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[Federal Register Volume 75, Number 238 (Monday, December 13, 2010)]
[Proposed Rules]
[Pages 77576-77588]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31029]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 39

RIN 3038-AC98

General Regulations and Derivatives Clearing Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing regulations to implement Title VII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act). These 
proposed amendments would establish the regulatory standards for 
compliance with derivatives clearing organization (DCO) Core Principles 
A (Compliance), H (Rule Enforcement), N (Antitrust Considerations), and 
R (Legal Risk), as well as DCO chief compliance officer (CCO) 
requirements set forth in Section 5b of the Commodity Exchange Act 
(CEA). The proposed amendments also would revise procedures for DCO 
applications, clarify procedures for the transfer of a DCO 
registration, add requirements for approval of DCO rules establishing a 
portfolio margining program for customer accounts carried by a futures 
commission merchant (FCM) that is also registered as a securities 
broker-dealer (FCM/BD), and make certain technical amendments. The 
Commission also is proposing amendments to update the definitions of 
``clearing member'' and ``clearing organization,'' and to add 
definitions for certain other terms.

DATES: Submit comments on or before February 11, 2011.

ADDRESSES: You may submit comments, identified by RIN 3038-AC98, by any 
of the following methods:
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.Regulations.gov. 
Follow the instructions for submitting comments.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's regulations, 17 CFR 
145.9.\1\
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    \1\ Commission regulations referred to herein are found at 17 
CFR Ch. 1 (2010). They are accessible on the Commission's Web site 
at http://www.cftc.gov.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Phyllis P. Dietz, Associate Director, 
202-418-5449, pdietz@cftc.gov, or Jonathan M. Lave, Special Counsel, 
202-418-5983, jlave@cftc.gov, Division of Clearing and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Proposed Definitional and Procedural Amendments
    B. Proposed Regulations Implementing Statutory Requirements for 
CCOs
    C. Proposed Regulations Implementing DCO Core Principles
II. Discussion
    A. Section 1.3 Definitions
    B. Part 39 Scope and Definitions
    1. Scope of Part 39
    2. Definitions
    C. Procedures for Registration as a DCO
    1. Procedures for DCO Applications
    2. Procedures for Transfer of a DCO Registration
    D. Procedures for Submitting DCO Rules To Establish a Portfolio 
Margining Program
    E. Compliance With Core Principles
    F. Rule Enforcement Requirements
    G. Antitrust Considerations
    H. Legal Risk Requirements
III. Technical Amendments
IV. Effective Date
V. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    1. Information Provided by Reporting Entities/Persons
    2. Information Collection Comments
    C. Cost-Benefit Analysis

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act.\2\ Title VII of the Dodd-Frank Act 
\3\ amended the CEA \4\ to establish a comprehensive new regulatory

[[Page 77577]]

framework for swaps and security-based swaps. The legislation was 
enacted to reduce risk, increase transparency, and promote market 
integrity within the financial system by, among other things: (1) 
Providing for the registration and comprehensive regulation of swap 
dealers and major swap participants; (2) imposing clearing and trade 
execution requirements on standardized derivative products; (3) 
creating rigorous recordkeeping and real-time reporting regimes; and 
(4) enhancing the Commission's rulemaking and enforcement authorities 
with respect to all registered entities and intermediaries subject to 
the Commission's oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq.
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    Section 725(c) of the Dodd-Frank Act amended Section 5b(c)(2) of 
the CEA, which sets forth core principles with which a DCO must comply 
in order to be registered and to maintain registration as a DCO. The 
core principles were added to the CEA by the Commodity Futures 
Modernization Act of 2000 (CFMA).\5\ The Commission did not adopt 
implementing rules and regulations, but instead promulgated guidance 
for DCOs on compliance with the core principles.\6\ Under Section 
5b(c)(2), as amended by the Dodd-Frank Act, Congress expressly 
confirmed that the Commission may adopt implementing rules and 
regulations pursuant to its rulemaking authority under Section 8a(5) of 
the CEA.\7\
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    \5\ See Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (2000).
    \6\ See 17 CFR part 39, app. A.
    \7\ See 7 U.S.C. 7a-1(c)(2). Section 8a(5) of the CEA authorizes 
the Commission to promulgate such regulations ``as, in the judgment 
of the Commission, are reasonably necessary to effectuate any of the 
provisions or to accomplish any of the purposes of [the CEA].'' 7 
U.S.C. 12a(5).
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    The Commission continues to believe that, where possible, each DCO 
should be afforded an appropriate level of discretion in determining 
how to operate its business within the statutory framework. At the same 
time, the Commission recognizes that specific, bright-line regulations 
may be necessary in order to facilitate DCO compliance with a given 
core principle and, ultimately, to protect the integrity of the U.S. 
clearing system. Accordingly, in developing the proposed regulations to 
update the Commission's regulations, streamline administrative 
procedures, and implement the DCO core principles as amended by the 
Dodd-Frank Act, the Commission has endeavored to strike an appropriate 
balance between establishing general prudential standards and 
prescriptive requirements.
    In this notice of proposed rulemaking, the Commission is proposing 
to adopt: (1) Certain definitional and procedural amendments to its 
regulations for DCOs; (2) regulations to implement statutory 
requirements for CCOs; and (3) requirements that would implement four 
DCO core principles.

