assessments on clearing members to replenish resources, commenters 
generally stated that there needs to be a maximum amount for 
assessments set at a reasonable level that is defined ex ante.\305\
---------------------------------------------------------------------------

    \301\ SIFMA at 13; The Associations at 16-17.
    \302\ SIFMA at 13.
    \303\ Id.; The Associations at 10, 16-17.
    \304\ SIFMA at 12; The Associations at 11, 12, 16-17.
    \305\ SIFMA at 5, 12, 19, 20-21; The Associations at 12.
---------------------------------------------------------------------------

    The CCAs under the Commission's supervision vary in markets served, 
products cleared, and ownership structures. These differences, among 
others, make it imprudent for the Commission to ex ante ban or 
explicitly limit certain tools, for the same reasons discussed in Part 
II.C.5.b, supra, regarding whether safeguards, prescriptions, and other 
limits on tools and resources generally are appropriate. Rather, by 
establishing new requirements related to scenarios, triggers, tools, 
testing, and implementation of the RWP, Rule 17Ad-26 helps ensure that 
the CCA is providing transparency to its participants and others as to 
whether and when certain tools may be used, based on the scenarios 
developed by the CCA and in a way that is informed by periodic testing 
of the RWP, which includes participation by a subset of clearing 
participants and other relevant stakeholders.
d. Level of Specificity of Description in RWP
    In the RWP Proposing Release, the Commission stated that the 
requirement to describe rules, policies, procedures,

[[Page 91024]]

and any other tools or resources that may be used in advance for 
certain situations would provide some level of predictability in such a 
situation and avoid unexpected actions because it would allow 
participants to understand the potential of tools or resources that 
could be used, including whether any of the tools would require 
participant involvement or resources (such as a cash call).\306\ The 
Commission also provided guidance for a CCA to generally consider when 
it is identifying and evaluating the appropriateness of tools and other 
resources for a particular recovery scenario or an orderly wind-down 
that may be included in its RWP.\307\ Furthermore, the Commission laid 
out nine items that a CCA generally should consider when analyzing the 
tools to be included in its RWP.\308\
---------------------------------------------------------------------------

    \306\ RWP Proposing Release, supra note 18, at 34722.
    \307\ Id.
    \308\ Id.
---------------------------------------------------------------------------

    One commenter strongly supported the proposed requirement to 
describe tools a CCA would use in a recovery or wind-down scenario. 
\309\ Another commenter stated that the Commission should require CCAs 
to provide further specificity on the use of recovery tools in the RWP 
to provide transparency and predictability for their clearing members, 
market participants, and the broader market and to ensure that these 
tools are not procyclical.\310\ Several commenters stated that the 
Commission should make the guidance provided in the RWP Proposing 
Release mandatory.\311\
---------------------------------------------------------------------------

    \309\ ICI at 4, 5, n.15.
    \310\ SIFMA at 12.
    \311\ Id.; The Associations at 19; ICI at 5, n.15.
---------------------------------------------------------------------------

    Requiring further specificity on the use of recovery tools in the 
RWP is not necessary as information on the recovery tools of a CCA is 
publicly available. As previously explained above, when a CCA proposes 
to add or modify the tools available in its RWP, such modifications are 
subject to Commission review and approval, pursuant to the SRO rule 
filing and advance notice processes, which includes public notice and 
an opportunity for public comment and, if approved, an approval order 
describing how the modifications are consistent with the Exchange 
Act.\312\ Furthermore, to achieve compliance with existing Rule 17Ad-
22(e)(23), a CCA is obligated to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to provide 
for publicly disclosing all relevant rules and material procedures, 
including key aspects of its default rules and procedures (which 
includes the tools that would be deployed pursuant to the RWP), and 
provide sufficient information to enable participants to identify and 
evaluate the risks, fees, and other material costs they incur by 
participating in the CCA. With this information, clearing members, 
market participants, and the broader market can consider whether such 
tools are procyclical.
---------------------------------------------------------------------------

    \312\ See supra notes 81-100 and accompanying text (discussing 
in further detail these Commission rules and processes facilitating 
input from and transparency to clearing participants and other key 
stakeholders).
---------------------------------------------------------------------------

    With respect to the comment stating that tools should not be 
procyclical, whether a tool is procyclical will necessarily depend on 
the way it is designed and applied, the products to which it is 
applied, and the market in which it would be used. In Part 
II.A.2.b.iii, the Commission discussed how a CCA might need to consider 
procyclical effects when collecting intraday margin, and commenters 
expressed support for ensuring that CCAs had appropriate discretion to 
apply margin to avoid procyclical effects. Similarly to that context, 
the Commission believes that discretion to select tools is a better 
approach than prescribing limits or imposing bans on certain tools in 
Rule 17Ad-26. Providing such discretion helps enable CCAs to apply 
their expertise and consider the range of tools they have developed in 
their RWPs for addressing a recovery or wind-down scenario that may 
minimize procyclical effects.
    In the case of a recovery or wind-down scenario, procyclical 
effects may facilitate the unnecessary onward transmission of systemic 
risk. As such, when a CCA seeks to add or modify the tools available in 
a recovery or wind-down scenario, those modifications would be subject 
to the proposed rule change and advance notice processes, where the 
specific facts and circumstances of a particular CCA (such as its 
organizational structure, markets served, or products cleared) and 
public comments on the proposed modification can help the Commission 
and the CCA identify whether any tools would be inappropriate, or 
appropriate only with certain limitations, consistent with the CCA's 
obligations under the Exchange Act and the Dodd-Frank Act.\313\
---------------------------------------------------------------------------

    \313\ See supra notes 81-100 and accompanying text (discussing 
in further detail these Commission rules and processes facilitating 
input from and transparency to clearing participants and other key 
stakeholders).
---------------------------------------------------------------------------

    The guidance in the RWP Proposing Release to identify and analyze 
tools for inclusion in the RWP is not being incorporated into the text 
of final Rule 17Ad-26(a)(5). This rule is part of the framework of 
rules applicable to CCAs that takes a principles-based approach, which 
does not prescribe specific arrangements to meet the required 
principles.\314\ Given that each CCA, serves different markets, clears 
different products, and deploys different ownership structures, the 
Commission is not incorporating the guidance into the rule text.
---------------------------------------------------------------------------

    \314\ See CCA Standards Adopting Release, supra note 5, at 
70800.
---------------------------------------------------------------------------

e. Allocation of Non-Default Losses
    One commenter stated that procedures should clearly distinguish 
between treatment of default losses resulting from the failure of a 
clearing member and non-default losses (``NDLs'') caused by a CCA's 
internal business decisions.\315\ The commenter further stated that 
financial responsibility for NDLs should be borne by the CCA and not by 
clearing members and market participants, that CCAs should be required 
to specify tools that would be used in an NDL scenario, and that a rule 
is needed to require CCAs to reserve appropriate amounts for NDL.\316\ 
Another commenter stated that a CCA's rulebooks and RWPs should make 
clear that the CCA is responsible for NDLs, for it is not generally 
appropriate for clearing members or participants to bear NDLs because 
they are not responsible for choices that lead to those losses.\317\ 
The commenter also stated that regulators require CCAs to manage, 
monitor, and hold sufficient capital against NDLs to ensure that such 
losses do not disrupt a CCA's ability to perform obligations, and that 
RWPs should be required to demonstrate a CCA's ability to cover such 
NDLs.\318\ Another commenter strongly recommended that the Commission 
ensure that the RWPs distinguish between the CCA's approach to default 
and non-default scenarios.\319\ The commenter also strongly recommended 
that the Commission require that the recovery tools a CCA uses in a NDL 
scenario ensure that the CCA and its shareholders are fully responsible 
for non-default losses, reflecting the principle that CCA and its 
shareholders are responsible for NDLs because such losses result 
directly from business decisions of CCA's management.\320\
---------------------------------------------------------------------------

    \315\ SIFMA at 5.
    \316\ Id. at 5, 12, 16, 18-19.
    \317\ The Associations at 4, 6, 7-8.
    \318\ Id. at 4.
    \319\ ICI at 3.
    \320\ Id. at 6, 7-8.
---------------------------------------------------------------------------

    While the Commission's regulatory framework for CCAs does not use 
``non-

[[Page 91025]]

default losses'' to describe losses other than default losses, existing 
Rule 17Ad-22(e)(15) requires a CCA to implement risk management 
measures to address ``general business losses,'' \321\ which generally 
includes what the commenters refer to as ``NDL.'' Having a requirement 
specific to address general business loss does distinguish those losses 
from other losses such as default losses.
---------------------------------------------------------------------------

    \321\ 17 CFR 240.17ad-22(e)(15).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(15) requires a CCA to have policies and procedures 
reasonably designed to mitigate the risk that business losses result in 
the disruption of clearing services. Under these policies and 
procedures, CCAs are required to hold liquid net assets funded by 
equity sufficient to cover potential general business losses, including 
by holding the greater of either six months of the covered clearing 
agency's current operating expenses, or the amount determined by the 
board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency.\322\ Accordingly, Rule 17Ad-22(e)(15) already requires a CCA to 
reserve appropriate resources to address general business losses and 
help ensure that the CCA internalizes financial responsibility for such 
losses by applying its own resources to general business losses. The 
particular mechanisms at each CCA for identifying the amount and 
holding appropriate resources under the rule have been set by the CCAs 
through the SRO rule filing and advance notice processes and are 
subject to examination.
---------------------------------------------------------------------------

    \322\ 17 CFR 240.17ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Consistent with existing Commission rules, however, the CCA itself 
is not required to be ``fully responsible'' for general business 
losses.\323\ Rather, such losses could trigger implementation of a 
CCA's RWP, as Rule 17Ad-22(e)(3)(ii) includes requirements directed to 
planning for recovery and orderly wind-down for ``losses from general 
business risk.'' \324\ As previously discussed, Rule 17Ad-22(e)(15) 
requires a CCA to have policies and procedures for holding liquid net 
assets funded by equity sufficient to cover potential general business 
losses, including by holding the greater of either six months of the 
covered clearing agency's current operating expenses, or the amount 
determined by the board of directors to be sufficient to ensure a 
recovery or orderly wind-down of critical operations and services of 
the covered clearing agency, as set forth in its RWP. Where such losses 
from general business risk prevent the CCA from continuing as a going 
concern and liquid net assets funded by equity held pursuant to Rule 
17Ad-22(e)(15) have failed to cover potential business losses, a CCA 
may need to implement its RWP to fully address such losses. In such a 
case, the CCA would deploy resources held pursuant to Rule 17Ad-
22(e)(15) to implement its RWP but may also,\325\ pursuant to its RWP 
and any rules for loss allocation approved pursuant to the Rule 19b-4 
process deploy tools that draw upon other resources of the CCA, 
including mutualized resources, to avoid it from becoming a 
transmission mechanism for systemic risk. Participation in a clearing 
agency where resources, and the loss allocation mechanisms that draw 
upon them, have been mutualized among the CCA and its participants, 
necessarily means that the CCA and its participants have agreed to 
mutualize losses, and such loss allocation mechanisms are explained in 
publicly available sources, including the CCA's rules, notices and 
approval orders published as part of the SRO rule filing process, and 
public disclosures made by the CCAs as required by Rule 17Ad-
22(e)(23).\326\
---------------------------------------------------------------------------

    \323\ As explained above, CCAs are required to have policies and 
procedures for holding sufficient liquid resources funded by equity 
to cover, at a minimum, six months of operating expenses or the 
amount determined by the board of directors to be sufficient to 
ensure a recovery or orderly wind-down. 17 CFR 240.17ad-
22(e)(15)(ii); see also PFMI, supra note 9, at 3.15.
    \324\ 17 CFR 240.17ad-22(e)(3)(ii).
    \325\ See 17 CFR 240.17ad-22(e)(15).
    \326\ See supra notes 81-100 (discussing in further detail these 
Commission rules and processes facilitating input from and 
transparency to clearing participants and other key stakeholders).
---------------------------------------------------------------------------

f. Skin-in-the-Game Requirement
    One commenter stated that Commission rules are needed to ensure 
that each CCA contributes equity to its default waterfall, even if the 
amount is not a meaningful loss absorbing resource, to serve as an 
additional risk management tool, and the commenter provided several 
accompanying recommendations to determine the appropriate amount that 
should be required.\327\ Another commenter stated that it is important 
for a CCA to maintain a second tranche of equity to apply to losses 
before the CCA allocates losses beyond its allocation of losses above 
the funded default reserve to better align the interests of the CCA and 
its clearing members.\328\ Another commenter stated that tools should 
ensure that a CCA designates a material amount of its own capital to 
cover default losses.\329\
---------------------------------------------------------------------------

    \327\ SIFMA at 5, 12-13, 16, 17-18.
    \328\ The Associations at 5, 11-12.
    \329\ ICI at 7.
---------------------------------------------------------------------------

    The Commission is not adopting a ``skin-in-the-game'' (``SITG'') 
requirement.\330\ In the context of a participant default, SITG may 
assist a CCA in addressing the resulting losses because a CCA will 
apply a designated amount of its own equity capital to address certain 
losses prior to allocating any prefunded resources of non-defaulting 
participants to the loss, or prior to applying an assessment to non-
defaulting participants directing them to contribute additional 
resources because all other prefunded resources of the CCA have been 
exhausted.\331\ The Commission has considered comments regarding SITG 
previously, stating that such new SITG requirements can help 
successfully manage the divergent incentives of a CCA's owners and 
participants and could be appropriate in the future.\332\ While SITG 
generally can play a role in helping to ensure the proper alignment of 
incentives between the owners of a clearing agency and its 
participants,\333\ in the context of this rulemaking regarding the 
planning for recovery and wind-down by CCAs, SITG would be a specific 
tool that a CCA may choose to incorporate into its RWP. As such, the 
Commission is not adopting a requirement for SITG to be a specific tool 
because the appropriateness of the tool in the context of planning for 
recovery and wind-down by CCAs will vary depending on the particular 
design and implementation of the RWP. Even though Commission rules for 
clearing agencies do not include an explicit requirement for SITG, CCAs 
generally have incorporated SITG into their respective default 
waterfalls.\334\
---------------------------------------------------------------------------

    \330\ See CA Governance Adopting Release, supra note 12, at 
84504; CCA Standards Adopting Release, supra note 5, at 70806.
    \331\ See CCA Standards Adopting Release, supra note 5, at 
70806.
    \332\ CA Governance Adopting Release, supra note 12, at 84504.
    \333\ See CCA Standards Adopting Release, supra note 5, at 
70806.
    \334\ See DTC Rule 4, Section 5 (``Corporate Contribution''); 
FICC Rule 4, Section 7a (``Corporate Contribution''); ICC Rule 
801(b) (``ICE Clear Credit contributions''); LCH SA Article 4.3.3 
(``LCH SA Contribution''); NSCC Rule 4 (``Corporate Contribution''); 
OCC Rule 101 (``Minimum Corporate Contribution'').
---------------------------------------------------------------------------

g. Compensation for Contributing Clearing Members
    One commenter stated that the externalization of losses to non-
defaulting clearing members and market participants should be treated 
as ``financing resources'' recoverable by those that contributed, which 
would make a distinction between loss

[[Page 91026]]

absorbing and financing resources.\335\ Another commenter stated that 
the Commission should include a requirement for compensation of 
clearing members that cover losses during a recovery or a wind-
down.\336\
---------------------------------------------------------------------------

    \335\ SIFMA at 13, 20-21.
    \336\ The Associations at 4-5, 10-12.
---------------------------------------------------------------------------

    Treatment of resources obtained from clearing members in a recovery 
or wind-down scenario would be subject to the CCA's rules, policies, 
and procedures, which would have been approved on an ex ante basis in 
the applicable SRO rule filing and advance notice processes. A CCA 
should be afforded discretion to structure its loss allocation rules, 
policies, and procedures in light of the needs of its unique ownership 
or governance structures, provided that those rules, policies, and 
procedures are consistent with the requirements of the Exchange Act and 
rules and regulations thereunder.
    As previously discussed, disclosures that already must be publicly 
provided by CCAs under Rule 17Ad-22(e)(23)(ii) require a CCA to provide 
participants with sufficient information to enable the participants to 
evaluate the risks, fees, and other material costs they may incur by 
participating in the CCA. With that information, a participant may 
determine whether the CCA would compensate non-defaulting participants 
for contributions made during a recovery or an orderly wind-down.
h. Governance
    One commenter stated that a CCA's RWP should include governance 
practices that obtain and address input from market participants on 
relevant risk issues and entail oversight by the systemic regulator in 
relation to tools like partial tear-up that may have broader market 
impact.\337\
---------------------------------------------------------------------------

    \337\ SIFMA at 11.
---------------------------------------------------------------------------

    Existing Commission requirements already address this concern for 
input and oversight.\338\ First, the SRO rule filing and advance notice 
processes provide for public notice and comment allowing for market 
participants to provide input on changes to rules, policies and 
procedures regarding recovery tools, and such processes require review 
and approval by the Commission. Second, Rule 17Ad-22(e)(2) includes 
requirements designed to provide for governance arrangements that 
clearly prioritize the safety and efficiency of the CCA, support the 
public interest requirements in section 17A of the Exchange Act 
applicable to clearing agencies, and support the objectives of owners 
and participants. Third, the requirement in section 17A(b)(3)(F) of the 
Exchange Act to have rules designed, in general, to protect investors 
helps ensure that a CCA's risk management functions are appropriately 
aligned with the goal of risk mitigation and responsive to the 
legitimate concerns of the relevant constituents.
---------------------------------------------------------------------------

    \338\ See 17 CFR 240.17ad-22(e)(2); 17 CFR 240.17ad-25; see also 
infra Part IV.B.1 (discussing the various ownership models across 
CCAs and relevant governance arrangements).
---------------------------------------------------------------------------

i. Other Comments on Resources
    Several comments concerned resources in general that should be 
available in a recovery or a wind-down scenario. One commenter stated 
that rules are needed to require a CCAs to arrange ex ante resources 
for use in RWPs, that the Commission should require application of 
equity-funded assets to implement RWPs, that CCA capital should be 
available in full before entry into resolution, that rules should be 
explicit that equity is fully loss absorbing in resolution and 
shareholders claims are fully subordinate to other creditors, and that 
it is critical that resolution authorities require CCAs to set aside ex 
ante resources for recapitalization to be bailed-in by the resolution 
authority to continue to operate the resolved CCA.\339\ Another 
commenter recommends including disclosures of external sources of 
liquidity (lenders, creditors, liquidity providers) and when 
applicable, where they sit in the waterfall.\340\
---------------------------------------------------------------------------

    \339\ SIFMA at 5, 20-21.
    \340\ The Associations at 13.
---------------------------------------------------------------------------

    A CCA already is required to hold equity-funded assets to implement 
its RWP under Rule 17Ad-22(e)(15)(ii), which requires a CCA to hold 
liquid net assets funded by equity equal to the greater of either six 
months of the CCA's current operating expenses or the amount sufficient 
to ensure a recovery or orderly wind-down.\341\ Other resources of the 
CCA available to cover certain losses before entry into resolution are 
those included in the current rules of the CCAs, which include SITG 
contributions \342\ and liquid net assets funded by equity of the CCA 
to cover potential business losses under Rule 17Ad-22(e)(15).\343\
---------------------------------------------------------------------------

    \341\ 17 CFR 240.17ad-22(e)(15)(ii).
    \342\ See supra note 334.
    \343\ 17 CFR 240.17ad-22(e)(15).
---------------------------------------------------------------------------

    Comments were received regarding the resolution of a CCA, and as 
described in the RWP Proposing Release, the FDIC would be appointed as 
the resolution authority of a CCA in the event the CCA was placed into 
resolution under Title II.\344\ Ultimate decisions regarding resolution 
would be determined pursuant to the requirements of Title II,\345\ and 
it is likely that a CCA's RWP would guide the resolution authority in 
evaluating any decisions to be made in support of an orderly 
resolution.
---------------------------------------------------------------------------

    \344\ RWP Proposing Release, supra note 18, at 34712.
    \345\ See supra note 26 and accompanying text.
---------------------------------------------------------------------------

    Regarding the disclosures of external sources of liquidity and 
where they sit in the waterfall, a CCA's rules, SRO rule filing notices 
and approval orders, and disclosures under Rule 17Ad-22(e)(15) provide 
transparency regarding the structure and composition of the default 
waterfalls across the CCAs.
6. Implementation: Rule 17Ad-26(a)(6)
    Proposed Rule 17Ad-26(a)(6) required a CCA's RWP to address how the 
rules, policies, procedures, and any other tools or resources 
identified in Rule 17Ad-26(a)(5) would ensure timely implementation of 
the recovery and orderly wind-down plan.
    Commenters expressed support for the rule as proposed.\346\ One 
commenter encourages the Commission to be internally prepared and in a 
proactive position to receive, consider, and approve any necessary 
regulatory requests from CCAs in a timely manner when RWPs have been 
implemented.\347\ As previously discussed, the Commission engages in 
ongoing supervision and oversight of CCAs to ensure that it is prepared 
to receive, consider, and act upon any requests related to RWPs. As 
discussed further in response to comments regarding Rule 17Ad-26(a)(7) 
below,\348\ policies and procedures that ensure the timely 
implementation of the RWP pursuant to Rule 17Ad-26(a)(6) would 
necessarily include provisions that ensure timely notification to 
affected parties that the CCA will implement its RWP. Such affected 
parties generally should include clearing participants, service 
providers for core services, other key stakeholders, the Commission, 
and other regulatory authorities, as appropriate.
---------------------------------------------------------------------------

    \346\ OCC at 9; The Associations at 19-20.
    \347\ DTCC at 13. This concern is also relevant to the 
requirement in Rule 17Ad-26(a)(7) to provide notification to the 
Commission when a CCA is ``considering'' implementation of its RWP. 
See infra Part II.C.7.
    \348\ See infra Part II.C.7 (further explaining and 
distinguishing the requirement for ``timely implementation'' in Rule 
17Ad-26(a)(6) from the requirement for notification specifically to 
the Commission when a CCA is ``considering implementing'' its RWP).
---------------------------------------------------------------------------

    Another commenter recommended ``the implementation of rigorous 
governance around the use of tools or emergency powers.'' \349\ The

[[Page 91027]]

Commission has recently adopted rules intended to bolster the 
governance of CCAs through requirements regarding board composition and 
director independence, the nominating and risk management committees of 
the board, conflicts of interest, oversight of service providers, and 
the solicitation of stakeholder viewpoints.\350\ Through these existing 
requirements, as well as the rule filing and advance notice 
requirements applicable to CCAs, the appropriate governance processes 
exist to help ensure that further development of the RWPs is consistent 
with the rules adopted in this release. The Commission is adopting Rule 
17Ad-26(a)(6) as proposed.
---------------------------------------------------------------------------

    \349\ The Associations at 19-20.
    \350\ See CA Governance Adopting Release, supra note 12.
---------------------------------------------------------------------------

7. Notification to Commission: Rule 17Ad-26(a)(7)
    Proposed Rule 17Ad-26(a)(7) required a CCA's RWP to include 
procedures for informing the Commission as soon as practicable when the 
CCA is considering initiating a recovery or orderly wind-down. In the 
RWP Proposing Release, the Commission stated it is critical that notice 
of potential recovery and wind-down be provided to the Commission as 
soon as practicable.\351\ The Commission explained that the systemic 
risk concerns raised by a recovery or orderly wind-down of a CCA are 
significant. With notice being provided to the Commission when a CCA is 
considering implementing its RWP, the Commission has the opportunity to 
consider whether the CCA engages the potential recovery or wind-down 
event consistent with its established RWP and the requirements of 
Commission rules to help mitigate the potential onward transmission of 
systemic risk and help ensure that a wind-down, if necessary, is 
orderly. Furthermore, such early notice would help the Commission 
ensure that it has information that it can share with other relevant 
authorities, such as the resolution authority, regarding the potential 
need for resolution.\352\ As discussed in the RWP Proposing Release, 
the Commission already maintains regular contact with each of the CCAs 
through its supervisory program, and this is a communication channel 
through which the CCA could provide notice to the Commission.\353\
---------------------------------------------------------------------------

    \351\ RWP Proposing Release, supra note 18, at 34723.
    \352\ Id.
    \353\ Id.
---------------------------------------------------------------------------

    One comment in support of Rule 17Ad-26(a)(6) as proposed stated 
that it was important for the Commission to be in a proactive position 
to receive, consider, and approve any necessary regulatory requests 
from CCAs in a timely manner when RWPs have been implemented.\354\ 
Several commenters asked for clarification or further guidance on the 
``considering initiating'' phrase in the proposed rule text. One 
commenter, agreeing that open communication is critical, stated that 
the ``considering initiating'' phrase introduces subjectivity and 
uncertainty into the requirement, which could expose a CCA and its 
responsible personnel to potential enforcement action if their 
interpretation differs from the Commission.\355\ The commenter 
recommends changing the phrase to make the obligation to notify the 
Commission when the CCA has ``determined to initiate'' its RWP.\356\ 
Similarly, other commenters stated that the proposed standard is vague 
and could lead to uncertainty about when the notification is required, 
and suggested, for clarity and consistent application, that the trigger 
to notify the Commission should be the formal decision to implement the 
plan.\357\
---------------------------------------------------------------------------

    \354\ DTCC at 13; see also supra note 347.
    \355\ OCC at 9 (explaining that this potential liability is 
particularly true if the triggers require an application of judgment 
while monitoring operations and risk on a continuous basis).
    \356\ Id. at 9-10.
    \357\ ICE at 4; CCP12 at 5.
---------------------------------------------------------------------------

    In requesting that the Commission remove ``considering'' from the 
rule text, these commenters misconstrue the purpose of the requirement 
in Rule 17Ad-26(a)(6) regarding timely implementation of the RWP with 
the requirement in Rule 17Ad-26(a)(7) regarding notice to the 
Commission. To ensure timely implementation of the RWP under Rule 17Ad-
26(a)(6), a CCA generally should have policies and procedures that can 
ensure affected parties, including clearing participants, service 
providers, other relevant stakeholders, and other market infrastructure 
to which it is linked, as well as the Commission and other relevant 
authorities, receive notification that the CCA has begun to implement 
elements of its RWP. However, requiring a CCA to notify the Commission 
only when it has decided to implement its RWP would limit the 
Commission's ability to evaluate market conditions and the decision-
making process of the CCA in the time between when it begins to 
consider implementing and before it has decided to implement. Once a 
CCA decides to implement its RWP, it will likely have numerous 
contractual obligations to share information regarding the 
implementation of its RWP with its participants, service providers, 
other key stakeholders, and other market infrastructure to which it is 
linked. Given these obligations, requiring notification only upon 
implementation would primarily serve the purpose of documenting and 
announcing the fact of implementation, rather than the separate but 
equally important purpose of informing the Commission, as market 
conditions are deteriorating or other events are occurring at the CCA 
that may trigger implementation of the RWP so that the Commission can 
consider whether it too should take action in response to the event.
    In contrast to Rule 17Ad-26(a)(6)'s requirement that CCAs provide 
timely notice of the RWP's implementation, Rule 17Ad-26(a)(7) helps 
ensure that the Commission receives advance notice that stressed market 
conditions or other events have raised the potential for implementation 
of the RWP. This requirement for timely notification when the CCA is 
considering implementation of its RWP will significantly enhance the 
Commission's ability to conduct effective supervision and market 
oversight and to share information on a timely basis, as appropriate, 
with other authorities. While the Commission regularly engages with 
CCAs as part of its supervisory process to anticipate the need for 
potential regulatory requests, Rule 17Ad-26(a)(7) further helps the 
Commission should it need to act by promoting timely advance 
notification that a CCA may implement its RWP.
    In addition, in contrast to the phase of a stressed market or other 
event where a CCA is considering implementation of its RWP, once a CCA 
has begun to implement its RWP the ability of the Commission to take 
steps of its own, consistent with its supervisory authority, and to 
coordinate with other authorities, may be more limited because the CCA 
will already be taking action in response to the event. For example, if 
a CCA is considering implementation of its RWP to deploy a certain 
recovery tool, to allocate losses, or to replenish resources, the 
Commission or other authorities may evaluate other available actions or 
tools that could also address or mitigate financial stability concerns 
in response to market events than the action planned by the CCA. In 
this regard, the Commission can best ensure that actions appropriate to 
maintaining financial stability can be made if it is notified when a 
CCA is ``considering'' action, rather than when a CCA has already begun 
to implement its RWP.
    As explained above, commenters also sought clarification regarding 
``consider

[[Page 91028]]

initiating.'' \358\ In response to concerns that the Commission and the 
CCA may differ regarding the exact moment when a CCA begins to 
``consider'' implementing its RWP, CCAs generally should seek to 
provide notification to the Commission that establishes an open line of 
communication, enabling the Commission, and other relevant authorities 
with which the Commission may be coordinating, time to evaluate market 
conditions and the potential financial stability implications of any 
decision under the RWP. The ability for the Commission or other 
relevant authorities to act potentially could help mitigate the need 
for a recovery or wind-down. When market conditions are deteriorating 
rapidly, the CCA may be the first party in a position to identify a 
potential scenario that could trigger implementation of the RWP, and so 
providing advance notice to the Commission can help the CCA, the 
Commission, and other potentially relevant authorities, navigate market 
events. Accordingly, a CCA generally would be ``considering'' 
implementing a recovery when the clearing agency determines that a 
market event may result in uncovered losses, liquidity shortfalls, or 
general business losses at the CCA following end-of-day settlement, or 
if the CCA anticipates that it will need to deploy prefunded financial 
resources or liquidity arrangements following end-of-day settlement in 
order to continue meeting its regulatory obligations.\359\ Similarly, 
if a clearing agency is faced with circumstances in which its status as 
a ``going concern'' may be in doubt following end-of-day settlement, 
resulting in the potential for a permanent cessation, sale, or transfer 
of one of more of its core services, a CCA would be ``considering'' 
implementation of its orderly wind-down plan.\360\ Whether a CCA is 
``considering'' implementing its RWP also depends on governance and 
decision-making processes within the CCA, and so CCAs generally should 
consider at what levels decisions regarding RWP can be made within 
their organization. For example, a CCA generally should consider 
whether decisions regarding RWP implementation and Commission 
notification are made by senior management, a specific senior officer, 
or the board of directors. The appropriate governance level may vary 
depending on the specific type of event or element of the RWP. For 
example, in considering implementing a recovery, questions regarding 
the potential for liquidity shortfalls may fall primarily to management 
or specific senior officers, whereas decisions regarding cessation or 
transfer of the business are likely to require board input before 
considering implementation. Accordingly, the Commission is retaining 
the ``considering'' language as proposed.
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    \358\ The Commission is making a technical modification to the 
rule to replace ``initiating'' with ``implementing.'' 
``Implementing'' is consistent with language used in other 
requirements in Rule 17Ad-26, as well as in the RWP Proposing 
Release and in the comments received more generally when referring 
to the implementation of the RWP. For example, Rules 17Ad-26(a)(4), 
(6), and (8) all use ``implementing'' rather than ``initiating.''
    \359\ See, e.g., FSB Analysis, supra note 24, at 1-2 (analyzing 
CCP services across seven entities and, in so doing, identifying 
hypothetical default and non-default loss scenarios that would have 
required the use of, or exhausted the use of, recovery tools in some 
scenarios for some of entities' service lines).
    \360\ See id.
---------------------------------------------------------------------------