A. Proposed Definitional and Procedural Amendments

    The Commission is proposing to amend the definitions of ``clearing 
member'' and ``clearing organization'' in Sec.  1.3 of its regulations 
to make the definitions consistent with terminology currently used in 
the CEA, as amended by the Dodd-Frank Act. It is also proposing to add 
to Sec.  1.3 definitions for the terms ``customer initial margin,'' 
``initial margin,'' ``spread margin,'' ``variation margin,'' and 
``margin call.'' In addition, the Commission is proposing to amend 
Sec.  39.1 to add definitions of the following terms: ``back test,'' 
``compliance policies and procedures,'' ``key personnel,'' ``stress 
test,'' and ``systemically important derivatives clearing 
organization.''
    Based on its experience in reviewing DCO applications over the past 
nearly ten years, the Commission is proposing to amend Sec.  39.3 to 
streamline the DCO application process by eliminating the 90-day 
expedited application review period. The proposed amendments also would 
clarify the procedures to be followed by a DCO when requesting a 
transfer of its DCO registration due to a corporate change and 
procedures for submission of DCO rules to establish a portfolio 
margining program.

B. Proposed Regulations Implementing Statutory Requirements for CCOs

    Section 725(b) of the Dodd-Frank Act, codified as Section 5b(i) of 
the CEA,\8\ requires each DCO to designate a CCO and further specifies 
the duties of the CCO.\9\ Among the CCO's responsibilities are the 
preparation and submission to the Commission of an annual compliance 
report. Proposed Sec.  30.10 codifies the statutory requirements for 
CCOs and sets forth additional provisions relating to CCOs.
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    \8\ 7 U.S.C. 7a-1(i).
    \9\ The Dodd-Frank Act established comparable CCO requirements 
for swap data repositories, swap dealers and major swap 
participants, FCMs, and swap execution facilities. See Sections 728, 
731, 732, and 733, respectively, of the Dodd-Frank Act.
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C. Proposed Regulations Implementing DCO Core Principles