    Some commenters also expressed views on the means of notification. 
One commenter stated that the notification should be made in a way that 
leaves an audit trail and can be better directed, avoiding a potential 
for the notification to not reach the right destination or receive the 
appropriate level of attention.\361\ One commenter recommended that a 
CCA be permitted to select the particular means of communication that 
would be used to notify the Commission, including dedicated phone 
numbers, email addresses, or other forms of electronic 
communication.\362\ Because Commission staff already remains in regular 
contact with each of the CCAs as part of its supervisory program,\363\ 
the purpose of the requirement in Rule 17Ad-26(a)(7), in part, is to 
facilitate a line of communication between the Commission and the CCA 
regarding the event, so that the Commission can evaluate the 
circumstances of a potential recovery or wind-down and its potential 
transmission of systemic risk. In this sense, the timeliness of 
notification is paramount, while the form of notification or the 
process of notification may vary under the circumstances so long as the 
CCA establishes a line of communication. Accordingly, the Commission is 
modifying the rule in response to these comments to replace the rule 
text stating ``Include procedures for informing'' with ``Require the 
covered clearing agency to inform.'' This modification removes the need 
to codify specific notification forms or procedures, providing the CCA 
with discretion to assess the best method for communication and the 
level of formality in the communication that is most appropriate under 
the circumstances, while ensuring that the timeliness of notification 
is the primary focus of the CCA. To ensure an appropriate audit or 
record of its decision, a CCA generally should consider memorializing 
the steps that it took to notify the Commission. In some circumstances, 
it may be appropriate to complete this documentation after the fact of 
notification, while in others, as described by the commenter, it may be 
appropriate to document notifications internally to ensure a proper 
audit trail. Any such correspondence with the Commission constitutes a 
record of a clearing agency and would be subject to the requirements of 
17 CFR 240.17a-1.\364\
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    \361\ The Associations at 20-21.
    \362\ DTCC at 12-13; see also Muth at 2 (``In part because of 
the complex Venn-diagram-esque relationship between financial 
regulators in terms of both activities and jurisdiction, management 
may be misinformed or uninformed as to when, how, and why to contact 
regulators who are the `relevant authorities' under the CCA 
Standards or what to communicate that would be illustrative as to 
the entity's predicament.'').
    \363\ RWP Proposing Release, supra note 18, at 34723.
    \364\ Rule 17a-1.
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    Two commenters stated that the Commission should require CCAs to 
notify clearing participants when the CCA is considering implementation 
of its RWP and when it has done so, in addition to providing 
notification to the Commission.\365\ Commission rules already provide 
for notification to participants regarding a range of issues, which 
generally would include the implementation of the RWP. As previously 
discussed, requirements for timely implementation of the RWP under Rule 
17Ad-26(a)(6) generally should include notification to participants and 
other stakeholders. In addition, other rules also promote the timely 
sharing of information between CCAs and clearing participants regarding 
their participation in the clearing agency. For example, Rule 17Ad-
22(e)(23)(ii) requires that a CCA establish, implement, maintain and 
enforce written policies and procedures reasonably designed to provide 
sufficient information to enable participants to identify and evaluate 
the risks, fees, and other material costs they incur by participating 
in the CCA. Because implementing a recovery or orderly wind-down may 
involve the use or replenishment of prefunded resources, as well as the 
potential allocation of losses from default or non-default loss 
scenarios to participants, a CCA generally would need to inform its 
participants regarding those aspects of a recovery or wind-down event 
at the time of implementation pursuant to Rule 17Ad-26(a)(6). In 
addition, a CCA

[[Page 91029]]

generally should discuss with its participants and other key 
stakeholders planning and development with respect to the RWP, as well 
as the results of testing. Two such venues for discussion of the RWP 
are already required by existing rules, as follows: Rule 17Ad-25(d), 
requiring the establishment of a risk management committee,\366\ and 
Rule 17Ad-25(j), regarding the solicitation of stakeholder 
viewpoints.\367\ These venues already require the CCA to share 
information regarding risk management topics, which necessarily would 
include the risk management implications of its RWP, with the risk 
management committee and with relevant stakeholders, respectively. In 
both cases, clearing participants would receive information regarding 
the RWP and have an opportunity to provide input (either as members of 
the risk management committee when reviewing matters regarding the RWP 
before the committee, or in providing viewpoints when solicited by the 
CCA).
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    \365\ The Associations at 5; ICI at 5, n.15.
    \366\ Specifically, Rule 17Ad-25(d)(2) requires that the risk 
management committee, in the performance of its duties, be able to 
provide a risk-based, independent, and informed opinion on all 
matters presented to the committee for consideration in a manner 
that supports the overall risk management, safety and efficiency of 
the registered clearing agency. 17 CFR 240.17ad-25(d)(2).
    \367\ Specifically, Rule 17Ad-25(j) requires that each 
registered clearing agency must establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to 
require the board of directors to solicit, consider, and document 
its consideration of the views of participants and other relevant 
stakeholders of the registered clearing agency regarding material 
developments in its risk management and operations on a recurring 
basis.
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    In contrast, the purpose of the notification requirement in Rule 
17Ad-26(a)(7) is to ensure that the Commission specifically has timely 
information regarding the potential for a CCA to implement recovery or 
wind-down. As previously discussed above, this helps ensure that the 
Commission can use the information in a timely manner to consider 
appropriate regulatory responses to market events, as well as to share 
information, as appropriate, with other authorities, such as the 
resolution authority, that also may be monitoring stressed market 
events alongside the Commission and may need to consider the potential 
for resolution. In addition, pursuant to clearing agency rules, 
clearing participants generally will be notified of circumstances 
related to a participant default, the potential for a portfolio 
auction, and the use of default management tools that may precede a 
recovery or wind-down event. While existing Commission rules,\368\ as 
well as participant agreements or other arrangements between CCAs and 
their participants are likely to facilitate timely notification 
regarding the planning, development, and implementation of key aspects 
of the RWP, as discussed above, it may not be appropriate in all 
circumstances for a CCA to provide advance notice to participants that 
it is considering implementing its RWP because such notification could 
increase market stress or accelerate deteriorating conditions, 
precipitating the very recovery or wind-down event that, in the absence 
of such increase or acceleration, the CCA, the Commission, or another 
authority could take appropriate steps to mitigate and avoid. 
Accordingly, the Commission is not adding a provision specifically 
requiring notification that the CCA is considering implementing its RWP 
to clearing participants as part of Rule 17Ad-26(a)(7).
---------------------------------------------------------------------------

    \368\ See, e.g., supra notes 366-367 and accompanying text.
---------------------------------------------------------------------------

8. Testing: Rule 17Ad-26(a)(8)
    Proposed Rule 17Ad-26(a)(8) required a CCA's RWP to include 
procedures for testing the CCA's ability to implement the recovery and 
wind-down plans at least every 12 months, including by requiring the 
CCA's participants and, when practicable, other stakeholders to 
participate in the testing of its plans, providing for reporting the 
results of the testing to the CCA's board of directors and senior 
management, and specifying the procedures for, as appropriate, amending 
the plans to address the results of the testing.
    In the RWP Proposing Release, the Commission explained that a 
testing requirement is important since it should help ensure that a 
CCA's RWP will be effective in the event of an actual recovery or 
orderly wind-down.\369\ The testing would likely be similar to that 
required under Rule 17Ad-22(e)(13), in that it would test how the RWP 
would perform in crisis situations, including the participation of 
senior management and the board of directors. The Commission stated 
that testing must involve the CCA's participants and, where applicable, 
other stakeholders. This inclusion should help to make sure that 
procedures will be practical and effective in the face of a recovery or 
orderly wind-down, noting that coordination will be required in such a 
situation.
---------------------------------------------------------------------------

    \369\ RWP Proposing Release, supra note 18, at 34723.
---------------------------------------------------------------------------

    The Commission also explained that testing every 12 months was an 
appropriate frequency because annual testing is already required for 
many other aspects of a CCA's risk management. Accordingly, a 
requirement for testing every 12 months for RWPs strikes an appropriate 
balance between the need to test an RWP and the desire to avoid 
duplicative requirements. The Commission further stated that a CCA may 
choose to conduct this RWP testing in conjunction with default testing 
for Rule 17Ad-22(e)(13) or business continuity testing. Due to the 
possibility of leveraging existing default management testing, the 
Commission believed that costs associated with RWP testing may not be 
too high for CCAs and likely would be moderate for participants, as 
they are already involved in the default management testing.\370\
---------------------------------------------------------------------------

    \370\ Id. at 34735.
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a. Support for Testing Requirement
    Several commenters expressed their agreement with or support of the 
proposed requirement to annually test the ability to implement a CCA's 
RWP.\371\ One commenter agreed with the importance of ensuring that a 
CCA's RWP is workable for a potential crisis situation, stating that it 
is essential for the CCA, its members and customers, and regulators all 
have confidence that the RWP will operate as designed.\372\ The 
commenter also stated that the value of periodic testing is to reduce 
the burden on a CCA when the need for implementing the RWP arises, a 
time when resources may be stretched thin, ensuring that there is a 
workable roadmap to address the situation at hand.\373\ Similarly, a 
different commenter emphasized that it is critical for a CCA to be 
confident that the RWP would be effective in an actual recovery or 
orderly wind-down event.\374\ Another commenter agrees that RWP testing 
is generally appropriate, provided that annual RWP testing can be 
combined with existing default management testing.\375\ One other 
commenter echoed this point and agrees that plans need to be tested on 
a regular basis, and a test every 12 months would be in line with 
requirements for default testing.\376\
---------------------------------------------------------------------------

    \371\ OCC at 10; The Associations at 21; ICE at 4; ICI at 5; 
CCP12 at 4.
    \372\ OCC at 10.
    \373\ Id.
    \374\ CCP12 at 4.
    \375\ ICE at 4.
    \376\ The Associations at 21.
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b. Scope of Testing and Interaction With Other Testing Requirements
    Some commenters sought more clarity regarding the scope of the 
``testing'' requirement in proposed Rule 17Ad-

[[Page 91030]]

26(a)(8), recommending baseline standards and discretion to test 
different scenarios or aspects of the plan each year.\377\
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    \377\ Davidson at 5 (explaining that ``testing'' needs to be 
clearly defined, pragmatic, and cost effective, and that it comes in 
many varieties, listing among the different types of testing 
conducted by CCAs business continuity tests, margin model and 
clearing fund testing and validations, default management testing, 
compliance testing, and internal audit testing); SIFMA at 11 (urging 
the Commission to set baseline standards for testing that would 
require CCAs to adhere to standards based on common best practices 
rather than establishing voluntary disparate practices); The 
Associations at 21 (stating that not every recovery scenario needs 
to be tested annually but that a CCA should pick material and 
significant scenarios and endeavor to test different scenarios or 
different parts of the plan each year).
---------------------------------------------------------------------------

    Several commenters specifically stated that CCAs should have 
discretion and flexibility to determine an appropriate approach to 
testing so that testing would not become duplicative, unnecessary, or 
burdensome.\378\ One commenter stated that a new testing requirement 
would require significant investment of time and resources from a CCA's 
most critical personnel, both to plan and execute the testing, which is 
a highly manual process.\379\ Similarly, another commenter explained 
that RWP testing at CCAs typically includes various types of exercises, 
and suggested that any final rule make clear that a CCA has discretion 
to rely on such practices to satisfy Rule 17Ad-27(a)(8).\380\
---------------------------------------------------------------------------

    \378\ ICE at 4-5; OCC at 10-11 (identifying its existing regular 
and periodic testing efforts (e.g., default simulations, table-top 
exercises, monthly analysis and monitoring for assessment 
capability) used to assess and enhance the operational capacity and 
effectiveness of risk management processes and tools, and stating 
that they are appropriately designed to ``help ensure that the RWP 
will be effective in the event of an actual recovery or orderly 
wind-down''); DTCC at 10-11; CCP12 at 4-5.
    \379\ OCC at 10.
    \380\ CCP12 at 4.
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    The definitions in Rule 17Ad-26(b) regarding ``recovery'' and 
``orderly wind-down'' provide much of the direction that commenters 
seek regarding the scope of testing contemplated under Rule 17Ad-
26(a)(8). Specifically, RWP testing would involve testing a CCA's plans 
for recovery (e.g., actions the CCA would take to address an uncovered 
loss, liquidity shortfall, or capital inadequacy, whether arising from 
a participant default or other causes, including actions to replenish 
any depleted prefunded financial resources and liquidity arrangements), 
and for wind-down (e.g., actions the CCA would take in scenarios that 
exhaust the CCA's ability to replenish resources and necessitate that 
it effect the permanent cessation, sale, or transfer of one or more of 
its core services).\381\ As such, testing of RWPs generally should 
include scenarios that consider both default and non-default scenarios. 
When testing the RWP against a default scenario, the clearing agency 
generally should consider the effects of exhausting prefunded 
resources, to ensure that the clearing agency also tests its ability 
replenish those resources (i.e., complete recovery). In the context of 
a default scenario, such a test may have similar elements to a default 
management testing exercise, though it would necessarily consider steps 
related to replenishing prefunded resources deployed in response to the 
scenario. In contrast, testing that considers non-default losses 
generally could not leverage existing testing related to default 
management, and so testing exercises developed for RWPs under Rule 
17Ad-26(a)(8) would also need to include testing of non-default loss 
scenarios to demonstrate that RWP testing was reasonably designed, 
consistent with the rule requirements. Because of the range of 
scenarios that may implicate RWPs, including scenarios in both default 
and non-default scenarios, or a combination thereof, a CCA retains 
discretion under the annual testing requirement to organize and design 
its testing scenarios to ensure that testing exercises produce 
effective tests of the elements of the RWP, in such a way that the CCA 
can review its testing results and consider improvements over time.
---------------------------------------------------------------------------

    \381\ More specifically, Rule 17Ad-26(b) defines ``recovery'' to 
mean the actions of a covered clearing agency, consistent with its 
rules, procedures, and other ex ante contractual arrangements, to 
address any uncovered loss, liquidity shortfall, or capital 
inadequacy, whether arising from participant default or other causes 
(such as business, operational, or other structural weaknesses), 
including actions to replenish any depleted prefunded financial 
resources and liquidity arrangements, as necessary to maintain the 
covered clearing agency's viability as a going concern and to 
continue its provision of core services, as identified by the 
covered clearing agency pursuant to Rule 17Ad-26(a)(1). It defines 
``orderly wind-down'' to mean the actions of a CCA to effect the 
permanent cessation, sale, or transfer of one or more of its core 
services, as identified by the CCA pursuant to Rule 17Ad-26(a)(1), 
in a manner that would not increase the risk of significant 
liquidity, credit, or operational problems spreading among financial 
institutions or markets and thereby threaten the stability of the 
U.S. financial system.
---------------------------------------------------------------------------

    With respect to the investment of time and resources necessary to 
plan and execute testing, and the charge that RWP testing is 
``unnecessary'' or ``burdensome,'' the commitment of such time and 
resources is critical to ensuring an effective RWP.\382\ The 
circumstances in which a CCA may need to implement its RWP are of such 
systemic consequence that CCAs should test their rules, policies, and 
procedures so that, should real world conditions arise, the CCA is 
prepared to implement its RWP in an effective manner, thereby helping 
to ensure the CCA does not become a mechanism for spreading contagion 
through the financial system or otherwise endangering financial 
stability. Similar to the way that default management testing under 
Rule 17Ad-22(e)(13) helps a CCA test its close-out procedures for a 
defaulted portfolio so that policies and procedures are sufficiently 
developed to promote a smooth and successful process,\383\ RWP testing 
can help a CCA ensure that its policies and procedures for recovery and 
orderly wind-down are sufficiently developed and can be effective in 
completing loss allocation and replenishment tasks, in the case of a 
recovery, or a cessation of services, in the case of a wind-down. A CCA 
that does not engage in regular testing of its RWP may find, in a 
moment where stressed market conditions are likely to be extreme and 
the viability of the CCA is itself in question, that it is under-
prepared to implement its plan, potentially negating the benefits of 
the planning process. The Commission agrees that effective planning for 
RWP testing is likely to be a manual process that draws upon critical 
personnel because RWP planning requires careful consideration of the 
procedures and tools upon which a CCA would draw in extreme market 
circumstances to maintain the ongoing viability of the CCA itself. As 
such, critical personnel, who may be directed in the RWP to make loss 
allocation or other critical decisions during a recovery or wind-down 
scenario, generally should participate in RWP testing conducted by the 
CCA to help ensure the design and execution of testing scenarios 
resemble, as well as can be estimated during the planning and testing 
process, anticipated real-world conditions necessitating a recovery or 
wind-down.

[[Page 91031]]

Including these critical personnel in RWP testing may increase the 
overall cost of testing but is necessary because these critical 
personnel are best positioned to identify the planning and procedures 
that can help ensure timely and effective implementation under real-
world conditions.
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    \382\ See infra Part IV.C.1.h (further discussing the benefits 
and costs associated with the testing requirement) and V.B (further 
discussing the paperwork burdens associated with Rule 17Ad-26).
    \383\ Separate from any obligations under Rule 17Ad-22(e)(13) 
with respect to default management testing, 31 CCPs voluntarily 
participated in a default management exercise led by CCP Global in 
2023 to share best practices, identify areas for follow-on work, and 
highlight insights from the testing process. Another exercise is 
planned for 2025. Such efforts suggest that, even where testing 
efforts require a commitment of time, personnel and resources, CCPs 
are eager to engage in testing as an effective mechanism to improve 
their rules, policies and procedures. CCP Global, Default Simulation 
Exercises by CCPs, https://ccp-global.org/defaultsimulation/ 
(describing an exercise completed in 2023).
---------------------------------------------------------------------------

    With respect to whether such testing may be duplicative, commenters 
also requested clarification as to the extent testing under Rule 17Ad-
26(a)(8) could be conducted as part of existing default management 
testing required under Rule 17Ad-22(e)(13) or business continuity 
testing required by Commission rules.\384\ One commenter stated that it 
would not object to the proposed frequency of annual RWP testing if it 
could be combined with existing default testing.\385\ Another similarly 
stated that the RWP and default management testing requirements could 
be combined into one, noting that both contemplate annual testing.\386\ 
One commenter, citing an operational concern in the potential overlap 
of the testing requirements, stated that it is unclear RWP testing 
would differ noticeably from default management testing, and encouraged 
combining both to reduce the potential for duplicative efforts that 
would be costly and perfunctory.\387\ Citing the potential cost-
effectiveness of leveraging existing practices pursuant to default 
management testing under Rule 17Ad-22(e)(13), another commenter stated 
that the Commission should more closely harmonize the proposed RWP 
testing requirement with the requirement in Rule 17Ad-22(e)(13), which 
would give CCAs flexibility to design testing procedures to properly 
fit the particular markets, cleared products, and participants that 
they serve.\388\
---------------------------------------------------------------------------

    \384\ RWP Proposing Release, supra note 18, at 34723-24.
    \385\ ICE at 4.
    \386\ The Associations at 21.
    \387\ CFA at 4.
    \388\ DTCC at 11.
---------------------------------------------------------------------------

    As discussed above, regular, annual testing is necessary to 
facilitate the timely implementation of the RWP when a recovery or 
wind-down scenario arises, as such scenario is likely to include 
stressed market conditions where clearing agency participants have 
defaulted or a non-default loss event that may contribute to market 
stress, strained organizational resources at the CCA, and market events 
that progress rapidly. The purpose of such testing is not to be 
duplicative; rather, it may well be complementary to, for example, the 
default management testing required by Rule 17Ad-22(e)(13). 
Accordingly, as explained further below, the Commission is modifying 
Rule 17Ad-26(a)(8) to explicitly distinguish default management testing 
from RWP testing because the CCA's role in default management would be 
distinct from its role implementing a recovery or wind-down.
    Nonetheless, as one commenter explained, CCAs may engage in one set 
of testing exercises designed to address multiple testing procedures or 
scenarios.\389\ Such an approach to harmonizing default management 
testing with RWP testing is consistent with the requirements of the 
rule; namely, a CCA can conduct one exercise with multiple tests, such 
as one that tests both default management and implementation of RWPs. 
Under Rule 17Ad-26(a)(8), a CCA retains discretion to conduct a single 
testing exercise intended to address multiple testing requirements 
under Commission rules, so long as the testing exercise addresses the 
distinct elements of separate testing requirements, including the 
possibility that some RWP testing scenarios would include non-default 
losses, as opposed to losses arising during a CCA's default management 
process.
---------------------------------------------------------------------------

    \389\ OCC at 10.
---------------------------------------------------------------------------

    For example, rather than conducting a narrow test of ``business as 
usual'' default management, a CCA may instead choose to conduct a more 
comprehensive testing exercise intended to cover not only its rules, 
policies and procedures for default management but scenarios and 
triggers for loss allocation that would activate the need for a 
recovery or orderly wind-down. Such an approach may be more efficient 
than conducting RWP testing that is wholly distinct from default 
management testing, given that participant defaults can be one of the 
scenarios or triggers that lead to a recovery or wind-down scenario. A 
more comprehensive testing exercise may also make it less costly to 
assemble a representative set of participants and other key 
stakeholders, as well as the board, producing a more effective testing 
exercise. As previously discussed above, and in contrast to default 
management testing, RWP testing may require consideration of scenarios 
and testing of procedures that go beyond default management because, 
for example, recovery includes the actions taken to address uncovered 
losses and replenishment of prefunded resources,\390\ and wind-down 
includes actions taken when resources have been exhausted, 
necessitating the permanent cessation, sale, or transfer of one or more 
of the CCA's core services.
---------------------------------------------------------------------------

    \390\ For example, in contrast to a default management exercise, 
where the CCA likely assumes it has sufficient resources to close 
out a defaulting participant's portfolio, a recovery plan generally 
should be formulated on the presumption that any uncovered loss or 
liquidity shortfall will be borne by the CCA, its owners' and its 
participants' own resources and provide an effective means of 
achieving a matched book, where applicable, and a means of 
replenishing financial resources. See CPMI-IOSCO Recovery Guidance, 
supra note 25, at 2.3.1.
---------------------------------------------------------------------------

    Accordingly, as discussed above, and because RWP testing is 
necessarily distinct from, if in ways complementary to, default 
management testing under Rule 17Ad-22(e)(13), the Commission is 
modifying Rule 17Ad-26(a)(8) at adoption to add new language stating, 
as follows: ``[r]equiring that such testing be in addition to testing 
pursuant to Sec.  240.17ad-22(e)(13).'' As previously explained, this 
language clarifies that, although a CCA may choose for efficiency 
purposes to combine default management and RWP testing into a single 
exercise, RWP testing should include testing of the procedures specific 
to its RWP.\391\ In addition, the existing requirement regarding 
default management testing in Rule 17Ad-22(e)(13) is unchanged; it is 
not replaced or superseded by the separate and distinct requirement for 
RWP testing.
---------------------------------------------------------------------------

    \391\ To improve readability, the Commission is also adding 
paragraph headings to the rule and modifying the first reference to 
``recovery and wind-down plans'' to the defined terms, so that it 
instead reads ``recovery and orderly wind-down plans.'' As such, 
final Rule 17Ad-22(a)(8) reads in full as follows: Include 
procedures for testing the CCA's ability to implement the recovery 
and orderly wind-down plans at least every 12 months, including by 
(a) requiring the CCA's participants and, when practicable, other 
stakeholders to participate in the testing of its plans, (b) 
requiring that such testing would be in addition to the testing 
required in paragraph (e)(13) of 17 CFR 240.17ad-22, (c) providing 
for reporting the results of the testing to the CCA's board of 
directors and senior management, and (d) specifying the procedures 
for, as appropriate, amending the plans to address the results of 
the testing.
---------------------------------------------------------------------------

c. Participation by Clearing Agency Participants and Other Stakeholders
    In the RWP Proposing Release, the Commission proposed to require 
that RWP testing include participation by clearing agency participants 
and, when practicable, other stakeholders.\392\ One commenter stated 
that involvement of clearing members is not necessarily appropriate for 
certain scenarios or tools related to general business losses or other 
non-default losses, and CCAs should have flexibility to determine the 
appropriate approach to testing and clearing member involvement in such

[[Page 91032]]

cases.\393\ The commenter suggested that the Commission remove or 
qualify the reference to requiring participant participation in 
testing.\394\ Another commenter stated that direct participation in 
testing of participants or other stakeholders is not necessarily the 
most effective way to test and requiring such participation may 
distract the CCA from optimizing its RWP testing.\395\ The commenter 
explained their inclusion may not be appropriate or beneficial for 
aspects of an RWP that do not impact them and also stated that testing 
aspects of an RWP can involve confidential or highly sensitive 
information that could make the inclusion of clearing members and other 
stakeholders inappropriate.\396\ The commenter stated that there are 
various other ways in which participants or other stakeholders can be 
educated in default management and recovery and orderly wind-down 
processes.\397\ In conclusion, the commenter requested that the 
Commission clarify, for the avoidance of doubt, that testing should not 
require any participation of clearing member or other stakeholders, as 
CCAs must retain flexibility to determine how their testing should be 
conducted, including whether and how to include participants and third-
party stakeholders.\398\ Another commenter agreed that participants and 
other stakeholders should be included in tests if any action is 
required from them as part of the plan; however, such testing should 
not become unduly onerous for market participants and knowing the 
significant overlap in member bases at CCAs, consideration should be 
given that testing be done simultaneously with other CCAs.\399\ One 
commenter stated that it was sensible to require that key external 
third parties participate.\400\ Another commenter recommended that the 
participation of risk management committees and risk advisory working 
groups be required, as the market participants on those bodies would 
possess relevant perspectives and input to ensure that the tests are 
properly calibrated and administered.\401\
---------------------------------------------------------------------------

    \392\ RWP Proposing Release, supra note 18, at 34716.
    \393\ ICE at 5.
    \394\ Id.
    \395\ CCP12 at 4.
    \396\ Id.
    \397\ Id.
    \398\ Id.
    \399\ The Associations at 21; see also ICE at 4-5 (expressing 
concern that additional testing requirements could be unnecessarily 
burdensome, particularly for clearing members who are likely to have 
testing obligations at multiple clearing organizations).
    \400\ Davidson at 6 (key external third parties, according to 
the commenter, may include settlement banks, liquidity providers, 
clearing members, technology vendors, market-makers, exchanges, and 
trading venues).
    \401\ ICI at 9.
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    One commenter stated it does not believe that it is appropriate to 
prescribe a specified approach for the inclusion of CCA participants 
and, where applicable, other stakeholders in the testing of its 
RWP.\402\ The commenter explained that it is important to recognize the 
differences in closing out a defaulting member at a CCA that clears 
cash-settled U.S. securities transactions versus a derivatives clearing 
agency.\403\ Additionally, for a CCA with multiple participant types, 
the commenter stated it is unclear how each different type of 
participant would participate in annual testing.\404\ The commenter 
recommends that CCAs be allowed to consider and implement approaches 
such as training and other educational outreach efforts to members and 
participants to satisfy any final requirement the Commission adopts for 
RWP testing.\405\ Instead of mandating participation, the commenter 
recommends that the Commission apply the same guidance to RWP testing 
as it did for default management testing under Rule 17Ad-22(e)(13)--not 
specify that participants be included in the testing process, but that 
some or all participants could be included in some or all of the 
testing.\406\
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    \402\ DTCC at 9.
    \403\ Id. at 10. In the commenter's view, participant action and 
awareness of the defaulter's portfolio is not needed in such a case 
and would be counterproductive to the CCA's need for confidentiality 
around its market-facing close-out activity. The commenter also 
stated that cash-market clearing agencies have a relatively large 
number of participants, meaning that a prescriptive mandate for 
engagement by all participants in testing would be impractical, cost 
and resource intensive, and potentially antithetical to the 
underlying goals of testing. Id.
    \404\ Id.
    \405\ Id.
    \406\ Id. at 11.
---------------------------------------------------------------------------

    Mindful of the requirements under Rule 17Ad-22(e)(13) for testing 
in the default management context, and consistent with the approach 
taken by the Commission there, Rule 17Ad-26(a)(8) has the same 
requirement for participant and other stakeholder involvement in RWP 
testing. Accordingly, the rule does not specify that all clearing 
agency participants participate in every test because, particularly for 
CCAs with large numbers of participants or multiple participant types, 
it may be impractical or counterproductive from a testing perspective 
and, as explained by commenters, given the wider range of topics 
covered as part of RWP planning, it may not always be appropriate to 
include participants in all aspects of testing.\407\ Nonetheless, 
participation in testing by clearing members helps ensure that clearing 
members are familiar with the CCA procedures that will be followed in a 
recovery or wind-down scenario, creating positive feedback where both 
clearing members and the CCA can plan, share experiences, and consider 
whether existing plans would, in fact, be viable. While other efforts 
by a CCA, such as trainings and educational outreach to participants 
and other stakeholders, may assist in the preparation for recovery and 
wind-down scenarios, and may also help ensure that participants 
participate meaningfully in testing exercises, training and other 
education activities are no substitute for having participants and 
other categories of stakeholders participate in testing.
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    \407\ For example, as discussed in Part II.C.8.d immediately 
below, testing of orderly wind-down plans may involve a tabletop 
exercise with the board and senior management focused on the 
considerations related to, e.g., a bankruptcy filing.
---------------------------------------------------------------------------

    In designing its testing plan consistent with Rule 17Ad-26(a)(8), a 
CCA may choose to designate in its policies and procedures certain 
participants, or categories of participants, for participation in 
certain tests. For example, in testing of loss allocation tools, where 
losses could be assigned to a participant, it may be useful to include 
participants in the testing to allow them to understand when they can 
be expected to bear losses and how those losses would be absorbed. In 
testing that involves business losses or certain types of non-default 
losses, it may be less appropriate to have participants participate in 
the testing, though a recovery or wind-down scenario involving a 
cybersecurity event may benefit from participant testing even if the 
loss is categorized as a non-default loss. In developing testing 
scenarios, a CCA may at times also need to use confidential or highly 
sensitive information that could limit its ability to include clearing 
participants. In addition, for testing that implicates the risk 
management framework, such as RWP testing for default loss scenarios, 
it may be appropriate to facilitate participation by the risk 
management committee of the board of directors, or other risk 
committees or advisory working groups organized by the CCA. Over time, 
a CCA generally should consider how to help ensure that a wide range of 
participants and other categories of stakeholder have participated in 
at least those aspects of testing that would affect those participants 
and other categories of stakeholder so that the participants and