    The Commission is proposing to codify the DCO core principles in 
Commission regulations and implement those statutory standards with 
regulatory requirements to the extent necessary to ensure that DCOs are 
subject to a comprehensive, prudential regulatory regime. This 
rulemaking is one of a series that will, in its entirety, propose 
regulations to implement all 18 DCO core principles.\10\ Section 725(c) 
of the Dodd-Frank Act amended Core Principle A, Compliance, to require 
a DCO to comply with each core principle set forth in Section 5b(c)(2) 
of the CEA and any requirement that the Commission may impose by rule 
or regulation pursuant to Section 8a(5) of the CEA.\11\ Proposed Sec.  
39.10 would implement Core Principle A.
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    \10\ See 75 FR 63732 (Oct. 18, 2010) (proposing regulations to 
implement Core Principle P (Conflicts of Interest)); and 75 FR 63113 
(Oct. 14, 2010) (proposing regulations to implement Core Principle B 
(Financial Resources)). Concurrent with issuing this notice, the 
Commission also is proposing regulations to implement Core 
Principles J (Reporting), K (Recordkeeping), L (Public Information), 
and M (Information Sharing). The Commission expects to issue two 
additional notices of proposed rulemaking to implement DCO core 
principles.
    \11\ Additionally, Section 805(a) of the Dodd-Frank Act allows 
the Commission to prescribe regulations for DCOs that the Financial 
Stability Oversight Council has determined are systemically 
important financial market utilities. In a future notice of proposed 
rulemaking, the Commission intends to propose a provision that would 
require all DCOs, including systemically important DCOs (SIDCOs), to 
comply with the core principles and the regulations thereunder, 
except to the extent that there are special requirements applicable 
to SIDCOs set forth in part 39 of the Commission's regulations.
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    Section 725(c) also amended Core Principle H, Rule Enforcement, to 
require a DCO to report to the Commission rule enforcement activities 
and sanctions imposed against clearing members. Proposed Sec.  39.17 
would implement Core Principle H.
    The Dodd-Frank Act amended Core Principle N, Antitrust 
Considerations, and Core Principle N now conforms to the amended 
antitrust core principle for designated contract markets (DCMs). 
Proposed Sec.  39.23 would codify and implement Core Principle N.
    Finally, Section 725(c) of the Dodd-Frank Act established a new 
Core Principle R, Legal Risk, which is consistent with the legal risk 
standard recommended by the Committee on Payment and Settlement Systems 
of the central banks of the Group of Ten countries (CPSS) and the 
Technical Committee of the International Organization of Securities 
Commissions (IOSCO).\12\ Proposed Sec.  39.27 would implement Core 
Principle R.
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    \12\ See infra n. 47.
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    The Commission requests comment on all aspects of the proposed 
rules, as well as comments on the specific provisions and issues 
highlighted in the discussion below.

[[Page 77578]]

II. Discussion

A. Section 1.3 Definitions

    The Commission proposes to amend the definitions of ``clearing 
member,'' ``clearing organization,'' and ``customer'' found in Sec.  
1.3 of its regulations to conform them to the concepts and terminology 
of the CEA, as amended. The Commission also is proposing to add to 
Sec.  1.3, definitions for ``clearing initial margin,'' ``customer 
initial margin,'' ``initial margin,'' ``margin call,'' ``spread 
margin,'' and ``variation margin.''
    Clearing member. The term ``clearing member'' is currently defined 
in Sec.  1.3(c) to mean ``any person who is a member of, or enjoys the 
privilege of clearing trades in his own name through, the clearing 
organization of a designated contract market or registered derivatives 
transaction execution facility.'' \13\ The Commission proposes to amend 
Sec.  1.3(c) to define a ``clearing member'' as ``any person \14\ that 
has clearing privileges such that it can process, clear and settle 
trades through a derivatives clearing organization on behalf of itself 
or others.'' This revised definition reflects the fact that a clearing 
member could have clearing privileges in connection with contracts that 
are not traded on a DCM, and it further clarifies that the term 
``clearing member,'' for purposes of the Commission's regulations, is 
intended to refer to a person who is authorized to clear through a 
registered DCO, even if the DCO is not a membership organization.
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    \13\ 17 CFR 1.3(c).
    \14\ The term ``person'' is defined as an individual, 
association, partnership, corporation, or trust. See Section 1a(38) 
of the CEA; 7 U.S.C. 1a(38); and 17 CFR 1.3(u).
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    Clearing organization. The term ``clearing organization'' is 
currently defined in Sec.  1.3(d) as ``the person or organization which 
acts as a medium for clearing transactions in commodities for future 
delivery or commodity option transactions, or for effecting settlements 
of contracts for future delivery or commodity option transactions, for 
and between members of any designated contract market or registered 
derivatives transaction execution facility.'' \15\ Recognizing that 
there may be CFTC regulations or other issuances that remain in effect 
and use the term ``clearing organization'' instead of ``derivatives 
clearing organization,'' the Commission proposes to include both terms 
as alternatives that have the same meaning. The definition would be the 
same as the definition of ``derivatives clearing organization'' in 
Section 1a(15) of the CEA.\16\ Accordingly, the definition would 
eliminate the references to DCMs and derivatives transaction execution 
facilities, thereby allowing the definition to encompass futures 
contracts and swaps, including swaps traded on a swap execution 
facility (SEF).
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    \15\ 17 CFR 1.3(d).
    \16\ Section 1a(15) of the CEA; 7 U.S.C. 1a(15), defines a 
derivatives clearing organization as follows:
    (A) IN GENERAL.--The term ``derivatives clearing organization'' 
means a clearinghouse, clearing association, clearing corporation, 
or similar entity, facility, system, or organization that, with 
respect to an agreement, contract, or transaction--
    (i) enables each party to the agreement, contract, or 
transaction to substitute, through novation or otherwise, the credit 
of the derivatives clearing organization for the credit of the 
parties;
    (ii) arranges or provides, on a multilateral basis, for the 
settlement or netting of obligations resulting from such agreements, 
contracts, or transactions executed by participants in the 
derivatives clearing organization; or
    (iii) otherwise provides clearing services or arrangements that 
mutualize or transfer among participants in the derivatives clearing 
organization the credit risk arising from such agreements, 
contracts, or transactions executed by the participants.
    (B) EXCLUSIONS.--The term ``derivatives clearing organization'' 
does not include an entity, facility, system, or organization solely 
because it arranges or provides for--
    (i) settlement, netting, or novation of obligations resulting 
from agreements, contracts, or transactions, on a bilateral basis 
and without a central counterparty;
    (ii) settlement or netting of cash payments through an interbank 
payment system; or
    (iii) settlement, netting, or novation of obligations resulting 
from a sale of a commodity in a transaction in the spot market for 
the commodity.
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    Customer. The Dodd-Frank Act expanded the Commission's regulatory 
authority over swaps. The term ``customer'' in Sec.  1.3(k) is 
currently defined to refer to a customer trading in any commodity.\17\ 
The Commission proposes to define customer to refer to trading in any 
commodity or swap as defined in Section 1a(47) of the CEA.
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    \17\ 17 CFR 1.3(k).
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    The Commission also is proposing to amend Sec.  1.3 to add 
definitions of terms that it expects will be used in future proposed 
regulations to implement Core Principle D, Risk Management, as well as 
other provisions of the CEA.
    Clearing initial margin. Proposed Sec.  1.3(jjj) would define the 
term ``clearing initial margin'' to mean initial margin posted by a 
clearing member with a DCO.
    Customer initial margin. Proposed Sec.  1.3(kkk) would define the 
term ``customer initial margin'' to mean initial margin posted by a 
customer with an FCM, or by a non-clearing member FCM with a clearing 
member.
    Initial margin. Proposed Sec.  1.3(lll) would define the term 
``initial margin'' to mean money, securities, or property posted by a 
party to a futures, option, or swap as performance bond to cover 
potential future exposures arising from changes in the market value of 
the position.
    Margin call. Proposed Sec.  1.3(mmm) would define the term ``margin 
call'' to mean a request from an FCM to a customer to post customer 
initial margin; or a request by a DCO to a clearing member to post 
clearing initial margin or variation margin. This would include margin 
calls for additional funds, sometimes referred to as ``super margin'' 
calls or ``special margin'' calls, both of which are effectively calls 
for initial margin.
    Spread margin. Proposed Sec.  1.3(nnn) would define the term 
``spread margin'' to mean a reduced initial margin that takes into 
account correlations between certain related positions held in a single 
account.
    Variation margin. Proposed Sec.  1.3(ooo) would define the term 
``variation margin'' to mean a payment made by a party to a futures, 
option, or swap to cover the current exposure arising from changes in 
the market value of the position since the trade was executed or the 
previous time the position was marked to market.