[[Page 91033]]

other stakeholders are well informed as to the CCA's policies and 
procedures regarding recovery and wind-down. The requirements of the 
rule give discretion to CCAs to identify the appropriate scenarios, 
participants, and audiences for tests, and for the inclusion of 
participants and other stakeholders as appropriate so that the testing 
requirement is not unduly onerous, either on CCAs or their participants 
and other key stakeholders.
    As with Rule 17Ad-22(e)(13), the Commission recognizes that under 
Rule 17Ad-26(a)(8), a CCA may have limited ability to require 
participation by all stakeholders in all circumstances, but a CCA 
generally should make efforts to secure participation of relevant 
stakeholders, such as liquidity providers or settlement banks. It may 
also consider including supervisory and resolution authorities as 
observers. Accordingly, the Commission is not modifying proposed Rule 
17Ad-26(a)(8) to remove requirements related to participation by 
clearing members and other key stakeholders.
d. Testing of Orderly Wind-Down Processes
    One commenter requested that the Commission provide additional 
guidance on how CCAs would implement the wind-down portion of their 
RWPs.\408\ The commenter asked for clarification that end-to-end 
testing obligations in the proposal do not require testing of steps 
related to effectuating legal processes and related decision-making, as 
those steps are operational in nature and do not lend themselves to 
standardized testing scripts or protocols.\409\ Other commenters echoed 
this statement that legal processes do not lend themselves to 
standardized testing processes, requesting that CCAs have discretion to 
determine whether it is necessary or feasible to test.\410\
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    \408\ DTCC at 9.
    \409\ DTCC at 11 (explaining that, as a practical matter for a 
CCA, other than internal governance requirements necessary to 
determine whether to trigger the implementation of the orderly wind-
down plan, implementation would include preparation of Bankruptcy 
Court filings, the provisioning of legal advice as a result of 
entering into the bankruptcy process, and then entering into various 
agreements and other processes that are operational in nature).
    \410\ CCP12 at 4-5; OCC at 11, n.27 (stating that some aspects 
of an RWP do not lend themselves to full simulation testing in any 
event, such as the contemplation of a potential transaction with an 
as-yet-identified third-party for a merger or acquisition).
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    For the portion of annual testing pertaining to orderly wind-down, 
a CCA generally should consider that elements of the legal processes 
associated with a wind-down may vary depending on the circumstances of 
the scenario and so the CCA may need to decide the order in which 
services wind down to help ensure an orderly process. In deciding in 
what order to wind down services, a CCA generally should consider the 
steps it would need to take to help ensure the wind-down is orderly. 
Additionally, as part of its orderly wind-down plan, a CCA generally 
should explore the steps that could achieve recovery and thereby avoid 
wind-down, to ensure all available tools and resources intended to 
prevent a wind-down have been exhausted before implementing the orderly 
wind-down of the CCA. Even though they are operational in nature, this 
aspect of testing may differ from other testing in that it could 
involve considering which legal documents to prepare or file, rather 
than engaging in an exercise that progresses through the CCA's default 
waterfall and related tools. Wind-down testing may also include, for 
example, tabletop exercises with senior management that consider when 
and how to execute bankruptcy proceedings or transfer of core functions 
to another entity.\411\ In addition, a CCA generally should consider 
whether different wind-down scenarios necessitate that a CCA consider 
winding down services in different sequences, so that the overall wind-
down effort remains orderly across different scenarios.
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    \411\ A CCA designated systemically important also generally 
should consider the extent to which recovery and wind-down scenarios 
may result in resolution by the resolution authority pursuant to 
Title II.
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e. Board Review and Sharing of Testing Results
    One commenter agreed that testing results should be provided to the 
board and senior management of the CCA to enable them to effectively 
oversee the RWP and its implementation.\412\ Another commenter stated 
that testing results should also be shared with risk advisory 
committees to ensure that participants are educated and can provide 
feedback to enhance procedures, as well as with regulatory authorities 
who can review and challenge the quality of testing scenarios, outputs, 
and the adequacy of resources.\413\
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    \412\ OCC at 10.
    \413\ The Associations at 21.
---------------------------------------------------------------------------

    While the Commission agrees that CCAs generally should consider 
ways to share information effectively throughout their organizations, 
as well as with their participants and regulatory authorities, other 
existing requirements already address the concerns raised by these 
commenters. For example, Rule 17Ad-25(j) establishes an obligation of 
the board to solicit and consider viewpoints of participants and other 
relevant stakeholders, such as through risk advisory committees. Under 
Rule 17Ad-25(j), each registered clearing agency must establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to require the board of directors to solicit, 
consider, and document its consideration of the views of participants 
and other relevant stakeholders of the registered clearing agency 
regarding material developments in its risk management and operations 
on a recurring basis. A CCA generally should consider material changes 
to, and annual testing of, its RWP as material developments in the 
CCA's risk management and operations under Rule 17Ad-25(j). In 
addition, Rule 17Ad-22(e)(23)(ii) also requires a CCA to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide sufficient information to enable 
participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in the CCA. Under this 
requirement, a CCA generally should consider the ways in which 
information regarding its RWP, changes thereto, and testing thereof, 
should be provided to participants to satisfy the requirements of Rule 
17Ad-22(e)(23)(ii). Furthermore, records related to RWP testing would 
be available to the Commission as records of the CCA pursuant to 17 CFR 
240.17a-1, including the results of testing provided to the board 
pursuant to Rule 17Ad-26(a)(8). In addition, as part of its supervisory 
program for CCAs, Commission staff generally do participate in existing 
default management exercises, which also address matters related to 
RWPs.
9. Board Approval: Rule 17Ad-26(a)(9)
    Proposed Rule 17Ad-26(a)(9) required a CCA's RWP to include 
procedures requiring review and approval by the board of the plans at 
least every 12 months or following material changes to the CCA's 
operations that would significantly affect the viability or execution 
of the plans, with such review informed, as appropriate by the CCA's 
testing of the plans.
    Three commenters supported the proposed approach.\414\ In addition, 
one

[[Page 91034]]

commenter stated that the board should consult with the risk management 
committee when developing or amending its RWP.\415\ Commission rules 
already require the board of a registered clearing agency to establish 
a risk management committee to assist the board in overseeing the risk 
management of the registered clearing agency.\416\ Given that many 
elements of the RWP would closely implicate the risk management of a 
CCA, and that the risk management committee is a committee of the 
board, a CCA generally should consider whether and how the risk 
management committee should assist in the review and approval of 
material changes to RWPs and review of RWP testing results. 
Accordingly, because Rule 17Ad-26(a)(9) already requires the board to 
review and approve the RWP, it is unnecessary to separately also 
require the board to consult the risk management committee as part of 
its review and approval.
---------------------------------------------------------------------------

    \414\ OCC at 11 (also supporting the fact that the cadence of 
testing matches that of board review); The Associations at 22 
(citing the importance of RWPs to the overall business of the CCA); 
Davidson at 12.
    \415\ ICI at 8.
    \416\ 17 CFR 240.17ad-25(d)(1).
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    Consistent with the above, the Commission is adopting the rule as 
proposed, with two technical modifications to improve clarity.\417\
---------------------------------------------------------------------------

    \417\ The Commission is making two technical modifications to 
the rule: for clarity and grammatical correctness, the final rule 
text modifies the phrase ``review and approval by the board of 
directors of the plans'' to ``review and approval of the plans by 
the board of directors of the covered clearing agency'' and includes 
an additional comma after the phrase ``as appropriate'' and before 
``by the CCA's testing of the plans.''
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10. Other Comments
a. Harmonization With CFTC Proposal
    Several commenters recommended that the Commission and CFTC 
coordinate to ensure that any final rules are aligned or structured so 
that dually registered entities (i.e., CCAs registered with the 
Commission and SIDCOs registered with the CFTC) can efficiently comply 
with both Commission and recently proposed CFTC rules,\418\ which two 
of these commenters stated include more prescriptive elements than the 
Commission's proposed rules.\419\
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    \418\ ICE at 5; ICI at 5 (also stating that, although the 
Commission and CFTC proposals differ regarding non-substantive 
matters, such differences may cause confusion and redundancy 
regarding the standards for RWPs and result in inefficiencies and 
harmonization would better facilitate compliance and consistency, 
certainty, and efficiency); OCC at 5, n.14; The Associations at 12; 
SIFMA at 5. The Options Clearing Corporation (``OCC'') and ICE Clear 
Credit (``ICC'') are each a CCA that is also registered as a SIDCO 
with the CFTC. See infra Part IV.B.1 (further describing each of the 
CCAs registered with the Commission).
    \419\ OCC at 5, n.14; ICI at 5.
---------------------------------------------------------------------------

    In developing Rule 17Ad-26, and consistent with its obligations 
under Title VIII of the Dodd-Frank Act, the Commission has consulted 
with the CFTC to ensure that regulatory requirements are effective and 
consistent.\420\ The Commission's final Rule 17Ad-26 is highly aligned 
with the CFTC's proposal. While commenters have identified some aspects 
of the CFTC's approach that differ in terms of the level of 
granularity, prescriptiveness, or in the use of particular language, 
these differences generally result from differences in historical 
approach or regulatory scope between the Commission and CFTC. For 
example, requirements proposed by the CFTC identify specific scenarios 
beyond those described in Rule 17Ad-26(a)(3), which focuses on 
scenarios involving uncovered credit losses, uncovered liquidity 
shortfalls, and general business losses, consistent with other 
requirements in Rule 17Ad-22. Such differences reflect non-substantive 
differences in approach between SIDCO regulations and the Commission's 
rules for CCAs, and it is important for the Commission's regulatory 
framework to align the new requirements in Rule 17Ad-26 with existing 
requirements in Rule 17Ad-22. In addition, the Commission's approach 
reflects the range of markets served and products cleared by CCAs and 
the principles-based approach generally taken in both Rule 17Ad-22 and 
new Rule 17Ad-26. As with the other requirements set forth in rules for 
CCAs, which are also consistent with comparable CFTC rules,\421\ the 
requirements in Rule 17Ad-26 related to the scenarios that might be 
implicated, and the tools that would be applied, in a recovery or wind-
down scenario necessarily depend, in part, on the risk profile of the 
products cleared and the structure of the markets served. Accordingly, 
such differences in approach as to the granularity of certain 
requirements are, as one commenter stated, non-substantive,\422\ and as 
such could not result in conflicting or confusing regulatory 
requirements for dually registered clearinghouses.
---------------------------------------------------------------------------

    \420\ See supra note 43 (explaining that Commission staff 
communicate with the CFTC staff regularly and has consulted on the 
respective proposed rules regarding RWPs specifically).
    \421\ CCA Standards Adopting Release, supra note 5, at 70795 
(explaining that ``the Commission has consulted with the CFTC, FRB, 
and FSOC in the development of [Rule 17Ad-22(e)] to, in part, avoid 
unnecessarily duplicative or inconsistent regulation with respect to 
clearing agencies that are dually registered'' and that ``because 
Rule 17Ad-22(e) and other comparable regulations--including those of 
the CFTC--are based on the same international standards, the 
potential for inconsistent regulation is low'') (citation omitted).
    \422\ ICI at 5.
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b. International Standards
    One commenter, addressing the discussion in the RWP Proposing 
Release stating that CCAs consider new policy statements from standard-
setting bodies, asked the Commission to reaffirm that international 
policy statements are non-binding guidance and considering when and how 
to implement such non-binding guidance remains within the discretion of 
the CCA.\423\
---------------------------------------------------------------------------

    \423\ DTCC at 12.
---------------------------------------------------------------------------

    As a general matter, international standing-setting bodies provide 
guidance that is helpful for regulatory authorities to consider when 
establishing and implementing changes to their regulatory frameworks in 
their respective jurisdictions. While not required by the rule, as 
discussed in the RWP Proposing Release, CCAs generally should consider 
policy statements and other guidance issued by standard-setting bodies 
when reviewing and considering updates to their rules, policies, and 
procedures related to RWPs.\424\
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    \424\ RWP Proposing Release, supra note 18, at 34724.
---------------------------------------------------------------------------

c. Other Topics
    One commenter reiterated its recommendation that the Commission 
impose very restrictive investment and credit policies for CCA margin 
and default funds.\425\ Preexisting Commission rules already establish 
requirements designed to minimize custody and investment risk 
consistent with international standards.\426\ Specifically, Rule 17Ad-
22(e)(16) requires a CCA to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to safeguard the 
CCA's own and its participants' assets, minimize the risk of loss and 
delay in access to these assets, and invest such assets in instruments 
with minimal credit, market, and liquidity risks.\427\ This requirement 
applies to margin and guaranty fund contributions held by the CCA on 
behalf of its participants.
---------------------------------------------------------------------------

    \425\ SRC at 6.
    \426\ See supra note 421 (discussing the same).
    \427\ 17 CFR 240.17ad-22(e)(16).
---------------------------------------------------------------------------

    Another commenter stated that RWPs should allow for positions to be 
ported to other CCAs.\428\ Preexisting Commission rules already 
establish requirements for segregation and portability consistent with 
international standards.\429\ Specifically, Rule 17Ad-22(e)(14) 
requires a CCA to establish, implement, maintain and enforce

[[Page 91035]]

written policies and procedures reasonably designed to enable the 
segregation and portability of positions of a participant's customers 
and the collateral provided to the CCA with respect to those positions 
and effectively protect such positions and related collateral from the 
default or insolvency of that participant.\430\
---------------------------------------------------------------------------

    \428\ The Associations at 5.
    \429\ See supra note 421 (discussing the same).
    \430\ 17 CFR 240.17ad-22(e)(14).
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    One commenter requested that the Commission and CFTC continue to 
move forward with important regulatory reforms to address several other 
areas related to clearinghouses, including CCP margin methodologies, 
CCP transparency and disclosures, CCP liquidity risk and stress 
testing, and CCP capital and SITG.\431\ Each such topic is the subject 
of or closely related to existing workstreams underway at the Basel 
Committee on Banking Supervision,\432\ CPMI-IOSCO,\433\ and the 
FSB,\434\ and Commission staff currently participate in each.
---------------------------------------------------------------------------

    \431\ ICI at 11.
    \432\ See supra note 14 and accompanying text (citing papers 
prepared by CPMI-IOSCO in coordination with the BCBS on topics 
related to CCP margin).
    \433\ See supra notes 14, 25, 29 and accompanying text (citing 
guidance prepared by CPMI-IOSCO on CCP resilience and recovery).
    \434\ See supra notes 24 and 29 and accompanying text (citing 
analysis and guidance prepared by the FSB on CCP resolution).
---------------------------------------------------------------------------

    Another commenter remains concerned with challenges resulting from 
the concentration of exposures at CCAs, stating that such concentration 
could potentially jeopardize the priorities for efficient clearing, 
settlement, and payment functions that CCAs must ensure pursuant to 
Title VIII of the Dodd-Frank Act.\435\ As discussed in Part I,\436\ the 
Commission has long acknowledged that, while central clearing and other 
important functions provided by CCAs generally benefit the markets they 
serve, CCAs can also pose systemic risk due in part to the fact that 
the clearing function concentrates risk. To mitigate this potential 
risk, the Commission has adopted a series of rules since the enactment 
of the Dodd-Frank Act designed to promote the resilience of CCAs. These 
rules include Rule 17Ad-22(e), which sets forth standards for CCAs that 
address all aspects of a CCA's operations, including financial risk 
management, operational risk, default management, governance, and 
participation requirements.\437\ These features of the regulatory 
framework, made more robust by the requirements adopted in this 
release, help ensure that CCAs benefit the markets they serve and do 
not create contagion events that could pose a systemic danger to the 
U.S. financial system.
---------------------------------------------------------------------------

    \435\ SRC at 4.
    \436\ See supra note 8 and accompanying text.
    \437\ See supra note 12 and accompanying text.
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D. Defined Terms in Rule 17Ad-26

1. Definition of ``Orderly Wind-Down''
    Proposed Rule 17Ad-26(b) defined ``orderly wind-down'' to mean the 
actions of a CCA to effect the permanent cessation, sale, or transfer 
of one or more of its critical services in a manner that would not 
increase the risk of significant liquidity, credit, or operational 
problems spreading among financial institutions or markets and thereby 
threaten the stability of the U.S. financial system.
    In the RWP Proposing Release, the Commission explained that the 
proposed definition would help identify the specific goals of an 
orderly wind-down: that the actions of a CCA should not increase the 
risk of significant liquidity, credit, or operational problems 
spreading among financial institutions or markets and thereby threaten 
the stability of the U.S. financial system, and that these actions 
would serve as a final and binding solution to whatever circumstance 
necessitated the wind-down (i.e., not a temporary stopgap 
measure).\438\ These considerations help distinguish the difference 
between an orderly wind-down, as opposed to a wind-down where the goal 
is to cease operations as quickly as possible. As discussed in the RWP 
Proposing Release, to be orderly, a wind-down generally should include 
providing notice to participants sufficient to allow them to transition 
to alternative arrangements in an orderly manner, as well as 
maintaining the operation of the CCA's critical services.\439\ 
Moreover, for a wind-down involving the sale or transfer of all or a 
portion of the CCA to be orderly, the CCA generally should consider the 
separability of the parts of the CCA and whether there are certain 
portions of the CCA's business that could be sold or transferred as 
separate businesses.\440\
---------------------------------------------------------------------------

    \438\ RWP Proposing Release, supra note 18, at 34718.
    \439\ Id.
    \440\ Id. at 34718.
---------------------------------------------------------------------------

a. Meaning of ``Orderly''
    Two commenters expressed the view that, despite the best efforts of 
all involved, a distressed CCA may be unable to wind-down in an 
``orderly'' manner without increasing the risk of significant 
liquidity, credit, or operational problems spreading among financial 
institutions or markets, thereby threatening the stability of the U.S. 
financial system.\441\ As the Commission acknowledged in the CCA 
Standards Adopting Release, wind-down may not always be advisable, and 
strategies based on recovery (rather than wind-down) may prove more 
feasible or workable in certain circumstances.\442\ Nonetheless, one 
purpose of Rule 17Ad-22(e)(3)(ii)--and now also of Rule 17Ad-26--is to 
ensure that CCAs have developed sufficient plans for both recovery and 
orderly wind-down to facilitate effective engagement and decision-
making with its supervisory and resolution authorities as they consider 
implementing their RWPs. Key to such engagement is ensuring that 
planning by the CCA has considered a range of scenarios, across 
circumstances that include both recovery and wind-down. Such planning, 
therefore, generally should focus on identifying strategies that can 
facilitate wind-down while mitigating to the greatest extent possible 
the risk of significant liquidity, credit, or operational problems 
spreading to other entities. Accordingly, in the CCA Standards Adopting 
Release, the Commission reiterated the importance of having plans for 
both recovery and orderly wind-down, explaining that a CCA generally 
should consider many factors across a range of potential considerations 
related to recovery and wind-down, including consideration of which 
options may be the most workable.\443\ Importantly, final Rule 17Ad-26 
requires planning for an orderly wind-down, having considered 
significant liquidity, credit, or operational problems spreading among 
financial institutions or markets should a wind-down become necessary. 
It also requires timely implementation of the RWP so that the CCA, 
participants in the clearing agency, and other stakeholders, including 
its supervisory and resolution authorities, can assess the impact of 
different scenarios. Such planning will be most effective when the CCA 
considers ways to effect the permanent cessation, sale, or transfer of 
one or more of its services in a manner that would not increase the 
risk of significant liquidity, credit, or operational problems 
spreading among financial institutions or markets and thereby threaten 
the stability of the U.S.

[[Page 91036]]

financial system. Accordingly, it is appropriate for the final rule to 
require planning designed to effect an orderly wind-down that mitigates 
the risk of significant liquidity, credit, or operational problems 
arising from the wind-down scenario.
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    \441\ ICE at 3, n.6 (explaining that while the goal of any wind-
down should be to minimize such problems, the commenter did not 
believe the possibility of increased risk should disqualify a wind-
down from being ``orderly''); see also DTCC at 11-12 (stating that 
it is impossible for either a CCA or its RWP to ex ante guarantee 
that contagion will not occur or that the U.S. financial system will 
not be impacted).
    \442\ CCA Standards Adopting Release, supra note 5, at 70808.
    \443\ Id.
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b. Applying a ``Reasonably Designed'' Standard
    One of the commenters recommended that the Commission modify the 
definition to incorporate a ``reasonably designed'' standard, 
suggesting that the definition be revised to state ``in a manner that 
is reasonably designed to not increase the risk of significant 
liquidity, credit, or operational problems spreading among financial 
institutions or markets and thereby threaten the stability of the U.S. 
financial system, while seeking the continuity of critical services 
provided by the CCA and limiting any related disruptions'' (emphasis 
added) (hereinafter the ``in a manner'' clause).\444\
---------------------------------------------------------------------------

    \444\ DTCC at 11-12.
---------------------------------------------------------------------------

    With respect to requiring that an orderly wind-down be ``reasonably 
designed,'' Rule 17Ad-22(e)(3)(ii) already applies a ``reasonably 
designed'' standard for the development of RWPs.\445\ Accordingly, a 
CCA must establish, implement, maintain and enforce written policies 
and procedures reasonably designed to, as applicable, include plans for 
the recovery and orderly wind-down of the CCA necessitated by credit 
losses, liquidity shortfalls, losses from general business risk, or any 
other losses.\446\ This ``reasonably designed'' standard effects the 
outcome desired by the commenter, and adding a second ``reasonably 
designed'' standard into the definition of ``orderly wind-down'' would 
make the definition less clear, since the definition itself only 
defines what constitutes an ``orderly'' wind-down. Accordingly, the 
Commission is retaining the ``in a manner'' clause as proposed.
---------------------------------------------------------------------------

    \445\ 17 CFR 240.17ad-22(e)(3)(ii).
    \446\ Id.
---------------------------------------------------------------------------

c. Feasibility of Wind-Down
    One commenter stated that wind-down of a CCA is infeasible because 
suitable alternatives do not exist and the time it would take to 
establish or transfer critical functions to a ``bridge'' or new entity 
would cause permanent damage to the markets served by the CCA.\447\ 
When the Commission adopted preexisting Rule 17Ad-22(e), which includes 
in paragraph (e)(3)(ii) the requirement for CCAs to have RWPs, it 
addressed comments expressing concern with the feasibility of winding 
down a CCA. As explained above, the Commission reiterated in the CCA 
Standards Adopting Release the importance of having plans for both 
recovery and orderly wind-down, explaining that a CCA generally should 
consider many factors in a range of potential considerations related to 
recovery and orderly wind-down, including consideration of which 
options may be the most feasible or workable.\448\ One commenter to the 
CCA Standards Adopting Release, representing three CCAs, stated its 
view that, while CCAs should analyze the feasibility of an orderly 
wind-down in their plans and include it when appropriate, in the 
commenter's view, recovery strategies (rather than wind-down) most 
effectively promote financial stability, ensure the continuation of 
services, and distribute losses in a fair and economically efficient 
manner.\449\ The Commission continues to agree that the steps to be 
taken in a recovery or wind-down scenario must promote financial 
stability, the continuity of systemically important services, and the 
fair and efficient allocation of losses.\450\ Consistent with this 
view, the requirements related to orderly wind-down in Rule 17Ad-26 
include elements focused on planning and timely implementation, to help 
ensure that, if a CCA were to enter recovery or become unable to 
continue as a going concern, the relevant supervisory authorities, and, 
in the case of a resolution, the relevant resolution authorities, could 
rely on the planning set forth in the CCA's RWPs. Such elements can 
help those authorities evaluate the most effective course of action 
under the circumstances while ensuring that systemically important 
functions continue to serve the affected markets.\451\ Accordingly, the 
definition of ``orderly wind-down'' seeks to identify those 
circumstances where a permanent cessation, sale, or transfer of one or 
more of its critical services could occur in a manner that would not 
increase the risk of significant liquidity, credit, or operational 
problems spreading among financial institutions or markets. In this 
way, although it may be unworkable to fully wind down systemically 
important functions provided by a CCA such that markets lose continuity 
of access to these functions, planning for the orderly wind-down of a 
CCA can help ensure that the CCA itself, as well as the markets it 
serves, have planned for and developed the mechanisms that can 
facilitate the continuity of such systemically important functions even 
if the CCA itself is unable to continue as a going concern. The 
Commission is therefore adopting the definition of ``orderly wind-
down'' in final Rule 17Ad-26 as proposed, with certain technical 
modifications to ensure consistency across the elements of Rule 17Ad-
26, as discussed immediately below.
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    \447\ Davidson at 1 (``It is simply not possible, as a practical 
matter, to `resolve' a systemically important financial market 
utility. They must be `recovered.' '').
    \448\ CCA Standards Adopting Release, supra note 5, at 70808.
    \449\ Id.
    \450\ See supra note 442 (stating the same).
    \451\ For example, the RWP would include information that can 
assist the resolution authority in the context of resolution 
planning.
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d. Other Modifications for Consistency
    The Commission is modifying the definition of ``orderly wind-down'' 
to ensure consistency with other modifications made in Rule 17Ad-26 
with respect to the defined term ``service providers for core 
services,'' as discussed above. Accordingly, the Commission is 
replacing the reference to ``critical services'' in the proposed 
definition with ``core services, as identified by the covered clearing 
agency pursuant to paragraph (a)(1) of this section.'' As such, final 
Rule 17Ad-26(b) defines ``orderly wind-down'' to mean the actions of a 
CCA to effect the permanent cessation, sale, or transfer of one or more 
of its core services, as identified by the CCA pursuant to Rule 17Ad-
26(a)(1), in a manner that would not increase the risk of significant 
liquidity, credit, or operational problems spreading among financial 
institutions or markets and thereby threaten the stability of the U.S. 
financial system.
2. Other Defined Terms and Introductory Clause
    In addition to the definition of ``orderly wind-down,'' the 
Commission proposed definitions for the terms ``affiliate,'' 
``recovery,'' and ``service provider.''
    The definition of ``affiliate'' as proposed meant a person that 
directly or indirectly controls, is controlled by, or is under common 
control with the CCA. The Commission received no comments on this 
definition and is adopting the definition of ``affiliate'' as proposed.
    The definition of ``recovery'' as proposed meant the actions of a 
CCA, consistent with its rules, procedures, and other ex ante 
contractual arrangements, to address any uncovered loss, liquidity 
shortfall, or capital

[[Page 91037]]

inadequacy, whether arising from participant default or other causes 
(such as business, operational, or other structural weaknesses), 
including actions to replenish any depleted prefunded financial 
resources and liquidity arrangements, as necessary to maintain the 
CCA's viability as a going concern and to continue its provision of 
critical services. The Commission received no comments on this 
definition. To align this definition with modifications to paragraph 
(a)(1) of Rule 17Ad-26, as well as corresponding modifications to the 
definitions of ``service provider for core services'' and ``orderly 
wind-down,'' the Commission is modifying the definition of ``recovery'' 
at adoption by replacing the language regarding ``critical services'' 
with ``core services, as identified by the covered clearing agency 
pursuant to paragraph (a)(1) of this section.'' Accordingly, as 
adopted, the definition of ``recovery'' means the actions of a CCA, 
consistent with its rules, procedures, and other ex ante contractual 
arrangements, to address any uncovered loss, liquidity shortfall, or 
capital inadequacy, whether arising from participant default or other 
causes (such as business, operational, or other structural weaknesses), 
including actions to replenish any depleted prefunded financial 
resources and liquidity arrangements, as necessary to maintain the 
CCA's viability as a going concern and to continue its provision of 
core services, as identified by the CCA pursuant to Rule 17Ad-26(a)(1).
    The definition of ``service provider'' as proposed meant any 
person, including an affiliate or a third party, that is contractually 
obligated to the CCA in any way related to the provision of critical 
services, as identified by the CCA in 17 CFR 240.17ad-26(a)(1). Several 
commenters stated that the proposed definition was overly broad, 
capturing service providers that would not directly support critical 
services, and that it would be burdensome to map to such a wide scope 
of service providers to critical services.\452\ Commenters made 
suggestions to narrow the scope of the definition, several of which the 
Commission is adopting,\453\ as discussed in Parts II.C.1 and 2.
---------------------------------------------------------------------------

    \452\ DTCC at 6; ICC at 3-4; OCC at 6-7; CCP12 at 3.
    \453\ DTCC at 7; ICC at 4.
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    To narrow the scope of the definition and consistent with the 
changes previously discussed in Parts II.C.1 and 2 regarding Rule 17Ad-
26(a)(1) and (2), the Commission is modifying the defined term 
``service provider'' to be ``service provider for core services.'' The 
Commission is also modifying the definition to narrow the scope to 
include only those services providers that have a written agreement to 
provide, on an ongoing basis, services that directly support the core 
services of the CCA. Specifically, the Commission is replacing the 
clause ``any person . . . that is contractually obligated to the CCA in 
any way related to the provision of critical services'' with ``any 
person . . . that, through a written agreement for services provided to 
or on behalf of the CCA, on an ongoing basis, directly supports the 
delivery of core services[.]'' \454\ These changes closely link the 
scope of ``service providers'' with the requirement in Rule 17Ad-
26(a)(1) to identify core services. The modifications to the definition 
also align the approach in Rule 17Ad-26 with the approach in existing 
Rule 17Ad-25, which establishes requirements, in part, for the board of 
directors of a registered clearing agency to oversee service providers 
for core services.
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    \454\ The Commission is also making a technical edit to the 
definition of ``service provider for core services'' in final Rule 
17Ad-26(b): replacing ``in 17 CFR 240.17ad-26(a)(1)'' with 
``pursuant to paragraph (a)(1) of this section.''
---------------------------------------------------------------------------

    Finally, the Commission is also modifying the introductory clause 
of paragraph (b) of Rule 17Ad-26 to state: ``All terms used in this 
section have the same meaning as in the Securities Exchange Act of 
1934, and, unless the context otherwise requires, the following 
definitions apply for purposes of this section[.]'' This modification 
clarifies that the terms defined in Rule 17Ad-26(b) are for the purpose 
of Rule 17Ad-26 and intended to be consistent with terms used in the 
Exchange Act.

III. Compliance Date

    The Commission did not receive any comments regarding compliance 
dates for the proposed rule amendments and new rules being adopted in 
this release.\455\ The Commission is adopting two compliance dates 
regarding these final rule amendments and new rules, as follows: (1) 
each covered clearing agency will be required to file with the 
Commission any proposed rule changes required under Rule 19b-4 and any 
Advance Notices required under Title VIII of the Dodd-Frank Act and 
Rule 19b-4(n) no later than April 17, 2025, and (2) the proposed rule 
changes and the Advance Notices must be effective by December 15, 2025. 
These compliance dates provide sufficient time for CCAs to consider 
changes to their rules, policies, and procedures necessary to ensure 
consistency with the rules amended and adopted in this release because, 
as discussed above and further in the Economic Analysis and Paperwork 
Reduction Act analysis below, CCAs generally have policies and 
procedures consistent with many of the elements of the final amendments 
to 17Ad-22(e)(6) and new Rule 17Ad-26. As such, while these new 
requirements likely require a CCA to review and update existing 
policies and procedures, it does not require a CCA to develop new 
systems, technologies, or processes. Because these rules promote 
iterative and incremental updates to existing policies and procedures, 
generally based on existing practices at some or all of the current set 
of CCAs, these compliance dates provide a sufficient time period to 
facilitate the filing, publication, and Commission review and approval, 
as appropriate, of any incremental changes to policies and procedures 
consistent with the processes for proposed rule changes under Rule 19b-
4 and Advance Notices under Title VIII and Rule 19b-4(n).
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    \455\ In determining compliance dates, the Commission considers 
the benefits of the rules as well as the costs of delayed compliance 
dates, and potential overlapping compliance dates. For the reasons 
discussed throughout the release, to the extent that there are costs 
from overlapping compliance dates, the benefits of the rule justify 
the costs. See infra sections IV.B. and IV.C.3 in the Economic 
Analysis for a discussion of the interaction of the final rule with 
certain other Commission rules.
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IV. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic consequences and 
effects of the final rule and amendments, including their benefits and 
costs.\456\ Since the final rule and amendments could require a CCA to 
adopt new policies and procedures, the Commission acknowledges that the 
development and implementation of those new policies and procedures 
will have economic effects.
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    \456\ Under section 3(f) of the Exchange Act, whenever the 
Commission engages in rulemaking under the Exchange Act and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, it must consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f). In addition, section 23(a)(2) of the Exchange Act prohibits 
the Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
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    This section addresses the economic effects of the final rule and 
amendments, including their anticipated and estimated benefits and 
costs and their effects on efficiency, competition, and capital 
formation. It is not feasible to quantify many of the

[[Page 91038]]

benefits and costs. For example, risk management is an area of key 
concern for all clearing agency stakeholders. Perceptions of risk 
affect how clearing agencies are operated, and those operations, in 
turn, affect perceptions of risk. Any change to the policies and 
procedures about how clearing agencies act in times of crisis affects 
the behavior of clearing agencies and participants in complex ways not 
only during a crisis but also before the crisis, and those behavioral 
changes may affect the likelihood and severity of a crisis. While the 
Commission has attempted to quantify economic effects where possible, 
much of the discussion of economic effects is qualitative in nature. 
The Commission also discusses the potential economic effects of certain 
alternatives to the final rule and amendments.

B. Economic Baseline

    To consider the effect of the final rule and amendments, the 
Commission first explains the current situation in the market (i.e., 
the economic baseline). All the benefits and costs of the final rule 
and amendments are calculated relative to the economic baseline. The 
economic baseline in this analysis considers: (1) the current market 
for CCA activities, including the number of CCAs, the distribution of 
participants across these clearing agencies, and the level of activity 
these clearing agencies process; (2) the current regulatory framework 
for CCAs; (3) the current recovery and orderly wind-down plans of CCAs; 
and (4) the current risk-based margin systems of CCAs. The Commission 
did not receive any comments on the economic baseline.
    We have considered the potential effects on entities that are 
implementing other recently adopted rules during the compliance period 
for these amendments. Recently adopted rules that may place compliance 
obligations on some of the same entities with obligations under these 
amendments include the 17 CFR 240.10c-1a (``Rule 10c-1a'') Adopting 
Release,\457\ the CA Governance Adopting Release,\458\ and the Treasury 
Clearing Adopting Release.\459\
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    \457\ Reporting of Securities Loans, Release No. 34-98737 (Oct. 
13, 2023) [88 FR 75644 (Nov. 3, 2023)] (``Rule 10c-1a Adopting 
Release''). This rule requires any covered person who agrees to a 
covered securities loan on behalf of itself or another person to 
report specified information about the covered securities loan to a 
registered national securities association (currently FINRA is the 
only registered national securities association)--or rely on a 
reporting agent to do so--and requires the registered national 
securities association to make certain information it receives 
available to the public. Covered persons will include market 
intermediaries, securities lenders, and broker-dealers, while 
reporting agents include certain brokers, dealers, or registered 
clearing agencies. The rule's compliance dates required that the 
registered national securities association propose rules pursuant to 
Rule 10c-1a(f) by May 2, 2024, and the proposed rules shall be 
effective no later than Jan. 2, 2025; that covered persons report 
Rule 10c-1a information to a registered national securities 
association on or by Jan. 2, 2026 (which requires that the 
registered national securities association have implemented data 
retention and availability requirements for reporting); and that the 
registered national securities association publicly report Rule 10c-
1a information by Apr. 2, 2026. See Rule 10c-1a Adopting Release, 
section VIII.
    \458\ CA Governance Adopting Release, supra note 12. The CA 
Governance Adopting Release establishes Rule 17Ad-25 for new 
governance requirements for registered clearing agencies. These 
include requirements for independent directors and for the 
composition of a registered clearing agency's board of directors, 
nominating committee, and risk management committee; requirements to 
identify and document existing or potential conflicts of interest 
involving directors or senior managers, and mitigate or eliminate 
and document the mitigation or elimination of such conflicts; and 
requirements for policies and procedures obligating directors to 
report conflicts of interest, managing risks from relationships with 
service providers, and requiring boards to solicit, consider, and 
document their consideration of the views of participants and other 
relevant stakeholders. The compliance date for Rule 17Ad-25 is Dec. 
5, 2024, except that the compliance date for the independence 
requirements of the board and board committees in Rules 17Ad-
25(b)(1), (c)(2), and (e) is Dec. 5, 2025. See CA Governance 
Adopting Release, section III.
    \459\ Treasury Clearing Adopting Release, supra note 62. Among 
other things, the amendments require CCAs for U.S. Treasury 
securities to have written policies and procedures reasonably 
designed to require that every direct participant of the CCA submit 
for clearance and settlement all eligible secondary market 
transactions in U.S. Treasury securities to which it is a 
counterparty. The compliance date was Mar. 18, 2024, for CCAs to 
file any proposed rule changes pursuant to Rule 17Ad-22(e)(6)(i) and 
(e)(18)(iv)(C) and 17 CFR 240.15c3-3 (``Rule 15c3-3''), which must 
be effective by Mar. 31, 2025. With respect to the changes to Rule 
17Ad-22(e)(18)(iv)(A) and (B), (i) CCAs were required to file any 
proposed rule changes regarding those amendments no later than June 
14, 2024, and (ii) those changes must be effective by Dec. 31, 2025, 
for cash market transactions encompassed by section (ii) of the 
definition of an eligible secondary market transaction, and by June 
30, 2026, for repo transactions encompassed by section (i) of the 
definition of eligible secondary market transactions. Finally, the 
Commission amended the broker-dealer customer protection rule to 
permit margin required and on deposit with CCAs for U.S. Treasury 
securities to be included as a debit in the reserve formulas for 
accounts of customers and proprietary accounts of broker-dealers, 
subject to certain conditions. Compliance by the direct participants 
of a U.S. Treasury securities CCA with the requirement to clear 
eligible secondary market transactions is not required until Dec. 
31, 2025, and June 30, 2026, respectively, for cash and repo 
transactions. See Treasury Clearing Adopting Release, section III.
---------------------------------------------------------------------------

1. Description of Market
    Of the eight registered clearing agencies, six are currently in 
operation.\460\ Five provide central counterparty (``CCP'') 
services,\461\ and one provides central securities depository (``CSD'') 
services.\462\ National Securities Clearing Corporation (``NSCC''), 
Fixed Income Clearing Corporation (``FICC''), and Depository Trust 
Company (``DTC'') are all CCAs that are subsidiaries of Depository 
Trust & Clearing Corporation (``DTCC''). NSCC offers clearance and 
settlement services for equities, corporate and municipal debt, 
American depositary receipts, exchange traded funds, and unit 
investment trusts (``UITs''). FICC's Mortgage-Backed Securities 
Division (``MBSD'') provides clearing, netting, and risk management 
services for trades in the mortgage-backed securities market. FICC's 
Government Securities Division (``GSD'') provides clearing,

[[Page 91039]]

netting, and risk management services for trades in U.S. Government 
debt, including buy-sell transactions and repurchase agreement 
transactions. DTC provides end-of-day net settlement for clients, 
processes corporate actions, provides securities movements for NSCC's 
net settlements, and it provides settlement for institutional trades.
---------------------------------------------------------------------------

    \460\ There are two registered but inactive clearing agencies: 
Boston Stock Exchange Clearing Corporation (``BSECC'') and Stock 
Clearing Corporation of Philadelphia (``SCCP''). Neither has 
provided clearing services in well over a decade. See Self-
Regulatory Organizations; The Boston Stock Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
to Amend the Articles of Organization and By-Laws, Exchange Act 
Release No. 63629 (Jan. 3, 2011), 76 FR 1473, 1474 (Jan. 3, 2011) 
(BSECC ``returned all clearing funds to its members by September 30, 
2010, and [ ] no longer maintains clearing members or has any other 
clearing operations as of that date. [ ] BSECC [ ] maintain[s] its 
registration as a clearing agency with the Commission for possible 
active operations in the future.''); Self-Regulatory Organizations; 
Stock Clearing Corporation of Philadelphia; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Relating to the 
Suspension of Certain Provisions Due to Inactivity, Exchange Act 
Release No. 63268 (Nov. 8, 2010), 75 FR 69730, 69731 (Nov. 15, 2010) 
(SCCP ``returned all clearing fund deposits by September 30, 2009; 
[and] as of that date SCCP no longer maintains clearing members or 
has any other clearing operations. [ ] SCCP [ ] maintain[s] its 
registration as a clearing agency for possible active operations in 
the future.''). Because they do not provide clearing services, BSECC 
and SCCP are not included in the economic baseline or the 
consideration of benefits and costs. ICE Clear Europe Limited 
withdrew its registration in Nov. 2023. See Exchange Act Release No. 
98902 (Nov. 9, 2023), 88 FR 78428 (Nov. 15, 2023).
    \461\ A CCP is a type of registered clearing agency that acts as 
the buyer to every seller and the seller to every buyer, providing a 
trade guaranty with respect to transactions submitted for clearing 
by the CCP's participants. See supra note 6. A CCP may perform a 
variety of risk management functions to manage the market, credit, 
and liquidity risks associated with transactions submitted for 
clearing. For example, CCPs help manage the effects of a participant 
default by closing out the defaulting participant's open positions 
and using financial resources available to the CCP to absorb any 
losses. In this way, the CCP can prevent the onward transmission of 
financial risk. See, e.g., Shortening the Securities Transaction 
Settlement Cycle, Exchange Act Release No. 94196 (Feb. 9, 2022), 87 
FR 10436, 10448 (Feb. 24, 2022).
    \462\ A CSD is a type of registered clearing agency that acts as 
a depository for handling securities, whereby all securities of a 
particular class or series of any issuer deposited within the system 
are treated as fungible. Through use of a CSD, securities may be 
transferred, loaned, or pledged by bookkeeping entry without the 
physical delivery of certificates. A CSD also may permit or 
facilitate the settlement of securities transactions more generally. 
See supra note 6.
---------------------------------------------------------------------------

    ICE Clear Credit LLC (``ICC'') is a CCA for credit default swaps 
(``CDS''), and it is a subsidiary of Intercontinental Exchange, Inc. 
(``ICE''). LCH SA is another CCA that offers clearing for CDS, and it 
is a France-based subsidiary of LCH Group Holdings Ltd, which, in turn, 
is majority owned by the London Stock Exchange Group plc. The sixth 
CCA, Options Clearing Corporation (``OCC''), offers clearing services 
for exchange-traded U.S. equity options.
    CCAs operate under one of two broad ownership models. In one model, 
the CCA is member-owned,\463\ while in the other model, the CCA is 
publicly traded.\464\
---------------------------------------------------------------------------

    \463\ See, e.g., Release No. 34-52922 (Dec. 7, 2005), 70 FR 
74070 (Dec. 14, 2005) (explaining that participants of DTC, FICC, 
and NSCC that make full use of the services of one or more of these 
clearing agency subsidiaries of DTCC are required to purchase DTCC 
common shares).
    \464\ OCC is owned by certain options exchanges, which are all 
publicly traded. ICC is a subsidiary of ICE (a publicly traded 
company). LCH SA is a subsidiary of LCH Group Holdings, Ltd., which 
is majority-owned by London Stock Exchange Group plc (a publicly 
traded company).
---------------------------------------------------------------------------

    CCAs currently operate specialized clearing services and face 
limited competition in their markets.\465\ For each of the following 
asset classes, for example, there is only one CCA serving as a central 
counterparty: exchange-traded equity options (OCC), government 
securities (FICC), mortgage-backed securities (FICC), and equity 
securities (NSCC). There is also only one CCA providing central 
securities depository services (DTC). CCA activities exhibit high 
barriers to entry and economies of scale.\466\ These features of the 
existing markets, and the resulting concentration of clearing and 
settlement services within a handful of entities, inform the 
Commission's examination of the effects of the final rule and 
amendments on competition, efficiency, and capital formation (see Part 
IV.C.3). Table 1 summarizes the most recent data on the number of 
participants at each CCA.\467\
---------------------------------------------------------------------------

    \465\ See SIFMA at 10.
    \466\ See Alistair Milne, Central Securities Depositories and 
Securities Clearing and Settlement: Business Practice and Public 
Policy Concerns, in Analyzing the Economics of Financial Market 
Infrastructures 334, 335 (Martin Diehl, et al. eds., 2016), 
available at https://doi.org/10.4018/978-1-4666-8745-5.ch017 
(``Clearing and settlement operations have evolved over time to 
become remarkably complex. This complexity creates business 
challenges, especially for management of liquidity, which could 
potentially have systemic consequences for the wider financial 
system. This complexity may also increase the barriers to entry that 
can discourage competition in trade settlement and securities 
services.'').
    \467\ Membership requirements vary across the CCAs. For example, 
the self-clearing minimum net-capital requirement is $500 thousand 
for NSCC, while OCC's net capital requirement is $2.5 million. 
Multiple memberships by the same firm are much more common at NSCC 
than at the other CCAs.

        Table 1\a\--Number of Participants at CCAs in August 2024
------------------------------------------------------------------------
                                                             Number of
                           CCA                             participants
------------------------------------------------------------------------
Subsidiaries of The Depository Trust & Clearing           ..............
 Corporation:
    National Securities Clearing Corporation \b\........           4,502
    The Depository Trust Company \c\....................             877
    Fixed Income Clearing Corporation (Government                    220
     Securities Division) \d\...........................
    Fixed Income Clearing Corporation (Mortgage Backed               139
     Securities Division) \e\...........................
Subsidiaries of Intercontinental Exchange:
    ICE Clear Credit \f\................................              31
Subsidiaries of LCH:
    LCH SA (CDSClear Participants Only) \g\.............              26
    The Options Clearing Corporation \h\................             181
------------------------------------------------------------------------
\a\ Participant statistics were taken from the websites of each of the
  listed clearing agencies in Aug. 2024.
\b\ DTCC, NSCC Member Directories, available at http://www.dtcc.com/client-center/nscc-directories.
\c\ DTCC, DTC Member Directories, available at http://www.dtcc.com/client-center/dtc-directories.
\d\ DTCC, FICC-GOV Member Directories, available at http://www.dtcc.com/client-center/ficc-gov-directories.
\e\ DTCC, FICC-MBS Member Directories, available at http://www.dtcc.com/client-center/ficc-mbs-directories.
\f\ ICE, ICE Clear Credit Participants, available at https://www.theice.com/clear-credit/participants.
\g\ LCH, LCH SA Membership, available at https://www.lch.com/membership/member-search.
\h\ OCC, Member Directory, available at http://www.theocc.com/Company-Information/Member-Directory.

    CCAs have become an essential part of the infrastructure of the 
U.S. securities markets due to their role as intermediaries. Over the 
last several years, CCAs have become increasingly important in 
financial markets as they clear an increasing fraction of market 
transactions.\468\ For example, in the 12-month period from October 
2021 to September 2022, approximately 65 percent, or $1.3 trillion 
notionally, of all single-name CDS transactions in the United States 
were centrally cleared,\469\ and the Commission adopted in December 
2023 rule changes which, among other things, require CCAs for U.S. 
Treasury securities to have written policies and procedures reasonably 
designed to require that every direct participant of the CCA submit for 
clearance and settlement all eligible secondary market transactions in 
U.S. Treasury securities to which it is a counterparty.\470\ The 
average daily value of equities trades cleared by NSCC in 2023 was $1.9 
trillion; at FICC, the total net value of government securities 
transactions in 2023 was $2,019 trillion and the total net par value 
for mortgage backed securities in 2023 was $58 trillion; and the total 
value of transactions settled by DTC in 2023 was $446 trillion.\471\ In 
addition, in 2023,

[[Page 91040]]

OCC cleared 11.1 billion options contracts.\472\
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    \468\ See Better Markets at 10 (``Since [the 2008 financial 
crisis], more and more connections in the global financial system 
run through CCPs. This growing interconnectedness has benefits but 
also poses risks.''). See SIFMA at 2 (``In this regard, the SEC's 
Proposal is increasingly relevant in light of the SEC's recent 
proposal to require increased clearing of the Treasury market, which 
would occur through a single SEC-regulated Clearing Agency.'').
    \469\ Data from DTCC's Trade Information Warehouse, compiled by 
Commission staff. At the time of adoption, 2023 data were not 
available.
    \470\ See supra note 459.
    \471\ See DTCC, Annual Report (2023), available at https://www.dtcc.com/-/media/Files/Downloads/Annual%20Report/2023/DTCC-2023-AR-Print.pdf. The total value of transactions settled in 2021 was 
$432 trillion. The proposing release reported the related statistic 
of the total value of securities transactions settled in 2021, which 
was $152 trillion.
    \472\ See OCC, Press Release OCC Reports December 2023 and Total 
2023 Volume Data (Jan. 4, 2024), available at https://www.theocc.com/newsroom/press-releases/2024/1-03-occ-reports-december-2023-and-total-2023-volume-data.
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    Central clearing benefits the markets by significantly reducing 
participants' counterparty risk and through more efficient netting of 
margin requirements. Consequently, central clearing also benefits the 
financial system by increasing financial resilience and the ability to 
monitor and manage risk.\473\ The role of a clearing agency in 
promoting resilience highlights its central importance in the 
functioning of markets.\474\ If a CCP is unable to perform its risk 
management functions effectively, it can transmit risk throughout the 
financial system. Similarly, if a CSD is unable to perform its 
functions, market participants may be unable to settle their 
transactions, which may transmit risk throughout the financial system.
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    \473\ See Darrell Duffie, Still the World's Safe Haven? 
Redesigning the U.S. Treasury Market After the COVID-19 Crisis 15 
(Hutchins Center Working Paper, Paper No. 62, 2020), available at 
https://www.brookings.edu/wp-content/uploads/2020/05/wp62_duffie_v2.pdf (``Central clearing increases the transparency of 
settlement risk to regulators and market participants, and in 
particular allows the CCP to identify concentrated positions and 
crowded trades, adjusting margin requirements accordingly. Central 
clearing also improves market safety by lowering exposure to 
settlement failures. . . . As depicted, settlement failures rose 
less in March [2020] for [U.S. Treasury] trades that were centrally 
cleared by FICC than for all trades involving primary dealers. A 
possible explanation is that central clearing reduces `daisy-chain' 
failures, which occur when firm A fails to deliver a security to 
firm B, causing firm B to fail to firm C, and so on.'').
    \474\ See generally Albert J. Menkveld & Guillaume Vuillemey, 
The Economics of Central Clearing, 13 Ann. Rev. Fin. Econ. 153 
(2021).
---------------------------------------------------------------------------

    Disruption to a clearing agency's operations, or failure on the 
part of a clearing agency to meet its obligations, could serve as a 
source of contagion, resulting in significant costs not only to the 
clearing agency itself and its participants but also to other market 
participants and the broader U.S. financial system.\475\ Absent proper 
risk management, a clearing agency failure could destabilize the 
financial system.\476\ As a result, proper management of the risks 
associated with central clearing helps ensure the stability of the U.S. 
securities markets and the broader U.S. financial system.\477\
---------------------------------------------------------------------------

    \475\ See generally Dietrich Domanski, Leonardo Gambacorta, & 
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS 
Q. Rev. (Dec. 2015), available at https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf (describing links between CCP financial risk 
management and systemic risk); Darrell Duffie, Ada Li, & Theo Lubke, 
Policy Perspectives on OTC Derivatives Market Infrastructure 9 (Fed. 
Res. Bank N.Y. Staff Rep., Paper No. 424, 2010), available at http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is 
successful in clearing a large quantity of derivatives trades, the 
CCP is itself a systemically important financial institution. The 
failure of a CCP could suddenly expose many major market 
participants to losses. Any such failure, moreover, is likely to 
have been triggered by the failure of one or more large clearing 
agency participants, and therefore to occur during a period of 
extreme market fragility.''); Craig Pirrong, The Inefficiency of 
Clearing Mandates 11-14, 16-17, 24-26 (Policy Analysis Working 
Paper, Paper No. 655, 2010), available at http://www.cato.org/pubs/pas/PA665.pdf (stating, among other things, that ``CCPs are 
concentrated points of potential failure that can create their own 
systemic risks,'' that ``[a]t most, creation of CCPs changes the 
topology of the network of connections among firms, but it does not 
eliminate these connections,'' that clearing may lead speculators 
and hedgers to take larger positions, that a CCP's failure to 
effectively price counterparty risks may lead to moral hazard and 
adverse selection problems, that the main effect of clearing would 
be to ``redistribute losses consequent to a bankruptcy or run,'' and 
that clearing entities have failed or come under stress in the past, 
including in connection with the 1987 market break); see Glenn 
Hubbard et al., Report of the Task Force on Financial Stability, 
Brookings Inst., 96 (June 2021), available at https://www.brookings.edu/wp-content/uploads/2021/06/financial-stability_report.pdf (``In short, the systemic consequences from a 
failure of a major CCP, or worse, multiple CCPs, would be severe. 
Pervasive reforms of derivatives markets following 2008 are, in 
effect, unfinished business; the systemic risk of CCPs has been 
exacerbated and left unaddressed.''); Froukelien Wendt, Central 
Counterparties: Addressing their Too Important to Fail Nature 
(working paper Jan. 2015), available at https://ssrn.com/abstract=2568596 (retrieved from SSRN Elsevier database) (assessing 
the potential channels for contagion arising from CCP 
interconnectedness); Manmohan Singh, Making OTC Derivatives Safe--A 
Fresh Look 5-11 (IMF Working Paper, Paper No. 11/66, 2011), 
available at http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf 
(addressing factors that could lead central counterparties to be 
``risk nodes'' that may threaten systemic disruption).
    \476\ See Better Markets at 10 (``The inability of a CCP to 
recover from severe losses, or the disorderly wind-down of a CCP, 
could have significant repercussions not only for the sector in 
which the CCP operates but for the markets and the economy as a 
whole.''); SIFMA at 2 (``In this regard, the SEC's Proposal is 
increasingly relevant in light of the SEC's recent proposal to 
require increased clearing of the Treasury market, which would occur 
through a single SEC-regulated Clearing Agency.'').
    \477\ See Paolo Saguato, Financial Regulation, Corporate 
Governance, and the Hidden Costs of Clearinghouses, 82 Ohio St. L.J. 
1071, 1074-75 (2021), available at https://moritzlaw.osu.edu/sites/default/files/2022-03/18.%20Saguato_v82-6_1071-1140.pdf (``[T]he 
decision to centralize risk in clearinghouses made them critical for 
the stability of the financial system, to the point that they are 
considered not only too-big-to-fail, but also too-important-to-fail 
institutions.'').
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2. Overview of the Existing Regulatory Framework
    The existing regulatory framework for clearing agencies registered 
with the Commission includes section 17A of the Exchange Act, the Dodd-
Frank Act, and the related rules adopted by the Commission.\478\
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    \478\ See RWP Proposing Release, supra note 18 at Part II.
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    Clearing agencies registered with the Commission may also be 
subject to other domestic or foreign regulation.\479\ Specifically, 
clearing agencies operating in the U.S. may also be subject to 
regulation by the CFTC (as designated clearing organizations, or DCOs, 
for futures or swaps that are dually registered with the CFTC and SEC) 
and the Board of Governors (as SIFMUs or State member banks).\480\ 
Additionally, LCH SA is regulated by l'Autorit[eacute] des 
march[eacute]s financiers, l'Autorit[eacute] de Contr[ocirc]le 
Prudentiel et de R[eacute]solution, and the Banque de France, and it is 
subject to European Market Infrastructure Regulation (EMIR).\481\
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    \479\ See supra Part III.D.2.
    \480\ See 12 U.S.C. 5472, 5469. Currently, ICC, LCH SA, and OCC 
are regulated by the Commission and the CFTC. The CFTC is the 
primary supervisory regulator for ICC and LCH SA, while the 
Commission is the primary supervisory regulator for OCC. DTC, FICC, 
NSCC, ICC, and OCC have been designated systemically important 
financial market utilities by the FSOC (see infra note 517 and the 
accompanying text). DTC is also a state member bank of the Federal 
Reserve System and a New York State registered trust company and is 
therefore also regulated by the New York Department of Banking and 
Finance. LCH SA is not regulated by the Board of Governors. The 
Board of Governors addresses certain recovery and orderly wind-down 
plans in Regulation HH (see RWP Proposing Release, supra note 18, at 
34710 n.68 and accompanying text), and the CFTC requires certain 
derivatives clearing organizations to maintain recovery and orderly 
wind-down plans through Regulation Sec.  39.39(b) and subsequent 
guidance (see RWP Proposing Release, supra note 18, at 34716 n.69 
and accompanying text).
    \481\ See LCH, Company Structure, available at https://www.lch.com/about-us/structure-and-governance/company-structure.
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3. Current Recovery and Orderly Wind-Down Plans
    Each CCA, as part of a sound risk-management framework, is 
currently required to establish and maintain plans for the recovery and 
orderly wind-down of the CCA necessitated by credit losses, liquidity 
shortfalls, losses from general business risk, or any other losses 
(such plans are referred to as recovery and wind-down plans, or 
RWPs).\482\ The CCA may have one RWP document, or it may maintain two 
separate documents, referring to one as the recovery plan and the other 
as the orderly wind-down plan. Although the Commission did not include 
specific requirements for RWPs in the CCA Standards Adopting Release, 
the Commission did offer guidance about what CCAs should consider when

[[Page 91041]]

creating their RWPs.\483\ The RWPs are subject to the rule filing 
requirement of Rule 19b-4, and all six active CCAs have submitted their 
plans and subsequent modifications to the Commission for review, public 
comment, and approval.\484\ Additionally, all of the CCAs have 
submitted confidential treatment requests with their RWPs pursuant to 
17 CFR 240.24b-2. The Commission has also reviewed these confidential 
treatment requests and concluded that the redacted material could be 
withheld from the public under the Freedom of Information Act.\485\ Due 
to the confidential treatment of the RWPs, the current release includes 
aggregated, anonymized analyses of the RWPs submitted to the Commission 
by the clearing agencies. Additionally, Form 19b-4, which is public, 
requires a description of the proposed rule change for public 
comment.\486\ To the extent that information in the baseline has been 
drawn from public sources, such as the CCAs' SRO rule filings, we have 
included attribution accordingly. All six active CCAs have approved 
RWPs in place, and the plans differ in, for example, length, style, 
emphasis, and specificity. In the remainder of Part IV.B. 3, we 
summarize CCAs' current RWPs in terms of nine elements that are part of 
final Rule 17Ad-26.
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    \482\ See RWP Proposing Release, supra note 18, at 34710 n.16 
and accompanying text.
    \483\ CCA Standards Adopting Release, supra note 5, at 70810; 
see also RWP Proposing Release, supra note 18 at Part II.A 
(discussing the guidance).
    \484\ See RWP Proposing Release supra note 18, at 34711 n.32 
(regarding Form 19b-4); id. at 34712 n.41 (regarding proposed rule 
changes).
    \485\ See, e.g., https://www.sec.gov/rules/sro/nscc/2018/34-82430-ex5a.pdf (as an example of the redacted filing materials 
posted for SR-NSCC-2017-017); see also id. A commenter stated that 
CCA members will manage key risks better if they have transparency 
into the RWPs of their CCAs. See ICI Letter at 8 (``It is critical 
for clearing members and end-user customers, such as funds, to have 
greater transparency into the content of RWPs. Such transparency 
could allow participants to determine the extent of their potential 
liabilities and predictably manage exposures to a clearing 
entity.'').
    \486\ See RWP Proposing Release, supra note 18, at 34711 n.32.
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a. Core Services
    Each RWP currently includes what the CCA has identified and 
described as its core payment, clearing, and settlement services,\487\ 
as well as the criteria that the CCA employs to make such a 
determination as to what constitutes core services.\488\ Depending on 
their operations and the structure of their RWPs, CCAs currently 
identify between one and a dozen or more core services in those RWPs. 
Currently, no CCA has analyses in its RWP regarding the staffing roles 
necessary to support the core services that they list or how such 
staffing roles necessary to support such core services would be 
available to continue operating the CCA in the event of a recovery and 
during an orderly wind-down.
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    \487\ In a change from Proposed Rule 17Ad-26(a)(1), instead of 
referring to ``critical payment, clearing and settlement services,'' 
the final rule refers to ``core payment, clearing, and settlement 
services.'' Use of the descriptive term ``core'' rather than 
``critical'' does not affect the Commission's prior guidance on 
identifying those services. See supra Part II.C.1.
    \488\ See, e.g., Exchange Act Release Nos. 82462 (Jan. 2, 2018), 
83 FR 884, 885 (Jan. 8, 2018) (SR-DTC-2017-021) (stating that the 
RWP provided a description of its services and the criteria to 
determine which services are considered critical) (``DTC 2017 
Notice''); 82431 (Jan. 2, 2018), 83 FR 871, 872 (Jan. 8, 2018) (SR-
FICC-2017-021) (stating that the RWP provided a description of its 
services and the criteria to determine which services are considered 
critical) (``FICC 2017 Notice''); 34-91806 (May 10, 2021), 86 FR 
26561 (May 14, 2021) (SR-ICC-2021-005) (``ICC 2021 Order'') (stating 
that the ICC recovery plan explains that ICC's sole critical 
operation is provides credit default swap clearing services); 82316 
(Dec. 13, 2017), 82 FR 60246, 60247 (Dec. 19, 2017) (SR-LCH SA-2017-
012) (stating that LCH SA performed an assessment on identification 
of critical functions and shared services in accordance with 
Financial Stability Board guidance) (``LCH 2017 Notice''); 82430 
(Jan. 2, 2018), 83 FR 841, 842 (Jan. 8, 2018) (SR-NSCC-2017-017) 
(stating that the RWP provided a description of its services and the 
criteria to determine which services are considered critical) 
(``NSCC 2017 Notice''); 82352 (Dec. 19, 2017), 82 FR 61072, 61074-75 
(Dec. 26, 2017) (SR-OCC-2017-021) (stating that OCC's RWP identifies 
critical services and critical support functions) (``OCC 2017 
Notice'').
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b. Service Providers
    Each RWP identifies and describes, to varying degrees, certain 
service providers, including both affiliates and third parties, upon 
which the associated CCA relies to provide its core payment, clearing, 
and settlement services. Most plans do not explicitly link the 
identified service providers to the CCAs' core payment, clearing, and 
settlement services. Some of the RWPs state that they assume core 
service providers will continue to perform in the event of a wind-down; 
at least one RWP states that it analyzes its contractual arrangements 
with respect to continuing to provide services during a recovery; \489\ 
and at least one RWP states that it is reducing dependencies on third 
parties.
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    \489\ For example, OCC's plan discusses the critical vendors for 
each of the identified critical services, the critical support 
functions, and the critical external interconnections that OCC 
maintains with other FMUs, exchanges (including designated contract 
markets), clearing and settlement banks, custodian banks, letter of 
credit banks, clearing members and credit facility lenders, and the 
appendices to the plan identifies key vendors and service providers, 
as well as key agreements to be maintained. OCC 2017 Notice, supra 
note 488, at 61075. ICC's plan categorizes its critical services by 
those that are provided to ICC by its parent company versus those 
that are provided by external third parties, and it also details the 
IT systems and applications critical to ICC's clearing operations, 
including those provided by ICE, those provided by external third 
parties, and those that ICC itself provides. Further, the plan 
analyzes ICC's contractual arrangements in the context of continuing 
services under those contracts during recovery. 34-79750 (Jan. 6, 
2017), 82 FR 3831 (Jan. 12, 2017) (SR-ICC-2016-013). In addition, 
NSCC's, FICC's, and DTC's plans identify external service providers 
for which the relationships are managed by a particular office 
within DTCC. See, e.g., Securities Exchange Act Release Nos. 91428 
(Mar. 29, 2021), 86 FR 17440, 17442 (Mar. 29, 2021) (SR-NSCC-2021-
004) (``NSCC 2021 Notice''); 91430 (Mar. 29, 2021), 86 FR 17432, 
17433-34 (Apr. 2, 2021) (SR-FICC-2021-002) (``FICC 2021 Notice''); 
91429 (Mar. 29, 2021), 86 FR 17421, 17422 (Mar. 29, 2021) (SR-DTC-
2021-004) (``DTC 2021 Notice'').
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c. Scenarios
    Each RWP generally identifies and describes certain scenarios that 
may potentially prevent the CCA from being able to provide its core 
payment, clearing, and settlement services as a going concern.\490\ The 
RWPs differ in the number of scenarios identified and described as well 
as the extent of the specificity with which each scenario is discussed. 
For example, some RWPs present short qualitative analyses of member 
defaults, while others present long, detailed quantitative analyses of 
member defaults.
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    \490\ For example, OCC's plan identifies and considers scenarios 
that may potentially prevent it from being able to provide its 
critical services as a going concern. See OCC 2017 Notice, supra 
note 488, at 61073. ICC's plan describes potential stress scenarios 
that may prevent it from being able to meet obligations and provide 
services and the recovery tools available to it to address these 
stress scenarios. See Securities Exchange Act Release No. 91439 
(Mar. 30, 2021), 86 FR 17649, 17650 (Apr. 5, 2021) (SR-ICC-2021-005) 
(``ICC 2021 Notice''). LCH SA's plans categorizes potential stress 
scenarios in two ways as a result of either: (i) Clearing member 
defaults and (ii) non-clearing member events. See LCH 2017 Notice, 
supra note 488, at 60248. In addition, each of the plans for NSCC, 
FICC, and DTC discuss, at a general level, scenarios in terms of 
uncovered losses or liquidity shortfalls that could result from the 
default of one or more of its members as well as losses that could 
arise from non-default events. See, e.g., NSCC 2021 Notice, supra 
note 489, at 17441; FICC 2021 Notice, supra note 489, at 17433; DTC 
2021 Notice, supra note 489, at 17421.
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d. Criteria That Could Trigger Implementation
    Each RWP identifies and describes criteria that could trigger the 
CCA's implementation of the recovery and orderly wind-down plans.\491\ 
The RWPs differ in the number of identified triggering criteria and in 
the detail in which they discuss each triggering