B. Part 39 Scope and Definitions

    The Commission proposes to revise the statement of the scope of 
part 39 and to add definitions that will appear elsewhere in part 39.
1. Scope of Part 39
    In a future rulemaking, the Commission intends to reorganize part 
39 into three subparts, with one subpart containing provisions 
applicable only to SIDCOs. Accordingly, the Commission intends to 
revise the statement of scope in a future rulemaking to establish that 
the provisions of subparts A and B of part 39 will apply to all DCOs, 
except to the extent that there are superseding provisions that apply 
to SIDCOs in subpart C.\18\ Because this reorganization is not being 
proposed in the current rulemaking, the Commission is not yet proposing 
any change to the text of Sec.  39.1. However, as a technical matter in 
order to propose certain definitions, the Commission is proposing to 
redesignate the current text of Sec.  39.1 as Sec.  39.1(a) ``Scope,'' 
and to add a new paragraph (b) ``Definitions.''
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    \18\ In this future rulemaking, the Commission also expects to 
propose a technical amendment to update the Sec.  39.1 citation to 
the definition of ``derivatives clearing organization'' in the CEA 
(term formerly defined in Section 1a(9) of the CEA; renumbered as 
Section 1a(15) by the Dodd-Frank Act).

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[[Page 77579]]

2. Definitions
    Proposed Sec.  39.1(b) would define certain terms, for purposes of 
part 39. Although some of these terms may be defined in Sec.  1.3 or 
other sections of the Commission's regulations, the definitions set 
forth in Sec.  39.1(b) would apply to provisions contained in part 39 
and such other rules as may explicitly cross-reference these 
definitions.
    Back test. The proposed rule would define the term ``back test'' to 
mean a test that compares a DCO's initial margin requirements with 
historical price changes to determine the extent of actual margin 
coverage. The Commission anticipates using this term in regulations 
relating to Core Principle D, Risk Management.\19\
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    \19\ See Section 5b(c)(2)(D) of the CEA; 7 U.S.C. 7a-1(c)(2)(D).
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    Compliance policies and procedures. The proposed rule would define 
the term ``compliance policies and procedures'' to mean all policies, 
procedures, codes, including a code of ethics, safeguards, rules, 
programs, and internal controls that are required to be adopted or 
established by a DCO pursuant to the CEA, Commission regulations, or 
orders. Compliance policies and procedures would include those policies 
and procedures that are not explicitly required by law, such as those 
relating to customer record protection and procedures and safeguards 
for electronic signatures.
    Customer account or customer origin. The proposed rule would define 
these terms to mean a clearing member's account held on behalf of 
customers, as defined in Sec.  1.3(k) of the Commission's regulations. 
A customer account is also a futures account, as that term is defined 
by Sec.  1.3(vv) of the Commission's regulations. The Commission 
proposes to define these terms as distinguishable from a ``house 
account'' or ``house origin,'' in connection with proposed reporting 
and other requirements under part 39, which may make such a 
distinction.\20\
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    \20\ For example, in a separate notice of proposed rulemaking, 
the Commission proposes to require DCOs to provide the Commission 
with a daily report of initial margin requirements and margin on 
deposit for each clearing member, by customer origin and house 
origin.
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    House account or house origin. The proposed rule would define 
``house account'' or ``house origin'' to mean a clearing member's 
combined proprietary accounts, as defined in Sec.  1.3(y).
    Key personnel. The proposed rule would define the term ``key 
personnel'' to mean personnel who play a significant role in the 
operation of the DCO, provision of clearing and settlement services, 
risk management, or oversight of compliance with the CEA and Commission 
regulations. Key personnel would include, but would not be limited to, 
those persons who are or perform the functions of any of the following: 
The chief executive officer; president; CCO; chief operating officer; 
chief risk officer; chief financial officer; chief technology officer; 
and emergency contacts or persons who are responsible for business 
continuity or disaster recovery planning or program execution.
    Stress test. The proposed rule would define the term ``stress 
test'' to mean a test that compares the impact of a potential price 
move, change in option volatility, or change in other inputs that 
affect the value of a position, to the financial resources of a DCO, 
clearing member, or large trader to determine the adequacy of such 
financial resources.
    Systemically important derivatives clearing organization. The 
proposed rule would define the term ``systemically important 
derivatives clearing organization'' to mean a financial market utility 
that is a DCO registered under Section 5b of the CEA, and which has 
been designated by the Financial Stability Oversight Council to be 
systemically important. As noted above, the Commission intends that 
certain proposed rules would apply only to SIDCOs.