[[Page 91042]]

criterion. There are also differences in the descriptions of the 
processes that CCAs use to monitor and determine whether the triggering 
criteria have been met, thus causing their RWPs to be implemented.
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    \491\ See OCC 2017 Notice, supra note 488, at 61079-80 
(discussing OCC's identification of qualitative trigger events for 
both recovery and wind-down); 83 FR 34183, 34221, and 44970 (stating 
the DTC, NSCC, and FICC have identified wind-down triggers and that 
a CCA would have entered ``recovery phase'' when it issues its first 
loss allocation round); ICC 2021 Order, supra note 488, at 26562.
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e. Rules, Policies, Procedures, and Other Tools or Resources
    Each RWP describes, to varying degrees, the rules, policies, 
procedures, and other tools or resources the CCA could rely upon in a 
recovery or orderly wind-down to address the scenarios identified in 
the RWP.\492\
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    \492\ See, e.g., 83 FR 34220-21 (identifying NSCC's recovery 
tool characteristics); FICC 2017 Notice, supra note 488, at 878 
(identifying FICC's recovery tool characteristics); 83 FR 44970 
(identifying DTC's recovery tool characteristics); OCC 2017 Notice, 
supra note 488, at 61075-80 (identifying OCC's enhanced risk 
management and recovery tools); ICC 2021 Order, supra note 488, at 
26562 (identifying ICC's recovery tools); 83 FR 28886-87 (describing 
LCH SA's tools).
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f. Procedures To Ensure Timely Implementation
    Each RWP mentions, to varying degrees, mechanisms that would ensure 
timely implementation of the RWP.\493\ Some of the RWPs include 
specific procedures to ensure timely implementation of the recovery and 
orderly wind-down plan after specific criteria have been triggered. One 
of the RWPs has taken steps to ensure timely completion of its recovery 
and orderly wind-down plan.
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    \493\ Each of the plans for NSCC, FICC, and DTC provides a 
description of the governance and process around management of a 
stress event along a ``Crisis Continuum'' timeline. See, e.g., NSCC 
2017 Notice, supra note 488, at 842; FICC 2017 Notice, supra note 
488, at 872; DTC 2017 Notice, supra note 488, at 886. OCC's recovery 
plan outlines an escalation process for the occurrence of a 
``Recovery Trigger Event'' as well as provides general descriptions 
of how it would anticipate deploying its recovery tools in response 
to the six stress scenarios it identified. OCC 2017 Notice, supra 
note 488, at 61079-80. The ICC recovery plan describes the 
governance arrangements that provide oversight and direction of the 
plan. See ICC 2021 Notice, supra note 490, at 17649. The LCH SA 
recovery plan identifies the groups and individuals within LCH SA 
that are responsible for the various aspects of plan. See LCH 2017 
Notice, supra note 488, at 60250.
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g. Informing the Commission
    Each RWP generally refers to informing the Commission about 
recovery or orderly wind-down activities. Some of the RWPs state that 
they will inform the Commission after a recovery or wind-down has been 
initiated.
h. Testing
    Three RWPs provide for annual plan testing but with varying degrees 
of specificity about the participants' involvement as well as the 
frequency of such testing. One such RWP specifically refers to sharing 
the results of the testing with its board of directors, and another 
states that the RWP would be updated as appropriate as a result of the 
testing.\494\ The remaining CCAs do not mention testing in their RWPs.
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    \494\ See ICC 2021 Order, supra note 488, at 26562 (referencing 
testing its Recovery Plan at least annually, as part of its annual 
default management drills and providing the results of such testing, 
as well as any changes it recommends due to such testing, to the ICC 
Board and Risk Committee); ICCEU, 83 FR 2857 (referencing testing 
elements of the Recovery Plan as part of normal operations and risk 
management procedures); LCH 2017 Notice, supra note 488, at 60250 
(referencing fire drills intended to simulate all aspects of a 
member default, including the auctioning of the defaulting members 
portfolio to non-defaulting members (where appropriate) and 
involving the participation of members and relevant functions within 
the LCH SA organization, with revisions to the recovery plan as 
appropriate in light of the testing).
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i. Board Review and Approval
    Each RWP provides for periodic plan reviews, typically annually or 
biennially.\495\ Two RWPs provide for non-scheduled reviews. In the 
existing plans, the boards of directors of the CCA are responsible for 
the review and approval of the RWPs, but the plans vary in whether they 
specify that such review will also occur after material changes to the 
CCA's operations or in response to the results of periodic testing of 
the RWPs.
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    \495\ NSCC, FICC, and DTC review their respective RWPs 
biennially. See NSCC 2021 Notice, supra note 489, at 17441; FICC 
2021 Notice, supra note 489, at 17433; DTC 2021 Notice, supra note 
489, at 17421. OCC conducts an annual review of its RWP. See 
Securities Exchange Act Release No. 90315 (Nov. 3, 2020), 85 FR 
71384, 71385 (Nov. 9, 2020) (SR-OCC-2020-013); see also OCC 2017 
Notice, supra note 488, at 61080. ICC's RWP describes governance 
arrangements that provide for oversight and direction in respect to 
review and testing of the plans. See ICC 2021 Notice, supra note 
490, at 17651-52. LCH SA decided to review its wind-down plan on an 
annual basis or more frequently, if required. See Securities 
Exchange Act Release No. 88297 (Feb. 27, 2020), 85 FR 12814 (Mar. 4, 
2020) (SR-LCH SA-2020-001).
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4. Current Risk-Based Margin
    As discussed in Part II.A supra and Part II.B supra, Rule 17Ad-
22(e)(6) requires CCAs that provide central counterparty services to 
establish written policies and procedures reasonably designed to cover 
their credit exposure to their participants by establishing risk-based 
margin systems with certain characteristics. Intraday margining is an 
important tool used by CCAs to manage risk exposures on a real-time 
basis because it permits the CCAs to make quick changes in required 
collateral from their participants to cover actual and potential losses 
in response to volatility spikes.
a. Monitoring Exposure and Intraday Margin Calls
    Each CCA currently has some ability to monitor for intraday 
exposure and to make certain intraday margin calls. The frequency of 
intraday monitoring and margin calls varies across markets, and it is 
responsive to the risk characteristics of the underlying markets and 
participants. Participants are generally required to post margin within 
an hour of notification or at specified times pursuant to the CCA's 
rules and procedures. The current practice of CCAs is to release excess 
margin to participants only once a day at a pre-scheduled time. CCAs 
have existing policies and procedures around the collection of intraday 
margin,\496\ and some CCAs document when they determine not to make an 
intraday call pursuant to their written policies and procedures 
required under Rule 17Ad-22(e)(6)(ii).
---------------------------------------------------------------------------

    \496\ Rule 17Ad-22(e)(6)(ii).
---------------------------------------------------------------------------

    For example, OCC revalues its participants' portfolios throughout 
the day to calculate updated account net asset value, and its rules 
provide it the authority to issue intraday margin calls.\497\ Its 
intraday calls are generally issued between 11 a.m. and 1:30 p.m. when 
unrealized losses of an account, based on its start-of-day positions, 
exceed 50 percent of the account's total margin. NSCC's rules provide 
the authority to impose intraday mark-to-market charges, and NSCC 
tracks intraday market price and position changes in 15-minute 
intervals. NSCC generally collects additional margin if the difference 
between the most recent mark-to-market price of a participant's net 
positions and the most recent observed market price exceeds a 
predetermined threshold, which is currently 80 percent of the 
participant's volatility charge and may be reduced if NSCC determines 
that a reduction of the threshold is appropriate to mitigate risk 
during volatile market conditions.\498\
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    \497\ See OCC, Disclosure Framework supra note 96 at 50; OCC 
Rule 609 (regarding intra-day margin calls).
    \498\ See NSCC Disclosure Framework supra note 96 at 58; NSCC 
Rules, Procedure XV (defining intraday mark-to-market charge). See 
DTCC at 3.
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    FICC's GSD and FICC's MBSD have the authority to make intraday 
margin calls.\499\ FICC monitors changes in

[[Page 91043]]

pricing and positions frequently throughout the day, and it may collect 
intraday margin to cover the price movement from those participants 
with a significant exposure in an identified security or net portfolio 
and the market value of those positions.\500\
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    \499\ See FICC's GSD Rule 4, section 2a (regarding the intraday 
supplemental fund deposit); FICC's MBSD Rule 1 (defining intraday 
VaR and intraday mark-to-market charges) and Rule 4, section 2(b) 
(regarding the daily margin requirement) and section 3a (regarding 
the intraday requirements). In addition, FICC's GSD collects margin 
twice a day under its current rules, notwithstanding any additional 
intraday margin calls. See FICC's GSD Rules, schedule of timeframes.
    \500\ See generally supra note 499; FICC Disclosure Framework at 
65, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf.
---------------------------------------------------------------------------

    ICC also monitors each participant's intraday profit and loss to 
determine if its intraday exposure is covered by the margin on deposit, 
and it may issue margin calls to participants that are not sufficiently 
collateralized.\501\ LCH SA also has the ability and authority to make 
intraday margin calls that are based on intraday positions and 
valuations.\502\
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    \501\ ICC Disclosure Framework at 22-23, available at https://www.theice.com/publicdocs/clear_credit/ICEClearCredit_DisclosureFramework.pdf; ICC Rule 401.
    \502\ See generally LCH SA Disclosure Framework at 31, available 
at https://www.lch.com/system/files/media_root/LCH%20SA%20-%20Comprehensive%20Disclosure%20as%20required%20by%20SEC%20Rule%2017Ad-22%28e%29%2823%29_2022%20Q32022.pdf, and LCH CDS Clearing 
Procedures section 2.21 (describing ``extraordinary margin'' that 
LCH SA may require to cover the risk of price/spread fluctuations 
occurring on an intraday basis).
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b. Reliable Sources of Timely Price Data and Other Substantive Inputs
    CCAs use price data as well as other data sources and other 
substantive inputs in their risk-based margin systems, which is 
expected given the substantive differences in the markets and 
participants they serve. Based on its supervisory experience, the 
Commission understands that all CCAs generally have policies and 
procedures in place to use a risk-based margin system that uses 
reliable sources of timely price data and includes procedures and sound 
valuation models for addressing circumstances in which price data are 
not readily available or reliable. The Commission also understands that 
if a CCA uses other substantive inputs, such as portfolio size, asset 
price volatility, duration, convexity, and outputs from external model 
vendors, which are not required by the Commission's rules, not all CCAs 
have policies and procedures for addressing circumstances in which 
those substantive inputs are not readily available or reliable so that 
the CCA can continue to meet its requirements under Rule 17Ad-
22(e)(6).The policies and procedures used when price data or other 
substantive inputs are not available vary from one RWP to another. For 
example, the largest component of margin at FICC's GSD is typically its 
``VaR Charge.'' The VaR Charge is based on the potential price 
volatility of unsettled positions using a sensitivity-based Value-at-
Risk (``VaR'') methodology over a ten-year historical look-back period. 
In addition, FICC's GSD also uses an alternative ``Margin Proxy'' 
calculation as a backup VaR Charge calculation to the sensitivity 
approach in the event that FICC experiences a data disruption with the 
third-party vendor upon which FICC relies to produce the sensitivity-
based VaR Charge.\503\ In a similar fashion, FICC's MBSD uses both a 
VaR Charge and, as a backup in the event of a data disruption from its 
third-party vendor, a Margin Proxy \504\ NSCC relies upon a parametric 
VaR model to determine the potential future exposure of a given 
portfolio based on historical price movements, using 153 days as the 
minimum sample period for the historical data. For certain securities, 
including fixed income securities, UITs, illiquid securities, 
securities that are amendable to statistical analysis only in a complex 
manner, and securities that are less amenable to statistical analysis, 
a haircut-based volatility charge is applied in lieu of the VaR 
Charge.\505\
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    \503\ See generally FICC Disclosure Framework at 62; Release No. 
34-82779 (Feb. 26, 2018), 83 FR 9055 (Mar. 2, 2018) (File No. SR-
FICC-2018-801) (describing both the sensitivity-based VaR model that 
would use a third party vendor to supply security-level risk 
sensitivity data and relevant historical risk factor time series 
data and the use of the ``Margin Proxy'' in the event of a 
disruption at FICC's third-party vendor, as well as the procedures 
that would govern in the event that the vendor fails to deliver such 
data).
    \504\ See, e.g., FICC Disclosure Framework at 64; Release No. 
34-079643 (Dec. 21, 2016), 81 FR 95669 (Dec. 28, 2016) (File No. SR-
FICC-2016-801) (describing both the sensitivity-based VaR model that 
would use a third party vendor to supply security-level risk 
sensitivity data and relevant historical risk factor time series 
data and the use of the ``Margin Proxy'' in the event of a 
disruption at FICC's third-party vendor, as well as the procedures 
that would govern in the event that the vendor fails to deliver such 
data); Release No. 34-92145 (June 10, 2021), 86 FR 32079 (June 16, 
2021) (File No. SR-FICC-2020-804) (describing the calculation of the 
Minimum Margin Amount).
    \505\ See NSCC Disclosure Framework, supra note 498, at 58-61.
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C. Consideration of Benefits and Costs as Well as the Effects on 
Efficiency, Competition, and Capital Formation

    The following discussion sets forth the potential economic effects 
stemming from the final rule and amendments, including the anticipated 
effects on efficiency, competition, and capital formation. The benefits 
and costs discussed in this section are relative to the economic 
baseline discussed previously, which includes the CCAs' current RWPs 
and their current risk-based margin practices. A commenter agrees that 
there is a large benefit flowing from requiring the CCAs to better 
define their risk management procedures.\506\
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    \506\ See SIFMA at 3 (``Our members are in agreement with the 
Commissions' determination that there is a very significant benefit 
to requiring the Clearing Agencies to better define their risk 
management procedures'').
---------------------------------------------------------------------------

    The level of change a CCA makes to its RWP and risk management 
practices to bring itself into alignment with the final rule and 
amendments will impact the size of the benefits and costs, both direct 
and indirect, for the CCAs, their members, and the broader market. As 
stated in the baseline, each CCAs' plans differ in, for example, 
length, style, emphasis, and specificity, and each CCA has a current 
risk-based margin system that it has designed to manage certain 
idiosyncratic risks that it faces. Additionally, the final rules and 
amendments are designed to provide a CCA with discretion and 
flexibility, which means that the CCAs will be able to tailor their 
RWPs and risk-based margin systems to their particular situations.
    To the extent that a CCA determines that it does not have to make 
changes to its RWP or risk-based margin system in response to a 
particular part of the final rule and amendments, the CCA, its 
participants, and the broader market will have already absorbed the 
benefits and costs of those parts of the final rule and amendments and, 
therefore, they may not experience any direct benefits or costs from 
those parts of the final rule and amendments.\507\
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    \507\ They may experience indirect benefits to the extent other 
CCAs make risk-reducing changes that reduce the risk of negative 
spillovers.
---------------------------------------------------------------------------

    Sufficiently large disruptions in the operations at any of the CCAs 
would cause significant negative externalities in the markets they 
serve, which would likely spill over into other markets. These ripple 
effects would negatively affect numerous market participants, including 
investors. Because CCAs may not internalize the full cost of these 
externalities due in part to the structure of the clearing markets, 
their investments in their RWPs and risk-based margin systems might be 
suboptimal from a public welfare perspective.\508\ An important benefit 
of the final rule and amendments is that they require CCAs to maintain 
a higher investment in risk management than they might otherwise choose 
if they

[[Page 91044]]

have not already adopted the requirements of the rule and amendments.
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    \508\ See SIFMA at 14 and 22 (``With the combination of clearing 
mandates and single product provider status, there is very limited 
business pressure on Clearing Agencies to invest in the optimum 
level of risk management. Rather, the impetus must come from 
regulatory oversight.'').
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    The Commission has sought to strike a balance between requirements 
that enhance risk management practices and recovery and winddown 
procedures and maintaining some flexibility in the design and 
implementation of these requirements. For example, while CCAs will be 
required to test their ability to implement the RWPs at least every 12 
months, each CCA may structure the planning, execution, and analysis of 
each test in a way that reduces its aggregate testing costs for itself, 
its participants, and its other stakeholders, so long as the testing 
exercise addresses the distinct elements of the separate testing 
requirements.
    The costs discussed in Part IV.C will be borne by CCAs and their 
participants. For CCAs owned by participants, all the costs will 
ultimately be passed on to participants because they are residual 
beneficiaries of the CCA. For CCAs not owned by participants, the level 
of pass-through will depend upon several factors, including the level 
of competition among clearing agencies and the existence of mandates 
that force market participants to clear. In both cases, the 
participants will likely pass through some of these costs to their 
customers, the level of which will depend on factors such as the 
customers' sensitivities to costs and the amount of competition between 
participants for customers. Generally, if a CCA does not face 
significant competition, it will have an incentive to absorb part of 
the cost increase. In the extreme case of a perfectly competitive 
market, on the other hand, an increase in costs will be fully passed 
through to the customer because there are no economic profits and price 
equals marginal costs.\509\
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    \509\ More specifically, the market clearing quantity of the 
good or service supplied will adjust and the extent of industry-wide 
cost pass-through in a perfectly competitive market depends on the 
elasticity of demand relative to supply. The more elastic is demand, 
and the less elastic is supply, the smaller the extent of pass-
through, all else being equal. See RBB Economics, Cost Pass-Through: 
Theory, Measurement and Potential Policy Implications, 4 (Feb. 
2014), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/320912/Cost_Pass-Through_Report.pdf.
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    To the extent that a CCA's current practices are misaligned with 
the final rule and amendments, the CCA, as discussed in the remainder 
of this subsection, will need to modify its RWP or risk-based margin 
system to comply with the new standards. The resulting benefits and 
costs will increase with the number of modifications. Because the 
Commission has previously stated that RWPs are rules for purposes of a 
CCA's SRO obligations, and because the CCAs already have filed such 
RWPs with the Commission for approval, any such modifications will be 
subject to Commission review and public comment pursuant to Rule 19b-
4.\510\ Similarly, the Commission considers changes to a CCA's risk-
based margin system as part of the SRO rule filing process, making any 
such modifications also subject to Commission review and public comment 
pursuant to Rule 19b-4.\511\ The final rule and amendments could also 
cause a clearing agency to make different business decisions, such as 
capital expenditure decisions, that may not be subject to the same 
Commission review process.
---------------------------------------------------------------------------

    \510\ Supra note 484. See infra section IV.C.1.j for cost 
estimates of written policies and procedures associated with final 
Rule 17Ad-26 and the rule 19b-4 approval process.
    \511\ See infra section IV.C.2.c for cost estimates of written 
policies and procedures associated with final Rule 17Ad-22(e)(6) and 
the Rule 19b-4 approval process.
---------------------------------------------------------------------------

    One commenter stated that participants and end-user customers need 
``greater transparency into the content of RWPs'' for several reasons, 
including allowing participants to better manage their exposure to the 
CCA and positively affecting the CCA's risk management functions.\512\ 
The new rule and the final amendments will increase transparency 
because they impose a public minimum standard that all CCAs must follow 
and also because, as described in the baseline, CCAs are subject to a 
public notice and comment process before making certain changes, 
including changes to their rule books.\513\
---------------------------------------------------------------------------

    \512\ See ICI at 8 (``It is critical for clearing members and 
end-user customers, such as funds, to have greater transparency into 
the content of RWPs. Such transparency could allow participants to 
determine the extent of their potential liabilities and predictably 
manage exposures to a clearing entity. Importantly, increased 
transparency could facilitate input from participants that may serve 
to enhance a clearing entity's risk management functions. While 
requiring clearing entities to maintain and submit RWPs for 
regulatory purposes provides the agencies with needed visibility and 
can increase confidence in cleared markets, such requirements alone 
fail to provide these important benefits to market participants.''). 
Id. at 9 (``At a minimum, clearing members and customers should be 
aware of (1) the criteria that may trigger implementation, (2) the 
tools and strategies that a clearing entity plans to use, and (3) 
the source of capital or funds to be applied in a recovery or wind-
down scenario. Providing access to these material portions of RWPs 
would help market participants have a more complete understanding of 
the risks presented by clearing with a particular clearing entity 
and allow them to better manage their exposures'').
    \513\ See supra note 484. Additionally, Rule 19b-4 would also 
apply to certain statements that a CCA issues concerning its margin 
methodology. See supra note 83.
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1. Final Rule 17Ad-26
    Final Rule 17Ad-26 sets forth nine elements that must be included 
in a CCA's RWP. The remainder of this subsection discusses each of 
these elements in turn, explaining how some will make RWPs more 
effective in guiding the CCAs during times of recovery or wind-down 
while others will help participants and regulators better understand 
how the CCAs will prepare for and respond to stress. The final rule 
will reduce systemic risk to the extent that it reduces the risk of 
unsuccessful recoveries, disorderly wind-downs, and negative spillovers 
to other clearing agencies and to other markets.\514\ These benefits 
likely will increase with the amount of change each CCA makes to align 
itself with the final rule because, as stated in the baseline analysis, 
some RWPs are more aligned with the nine elements that are part of 
final Rule 17Ad-26 than are other RWPs. Final Rule 17Ad-26 will require 
CCAs to modify their RWPs to the extent their RWPs do not already align 
with the final rule. One commenter stated that the benefits are purely 
hypothetical because they would only accrue in the event of the 
implementation of a recovery plan.\515\ The Commission disagrees with 
this assessment and anticipates that these changes may result in the 
CCAs being more aware of potential risks and the associated costs of 
certain factors under their control, which could, in turn, lead to the 
CCA making risk-reducing changes to certain business practices. A few 
commenters stated that CCAs' current risk-management efforts may be 
suboptimal from a public welfare perspective.\516\ The final new rule 
includes a set of risk-focused requirements that RWPs must meet in the 
future, which will ensure that CCAs maintain a higher investment in 
risk management than they might otherwise choose.
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    \514\ See supra note 475 and accompanying text. See Better 
Markets at 9 (``Requiring that the recovery and wind-down plans of 
covered clearing agencies include certain specific elements is 
likely to reduce the risk of unsuccessful recoveries, disorderly 
wind downs, and negative spillovers to other clearing agencies and 
other markets.'').
    \515\ Davidson at 2.
    \516\ See supra note 508 and accompanying text; see also Muth at 
2 (``A complex cocktail of incentives familiar to the Commission but 
too labyrinthine to elucidate here causes management to (1) 
underestimate the risk of entity failure, (2) underestimate the 
range of scenarios that might threaten entity survival, and (3) 
underestimate the amount of information that needs to be 
communicated effectively to 'relevant authorities' to illuminate 
threats to the entity's solvency, especially when those threats are 
high-magnitude, low-frequency risks.'').

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[[Page 91045]]

    The Commission did not receive any comments on the costs each CCA 
will incur to bring its RWP into alignment with proposed Rule 17Ad-
26(a)(4), (5), and (6).
a. Core Clearing and Settlement Services
    Final Rule 17Ad-26(a)(1) requires RWPs to identify and describe 
their core payment, clearing, and settlement services and to address 
how the CCA would continue to provide such core services in the event 
of a recovery and during an orderly wind-down, including the (a) 
identification of the staffing roles necessary to support such core 
services, and (b) analysis of how such staffing roles necessary to 
support such core services would continue in the event of a recovery 
and during an orderly wind-down.
    CCAs play an important role as financial market utilities. By 
virtue of the unique services that they offer, the network effects 
under which they operate, and their specialization by asset class, any 
failure of the CCAs to provide their core services might affect the 
stability of U.S. financial markets.\517\ Accordingly, policies and 
procedures that increase the resiliency of CCAs are expected to improve 
the stability of these markets.
---------------------------------------------------------------------------

    \517\ Five of the six CCAs have been designated by the FSOC as 
SIFMUs because the failure or disruption to the functioning of the 
financial market utility could create or increase the risk of 
significant liquidity or credit problems spreading among financial 
institutions or markets. See Designations, U.S. Dep't Treasury, 
https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations; see also supra 
note 88.
---------------------------------------------------------------------------

    Each of the CCAs' RWPs currently identifies its core services, as 
stated in the baseline analysis, but they differ in the degree to which 
they address continuation in the event of a recovery and during an 
orderly wind-down.
    Markets in which the dominant CCAs are currently less comprehensive 
in addressing continuation in their RWPs likely will benefit from this 
requirement because these CCAs will be required to work through and 
memorialize in their RWPs how the CCA will continue to provide its core 
services in the event of a recovery and during an orderly wind-down.
    As mentioned in the economic baseline section, none of the CCAs 
currently identifies the staffing roles necessary to support core 
services or provides in their RWPs analyses of how such staffing roles 
necessary to support such core services would continue in the event of 
a recovery and during an orderly wind-down. Because CCAs do not 
currently identify the staffing roles that are necessary to support 
core services and how such staffing roles would continue during times 
of crisis, this new requirement likely will provide benefits to the 
market. Forward-looking analyses around issues related to potential 
staffing shortfalls should provide each CCA with additional certainty 
and clarity around who would deploy the RWP and supervise its 
implementation. The RWP might contemplate tools that help with the 
retention of certain personnel, the development of other internal 
personnel who could stand in for those personnel, the recruitment of 
replacement personnel, possibly from its own participants or from other 
domestic or international CCAs. In all cases, the tools should be 
robust regardless of the financial situation of the CCA. A CCA that 
retains its personnel and its ability to service external relationships 
in the event of a recovery or orderly wind-down may be able to reduce 
not only potential losses for its participants but also further market 
disruptions by ensuring its critical clearance and settlement services 
continue.\518\
---------------------------------------------------------------------------

    \518\ See SIFMA at 14 (``In fact, one of the lessons that can be 
drawn from the Lehman Brothers failure that precipitated the 2008 
financial crisis is that the largest losses may not be the ones that 
lead up to the insolvency event, but rather those that follow the 
insolvency event. In the case of Lehman Brothers, its inability 
following the insolvency event to keep its personnel from leaving 
and the difficulty it had in continuing servicing relationships were 
in large part the cause of the financial losses to its customers and 
market disruptions.'').
---------------------------------------------------------------------------

    The current lack of staffing role analyses in RWPs means that CCAs 
will incur costs, related to drafting the analyses and implementing the 
resulting conclusions from the analyses. For example, were the CCA to 
undertake a recovery or wind-down that significantly affects its 
operations or structure, a CCA may determine that certain personnel 
would be likely to leave the CCA. The CCA may determine that it is 
appropriate to strengthen its employee agreements so that those 
employees have more incentives to remain at the CCA during a recovery 
or wind-down even if this includes a sale or transfer of one or more of 
its core services to another entity or a receiver. Alternatively, or 
additionally, a CCA may choose to invest in internal development 
programs and processes so other employees acquire skills that are 
necessary during recovery and wind-down events, making the loss of any 
employee less costly via internal redundancy. Commenters stated that 
attracting and retaining skilled employees is costly; one commenter 
stated that some employees might chose to leave in certain 
circumstances despite having very lucrative employment contracts; 
another commenter stated CCAs with sufficient resources will be able to 
retain their key personnel.\519\ The Commission recognizes that it may 
be costly to ensure that employees in essential staffing roles are 
available to support core services in the event of a recovery and 
during an orderly wind-down. The final rules do not require retention 
of any employee, but they do require the identification of staffing 
roles and an analysis of how those roles would continue. The final 
rules allow CCAs to use a variety of human resource management tools, 
which will better enable CCAs to find cost-effective tools that enable 
them to maintain their core services in the event of a recovery and 
during an orderly wind-down.
---------------------------------------------------------------------------

    \519\ See Donaldson at 5 (``Likewise, the required skills, the 
demands on retention, and the time to identify, attract and train 
new staff to the necessary level of expertise in virtually all the 
relevant departments is very substantial.''). See SIFMA at 14 (``It 
is important that a Clearing Agency have service contracts that 
cannot be terminated in the aftermath of an insolvency event and 
that it has sufficient going concern resources that will allow it to 
retain its key personnel.''). See Donaldson at 6 (``The recent 
experience at a large household name social media company should 
make clear that even the most lucrative employment agreements are 
rarely sufficient to get highly in demand skilled employees to stay 
on board a `sinking ship.' Furthermore, certain CCAs have organized 
labor agreements in place with many of their employees which would 
likely require time consuming renegotiation in order to satisfy this 
provision.'').
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b. Service Providers
    Final Rule 17Ad-26(a)(2) requires RWPs (i) to identify and describe 
any service providers for core services, specifying which core services 
each service provider support, and (ii) to address how the CCA would 
ensure that service providers for core services would continue to 
perform in the event of a recovery and during an orderly wind-down, 
including consideration of its written agreements with such service 
providers and whether the obligations under those written agreements 
are subject to alteration or termination as a result of initiation of 
the recovery and orderly wind-down plan.
    One commenter stated that it is critical that CCAs have service 
contracts that cannot be terminated in the aftermath of an insolvency 
event,\520\ whereas other commenters stated that CCAs cannot ``ensure'' 
that service providers would continue to perform in the event of a 
recovery and during an

[[Page 91046]]

orderly wind-down.\521\ The Commission acknowledges that a CCA cannot 
ensure that a service provider for core services will continue to 
perform throughout a recovery and an orderly wind-down; nevertheless, 
if its analysis indicates that the service provider might not continue 
to perform in those events, it could address how it would handle any 
termination or non-performance by the service provider, which could 
satisfy the new requirements.\522\
---------------------------------------------------------------------------

    \520\ See SIFMA at 14 (``It is important that a Clearing Agency 
have service contracts that cannot be terminated in the aftermath of 
an insolvency event and that it has sufficient going concern 
resources that will allow it to retain its key personnel.'').
    \521\ See CCP12 at 4 (``CCAs cannot `ensure' that such service 
providers would continue to perform in the event of a recovery and 
during an orderly winddown.''). See DTCC at 8 (``This proposed 
requirement overestimates the negotiating leverage that CCAs have 
when entering contracts with service providers or assumes that CCAs 
would be able to unilaterally require service providers to continue 
performance during a recovery or orderly winddown.''). See ICE at 4 
(``ICE does not believe it is possible for a [clearing agency] to 
`ensure' that a service provider would perform.'').
    \522\ See supra Part II.C.2.
---------------------------------------------------------------------------

    Some commenters stated that the proposed definition of ``service 
provider'' was too broad and would unnecessarily increase CCA costs by 
capturing too many non-essential service providers.\523\ The Commission 
generally agrees with the comments on this point and therefore made 
corresponding changes to the proposed rule text. The reduced scope of 
service providers captured by the revised rule is appropriate for 
recovery and orderly wind-down planning purposes and helps ensure that 
the CCA focuses its RWPs on the key risks and its responses to those 
risks.\524\
---------------------------------------------------------------------------