C. Procedures for Registration as a DCO

1. Procedures for DCO Applications
    The proposed rules would remove the 90-day expedited review 
provision. In 2001, the Commission adopted Sec.  39.3 to implement the 
CFMA's core principle regime and to establish registration standards 
and procedures for DCOs, which were then a new category of 
registrant.\21\ Although the CEA does not require the Commission to 
review DCO applications within a prescribed time period or subject to 
any prescribed procedures, the Commission nonetheless adopted the time 
period and procedures specified in Section 6(a) of the CEA for review 
of applications for designation of a contract market or registration of 
a derivatives transaction execution facility.\22\ The Commission 
initially provided for an expedited 60-day review process, which it 
changed to a 90-day review process in 2006.\23\
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    \21\ See 66 FR 45604 (Aug. 29, 2001).
    \22\ See 17 CFR 39.3(a) (providing that the Commission will 
review the application for registration as a DCO pursuant to the 
180-day time frame and procedures specified in Section 6(a) of the 
CEA).
    \23\ See 71 FR 1953 (Jan. 12, 2006) (extending the 60-day review 
period to 90 days based on the Commission's experience in processing 
applications).
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    Since 2006, the Commission has learned that a 90-day expedited 
review period is not practicable in most instances, particularly in 
cases where the margin methodology to be applied or the products to be 
cleared are novel or complex. The proposed amendments to Sec.  39.3 
would therefore eliminate the 90-day expedited review period provided 
under Sec.  39.3(a)(3) and remove related provisions for termination of 
the 90-day review under Sec.  39.3(b). The Commission notes that the 
180-day review period does not preclude it from rendering a decision in 
less than 180 days.
2. Procedures for Transfer of a DCO Registration
    The Commission is proposing to add a new paragraph (h) to Sec.  
39.3 to formalize the procedures that a DCO must follow when requesting 
the transfer of its DCO registration and positions comprising open 
interest for clearing and settlement, in anticipation of a corporate 
change (e.g., a merger, corporate reorganization, or change in 
corporate domicile), which results in the transfer of all or 
substantially all of the DCO's assets to another legal entity. Under 
proposed Sec.  39.3(h), the DCO would submit to the Commission a 
request for transfer no later than three months prior to the 
anticipated corporate change, in accordance with the reporting 
requirements of proposed Sec.  39.19.\24\ The request would include: 
(1) The underlying agreement that governs the corporate change; (2) a 
narrative description of the corporate change, including the reason for 
the change, its impact on the DCO's financial resources, governance, 
and operations, and its impact on the rights and obligations of 
clearing members and market participants holding the positions that 
comprise the DCO's open interest; (3) a discussion of the transferee's 
ability to comply with the CEA, including the core principles 
applicable to DCOs, and the Commission's regulations thereunder; (4) 
the governing documents of the transferee, including but not limited to 
articles of incorporation and bylaws; (5) the transferee's rules marked 
to show changes from the current rules of the

[[Page 77580]]

DCO; and (6) a list of contracts, agreements, transactions, or swaps 
for which the DCO requests transfer of open interest.
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    \24\ In a separate notice of proposed rulemaking, the Commission 
is proposing to require a DCO to notify the Commission of various 
corporate events, all of which would require three months advance 
notice. The Commission is proposing to allow an exception to the 
three-month prior reporting requirement if the DCO does not know and 
reasonably could have not have known of the anticipated change three 
months prior to that change. In such event, the DCO would be 
required to promptly report such change to the Commission as soon as 
it knows of the change.
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    Proposed Sec.  39.3(h) also would require, as a condition of 
approval, that the DCO submit a representation that it is in compliance 
with the CEA, including the DCO core principles, and the Commission's 
regulations. In addition, the DCO would have to submit a representation 
by the transferee that the transferee understands that a DCO is a 
regulated entity that must comply with the CEA, including the DCO core 
principles and the Commission's regulations, in order to maintain its 
registration as a DCO; and further, that the transferee will continue 
to comply with all self-regulatory requirements applicable to a DCO 
under the CEA and the Commission's regulations.
    The Commission would review any requests for transfer of 
registration and open interest as soon as practicable and determine 
whether the transferee would be able to continue to operate the DCO in 
compliance with the CEA and the Commission's regulations. The request 
would be approved or denied pursuant to a Commission order.
    The Commission notes that there are differences in the proposed 
procedures for registration/designation transfer requests for DCOs, 
DCMs, swap execution facilities, and swap data repositories. The 
Commission requests comment on the proposed requirements for 
registration transfer requests under Sec.  39.3(h), generally, and, 
more specifically, solicits comment on the extent to which there should 
be uniformity or differentiation in procedures applied to different 
types of registrants.