    \523\ See DTCC at 6 (``[The proposed rule] would capture large 
numbers of service providers to DTCC that are not immediately 
necessary to the ongoing operations of the critical services of 
DTCC's CCAs. We believe that this would result in a significant 
burden upon our CCAs (and likely other CCAs) with minimal benefit to 
the development of effective RWP.''). See ICE at 4 (``ICE believes 
that the proposed definition of `critical services' would include 
third parties that are [not] `in any way related to the provision of 
a critical service' and believes this definition is overly broad. In 
particular, the definition would cover service providers that are 
only tangentially related to clearing services and have no practical 
impact on recovery or wind-down planning which would be burdensome 
for CAs and provide minimal, if any, benefit.'').
    \524\ See supra Parts II.C.2.a and II.D.2.
---------------------------------------------------------------------------

    One commenter stated that due to differences across CCAs, markets, 
and members, CCAs must be afforded flexibility to interpret and 
implement the final Rule 17Ad-26(a)(2).\525\ The Commission 
acknowledges that there are important differences across CCAs in terms 
of products cleared and markets served. The principles-based Rule 17Ad-
26(a)(2) allows CCAs to take approaches in their RWPs that differ from 
those taken by other CCAs in their RWPs.
---------------------------------------------------------------------------

    \525\ See DTCC at 2 (``DTCC continues to stress, as it has in 
prior comment letters to the Commission, that CCAs must be afforded 
the discretion and flexibility to interpret and implement rules 
based on the risk profiles, markets, and products that respective 
CCAs serve. Aspects from the Proposal that would benefit from this 
discretion include . . . the proposed requirement to include 
contractual terms and conditions that would prevent automatic 
termination by service providers in the event of a recovery or 
orderly wind-down.'').
---------------------------------------------------------------------------

    As stated in the baseline analysis, the RWPs differ in their degree 
of alignment with the final rule and the level of descriptiveness of 
service providers. The markets that likely will benefit the most from 
this new requirement are the ones in which the dominant CCAs' RWPs are 
currently the least comprehensive in identifying and describing the 
required service providers and identifying how those service providers 
will perform in the event of a recovery and during an orderly wind-down 
because those CCAs would have to negotiate with service providers to 
ensure their continued performance or find other alternatives. CCAs 
that make more changes in identifying the service providers and the 
core payment, clearing, and settlement services provided by each 
service provider likely will bring more benefits to the markets they 
serve by putting themselves in a better position to manage their 
service providers in the event of a recovery or during an orderly wind-
down. One commenter stated that in the event that one of the service 
providers fails, it may not be possible to switch to another service 
provider because the remaining service providers might not be able to 
quickly scale up their operations.\526\ The Commission recognizes that 
switching vendors may be difficult in certain circumstances such as 
during times of crisis and when other CCAs are switching in or out of 
the same service providers en masse. A key benefit of final Rule 17Ad-
26(a)(2) is that CCAs will consider these sorts of costs and 
incorporate appropriate prophylactic responses to them into their RWPs. 
This will make the CCAs more resilient, by having more robust RWPs, 
which will, in turn, reduce the risk and/or size of systemic events.
---------------------------------------------------------------------------

    \526\ See Davidson at 7 (``[a]t present, while it is possible to 
operate separate genre of application software on different `Cloud' 
providers, it is extremely challenging, requiring significant time 
for deployment and rigorous testing, to move a set of tightly woven 
operational software applications from one `Cloud' provider to 
another. While the existence of several major competitors in the 
`Cloud' computing space would appear to support the ability to move 
among providers in the highly improbable event of a catastrophic 
failure of one of them, the above constraints make that a time-
consuming process for all users. . . . Notwithstanding their 
tremendous scale and ability to support existing customers with 
`capacity on demand,' such vendors do not make a habit of operating 
with sufficient spare capacity to accommodate a significant piece of 
their competitors' business quickly and easily.'').
---------------------------------------------------------------------------

    Each CCA will incur costs to bring its RWP into alignment with the 
new rule, and these costs are estimated in Part IV.C.1.j, infra. These 
alignment costs will depend on the extent of the enhancements the CCA 
makes to its RWP, including any contractual changes with its service 
providers. The underlying costs of the contractual changes may be 
affected by the relative market power of the CCA versus the service 
provider in light of the regulatory requirement to meet these new 
standards. For example, the amendments require the consideration of the 
CCA's written agreements with its service providers and whether the 
obligations under those written agreements are subject to alteration or 
termination as a result of initiation of the recovery and orderly wind-
down plan. Consequently, a service provider that has market power or 
offers a service for which there are high switching costs could 
potentially earn economic profits by increasing its fees to sign a 
written agreement with a CCA that ensures the continuation of a core 
service in the event of a recovery and orderly wind-down.
c. Scenarios
    Final Rule 17Ad-26(a)(3) requires RWPs to identify and describe 
scenarios that may potentially prevent the CCA from being able to 
provide its core services identified in Rule 17Ad-26(a)(1) as a going 
concern, including (a) uncovered credit losses, (b) uncovered liquidity 
shortfalls, and (c) general business losses. As stated in the baseline 
analysis, each of the CCAs' RWPs currently identifies and describes, to 
varying degrees, certain relevant scenarios.
    The more significant benefits of being required to identify these 
scenarios will accrue to those markets in which the dominant CCAs lack 
breadth and specificity in identifying and describing their scenarios. 
By better understanding the circumstances that could threaten their 
ability to provide their core services, these CCAs can take steps to 
reduce the likelihood of these scenarios and, should they materialize, 
be better prepared to achieve a recovery or orderly wind-down.\527\
---------------------------------------------------------------------------

    \527\ See supra note 514.
---------------------------------------------------------------------------

    Each CCA will incur costs to bring its RWP into alignment with the 
new rule. The alignment costs will depend on the extent of the 
enhancements the CCA makes to its RWP. The costs to modify plans that 
require changes, including those that need to be expanded to

[[Page 91047]]

include additional scenarios, will be modest, but they will vary across 
CCAs because of differences in the markets and participants they serve.
    A commenter stated that CCAs underestimate the range of scenarios 
that might threaten their survival \528\ and that scenario analyses 
impose small costs while yielding greatly enhanced transparency 
benefits.\529\ A key benefit of final Rule 17Ad-26(a)(3) is that each 
CCA will revisit the question of what might threaten its ability to 
carry out its core services. As certain CCAs update their RWPs in 
response to this new rule, they may conclude that they need to add new 
scenarios and that they need to discuss their scenarios in more detail. 
That notwithstanding, it will not be costly for CCAs to comply with the 
new rule, which is shown by the cost estimates that are presented in 
Part IV.C.1.j infra. The Commission is not mandating that all CCAs 
include a common list of specific scenarios in their RWPs because of 
differences across CCAs and the products cleared and markets served--
scenarios that are essential at one CCA might be irrelevant at another 
CCA--and because the list of scenarios is likely to change through time 
and is thus not suited for a static list.\530\
---------------------------------------------------------------------------

    \528\ See Muth at 2 (``A complex cocktail of incentives familiar 
to the Commission but too labyrinthine to elucidate here causes 
management to . . . underestimate the range of scenarios that might 
threaten entity survival'').
    \529\ See id. at 3 (``The requirement of explicit consideration 
in the recovery plan of what might lead to each scenario's coming 
into being and how the scenario might take shape (including 
prerequisite contemplated market conditions) imposes a small burden 
on compliance and risk functions in the entity while creating 
greatly-enhanced transparency to investors and regulators around 
how, how quickly, and under what conditions the entity may fail to 
meet obligations.'').
    \530\ See infra Part IV.D.1.
---------------------------------------------------------------------------

d. Criteria That Could Trigger Implementation
    Final Rule 17Ad-26(a)(4) requires RWPs to identify and describe (a) 
criteria that could trigger the CCA's implementation of the recovery 
and orderly wind-down plans and (b) the process that the CCA uses to 
monitor and determine whether the criteria have been met, including the 
governance arrangements applicable to such process.
    As stated in the baseline analysis, each CCA's RWP identifies and 
describes, to varying degrees, criteria that could trigger the 
implementation of a recovery or orderly wind-down. The largest benefits 
of this rule likely will accrue to the markets in which the dominant 
CCAs currently have the least comprehensive RWPs in identifying and 
describing appropriate triggers. The ex ante identification and 
description of triggers likely will have the benefit of being a 
disciplining mechanism that signals when and how the CCA may act during 
periods of market stress. The Commission further believes that the ex-
ante identification and description of triggers likely will lead CCAs 
to anticipate and prepare for market stress or other events that could 
lead to a recovery or wind-down. Each CCA will incur costs to bring its 
RWP into alignment with the final rule. The alignment costs will depend 
on the extent of the enhancements the CCA makes to its RWP.
e. Rules, Policies, Procedures, and Other Tools or Resources
    Final Rule 17Ad-26(a)(5) requires RWPs to identify and describe the 
rules, policies, procedures, and any other tools or resources on which 
the CCA could rely in a recovery or orderly wind-down. The markets that 
likely will benefit the most from this requirement are the ones in 
which the dominant CCAs have the least comprehensive RWPs in describing 
how the rules, policies, procedures, tools, and other resources could 
be used during a recovery or wind-down. Making these changes to their 
RWPs likely will enable the CCAs to anticipate more fully how future 
crises might affect their operations, which should enhance their 
ability to respond and, accordingly, decrease the expected costs borne 
by CCAs, the participants, and other stakeholders in future crises. For 
example, if a CCA determines that it needs a new rule to respond to a 
specific scenario, the CCA may be better positioned to respond 
appropriately to that scenario if it arises.
    Each CCA will incur costs to bring its RWP into alignment with the 
final rule. The alignment costs will depend on the extent of the 
enhancements the CCA makes to its RWP. CCAs that determine that they 
need to include more responses, different resources, or better 
descriptions will incur more costs as they make appropriate 
modifications to their RWPs. The costs to modify plans that require 
changes, including those that need to be expanded, will increase with 
the number of required changes such as the number of new rules the CCA 
adopts.
f. Procedures To Ensure Timely Implementation
    Final Rule 17Ad-26(a)(6) requires RWPs to address how the rules, 
policies, procedures, and any other tools or resources identified in 
Rule 17Ad-26(a)(5) would ensure timely implementation of the RWP. As 
stated in the baseline analysis, each RWP mentions the concept of 
timeliness in either recovery or wind-down, but most RWPs do not list 
specific procedures to ensure the timely implementation of the RWP. A 
key benefit of this rule is that CCAs will address in their RWPs how 
the RWP will be implemented in a timely manner when the need arises. A 
timely start will increase the chance that the CCA is able to address 
the underlying problem quickly and with low costs to the various 
stakeholders. The benefits of this rule likely will accrue primarily to 
the markets in which the dominant CCAs add more or better rules, 
policies, procedures, tools, or other resources to ensure timely 
implementation of their RWPs.
    Each CCA will incur costs to bring its RWP into alignment with the 
final rule. The alignment costs will depend on the extent of the 
enhancements the CCA makes to its RWP. The costs to modify plans that 
require changes, including those that need to be expanded to include 
additional rules, policies, procedures, or any other tool or resource 
will be modest because current RWPs already place some focus on 
timeliness as a desired feature.
g. Informing the Commission
    Final Rule 17Ad-26(a)(7) requires the CCA to inform the Commission 
as soon as practicable when the CCA is considering implementing a 
recovery or orderly wind-down. As stated in the baseline analysis, each 
RWP generally refers to informing the Commission, but some plans inform 
the Commission after initiating a recovery or orderly wind-down. 
Providing notice to the Commission when the CCA is considering 
implementing a recovery or orderly wind-down may help ensure that the 
Commission can, from the start, dynamically monitor how a CCA engages 
the recovery or wind-down event consistent with its established RWPs 
and the requirements of Commission rules, to help mitigate the 
potential onward transmission of system risk and help ensure that a 
wind-down, if necessary, is orderly. These benefits likely will accrue 
primarily to the markets in which the dominant CCAs currently do not 
have a plan in place for informing the Commission as soon as 
practicable when the CCA is considering implementing a recovery or 
orderly wind-down.
    One cost of the new rule is that CCAs will need to decide whether 
they have begun considering an implementation of either a recovery or 
an orderly wind-down. The marginal cost of such a determination is 
small, and it would

[[Page 91048]]

occur in the normal course of business, separate from the new 
requirement. For example, a CCA generally would be ``considering'' 
implementing a recovery when the clearing agency determines that a 
market event may result in uncovered losses, liquidity shortfalls, or 
capital inadequacies at the CCA following end-of-day settlement, or 
when the CCA anticipates that it will need to deploy prefunded 
financial resources or liquidity arrangements following end-of-day 
settlement in order continue meeting its regulatory obligations.\531\ 
Those determinations would be made in absence of the final notification 
rule, and they do not therefore affect the rule's costs. Additionally, 
the primary focus for the CCA is on the timeliness of the notification 
to the Commission and not on its method or form.\532\ The Commission 
can best ensure that actions appropriate to maintaining financial 
stability can be made if it is notified when a CCA is ``considering'' 
action, rather than when a CCA has already begun to implement its RWP. 
For example, the Commission or other authorities may evaluate the 
available actions or tools to address or mitigate financial stability 
concerns in response to market events.
---------------------------------------------------------------------------

    \531\ See supra Part II.C.7.
    \532\ See supra Part II.C.7.
---------------------------------------------------------------------------

    A commenter stated that CCA management may face disincentives to 
candid communication with the Commission about considering implementing 
a recovery or orderly wind-down because of concerns about other 
implications of such reporting, including the potential for harm in 
future shareholder litigation.\533\ We acknowledge that there may be 
conflicting incentives for individual managers regarding any regulatory 
reporting, but we do not believe that these conflicting incentives 
would undermine the intended benefits nor do they alter the reporting 
and disclosure obligations of CCAs or their publicly-traded affiliates. 
These conflicting incentives are already present in the regulatory 
structure. All CCAs currently maintain frequent communication with 
Commission staff about potentially sensitive information. And CCAs are 
already required to disclose key information about their operations to 
various third parties that may be considerably more extensive than that 
which is mandated by new Rule 17Ad-26(a)(7). Pursuant to Commission 
rules, for example, clearing participants generally will be notified of 
circumstances related to a participant default, the potential for a 
portfolio auction, and the use of default management tools that may 
precede a recovery or wind-down event.\534\ Finally, while CCAs' 
publicly-traded affiliates will need to consider whether public 
disclosure to investors is appropriate when considering implementing a 
recovery or orderly wind-down, those considerations exist regardless of 
any required notification to the Commission.
---------------------------------------------------------------------------

    \533\ See Muth at 2 (``In the case of publicly-traded entities 
in particular, management may be understandably hesitant to make 
forward-looking pessimistic statements that may be unearthed in 
future shareholder litigation or insolvency proceedings.''); id. 
(``A complex cocktail of incentives familiar to the Commission but 
too labyrinthine to elucidate here causes management to . . . 
underestimate the amount of information that needs to be 
communicated effectively to `relevant authorities' to illuminate 
threats to the entity's solvency, especially when those threats are 
high-magnitude, low-frequency risks.'').
    \534\ See supra Part II.C.7.
---------------------------------------------------------------------------

    Each CCA will incur costs to bring its RWP into alignment with the 
final rule. The alignment costs will depend on the extent of the 
enhancements the CCA makes to its RWP. The costs to modify plans that 
require changes, including those that need to change their RWPs to 
notify the Commission before the RWP implementation, likely will be 
modest because current RWPs already place some focus on informing the 
Commission. If the CCA ever experiences an event that causes it to 
consider implementing a recovery or orderly wind-down, it will have to 
devote nominal resources to inform the Commission as soon as 
practicable.
h. Testing
    Final Rule 17Ad-26(a)(8) requires RWPs to include procedures for 
testing the CCA's ability to implement the RWPs at least every 12 
months, including by (a) requiring the CCA's participants and, when 
practicable, other stakeholders to participate in the testing of its 
plans; (b) requiring that such testing would be in addition to testing 
pursuit to paragraph (e)(13) of 17 CFR 240.17ab-22; (c) providing for 
reporting the results of the testing to the CCA's board of directors 
and senior management; and (d) specifying the procedures for, as 
appropriate, amending the plans to address the results of such testing.
    A few commenters stated that CCAs need considerable latitude in 
designing and executing their testing obligations because including 
participants and certain other stakeholders in plan testing may be 
inefficient and perhaps inappropriate due to costs, sharing of private 
and confidential information, and other reasons.\535\ The Commission 
recognizes that there are certain efficiencies from allowing each CCA 
to customize its testing due to differences between markets, cleared 
products, participant types, and testing obligations from other 
regulators and final Rule 17Ad-26(a)(8) allows a CCA to designate in 
its policies and procedures that certain participants, or categories of 
participants, be designated for participation in certain tests. It may 
not always be appropriate to include certain participants in all 
aspects of testing.\536\ The different types of products that each CCA 
clears helps determine the type, resources, and expertise of 
stakeholders that participate in these testing exercises. For example, 
in testing of loss allocation tools, where losses could be assigned to 
a participant, it may be useful to include participants in the testing 
to allow them to understand when they can be expected to bear losses 
and how those losses would be absorbed. In testing that involves 
business losses or certain types of non-default losses, it may be less 
appropriate to have participants participate in the testing.
---------------------------------------------------------------------------

    \535\ See CCP12 at 4; DTCC at 9; ICE at 4.
    \536\ See supra Part II.C.8.c.
---------------------------------------------------------------------------

    One commenter stated that new testing requirements would require 
significant investment of time and resources by a CCA's most critical 
personnel, both in the planning of the test and in the likely manual 
execution of the test for many CCAs.\537\ The Commission acknowledges 
that CCAs will incur costs every 12 months to plan and execute their 
tests. The CCAs' most critical personnel will likely need to be 
actively engaged in the execution of the tests, including monitoring 
both market conditions and the CCAs' resources as the situation 
develops. As stated above, including critical personnel in testing may 
increase the overall cost of testing, but it is necessary because these 
critical personnel are best positioned to identify the planning and 
procedures that can help ensure timely and effective implementation of 
the RWP in the event of a future recovery or orderly wind-down.\538\ 
Plan testing benefits CCAs because it helps them identify weakness 
during the testing that can be used to update their RWPs and it helps 
them gain practical skills that may be used during an actual recovery 
or wind-down event. These effects, in turn, improve the stability of 
the CCAs, which benefits not only their participants but also the 
broader financial markets. A key cost to the CCA during plan testing is 
the

[[Page 91049]]

opportunity cost of the critical personnel being less available to 
attend to other matters, and participants will incur related costs from 
their participation.
---------------------------------------------------------------------------

    \537\ See OCC at 10.
    \538\ See supra Part II.C.8.b.
---------------------------------------------------------------------------

    In the RWP Proposing Release, the Commission requested comment on 
how costly it will be for CCAs to test their plans as required in Rule 
17Ad-26(a)(8).\539\ No commenter, including the CCAs, provided 
estimated plan-testing costs or other information that would aid the 
Commission in quantifying the costs for CCAs to test their RWPs every 
12 months.\540\ Because under the final rule the nature and scope of 
the required testing is dependent on the needs of each CCA, it would be 
impracticable to estimate the cost of testing without particularized 
information about the elements and testing scenarios of each CCA's RWP 
after the RWPs have been brought into alignment with the final rule. 
Final Rule 17Ad-26(a)(8) allows a CCA to retain discretion to organize 
and design its testing scenarios to ensure that testing exercises 
produce effective tests of the elements of the RWP. This discretion 
means that each CCA may test different default and non-default 
scenarios from one another. Additionally, final Rule 17Ad-26(a)(8) does 
not create parameters around the number of scenarios a CCA is required 
to test. Final Rule 17Ad-26(a)(8) also allows a CCA to designate in its 
policies and procedures certain participants, or categories of 
participants, for participation in certain tests. Each CCA will rely on 
different resources and expertise of stakeholders depending on its 
market and the type of products that the CCA clears, and the number and 
identity of those participants will also vary.\541\ The Commission 
would need more information about the type and number of scenarios each 
CCA is testing or the type and number of participants each CCA will be 
designating in order to quantify the cost of testing.
---------------------------------------------------------------------------

    \539\ RWP Proposing Release, supra note 18, at 34740 (``44. How 
costly will it be for covered clearing agencies to test their plans 
as required in proposed Rule 17ad-26(a)(8)? What costs will be 
incurred by the participants and, when practicable, other 
stakeholders? Will any of these costs substantively vary based on 
whether or not the current RWP includes testing?'').
    \540\ See infra note 542.
    \541\ See supra Table 1 for the number of participants at CCAs 
as of Aug. 2024.
---------------------------------------------------------------------------

    A few commenters also stated that testing requirements in Rules 
17Ad-22 and 17Ad-26 should be harmonized to the extent possible due to 
high testing costs that outweigh benefits of independent testing.\542\ 
The testing requirements in new Rule 17Ad-26(a)(8) are in addition to 
those in Rule 17Ad-22(e)(13), and each test must be performed because 
RWP testing may require consideration of scenarios and testing of 
procedures that go beyond default management. For example, recovery 
includes the actions taken to address uncovered losses and 
replenishment of prefunded resources, and wind-down includes actions 
taken when resources have been exhausted, necessitating the permanent 
cessation, sale, or transfer of one or more of the CCA's core services. 
Nevertheless, each CCA is allowed to structure the planning, execution, 
and analysis of each test in a way that improves efficiency and reduces 
its aggregate testing costs for itself, its participants, and its other 
stakeholders so long as the testing exercise addresses the distinct 
elements of the separate testing requirements.\543\ A more 
comprehensive testing exercise may make it less costly to assemble a 
representative set of participants and other key stakeholders, as well 
as the board, producing a more effective testing exercise.
---------------------------------------------------------------------------

    \542\ See DTCC at 10-11; ICE at 4-5; OCC at 10-11 (concluding 
that imposing additional testing requirements or mandating a 
separate, RWP-designed test would be duplicative of ongoing testing 
and would introduce unnecessary and potentially significant burdens 
without a proportionate benefit); CCP12 at 4-5; CFA at 4.
    \543\ See supra Part II.C.8.b.
---------------------------------------------------------------------------

    The new test required by final Rule 17Ad-26(a)(8) cannot be 
subsumed by the default management tests under Rule 17Ad-22(e)(13) 
because it goes beyond default management by including, for example, 
recovery, which includes the actions taken to address uncovered losses 
and replenishment of prefunded resources, and wind-down, which includes 
actions taken when resources have been exhausted, necessitating the 
permanent cessation, sale, or transfer of one or more of the CCA's core 
services.
    As stated in the baseline analysis, only a few RWPs refer to plan 
testing. The markets that likely will benefit the most from this 
requirement are those in which the dominant CCAs have the least 
comprehensive policies around testing in their RWPs because those CCAs 
likely will create procedures for more frequent testing and the 
inclusion of more stakeholders, and those changes likely will help 
ensure that those RWPs remain current and take into account changing 
system and market conditions. Additionally, the testing will help the 
test participants and other stakeholders better understand the recovery 
and orderly wind-down processes, and it may make them more efficient in 
the event of an actual recovery or wind-down event because of their 
practice going through a dry-run recovery and orderly wind-down. 
Contrary to the suggestion of a commenter, the participation in a real 
test yields benefits for the various stakeholders that they cannot 
learn through other methods, including reading the CCAs' RWPs.\544\
---------------------------------------------------------------------------

    \544\ CCP12 at 4.
---------------------------------------------------------------------------

    The upfront costs to begin testing as required by the new rule may 
not be large for the four CCAs that do not mention plan testing in 
their RWPs because they might be able to leverage existing requirements 
around default management testing under Rule 17Ad-22(e)(13) as they 
develop their new plans that are distinct from those existing 
requirements.\545\ The corresponding testing costs for the CCAs' 
participants and, when practicable, other stakeholders likely will be 
moderate, in part because the CCAs are already required to include such 
entities in their default procedures testing under Rule 17Ad-22(e)(13). 
The costs for any subsequent RWP amendments in response to the annual 
testing likely will be small.
---------------------------------------------------------------------------

    \545\ See 17 CFR 240.17ad-22(e)(13); supra Part II.C.8.b.
---------------------------------------------------------------------------

i. Board Review and Approval
    Final Rule 17Ad-26(a)(9) requires RWPs to include procedures 
requiring review and approval of the plans by the board of directors of 
the CCA at least every 12 months or following material changes to the 
CCA's operations that would significantly affect the viability or 
execution of the plans, with such review informed, as appropriate, by 
the CCA's testing of the plans. As stated in the baseline analysis, 
each RWP refers to periodic plan reviews, typically annually or 
biennially.
    The markets that likely will benefit the most from this requirement 
are those in which the dominant CCAs currently have the least 
comprehensive RWPs in addressing plan review because they would create 
more frequent procedures for review, and more frequent reviews, in 
turn, should help ensure that RWPs remain current and consider any 
changes to the CCAs' operations.
    There are costs associated to this new requirement. The board of 
directors of some CCAs will need to devote additional time and 
resources as they move to a review cycle of at least every 12 months, 
and they will need to review material changes to the CCA's operations 
that would significantly affect the viability or execution of the 
plans. For those CCAs that review every two years, moving to a review 
at least every 12 months will increase their

[[Page 91050]]

costs by as much as a factor of two. We estimate that the cost of the 
additional time and resources for each additional review will be minor 
because we do not anticipate that this type of review will take many 
hours or many board resources.
    Material changes to the CCA's operations may result in changes to 
the RWP. Those RWP changes that are material will be reviewed by the 
board. We estimate that the cost of the additional time and resources 
by the CCA to determine which RWP changes are material will be minor 
because we do not anticipate that this determination will take many 
hours or many resources.
    Each CCA will incur costs to bring its RWP into alignment with the 
final rule. The alignment costs will depend on the extent of the 
enhancements the CCA makes to its RWP. The costs to modify plans that 
have biennial reviews to replace them with annual reviews will be 
modest. The costs to review RWPs after material changes to the CCAs' 
operations will depend on the nature and number of material changes 
that result in new reviews.
j. Quantified Costs of Written Policies and Procedures Associated With 
Final Rule 17Ad-26
    The Commission has estimated the implementation and ongoing cost of 
final Rule 17Ad-26. The estimated average implementation cost for one 
CCA to review and update existing policies and procedures is about 
$49,000.\546\ These approximate costs are the same as those estimated 
at the proposal stage for final Rule 17Ad-26 adjusted for inflation, 
and we did not receive any specific comments on this estimate.
---------------------------------------------------------------------------

    \546\ The $49,000 estimate is based on the following 
calculations: $11,460 (blended hourly rate for assistant general 
counsel at $573 for 20 hours) + $22,450 (blended hourly rate for 
compliance attorney at $449 for 50 hours) + $8,575 (blended hourly 
rate for business risk analyst at $245 for 35 hours) + $6,600 
(blended hourly rate for senior risk management specialist at $440 
for 15 hours) [ap] $49,000. Salaries for estimates presented in this 
section are derived from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013, modified to account for an 1,800-
hour work-year and inflation, and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits and overhead. See infra note 
610. As stated in the baseline analysis, some RWPs are more aligned 
with the nine elements that are part of final Rule 17Ad-26 than are 
other RWPs, so the estimated cost may vary.
---------------------------------------------------------------------------

    One commenter provided feedback on the additional cost of obtaining 
Commission approval for any updated policies and procedures pursuant to 
Rule 19b-4.\547\ The commenter stated that a two order of magnitude 
multiplier should be applied to the Commission's cost estimate because 
the rule-change process requires a broad cross-section of a CCA 
management and staff, as well as interactions with SEC staff.\548\ The 
Commission acknowledges that once a CCA has reviewed and updated its 
policies and procedures the CCA will have to submit its plan 
modifications to the Commission for review, public comment, and 
approval as required by Rule 19b-4, which requires time and effort from 
both CCA management and staff. As the number of consultations between 
CCA management and SEC staff increases during the process of submitting 
the CCA's plan modifications, there will be corresponding increases in 
costs, as the commenter suggested. But the magnitude of these costs 
will be far less than the commenter suggested (i.e., 100 times more 
than the costs associated with reviewing and updating policies and 
procedures). Instead, the Commission estimates this process will 
conservatively cost about $74,000 per CCA.\549\ In addition, to the 
extent that a CCA must submit an advance notice, the Commission 
estimates a cost of about $73,000 per CCA.\550\
---------------------------------------------------------------------------

    \547\ Davidson at 12 (``As a general matter the cost estimates 
in the document for the CCAs to conform to the proposed rules are 
ridiculously low. Rule change processes require the participation by 
a much broader cross-section of CCA management and staff . . . . A 
two order of magnitude multiplier on the current document's 
estimates would not overcount the cost to comply.'').
    \548\ Id. (``Furthermore, the `informal' interaction with 
[Trading & Markets] staff frequently continues for multiple months, 
always involving Legal Department staff and frequently requiring the 
engagement of domain experts as well. All this happens before a 
formal submission is permitted, and the post formal submission 
process also requires a significant amount of interaction, although 
that process draws more on Legal than domain expert resources.'').
    \549\ Assuming that the distribution of responsibility among CCA 
staff for completing the Rule 19b-4 submission process is similar to 
the distribution for reviewing and updating policies and procedures, 
see supra note 546 (estimating 120 hours of total CCA staff time), 
the commenter's estimate would imply that CCA staff would spend an 
average of approximately 12,000 hours per submission, inclusive of 
the 120 hours to review and update policies and procedures. The 
Commission disagrees that this is a reasonable estimate of the 
number of hours for the process. Rather, the Commission has 
previously estimated--after receiving no comments on a similar 
estimate in the proposing release--that submitting a proposed rule 
change through the Rule 19b-4 process takes a CCA 34 hours for an 
average rule change filing and 129 hours for a novel or complex rule 
change filing. See Process for Submissions for Review of Security-
Based Swaps for Mandatory Clearing and Notice Filing Requirements 
for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 
19b-4 Applicable to All Self-Regulatory Organizations, Release No. 
34-67286 (June 28, 2012) 77 FR 41602, 41631 & n.211 (July 13, 2012). 
Using the time for a novel or complex rule change filing as a 
conservative estimate, the Commission assumes that the CCA staff 
with the highest hourly cost involved in reviewing and updating CCA 
policies and procedures (i.e., an assistant general counsel) 
performs all 129 hours of tasks associated with the Rule 19b-4 
submission process, resulting in an estimated cost of $74,000. 
Specifically, the $74,000 estimate is based on the following 
calculations: $73,917 (blended hourly rate for assistant general 
counsel at $573 for 129 hours) [ap] $74,000. If instead the 
estimated time for an average rule change filing were used, the 
estimated cost would be $19,000 based on the following calculations: 
$19,482 (blended hourly rate for assistant general counsel at $573 
for 34 hours) [ap] $19,000.
    \550\ The Commission estimates an additional cost of $73,000 
based on the following calculations: $52,716 (blended hourly rate 
for assistant general counsel at $573 for 92 hours) + $20,440 
(blended hourly rate for attorney at $511 for 40 hours) [ap] 
$73,000. See id. at 41632 & nn.213-14 (estimating time for Advance 
Notice).
---------------------------------------------------------------------------

    Final Rule 17Ad-26 will also impose ongoing costs on a CCA. The 
rule will require ongoing monitoring and compliance activities with 
respect to the written policies and procedures created in response to 
the rule. Based on the Commission's previous estimates for ongoing 
monitoring and compliance costs with respect to existing 17 CFR 
240.17ad-22(e)(2) (``Rule 17Ad-22(e)(2)''),\551\ the Commission 
estimates that the ongoing monitoring and compliance activities 
required by final Rule 17Ad-26 will impose an annual cost on CCAs of 
$19,000 per CCA.\552\ These approximate costs are the same as those 
estimated at the proposal stage for final Rule 17Ad-26 adjusted for 
inflation, and we did not receive any specific comments on this 
estimate.
---------------------------------------------------------------------------

    \551\ See CCA Standards Adopting Release, supra note 5, at 70892 
(discussing Rule 17Ad-22(e)(2)).
    \552\ The $19,000 estimate is based on the following 
calculations: $5,730 (blended hourly rate for assistant general 
counsel at $573 for 10 hours) + $13,470 (blended hourly rate for 
compliance attorney at $449 for 30 hours) [ap] $19,000. See infra 
note 611. As stated in the baseline analysis, some RWPs are more 
aligned with the nine elements that are part of final Rule 17Ad-26 
than are other RWPs, so the estimated cost may vary.
---------------------------------------------------------------------------

2. Amendments to Rule 17Ad-22(e)(6)
    Rule 17Ad-22(e)(6) requires CCAs that provide central counterparty 
services to establish a risk-based margin system to manage their credit 
exposures to their participants. The final amendment to Rule 17Ad-
22(e)(6)(ii) will strengthen the requirements: (a) by requiring that 
CCAs monitor intraday risk exposures to their participants on an 
ongoing basis, and (b) by providing additional specificity to the 
circumstances in which CCAs should have policies and procedures in 
place to make intraday margin calls. The final amendment to Rule 17Ad-
22(e)(6)(iv) will strengthen the requirements by ensuring that CCAs can 
meet their Rule 17Ad-22(e)(6) obligations when their price data or 
other substantive inputs are not available by including procedures to 
use price data or other

[[Page 91051]]

substantive inputs from an alternate source or to use a risk-based 
margin system that does not similarly rely on the unavailable or 
unreliable substantive inputs.
a. Monitoring Exposure and Intraday Margin Calls
    CCAs use intraday margin calls as one of their tools to manage 
their credit exposures to their participants. The final amendment to 
Rule 17Ad-22(e)(6)(ii) requires CCAs to monitor exposure on an ongoing 
basis and to make intraday margin calls as frequently as circumstances 
warrant, possibly including when risk thresholds specified by the CCA 
are breached or when the products cleared or markets served display 
elevated volatility, which would help reduce, but not eliminate, their 
credit exposure to their participants. When facing special 
circumstances such as these, the CCA is required to document when it 
determines not to make an intraday call pursuant to its written 
policies and procedures required under amended Rule 17Ad-
22(e)(6)(ii)(C).
    Two commenters stated that members' intraday actions can create 
large negative externalities with respect to other participants and the 
CCA itself that the CCA could mitigate through its margin 
policies.\553\ One commenter stated that margin calls benefit 
participants and the CCA, which, in turn, serves the interests of 
broader market stability.\554\ The Commission recognizes that the 
structure of these clearing markets may permit certain negative 
externalities, and it has crafted the amendment to Rule 17Ad-
22(e)(6)(ii) to reduce those externalities, which will, in turn, 
improve market stability. The final amendment affords CCAs latitude in 
crafting their updated margin procedures that will better reduce these 
negative externalities given their products cleared and markets served.
---------------------------------------------------------------------------

    \553\ See Better Markets at 2 (``The requirement that covered 
clearing agencies monitor intraday exposure responds to the risks 
that may arise intraday. A CCP faces the risk that its exposure to 
its participants can change rapidly as a result of intraday changes 
in price, positions, or both, including adverse price movements, as 
well as participants building larger positions through new trading 
(and settlement of maturing trades). For these reasons, a CCP must 
monitor and address such risks on an ongoing basis.''); see also 
SIFMA at 4 (``Failure to collect and maintain adequate margin from 
one clearing member transfers the risk of that deficiency to the 
other clearing members and market participants.'').
    \554\ See SIFMA at 6 (``SIFMA believes that the making of such 
calls is essential to prudent risk management by a Clearing Agency 
and thus provides meaningful benefits not only to the Clearing 
Agency, but also to market participants and serves the interests of 
financial stability by protecting the Clearing Agency from default 
risk.'').
---------------------------------------------------------------------------

    Each CCA will have to determine how to operationalize ``on an 
ongoing basis'' and ``as frequently as circumstances warrant'' given 
its own market and participants. Each CCA will also need to ensure that 
its systems can monitor exposure and make margin calls at those 
frequencies. As discussed in the baseline analysis, each CCA is already 
capable of monitoring exposure and collecting margin on an intraday 
basis; nevertheless, some CCAs might need to make changes to align with 
the final amendment, such as increasing the frequency of exposure 
monitoring and improving their information technology, so they can 
process more frequent scheduled and ad hoc intraday margin calls. As 
facts and circumstances change through time, CCAs might need to change 
how they operationalize these new requirements, including changing the 
frequency of potential scheduled and ad hoc intra-day margin calls.
    To the extent a CCA currently aligns with the final amendment, it 
will not experience new benefits from the final amendment. 
Nevertheless, the amendment will have incremental benefits for the 
market because it will ensure that the CCAs continue to meet the 
standard of the final amendment with which they are currently aligned 
and that any new CCA that provides central counterparty services meets 
the same standard.
    In addition to updating policies and procedures surrounding the 
risk-based margin systems that require changes, some CCAs might need to 
update IT and other systems in order to assess, impose, and collect 
intraday margin on a more frequent basis. The costs to modify the risk-
based margin systems that require changes will be modest because CCAs 
have already incurred the initial costs of building their risk 
management infrastructure, including the ability to make intraday 
margin calls based on some sort of intraday monitoring. Once those 
costs have been incurred and amortized, the variable costs of modifying 
the frequency of the monitoring, and of additional margin calls, are 
likely low.
    To the extent that the final amendment results in CCAs being 
positioned to make more unscheduled margin calls, participants may face 
increased liquidity-management costs whether or not the CCAs actually 
make more unscheduled margin calls. Several commenters highlighted the 
potential for increased margin calls to impose increased liquidity 
costs on the CCAs' participants and their clients,\555\ and several 
commenters explicitly stated that CCAs, in order to reduce 
participants' liquidity costs, must make the triggers for intraday 
margin calls known to their participants.\556\ A CCA's margin 
methodology constitutes a material aspect of its operations, meaning 
that it should be considered part of a CCA's stated policies, 
practices, or interpretations under Exchange Act Rule 19b-4. As such, a 
CCA's margin methodology is subject to the filing obligations 
applicable to SROs under section 19(b) of the Exchange Act regarding 
any proposed rule or proposed change to its rules. Through the notice 
and comment process, market participants and the general public will 
have transparency into a CCA's margin call methodology. This 
information will enable the participants to reduce their liquidity 
costs to the extent they incorporate it into their liquidity models. 
That notwithstanding, a CCA's policies and procedures regarding 
intraday margin generally should consider concerns such as 
procyclicality, so not every margin call can be perfectly predicted by 
the participants.
---------------------------------------------------------------------------

    \555\ See Davidson at 9; Better Markets at 7; ICI at 10 (stating 
``the unpredictability of such margin calls means that funds must 
keep a portion of their assets in highly liquid assets in 
anticipation of potential ad hoc intraday margin calls, which may 
lower returns for fund investors''), 11; SIFMA at 9; The 
Associations at 2; ICE at 2.
    \556\ See Better Markets at 7; ICI at 11; SIFMA at 5, 9.
---------------------------------------------------------------------------

    One commenter stated that it is more costly for participants to 
respond to margin calls late in the trading day than early in the 
trading day because, in part, the United States is the last major 
market to close each day due to the geographic position of the 
International Date Line.\557\ The Commission recognizes that margin 
calls are costly for participants, that those costs may potentially 
rise near the end of the trading day, and that those costs may 
potentially be higher during times of market stress; nevertheless, 
these time-varying costs are not unique to the clearing market. Some 
participants might adjust their liquidity models to control for the 
costs of late-in-day ad hoc margin calls that CCAs might make.
---------------------------------------------------------------------------

    \557\ See Davidson at 9.
---------------------------------------------------------------------------

    A few commenters stated that CCAs should be quick to return margin 
if markets revert during the trading day, and no commenter recommended 
against it.\558\ The Commission is unaware of any CCA that routinely 
returns margin on an intraday basis today even though no SEC rule would

[[Page 91052]]

prohibit it. The Commission is not requiring CCAs to return some or all 
the newly collected intraday margin in the event of a same-day 
reversion, and it is instead leaving that decision to each CCA. The CCA 
will need to balance the benefits of potentially reduced liquidity 
costs to the participant from returning intraday margin against the 
benefits of potentially decreased risk to the CCA and its members from 
retaining intraday margin during periods of heightened asset 
volatility. The Commission's approach to Rule 17Ad-22(e) is to provide 
flexibility to CCAs, subject to their obligations and responsibilities 
as SROs under the Exchange Act, to design and structure their policies 
and procedures to take into account the differences among clearing 
agencies and their participants and differences through time.
---------------------------------------------------------------------------

    \558\ See The Associations at 2; Davidson at 2; SIFMA at 8.
---------------------------------------------------------------------------

    Increased intraday margin calls may potentially result in 
procyclicality problems that exacerbate market stress: margin calls 
during periods of declining asset prices may cause participants to sell 
assets, putting further negative pressure on asset prices and the 
market that may negatively affect not just other participants but also 
may spill over into other CCAs and their markets.\559\ This stress may 
be transmitted by participants that are members of more than one CCA 
when, for example, a margin call in one market makes a participant sell 
assets in a different market. The stress may also be transmitted by 
assets that are linked between markets, such as the link between option 
prices (OCC) and equity prices (NSCC). Various industry participants 
have expressed concerns that excessive intraday margin calls, 
especially unanticipated ones, have the potential to exacerbate 
liquidity issues for clearing members who would have to post new liquid 
collateral to the CCA with little notice,\560\ and one commenter stated 
that the unanticipated margin call itself might cause the member firm 
to default.\561\ On the other hand, such intraday margin calls reduce 
immediate credit risk for the CCAs during periods of market stress, 
which, in turn, reduces risk for the other participants of those CCAs.
---------------------------------------------------------------------------

    \559\ One commenter agrees with the Commission's analysis of 
procyclicality. See The Associations at 2 (``Intraday margin calls 
can cause procyclical impacts to markets, especially if these calls 
are unpredictable for clearing participants.'').
    \560\ Revisiting Procyclicality: The Impact of the COVID Crisis 
on CCP Margin Requirements, Futures Indus. Ass'n (Oct. 2020), 
available at https://www.fia.org/sites/default/files/2020-10/FIA_WP_Procyclicality_CCP%20Margin%20Requirements.pdf.
    \561\ See ICE at 2 (``ICE does not believe the Commission has 
considered the costs associated with the procyclical effects that 
intraday margin calls can have, potentially exacerbating credit and 
liquidity concerns with clearing members and in extreme cases 
causing market participant defaults.'').
---------------------------------------------------------------------------

    CCAs, when deciding whether to make an intraday margin call 
exception, generally should consider these concerns about 
procyclicality and potential participant default.\562\ Notwithstanding 
their written policies and procedures that would require a CCA to issue 
a margin call in a particular situation, the CCA may choose to make an 
exception to its policies and procedures and not make a call, including 
in a situation where the CCA believes that procyclicality is a 
substantive risk or that the risk of the default of a particular 
participant is transient, perhaps due to the CCA's knowledge of the 
participant's portfolio. CCAs' ability to make exceptions based on 
their particular facts and circumstances allows them to balance these 
competing risks during future crises.\563\
---------------------------------------------------------------------------

    \562\ See Part II.A.2.b.iii.
    \563\ See OCC at 4 (``However, while OCC agrees with goal of 
ensuring that this capability can be exercised when and as needed, 
we are concerned that imposing a requirement to establish strict 
quantitative thresholds that will trigger an otherwise unscheduled 
margin call would prevent the CCA from applying its judgment and 
expertise to determining whether the benefit of collecting that 
margin for its own purposes at that moment outweighs these possible 
procyclical impacts.'').
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b. Reliable Sources of Timely Price Data and Other Substantive Inputs
    CCAs have risk-based margin systems that, to different degrees, 
align with the final amendment to Rule 17Ad-22(e)(6)(iv), with the 
exception of at least one CCA that likely would need to implement 
additional changes to its risk-based margin system to ensure that it 
could continue to meet its obligations under Rule 17Ad-22(e)(6) in the 
event of the unavailability of a substantive input from a third party. 
If that one CCA were to lose access to its price data or other inputs, 
it may be unable to perform its core payment, clearing, and settlement 
services, and that, in turn, may force it into an orderly wind-down, 
which would have negative implications for its participants and the 
broader financial system.
    The incremental benefits of the final amendment beyond the baseline 
lie primarily in expanding the scope of this rule beyond price data and 
further specifying the nature of the procedures that a CCA uses if such 
data or inputs are not readily available or reliable and in ensuring 
that any new CCA has that same standard of the final amendment. These 
benefits are substantial because the final amendment reduces the risk 
that the CCA fails to provide its core payment, clearing, and 
settlement services in future periods of high market stress.\564\ For 
example, the Options Clearing Corporation cleared a year-to-date 
average daily volume of 47.4 million contracts through April 2024, and 
DTCC reported that the average daily cleared broker-to-broker 
transactions was $1.9 trillion in 2023.\565\ Because there is increased 
activity in the financial markets at the end of the trading day,\566\ 
even a one-hour price data feed malfunction near the end of the trading 
day could affect the normal processing of millions of options contracts 
and hundreds of billions of dollars of equity transactions. Moreover, 
the unavailability of price data at one CCA that is closely 
interconnected to another CCA \567\ could result in negative spillover 
effects that spread to that other CCA.
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    \564\ One commenter stated that the proposed amendment to Rule 
17Ad-22(e)(6)(iv) should be scaled back because, in part, no CCA has 
ever had an input-price failure that it was unable to resolve 
through its normal business operations (see ICE at 3); nevertheless, 
evolving market conditions, including high levels of growth in some 
cleared markets, justify regulatory changes to reduce the risk of 
future failures.
    \565\ See OCC, Press Release OCC April 2024 Monthly Volume Data 
(May 2, 2024), available at https://www.theocc.com/newsroom/views/2024/05-02-occ-april-2024-monthly-volume-data and DTCC 2023 Annual 
Report, supra note 471.
    \566\ The two busiest trading periods for both equities and 
equity options are usually immediately after the opening bell and 
immediately before the closing bell.
    \567\ For instance, OCC and NSCC have an information-sharing 
agreement to facilitate the settlement and delivery of physically-
settled stock options cleared by OCC via NSCC. See Securities 
Exchange Act Release No. 37731 (Sept. 26, 1996), 61 FR 51731 (Oct. 
3, 1996) (SR-OCC-96-04 and SR-NSCC-96-11) (Order Approving Proposed 
Rule Change Related to an Amended and Restated Options Exercise 
Settlement Agreement Between the Options Clearing Corporation and 
the National Securities Clearing Corporation); Securities Exchange 
Act Release No. 43837 (Jan. 12, 2001), 66 FR 6726 (Jan. 22, 2001) 
(SR-OCC-00-12) (Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to the Creation of a Program to Relieve Strains 
on Clearing Members' Liquidity in Connection With Exercise 
Settlements); and Securities Exchange Act Release No. 58988 (Nov. 
20, 2008), 73 FR 72098 (Nov. 26, 2008) (SR-OCC-2008-18 and SR-NSCC-
2008-09) (Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Changes Relating to Amendment No. 2 to the Third 
Amended and Restated Options Exercise Settlement Agreement).
---------------------------------------------------------------------------

    In the RWP Proposing Release, the Commission requested comment on 
how costly it will be for CCAs to secure the use of price data or 
substantive inputs from an alternate source.\568\

[[Page 91053]]

Several commenters addressed the costs of the proposed amendments to 
Rule 17Ad-22(e)(6)(iv). Some commenters stated that (a) alternate data 
sources are too costly and unlikely to substantively affect margin 
calculations,\569\ (b) the alternate data may not be available in the 
market for the desired circumstances,\570\ and (c) it may not be 
feasible to switch to a new source at the desired time due to capacity, 
timing, and other constraints.\571\ No commenter presented estimated 
data costs, and no commenter presented any data, methodology, or basis 
for estimating such costs.
---------------------------------------------------------------------------

    \568\ RWP Proposing Release, supra note 18, at 34739 (``40. How 
costly is it for covered clearing agencies to secure the use of 
price data or substantive inputs from an alternate source? Must the 
data or substantive inputs subscription be purchased outright, or 
can the covered clearing agency, for a lower fee, purchase an option 
to use the data and substantive inputs only when its primary sources 
prove inadequate?'').
    \569\ See CCP12 at 2 (stating that if the Commission prescribed 
a definition of ``substantive input,'' a CCA may be forced to 
``obtain, often at great expense, alternate data sources for inputs 
with limited utility and minimal or no impact on margin 
calculations.''); OCC at 5 (stating that requiring CCAs to develop 
and maintain an entire alternate risk-based margin system would be 
prohibitively expensive and operationally burdensome); id. at 2 and 
4.
    \570\ See DTCC at 4.
    \571\ See Davidson at 7.
---------------------------------------------------------------------------

    In the RWP Proposing Release, the Commission requested comment on 
how costly it will be for CCAs to secure the use of alternate risk-
based margin systems.\572\ Several commenters stated that developing an 
alternate risk-based margin system is too costly.\573\ The amendments 
being adopted in this release do not mandate the use or development of 
an alternate risk-based margin system. Rather, the amendments require 
that a CCA must use procedures for addressing scenarios when price data 
or other substantial inputs become unavailable or unreliable to ensure 
that the CCA can meet its credit obligations to its participants, and 
that such procedures must include either: (i) price data or substantive 
inputs from an alternate source; or (ii) if the CCA does not use an 
alternate source, a risk-based margin system that does not rely on the 
unavailable or unreliable substantive input. As discussed in the 
baseline analysis, several CCAs already use one or both of these 
alternatives in their current margin systems. Even for a CCA that does 
not have policies and procedures developed to address this issue, the 
costs to develop such policies and procedures will not be very large 
because their experience dealing with periodic input failures means 
that they are already familiar with the risks of failures and the 
processes for dealing with those failures.
---------------------------------------------------------------------------

    \572\ RWP Proposing Release, supra note 18, at 34740 (``41. How 
costly is it for covered clearing agencies to secure the use of 
alternate risk-based margin systems? Would covered clearing agencies 
create their own alternate risk-based margin systems, or would they 
secure access to one from a third party, and, if so, at what 
cost?'').
    \573\ See ICE at 2-3 (stating that the Commission has not 
``recognized the considerable costs to [CCAs], clearing firms and 
other market participants that would be required to develop and 
implement alternative margin models to address a remote and 
theoretical problem with price or other data inputs''); OCC at 2, 4-
5; CCP12 at 3.
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c. Quantified Costs of Written Policies and Procedures Associated With 
Final Amendments to Rule 17Ad-22(e)(6)
    The estimated costs for the final amendment to Rule 17Ad-22(e)(6) 
may require a CCA to make fairly substantial changes to its policies 
and procedures. Based on the similar policies and procedures 
requirements and the corresponding estimates previously made by the 
Commission for several rules in the CCA Standards where the Commission 
anticipated similar costs,\574\ the Commission estimates that each CCA 
will incur a one-time cost of about $59,000.\575\ Additionally, the 
Commission estimates that the cost of obtaining Commission approval for 
any updated policies and procedures pursuant to Rule 19b-4 will 
conservatively cost about $23,000 per CCA.\576\
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    \574\ See CCA Standards Adopting Release, supra note 5, at 
70892, 70895-97 (discussing Rules 17Ad-22(e)(2) and (13)). Although 
the rule amendment is with respect to Rule 17Ad-22(e)(6), these 
Rules present the best overall comparison to the current rule 
amendment, in light of the nature of the changes needed to implement 
the proposal here and what was proposed in the CCA Standards.
    \575\ The $59,000 estimate is based on the following 
calculations: $11,460 (blended hourly rate for assistant general 
counsel at $573 for 20 hours) + $17,960 (blended hourly rate for 
compliance attorney at $449 for 40 hours) + $6,504 (blended hourly 
rate for computer operations manager at $542 for 12 hours) + $8,160 
(blended hourly rate for senior programmer at $408 for 20 hours) + 
$11,000 (blended hourly rate for senior risk management specialist 
at $440 for 25 hours) + $4,056 (blended hourly rate for senior 
business analyst at $338 for 12 hours) [ap] $59,000. Salaries for 
estimates presented in this section are derived from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013, 
modified to account for an 1,800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead. See infra note 603.
    \576\ See supra note 549.
---------------------------------------------------------------------------

    The final amendments to Rule 17Ad-22(e)(6) will also impose annual 
costs on the CCAs. The final rule will require ongoing monitoring and 
compliance activities with respect to the written policies and 
procedures created in response to the final rule. Based on the similar 
reporting requirements and the corresponding estimates previously made 
by the Commission for several rules in the CCA Standards where the 
Commission anticipated similar costs,\577\ the Commission estimates 
that the ongoing activities required by the amendments to Rule 17Ad-
22(e)(6) will impose an annual cost of about $31,000.\578\
---------------------------------------------------------------------------

    \577\ See CCA Standards Adopting Release, supra note 5, at 
70893, 70895-96 (discussing Rules 17Ad-22(e)(6) and (13)).
    \578\ The $31,000 estimate is based on the following 
calculations: $11,674 (blended hourly rate for compliance attorney 
at $449 for 26 hours) + $10,045 (blended hourly rate for business 
risk analyst at $245 for 41 hours) + $9,240 (blended hourly rate for 
senior risk management specialist at $440 for 21 hours) [ap] 
$31,000. See infra note 604.
---------------------------------------------------------------------------

3. Other Compliance Costs
    We have considered the potential effects on entities that are 
implementing other recently adopted rules during the compliance period 
for these amendments.
    Consistent with its long-standing practice, the Commission's 
economic analysis in each adopting release considers the incremental 
benefits and costs for the specific rule--that is, the benefits and 
costs stemming from that rule compared to the baseline. The Commission 
acknowledges that complying with more than one rule in the same time 
period may entail compliance costs that will be higher than if the 
rules were to be complied with separately. The Commission identified 
several rules for which the compliance periods overlap, in part, with 
the compliance periods for the amendments, but the compliance dates 
adopted by the Commission in recent rules are generally spread out over 
a period extending to January 2026.\579\
---------------------------------------------------------------------------

    \579\ See supra Part IV.B (listing recent rule adoptions and 
their respective compliance dates) and Part III (listing compliance 
dates).
---------------------------------------------------------------------------

    Entities subject to the amendments may be subject to one or more 
other recently adopted rules depending on whether those entities' 
activities fall within the scope of the other rules. Specifically, the 
Treasury Clearing Adopting Release applies to certain clearing agencies 
for U.S. Treasury securities and certain participants of the CCAs.\580\ 
The Rule 10c-1a Adopting Release also applies to certain CCAs \581\--
although due to differing requirements, these rules may not all apply 
to any given CCA. Where overlap in compliance periods exists, the 
Commission acknowledges that there may be additional costs on those 
entities that are subject to one or more other rules.
---------------------------------------------------------------------------

    \580\ See Treasury Clearing Adopting Release, supra note 62, at 
2717, 2791.
    \581\ See Rule 10c-1a Adopting Release, supra note 457, at 
75647, 75717-18. The final rule adds ``registered clearing 
agencies'' to the proposed rule's scope of entities that are 
permitted to act as reporting agents, which was limited to brokers 
or dealers. Id. at 75656. However, a registered clearing agency may 
elect not to be a reporting agent. Id. at 75733.

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[[Page 91054]]

4. Efficiency, Competition, and Capital Formation
a. Efficiency
    CCAs current policies and procedures, at a high level, largely 
align with final Rule 17Ad-26. As stated in the baseline, all CCAs make 
at least some reference in their current RWPs to each of the nine 
required elements of this new rule with the exception of plan 
testing.\582\ Therefore, the Commission does not expect substantive 
efficiency changes due to the final rule.
---------------------------------------------------------------------------

    \582\ Three CCAs do not mention plan testing in their RWPs. See 
supra Part IV.B.3.h.
---------------------------------------------------------------------------

    The final amendment to Rule 17Ad-22(e)(6)(ii) will benefit 
participants by providing increased specificity around the methods used 
by CCAs to assess intraday margin calls, thus enabling more efficient 
planning in the use of scarce margin funds. This will reduce any 
negative effects on participants' liquidity costs, as previously 
described.\583\
---------------------------------------------------------------------------

    \583\ SIFMA at 4 (``Failure to collect and maintain adequate 
margin from one clearing member transfers the risk of that 
deficiency to the other clearing members and market 
participants.'').
---------------------------------------------------------------------------

    The final amendment to Rule 17Ad-22(e)(6)(iv) will increase 
informational efficiency by promoting the quick and reliable 
dissemination of information that allows for price discovery during 
periods when price data or other substantive inputs are not available 
to the CCA. Calculating margin and managing and disseminating risk 
information are core competencies of all CCAs, and various stakeholders 
rely on those data outputs. By requiring secondary sources, the final 
amendment may mitigate the reduction in efficiency that would otherwise 
happen when primary sources fail at a CCA that does not have secondary 
sources. Having the ability to continue calculating margin and 
disseminating that information to participants even when primary data 
are not available will prevent a reduction in informational efficiency 
when price data or other substantive inputs are not available.
b. Competition
    As described in the baseline, CCAs are currently not subject to 
strong competitive pressures given high start-up costs, the network 
effects that are inherent in the clearing business, their subsequent 
historical consolidation by market segments (options clearing for OCC, 
equities clearing for NSCC, fixed income clearing for FICC, etc.), and 
clearing mandates that require the use of clearing services.\584\ In 
terms of potential new entrants in the market for clearing and 
settlement services, the incremental costs of the final Rule 17Ad-26 
and the final amendment to Rule 17Ad-22(e)(6)(ii) are small and, 
therefore, unlikely to be noteworthy barriers to entry. The final 
amendment to Rule 17Ad-22(e)(6)(iv) may have a modest effect on 
competition because it imposes additional start-up costs that a new 
competitor would have to assume to enter the CCA market.
---------------------------------------------------------------------------

    \584\ See SIFMA at 10-11.
---------------------------------------------------------------------------

    As discussed above, the Commission acknowledges that overlapping 
compliance periods may in some cases increase costs. We acknowledge 
that to the extent overlap occurs between the compliance periods of 
this rule and the compliance periods of other rules, there could be 
costs that could affect competition. However, the compliance dates are 
spread over a period extending to January 2026. We therefore do not 
expect the risk of negative competitive effects from increased 
compliance costs from overlapping compliance periods to be significant.
c. Capital Formation
    The Commission expects the effects of the final rule and amendments 
on capital formation to be ancillary because the final rule and 
amendments focus on issues related to secondary market trading and not 
on issues related to primary market issuances. To the degree that 
market participants view equity and fixed-income CCAs as more reliable 
venues for risk transfer, they may increase their activity and 
therefore signal a demand for more capital-creating securities.

D. Reasonable Alternatives to the Final Rule and Amendments

1. Establish Precise Triggers for Implementation of RWPs Across All 
CCAs
    Instead of requiring CCAs to identify and implement their own 
triggers to recovery and orderly wind-down procedures, the Commission 
could adopt a more prescriptive approach and determine specific 
triggers that all CCAs would be required to follow. For example, the 
Commission could specify that exhausting prefunded financial resources 
in the waterfall structure of a CCA would immediately trigger a 
recovery or wind-down procedure.\585\ Alternatively, the Commission 
could require a trigger when unfunded commitments to the CCP are called 
upon and reach a specific dollar number.
---------------------------------------------------------------------------

    \585\ See John W. McPartland and Rebecca Lewis, The Goldilocks 
Problem: How to Get Incentives and Default Waterfalls ``Just 
Right'', 41 Econ. Persps. 1, 2 (Mar. 2017), available at https://www.chicagofed.org/publications/economic-perspectives/2017/1-mcpartland-lewis (``All CCPs have a default waterfall that provides 
financial resources for managing a clearing member default. The 
waterfall consists of both prefunded resources and unfunded 
obligations. When a clearing member defaults, the CCP must continue 
to meet defaulter's financial obligations, whose performance it 
guarantees, to the non-defaulting clearing members, attempt to find 
clearing members willing accept the defaulter's clients, and return 
to a matched book status by liquidating or auctioning off the 
defaulter's positions. If the CCP cannot find other clearing members 
willing to onboard the defaulter's clients, then the clients' 
positions must be liquidated to restore the CCP to a matched book 
status. The default waterfall provides funding to cover the cost of 
meeting the defaulter's obligations and liquidating the defaulter's 
positions, as well as, if necessary, those of its clients.'').
---------------------------------------------------------------------------

    In the RWP Proposing Release, the Commission asked, ``[s]hould the 
Commission prescribe any particular triggers, whether qualitative or 
quantitative? For example, should the Commission require that a CCA 
should consider using the exhaustion of its prefunded resources as a 
trigger?'' \586\ One commenter proposed both a list of required 
triggers and a list of triggers that each CCA should consider.\587\ 
This alternative would harmonize triggers across all CCAs, and it would 
create a single standard that market participants could rely on, 
eliminating any confusion or ambiguity attendant to different triggers. 
Nevertheless, CCAs are active in different markets (equities, bonds, 
options, CDS, etc.), have different organizational structures, and 
focus on different risks. As an example, one of the OCC's focus areas 
is monitoring option sensitivities, and, as a result, its margin models 
and waterfall structure are responsive to that consideration while 
FICC, on the other hand, focuses on duration and convexity so its 
waterfall structure is more responsive to those risks. Having this more 
prescriptive approach would be unresponsive to the characteristics of 
each market and could expose CCAs to recovery or wind-down triggers 
that are not aligned with its actual risks. One

[[Page 91055]]

commenter agreed with the Commission's conclusion.\588\
---------------------------------------------------------------------------

    \586\ RWP Proposing Release, supra note 18, at 34725 (``25. 
Proposed Rule 17ad-26 would also require that the RWP identify 
triggers but does not prescribe a list of specific triggers. Should 
the Commission prescribe any particular triggers, whether 
qualitative or quantitative? For example, should the Commission 
require that a covered clearing agency should consider using the 
exhaustion of its prefunded resources as a trigger?'').
    \587\ The Associations at 17 (``We propose for the Commission to 
provide a list of triggers that are required to be covered in the 
RWP, and ideally another list of triggers that a clearing agency 
should consider. For this second list, a clearing agency could 
determine (yet explain) that a trigger is not relevant for the 
products cleared and/or markets served by the clearing agency.'').
    \588\ OCC at 8 (``Prescribing bright line, quantitative triggers 
that would apply to all CCAs, irrespective of their unique 
structures and the features of the markets they serve and products 
they clear, would run the risk of creating market instability by 
potentially forcing a CCA to initiate its RWP even when the CCA has 
not yet made the determination that it was necessary. For this 
reason, we support the Commission's determination to allow CCAs to 
identify appropriate triggers for their individual circumstances.'') 
(citation omitted).
---------------------------------------------------------------------------

2. Establish Specific Scenarios and Analyses
    Instead of requiring CCAs to identify scenarios that may prevent 
them from being able to provide their core payment, clearing, and 
settlement services, the Commission could adopt a more prescriptive 
approach and identify specific scenarios in new Rule 17Ad-26 that each 
CCA must include in its RWP. For example, the Commission could identify 
the scenario of the default of the CCA's one or two largest 
participants and scenarios of specific business risks such as the 
default of a custodian bank or a significant cyber-attack.\589\ The 
Commission could also require more detail regarding how each of the 
CCAs analyzes these scenarios.\590\
---------------------------------------------------------------------------