D. Procedures for Submitting DCO Rules To Establish a Portfolio 
Margining Program

    Section 713(a) of the Dodd-Frank Act amended Section 15(c)(3) of 
the Securities Exchange Act of 1934 \25\ to require the SEC to adopt 
rules that permit securities to be held in a portfolio margining 
account that is regulated as a futures account pursuant to a portfolio 
margining program approved by the Commission. Similarly, Section 713(b) 
of the Dodd-Frank Act amended Section 4d of the CEA\26\ to require the 
Commission to adopt rules that permit futures and options on futures to 
be held in a portfolio margining account regulated as a securities 
account pursuant to a portfolio margining program approved by the SEC. 
In both cases, the SEC and the Commission are required to consult with 
each other in the adoption of such rules in order to ensure that the 
relevant transactions and accounts are subject to comparable 
requirements to the extent practicable for similar products.
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    \25\ 15 U.S.C. 78o(c)(3).
    \26\ 7 U.S.C. 6d.
---------------------------------------------------------------------------

    As a first step towards meeting this goal, the Commission is 
proposing to amend part 39 to include procedural requirements for a DCO 
that intends to offer a portfolio margining program. Under proposed 
Sec.  39.4(e), a DCO seeking to provide clearing and settlement 
services for a futures portfolio margining account that holds 
securities would have to submit its proposed portfolio margining rules 
for Commission approval under Sec.  40.5 of the Commission's 
regulations. This will enable the DCO to satisfy the statutory 
requirement that the futures portfolio margining program be approved by 
the Commission, as a pre-condition to the SEC permitting securities to 
be held in the account. Concurrent with its request for rule approval, 
the DCO also would be required to submit a petition for a related order 
under Section 4d of the CEA.\27\
---------------------------------------------------------------------------

    \27\ An order under Section 4d of the CEA would permit the 
commingling of exchange-traded futures and options on futures with 
securities.
---------------------------------------------------------------------------

    The Commission is proposing only procedural requirements as part of 
this notice. It anticipates consulting with the SEC in the future to 
determine the substantive requirements it would impose in approving a 
futures portfolio margining program and, additionally, in granting an 
exemption under Section 4(c) of the CEA and an order under Section 4d 
of the CEA to permit futures and options on futures to be held in a 
securities portfolio margining account. The Dodd-Frank Act does not set 
a deadline for these actions, and the Commission believes that it is 
important to give this matter due consideration, both in terms of 
consultation with the SEC and, more broadly, in obtaining industry 
views on the topic before proposing substantive regulations or other 
guidance. The Commission requests comment on possible strategies for 
the Commission and the SEC to address issues raised by portfolio 
margining and to facilitate the availability of portfolio margining 
programs for qualified participants.

E. Compliance With Core Principles

    As noted above, Section 725(c) of the Dodd-Frank Act amended Core 
Principle A to require a registered DCO to comply with each core 
principle set forth in Section 5b(c)(2) of the CEA and any requirement 
that the Commission may impose by rule or regulation pursuant to 
Section 8a(5) of the CEA.\28\ The Dodd-Frank Act also provides a DCO 
with reasonable discretion to establish the manner by which it complies 
with each core principle.\29\ Proposed Sec. Sec.  39.10(a) and 39.10(b) 
would codify these provisions, respectively.
---------------------------------------------------------------------------

    \28\ Core Principle A provides that ``To be registered and to 
maintain registration as a derivatives clearing organization, a 
derivatives clearing organization shall comply with each core 
principle described in this paragraph and any requirement that the 
Commission may impose by rule or regulation pursuant to section 
8a(5).'' 7 U.S.C. 7a-1(c)(2)(A)(i).
    \29\ Core Principle A provides that ``Subject to any rule or 
regulation prescribed by the Commission, a derivatives clearing 
organization shall have reasonable discretion in establishing the 
manner by which the derivatives clearing organization complies with 
each core principle described in this paragraph.'' 7 U.S.C. 7a-
1(c)(2)(A)(ii).
---------------------------------------------------------------------------