    \589\ Additional such scenarios that could be enumerated in new 
Rule 17Ad-26 could include any or all of the following scenarios: 
(A) credit losses or liquidity shortfalls created by single and 
multiple clearing member defaults; (B) liquidity shortfall created 
by a combination of clearing member default and a failure of a 
liquidity provider to perform; (C) settlement bank failure; (D) 
custodian or depository bank failure; (E) losses resulting from 
investment risk; (F) losses from poor business results; (G) 
financial effects from cybersecurity events; (H) fraud (internal, 
external, and/or actions of criminals or of public enemies); (I) 
legal liabilities, including those not specific to the CCA's 
business as a CCA; (J) losses resulting from interconnections and 
interdependencies among the CCA and its parent, affiliates, and/or 
internal or external service providers; (K) losses resulting from 
interconnections and interdependencies with other CCAs; and (L) 
losses resulting from issues relating to services that are ancillary 
to the CCA's critical services. It could also include scenarios 
involving multiple failures (e.g., a member default occurring 
simultaneously, or nearly so, with a failure of a service provider) 
that, in the judgment of the CCA, are particularly relevant to its 
business.
    \590\ That is, the Commission could require in new Rule 17Ad-26 
that the RWP include an analysis that includes: (A) a description of 
the scenario; (B) the events that are likely to trigger the 
scenario; (C) the CCA's process for monitoring for such events; (D) 
the market conditions, operational and financial difficulties and 
other relevant circumstances that are likely to result from the 
scenario; (E) the potential financial and operational impact of the 
scenario on the CCA and on its clearing members, internal and 
external service providers and relevant affiliated companies, both 
in an orderly market and in a disorderly market; and (F) the 
specific steps the CCA would expect to take when the scenario 
occurs, or appears likely to occur, including, without limitation, 
any governance or other procedures that may be necessary to 
implement the relevant recovery tools and to ensure that such 
implementation occurs in sufficient time for the recovery tools to 
achieve their intended effect.
---------------------------------------------------------------------------

    This alternative approach may reduce compliance costs by 
establishing the precise scope of the rule, which could allow CCAs to 
tailor their RWPs to the enumerated requirements for identifying 
scenarios and analyses. In addition, the inclusion of elements similar 
to those prescribed by other agencies that also regulate several CCAs 
could result in certain efficiencies and reduced costs for those 
CCAs.\591\
---------------------------------------------------------------------------

    \591\ See supra Part IV.B.2; RWP Proposing Release supra note 
18, at 34716-7 nn.68-69; id. at 34724-25 (discussing Request for 
Comment 15, and 21-23); see also supra notes 418 and 419 for 
commenters who recommended that the Commission and CFTC coordinate 
to ensure that any final rules are aligned or structured so that 
dually registered clearinghouses (i.e., CCAs registered with the 
Commission and SIDCOs registered with the CFTC) can efficiently 
comply with both Commission and CFTC rules.
---------------------------------------------------------------------------

    However, the adopted rule's approach retains flexibility compared 
with this alternative by permitting the scenarios to vary across CCAs 
because the underlying risks vary across markets and participants. 
Because participants vary in size and economic significance across 
CCAs, scenarios invoking a pre-determined number of failures or fixed 
dollar amounts may have significantly different effects in one CCA than 
in another.
3. Establish Specific Rules, Policies, Procedures, Tools, and Resources
    Instead of requiring CCAs to describes the rules, policies, 
procedures, and any other tools or resources the CCA would rely upon in 
the event of a recovery or during an orderly wind-down to address the 
scenarios identified in their RWPs, the Commission could adopt a more 
prescriptive approach and identify in new Rule 17Ad-26 the rules, 
policies, procedures, and any other tools or resources for all CCAs. 
The Commission could also require in new Rule 17Ad-26 more detail 
regarding how a CCA analyzes its rules, policies, procedures, tools, 
and resources.\592\
---------------------------------------------------------------------------

    \592\ For example, the Commission could require in new Rule 
17Ad-26 that the RWP include an analysis that includes: (A) a 
description of the tools that the CCA would expect to use in each 
scenario; (B) the order in which each tool would be expected to be 
used; (C) the time frame within which the tool would be used; (D) 
the governance and approval processes and arrangements within the 
CCA for the use of each of the tools available, including the 
exercise of any available discretion; (E) the processes to obtain 
any approvals external to the CCA (including any regulatory 
approvals) that would be necessary to use each of the tools 
available, and the steps that might be taken if such approval is not 
obtained; (F) the steps necessary to implement the tools; (G) the 
roles and responsibilities of all parties, including non-defaulting 
participants; (H) whether the tool is mandatory or voluntary; (I) an 
assessment of the associated risks from the use of each tool to non-
defaulting clearing members and their customers, linked financial 
market infrastructures, and the financial system more broadly; and 
(J), for wind-down, an assessment of the likelihood that the tool 
would result in orderly wind-down.
---------------------------------------------------------------------------

    This alternative approach may reduce compliance costs by 
establishing the precise scope of the rule, which could allow CCAs to 
tailor their RWPs to the enumerated requirements for describing rules, 
policies, procedures, and other tools or resources. In addition, the 
inclusion of elements similar to those prescribed by other agencies 
that also regulate several CCAs could result in certain efficiencies 
and reduced costs for those CCAs.\593\
---------------------------------------------------------------------------

    \593\ See supra Part IV.B.2; RWP Proposing Release supra note 
18, at 34716-7 nn.68-69; id. at 34724-25 (discussing Request for 
Comment 15, 20-22, and 27; see also supra notes 418 and 419 for 
commenters who recommended that the Commission and CFTC coordinate 
to ensure that any final rules are aligned or structured so that 
dually registered clearinghouses (i.e., CCAs registered with the 
Commission and SIDCOs registered with the CFTC) can efficiently 
comply with both Commission and CFTC rules.
---------------------------------------------------------------------------

    However, it is better to permit the rules, policies, procedures, 
and any other tools or resources to vary across CCAs because the 
underlying risks and resources vary across CCAs. For example, a CCA 
that clears products of longer duration may have a greater need for a 
tear-up tool that extinguishes a participant's positions in certain 
circumstances than a CCA that clears contracts with a relatively short 
duration. In addition, the overall volume of transactions settled by a 
CCA may affect the choice of its liquidity tools or resources, as the 
CCA would have to ensure that it had sufficient liquidity resources to 
complete settlement.
4. Require the Identification of Interconnections and Interdependencies
    In addition to the requirements with respect to service providers 
set forth in final Rule 17Ad-26(a)(2), the Commission could require 
that the CCA's RWP identify any financial or operational 
interconnections and interdependencies that the CCA has with other 
market participants. This would allow for consideration of the effect 
of the multiple roles and relationships that a single financial entity 
may have with respect to the CCA including affiliated entities and 
third parties (e.g., a single entity that acts as both a clearing 
member and a settlement bank and a liquidity provider).\594\
---------------------------------------------------------------------------

    \594\ More specifically, a bank holding company structure may 
operate through a set of legal entities (e.g., a broker-dealer/
futures commission merchant separate from a bank, which is in turn 
distinct from an information technology service provider), each of 
which has different relationships with the CCA.
---------------------------------------------------------------------------

    A CCA is already required to establish, implement, maintain, and

[[Page 91056]]

enforce written policies and procedures reasonably designed to 
identify, monitor, and manage risks related to any link the CCA 
establishes with one or more other clearing agencies, financial market 
utilities, or trading markets.\595\ This requirement, in conjunction 
with the requirement to identify and describe service providers for 
core services and to specify to which core service they relate, should 
accomplish the same general objective, making this reasonable 
alternative redundant to the final policy choice.
---------------------------------------------------------------------------

    \595\ 17 CFR 240.17ad-22(e)(20).
---------------------------------------------------------------------------

5. Establish a Specific Monitoring Frequency for Intraday Margin Calls
    The final amendment to Rule 17Ad-22(e)(6)(ii) expressly 
incorporates the requirement of intraday monitoring to ensure that such 
monitoring is done on an ongoing basis. One reasonable alternative is 
to prescribe the necessary frequency of monitoring as opposed to ``on 
an ongoing basis.'' For example, CCAs could be required to monitor 
exposure every 5 or 15 minutes.
    However, monitoring on an ongoing basis is preferable because a 
fixed, pre-specified monitoring frequency may not be responsive enough 
to risk differences that exist across the markets served by the CCAs or 
to volatility changes that may happen through time.
6. Adopt Only Certain Elements of Rule 17Ad-26
    Instead of adopting all nine elements of Rule 17Ad-26, the 
Commission could adopt a subset of the elements. For example, the 
Commission could drop the element to identify service providers or the 
element to address how the CCA would ensure that the service providers 
would continue to perform in the event of a recovery and during an 
orderly wind-down. Alternatively, the Commission could drop the element 
for plan review or the element for plan testing.
    It is better to adopt all nine elements of Rule 17Ad-26 because 
each element helps ensure that the plan is fit for purpose and the 
combination of all components provides sufficient and comprehensive 
identification of how a CCA would perform in the event of a recovery 
and during an orderly wind-down. As described above, compliance with 
each of the nine elements by CCAs will contribute to reducing systemic 
risk and benefit other CCAs, other market participants, and investors 
in the event of a recovery or wind-down.\596\
---------------------------------------------------------------------------

    \596\ See supra Part IV.C.1.
---------------------------------------------------------------------------

7. Focus Intraday Margin Requirements on a Subset of CCAs
    As an alternative to implementing the intraday margin amendments on 
a blanket basis, the Commission could adopt a more tailored approach 
that imposes the requirements only on a subset of CCAs that operate in 
certain markets such as those markets with the highest levels of 
activity \597\ or those markets that have only one CCA.\598\ A more 
tailored market-level risk-based approach would adjust to the size and 
systemic importance of each market, which would reduce, under this 
alternative, the compliance costs for the CCAs in the markets with less 
activity or with more than one available clearing agency.
---------------------------------------------------------------------------

    \597\ Activity could be measured in different ways, including 
the number or value of cleared transactions. Average daily 
settlement value is much higher in the equity market (NSCC) than it 
is in the fixed income market (FICC). DTCC Annual Report, supra note 
471.
    \598\ The following securities markets have only one central 
counterparty: exchange-traded equity options (OCC), government 
securities (FICC), mortgage-backed securities (FICC), and equity 
securities (NSCC). The market for central securities depository 
services has only one provider (DTC). The credit default swaps 
market is served by LCH SA and ICC.
---------------------------------------------------------------------------

    However, the amendments already include an appropriate adjustment 
for market-level risk insofar as they would require the CCAs to 
consider their own particular facts and circumstances when aligning 
with the final rules. For example, the final amendment to Rule 17Ad-
22(e)(6)(ii) would require CCAs to have the operational capacity to 
make intraday margin calls ``as frequently as circumstances warrant,'' 
and that frequency is expected to vary across markets and through time.

V. Paperwork Reduction Act

    As discussed in the RWP Proposing Release, the amendments to Rule 
17Ad-22(e)(6) and new Rule 17Ad-26 contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\599\ The Commission submitted the 
proposed collections of information to the Office of Management and 
Budget (``OMB'') for review in accordance with the PRA. With respect to 
Rule 17Ad-22(e)(6), the title of the information collection is 
``Clearing Agency Standards for Operation and Governance'' (OMB Control 
No. 3235-0695). With respect to Rule 17Ad-26, the title of the 
information collection is ``Rule 17Ad-26: CCA Recovery and Orderly 
Wind-Down Plans'' (OMB Control No. OMB 3235-0811). An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid OMB 
control number.
---------------------------------------------------------------------------

    \599\ See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Amendments to Rule 17Ad-22(e)(6)

    As discussed in the RWP Proposing Release, respondents under Rule 
17Ad-22(e)(6) are CCAs that provide CCP services, of which there are 
currently five.\600\ The Commission continues to anticipate that one 
additional entity may seek to register as a clearing agency to provide 
CCP services in the next three years, and so for purposes of this 
adoption the Commission has assumed six respondents.
---------------------------------------------------------------------------

    \600\ Since the Commission issued the RWP Proposing Release, one 
CCA that provides CCP services has withdrawn its registration. See 
Release No. 34-98902 (Nov. 9, 2023), 88 FR 78428 (Nov. 15, 2023).
---------------------------------------------------------------------------

    As discussed in the RWP Proposing Release,\601\ the purpose of this 
collection of information is to enable a CCA to have the authority and 
operational capacity to monitor intraday exposures on an ongoing basis 
and to collect intraday margin in certain specified circumstances. The 
collection is mandatory. To the extent that the Commission receives 
confidential information pursuant to this collection of information, 
such information would be kept confidential subject to the provisions 
of applicable law.\602\
---------------------------------------------------------------------------

    \601\ RWP Proposing Release, supra note 18, at 34740.
    \602\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of 
Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    As discussed further in Part II, the amendments to Rule 17Ad-
22(e)(6) require a CCA to establish, implement, maintain, and enforce 
written policies and procedures. The rule amendment contains similar 
provisions to preexisting rules for CCAs (i.e., Rule 17Ad-22(e)(6)(ii) 
and (iv)), but also imposes additional requirements that did not appear 
in preexisting Rule 17Ad-22(e)(6). As a result, a respondent CCA will 
incur burdens of reviewing and updating existing policies and 
procedures to consider whether it complies with the amendments to Rule 
17Ad-22(e)(6) and, in some cases, may need to create new policies and 
procedures to comply with the amendments to Rule 17Ad-22(e)(6). For 
example, a CCA likely will need to review its existing margin 
methodology

[[Page 91057]]

and consider whether any additional changes are necessary to ensure 
that it can meet the additional requirements of the rule.
    The estimated PRA burdens for the amendment to Rule 17Ad-22(e)(6) 
will require a respondent CCA to make fairly substantial changes to its 
policies and procedures. The amendments to Rule 17Ad-22(e)(6) also 
would impose ongoing burdens on a respondent CCA by requiring ongoing 
monitoring and compliance activities with respect to the written 
policies and procedures created or modified in response to the rule.
    The Commission received no comments regarding the PRA estimates in 
the RWP Proposing Release; however, in addressing other comments on the 
proposed rule, the Commission has modified the rule text to add a 
requirement to document when the CCA determines not to make an intraday 
margin call, pursuant to its written policies and procedures for 
intraday margin collection, and this affects the burdens with respect 
to ongoing activities under the rule. Accordingly, the Commission 
continues to estimate that respondent CCAs would incur an aggregate 
one-time burden of approximately 774 hours to review existing policies 
and procedures and create new or modified policies and procedures.\603\ 
With respect to ongoing activities required by the amendments to Rule 
17Ad-22(e)(6), the Commission now estimates that the final rule 
amendments will impose an aggregate annual burden on respondent CCAs of 
528 hours.\604\
---------------------------------------------------------------------------

    \603\ This figure was calculated as follows: (Assistant General 
Counsel for 20 hours) + (Compliance Attorney for 40 hours) + 
(Computer Operations Manager for 12 hours) + (Senior Programmer for 
20 hours) + (Senior Risk Management Specialist for 25 hours) + 
(Senior Business Analyst for 12 hours) = 129 hours x 6 respondent 
clearing agencies = 774 hours. When compared to the estimates in the 
RWP Proposing Release, this reflects a reduction in the number of 
respondents from seven to six.
    \604\ This figure was calculated as follows: (Compliance 
Attorney for 26 hours + Business Risk Analyst for 41 hours + Senior 
Risk Management Specialist for 21 hours) = 88 hours x 6 respondent 
clearing agencies = 528 hours. When compared to the estimates in the 
RWP Proposing Release, this reflects an increase of one burden hour 
for each of the Compliance Attorney, Business Risk Analyst, and 
Senior Risk Management Specialist, as well as a reduction in the 
number of respondents from seven to six.
---------------------------------------------------------------------------

B. New Rule 17Ad-26

    As discussed in the RWP Proposing Release,\605\ respondents under 
Rule 17Ad-26 are CCAs, of which there are currently six. The Commission 
anticipates that one additional entity may seek to register as a CCA in 
the next three years, and so for purposes of this adoption the 
Commission has assumed seven respondents.
---------------------------------------------------------------------------

    \605\ RWP Proposing Release, supra note 18, at 34741.
---------------------------------------------------------------------------

    As discussed in the RWP Proposing Release,\606\ the purpose of the 
collections under Rule 17Ad-26 is to ensure that CCAs include a set of 
particular items in the RWPs currently required under Rule 17Ad-
22(e)(3)(ii). The collections are mandatory. To the extent that the 
Commission receives confidential information pursuant to this 
collection of information, such information would be kept confidential 
subject to the provisions of applicable law.\607\
---------------------------------------------------------------------------

    \606\ Id.
    \607\ See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of the Freedom 
of Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    Because Rule 17Ad-22(e)(3)(ii) already required CCAs to maintain 
RWPs, Rule 17Ad-26 will impose on a CCA similar burdens as when, for 
example, Rule 17Ad-22(e)(2) was proposed and CCAs generally had 
governance arrangements in place at that time.\608\ Based on the 
Commission's review and understanding of the CCAs' existing RWPs,\609\ 
respondent CCAs generally have written rules, policies, and procedures 
similar to the requirements that will be imposed under Rule 17Ad-26. 
The PRA burden imposed by the rule will therefore be minimal and will 
likely be limited to the review of current policies and procedures and 
updating existing policies and procedures where appropriate to ensure 
compliance with the rule.
---------------------------------------------------------------------------

    \608\ See CCA Standards Adopting Release, supra note 5, at 70892 
(discussing Rule 17Ad-22(e)(2)).
    \609\ See, e.g., supra Part IV.B.3 (providing an overview of 
current RWPs).
---------------------------------------------------------------------------

    Rule 17Ad-26 will also impose ongoing burdens on a respondent CCA 
by requiring ongoing monitoring and compliance activities with respect 
to the written policies and procedures created or modified in response 
to the rule.
    The Commission received no comments regarding the PRA estimates in 
the RWP Proposing Release and estimates that respondent CCAs will incur 
an aggregate one-time burden of approximately 840 hours to review and 
update existing policies and procedures.\610\ The Commission also 
continues to estimate that the ongoing activities required by Rule 
17Ad-26 will impose an aggregate annual burden on respondent CCAs of 
280 hours.\611\
---------------------------------------------------------------------------

    \610\ This figure was calculated as follows: ((Assistant General 
Counsel for 20 hours) + (Compliance Attorney for 50 hours) + 
(Business Risk Analyst for 35 hours) + (Senior Risk Management 
Specialist for 15) = 120 hours x 7 respondent clearing agencies = 
840 hours. When compared to the estimates in the RWP Proposing 
Release, this reflects a reduction in the number of respondents from 
eight to seven.
    \611\ This figure was calculated as follows: ((Assistant General 
Counsel for 10 hours) + Compliance Attorney for 30 hours)) x 7 
respondent clearing agencies = 280 hours. When compared to the 
estimates in the RWP Proposing Release, this reflects a reduction in 
the number of respondents from eight to seven.
---------------------------------------------------------------------------

C. Chart of Total PRA Burdens

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Number of    Initial burden     Aggregate    Ongoing burden     Aggregate
      Name of information collection               Type of burden           respondents     per entity    initial burden    per entity    ongoing burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
17Ad-22(e)(6).............................  Recordkeeping...............           \a\ 6             129             774              88             528
17Ad-26...................................  Recordkeeping...............               7             120             840              40             280
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ See supra notes 600, 605, and accompanying text (explaining that Rule 17Ad-22(e)(6) applies only to CCAs that provide CCP services, whereas Rule
  17Ad-26 applies to all CCAs, which includes those that provide both CCP and CSD services).

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\612\ Section 603(a) of the Administrative Procedure Act,\613\ 
as amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules to determine the 
impact of such rulemaking on ``small

[[Page 91058]]

entities.'' \614\ Section 605(b) of the RFA states that this 
requirement shall not apply to any proposed rule which, if adopted, 
would not have a significant economic impact on a substantial number of 
small entities.\615\ The Commission certified in the RWP Proposing 
Release, pursuant to section 605(b) of the RFA, that the proposed rules 
would not, if adopted, have a significant impact on a substantial 
number of small entities. The Commission received no comments on this 
certification.
---------------------------------------------------------------------------

    \612\ See 5 U.S.C. 601 et seq.
    \613\ 5 U.S.C. 603(a).
    \614\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this rulemaking, are set forth in 17 CFR 
240.0-10.
    \615\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Clearing Agencies

    The amendments to Rule 17Ad-22(e)(6) and new Rule 17Ad-26 apply to 
CCAs, which are registered clearing agencies that provide the services 
of a CCP or CSD. For the purposes of Commission rulemaking and as 
applicable to these rule amendments and new rule, a small entity 
includes, when used with reference to a clearing agency, a clearing 
agency that (i) compared, cleared, and settled less than $500 million 
in securities transactions during the preceding fiscal year, (ii) had 
less than $200 million of funds and securities in its custody or 
control at all times during the preceding fiscal year (or at any time 
that it has been in business, if shorter), and (iii) is not affiliated 
with any person (other than a natural person) that is not a small 
business or small organization.\616\
---------------------------------------------------------------------------

    \616\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission,\617\ all such 
registered clearing agencies exceed the thresholds defining ``small 
entities'' set out above. While other clearing agencies may emerge and 
seek to register as clearing agencies with the Commission, no such 
entities would be ``small entities'' as defined in 17 CFR 240.0-10 
(``Exchange Act Rule 0-10'').\618\ In any case, registered clearing 
agencies can only become subject to the rule amendments and new rule 
adopted in this release when they meet the definition of a CCA, as 
described above. Accordingly, the Commission preliminarily believes 
that any such registered clearing agencies will exceed the thresholds 
for ``small entities'' set forth in Exchange Act Rule 0-10.
---------------------------------------------------------------------------

    \617\ The average daily value of equities trades cleared by NSCC 
in 2023 was $1.932 trillion; at FICC, the total net value of 
government securities transactions in 2022 was $2.019 trillion and 
the total net par value for mortgage-backed securities in 2023 was 
$58 trillion; and DTC settled a total of $446 trillion of securities 
in 2023. See DTCC, 2023 Annual Report, at 39-40, https://www.dtcc.com/-/media/Files/Downloads/Annual%20Report/2023/DTCC-2023-AR-Print.pdf. In 2023, OCC cleared 11.052 billion options contracts. 
See OCC, 2023 Annual Report: 2023 Year in Review, https://annualreport.theocc.com/2023/year-in-review. In addition, the 
notional value of CDS cleared by ICE was $18.8 trillion and $23.8 
trillion in 2023 and 2022, respectively. See ICE, 2023 Annual 
Report, at 60, https://s2.q4cdn.com/154085107/files/doc_financials/2023/ar/597756_002_bmk.pdf. The notional value of CDS cleared by LCH 
SA was [euro]4,975 billion and [euro]3,367 billion in 2023 and 2022, 
respectively. See LCH Group Holdings Ltd., 2023 Annual Report, at 3, 
https://www.lch.com/system/files/media_root/lch-group-holdings-limited-financial-statements.pdf. In each case, these volumes exceed 
the $500 million threshold for small entities.
    \618\ See 17 CFR 240.0-10(d). The Commission based this 
determination on its review of public sources of financial 
information about registered clearing agencies.
---------------------------------------------------------------------------

B. Certification

    For the reasons described above, the Commission certifies that the 
amendments to rule 17Ad-22(e)(6) and new Rule 17Ad-26 do not have a 
significant economic impact on a substantial number of small entities 
for purposes of the RFA.

VII. Other Matters

    The Commission considers the provisions of the final amendments to 
be severable to the fullest extent permitted by law. ``If parts of a 
regulation are invalid and other parts are not,'' courts ``set aside 
only the invalid parts unless the remaining ones cannot operate by 
themselves or unless the agency manifests an intent for the entire 
package to rise or fall together.'' Bd. of Cnty. Commissioners of Weld 
Cnty. v. EPA, 72 F.4th 284, 296 (D.C. Cir. 2023); see K Mart Corp. v. 
Cartier, Inc., 486 U.S. 281, 294 (1988). ``In such an inquiry, the 
presumption is always in favor of severability.'' Cmty. for Creative 
Non-Violence v. Turner, 893 F.2d 1387, 1394 (D.C. Cir. 1990). 
Consistent with these principles, while the Commission believes that 
all provisions of the final amendments are fully consistent with 
governing law, if any of the provisions of these amendments, or the 
application thereof to any person or circumstance, is held to be 
invalid, the Commission intends that such invalidity shall not affect 
other provisions or application of such provisions to other persons or 
circumstances that can be given effect without the invalid provision or 
application. In particular, the amendments to Rule 17Ad-22(e)(6) 
pertaining to a CCA's written policies and procedures for its risk-
based margin system operate independently from new Rule 17Ad-26 
pertaining to a CCA's written policies and procedures for its RWPs.
    Pursuant to the Congressional Review Act,\619\ the Office of 
Information and Regulatory Affairs has designated these rules as a not 
a ``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \619\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

Statutory Authority

    The Commission is adopting amendments to Rule 17Ad-22(e)(6) and new 
Rule 17Ad-26 under the Commission's rulemaking authority in the 
Exchange Act, particularly section 17(a), 15 U.S.C. 78q(a), section 
17A, 15 U.S.C. 78q-1, and section 23(a), 15 U.S.C. 78w(a), and the 
Dodd-Frank Act, particularly section 805 of the Clearing Supervision 
Act, 15 U.S.C. 5464.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 
1681w(a)(1), 6801-6809, 6825, 7201 et seq., and 8302; 7 U.S.C. 
2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 
939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, sec. 503 and 602, 
126 Stat. 326 (2012), unless otherwise noted.
* * * * *

    Section 240.17ad-22 is also issued under 12 U.S.C. 5461 et seq.
* * * * *

0
2. Amend Sec.  240.17ad-22 by revising paragraphs (e)(6)(ii) and (iv) 
to read as follows:


Sec.  240.17ad-22   Standards for clearing agencies.

* * * * *
    (e) * * *
    (6) * * *
    (ii)(A) Marks participant positions to market and collects margin 
(including variation margin or equivalent charges if relevant) at least 
daily;
    (B) Monitors intraday exposures on an ongoing basis;

[[Page 91059]]

    (C) Includes the authority and operational capacity to make 
intraday margin calls, as frequently as circumstances warrant, 
including the following circumstances:
    (1) When risk thresholds specified by the covered clearing agency 
are breached; or
    (2) When the products cleared or markets served display elevated 
volatility; and
    (D) Documents when the covered clearing agency determines not to 
make an intraday call pursuant to its written policies and procedures 
required under paragraph (e)(6)(ii)(C) of this section;
* * * * *
    (iv)(A) Uses reliable sources of timely price data and other 
substantive inputs;
    (B) Uses procedures (and, with respect to price data, sound 
valuation models) for addressing circumstances in which price data or 
other substantive inputs are not readily available or reliable, to 
ensure that the covered clearing agency can continue to meet its 
obligations under this section; and
    (C) Such procedures under paragraph (e)(6)(iv)(B) of this section 
must include either:
    (1) The use of price data or substantive inputs from an alternate 
source; or
    (2) If it does not use an alternate source, the use of a risk-based 
margin system that does not rely on substantive inputs that are 
unavailable or unreliable;
* * * * *

0
3. Section 240.17ad-26 is added to read as follows:


Sec.  240.17ad-26  Recovery and orderly wind-down plans of covered 
clearing agencies.

    (a) The plans for the recovery and orderly wind-down of the covered 
clearing agency referenced in Sec.  240.17ad-22(e)(3)(ii) must:
    (1) Identify and describe the covered clearing agency's core 
payment, clearing, and settlement services and address how the covered 
clearing agency would continue to provide such core services in the 
event of a recovery and during an orderly wind-down, including by:
    (i) Identifying the staffing roles necessary to support such core 
services; and
    (ii) Analyzing how such staffing roles necessary to support such 
core services would continue in the event of a recovery and during an 
orderly wind-down;
    (2)(i) Identify and describe any service providers for core 
services, specifying which core services each service provider 
supports; and
    (ii) Address how the covered clearing agency would ensure that 
service providers for core services would continue to perform in the 
event of a recovery and during an orderly wind-down, including 
consideration of its written agreements with such service providers and 
whether the obligations under those written agreements are subject to 
alteration or termination as a result of initiation of the recovery and 
orderly wind-down plan;
    (3) Identify and describe scenarios that may potentially prevent 
the covered clearing agency from being able to provide its core 
services identified in paragraph (a)(1) of this section as a going 
concern, including uncovered credit losses (as described in Sec.  
240.17ad-22(e)(4)(viii)), uncovered liquidity shortfalls (as described 
in Sec.  240.17ad-22(e)(7)(viii)), and general business losses (as 
described in Sec.  240.17ad-22(e)(15));
    (4) Identify and describe criteria that could trigger the covered 
clearing agency's implementation of the recovery and orderly wind-down 
plans and the process that the covered clearing agency uses to monitor 
and determine whether the criteria have been met, including the 
governance arrangements applicable to such process;
    (5) Identify and describe the rules, policies, procedures, and any 
other tools or resources on which the covered clearing agency would 
rely in a recovery or orderly wind-down;
    (6) Address how the rules, policies, procedures, and any other 
tools or resources identified in paragraph (a)(5) of this section would 
ensure timely implementation of the recovery and orderly wind-down 
plan;
    (7) Require the covered clearing agency to inform the Commission as 
soon as practicable when the covered clearing agency is considering 
implementing a recovery or orderly wind-down;
    (8) Include procedures for testing the covered clearing agency's 
ability to implement the recovery and orderly wind-down plans at least 
every 12 months, including by:
    (i) Requiring the covered clearing agency's participants and, when 
practicable, other stakeholders to participate in the testing of its 
plans;
    (ii) Requiring that such testing be in addition to testing pursuant 
to Sec.  240.17ad-22(e)(13);
    (iii) Providing for reporting the results of such testing to the 
covered clearing agency's board of directors and senior management; and
    (iv) Specifying the procedures for, as appropriate, amending the 
plans to address the results of such testing; and
    (9) Include procedures requiring review and approval of the plans 
by the board of directors of the covered clearing agency at least every 
12 months or following material changes to the covered clearing 
agency's operations that would significantly affect the viability or 
execution of the plans, with such review informed, as appropriate, by 
the covered clearing agency's testing of the plans.
    (b) All terms used in this section have the same meaning as in the 
Securities Exchange Act of 1934, and unless the context otherwise 
requires, the following definitions apply for purposes of this section:
    Affiliate means a person that directly or indirectly controls, is 
controlled by, or is under common control with the covered clearing 
agency.
    Orderly wind-down means the actions of a covered clearing agency to 
effect the permanent cessation, sale, or transfer of one or more of its 
core services, as identified by the covered clearing agency pursuant to 
paragraph (a)(1) of this section, in a manner that would not increase 
the risk of significant liquidity, credit, or operational problems 
spreading among financial institutions or markets and thereby threaten 
the stability of the U.S. financial system.
    Recovery means the actions of a covered clearing agency, consistent 
with its rules, procedures, and other ex ante contractual arrangements, 
to address any uncovered loss, liquidity shortfall, or capital 
inadequacy, whether arising from participant default or other causes 
(such as business, operational, or other structural weaknesses), 
including actions to replenish any depleted prefunded financial 
resources and liquidity arrangements, as necessary to maintain the 
covered clearing agency's viability as a going concern and to continue 
its provision of core services, as identified by the covered clearing 
agency pursuant to paragraph (a)(1) of this section.
    Service provider for core services means any person, including an 
affiliate or a third party, that, through a written agreement for 
services provided to or on behalf of the covered clearing agency, on an 
ongoing basis, directly supports the delivery of core services, as 
identified by the covered clearing agency pursuant to paragraph (a)(1) 
of this section.

    By the Commission.

    Dated: October 25, 2024.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-25570 Filed 11-15-24; 8:45 am]
BILLING CODE 8011-01-P`