    Section 725(b) of the Dodd-Frank Act amended Section 5b of the CEA 
to require each DCO to designate an individual as its CCO, responsible 
for the DCO's compliance with Commission regulations and filing an 
annual compliance report.\30\ Proposed Sec.  39.10(c)(1) would require 
each DCO to establish the position of CCO and to designate a CCO. The 
proposed provision also would require that the DCO provide the CCO with 
the responsibility and authority to develop and enforce appropriate 
compliance policies and procedures to fulfill his or her duties.
---------------------------------------------------------------------------

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

    Proposed Sec.  39.10(c)(1)(i) would require a DCO to designate an 
individual with the background and skills appropriate for fulfilling 
the responsibilities of the position. The rule also would require the 
person to meet minimum ethical requirements, and prohibit from serving 
as a CCO any person who would be disqualified from registration under 
Sections 8a(2) or 8a(3) of the CEA.\31\
---------------------------------------------------------------------------

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

    The Dodd-Frank Act requires that a CCO report directly to the board 
of directors or the senior officer of the DCO.\32\ This requirement is 
codified as proposed Sec.  39.10(c)(1)(ii). The proposed rule also 
would require the board of directors or the senior officer to approve 
the compensation of the CCO.
---------------------------------------------------------------------------

    \32\ See Section 5b(i)(2)(A) of the CEA; 7 U.S.C. 7a-1(i)(2)(A). 
Proposed Sec.  1.3(zz) defines the term ``Board of Directors'' to 
mean ``the Board of Directors or Board of Governors of a company or 
organization, or equivalent governing body.'' See 75 FR at 63747.
---------------------------------------------------------------------------

    Proposed Sec.  39.10(c)(1)(iii) would require a CCO to meet with 
the board of directors or the senior officer at least once a year to 
discuss the effectiveness of the DCO's compliance policies and

[[Page 77581]]

procedures, as well as the administration of those policies and 
procedures by the CCO. The meeting would afford an opportunity for the 
CCO and the board of directors or the senior officer to speak freely 
about any compliance issues of concern, and would further the 
Commission's goal of promoting self-assessment and internal oversight 
of compliance matters. The Commission notes that the requirement for an 
annual discussion would not preclude the board of directors or the 
senior officer from meeting with the CCO more frequently.\33\
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    \33\ In addition to the board of directors or the senior 
officer, under the Commission's proposed Sec.  39.13(g), a DCO's 
Risk Management Committee would be required to review the 
performance of the CCO and make recommendations to the board. See 75 
FR at 63750.
---------------------------------------------------------------------------

    Proposed Sec.  39.10(c)(1)(iv) would require that a change in the 
designation of the individual serving as the CCO be reported to the 
Commission, in accordance with the requirements of proposed Sec.  
39.19(c)(4)(xi).\34\
---------------------------------------------------------------------------

    \34\ The notification requirement is being proposed by the 
Commission in a separate notice of proposed rulemaking.
---------------------------------------------------------------------------

    The Dodd-Frank Act sets forth the duties of a CCO,\35\ and proposed 
Sec.  39.10(c)(2) codifies those duties in paragraphs (i)-(vi).\36\ The 
Commission believes the statutory duties are largely self-explanatory, 
but in the interest of clarity, those duties are briefly discussed.
---------------------------------------------------------------------------

    \35\ See Section 5b(i)(2) of the CEA; 7 U.S.C. 7a-1(i)(2).
    \36\ The Commission notes, however, that the first statutory 
requirement identified under the heading ``duties,'' i.e., that the 
CCO report to the board of directors or the senior officer, is 
codified in proposed Sec.  39.10(c)(1)(ii).
---------------------------------------------------------------------------

    Proposed Sec.  39.10(c)(2)(i) would require the CCO to review the 
DCO's compliance with each core principle.
    Under proposed Sec.  39.10(c)(2)(ii), in consultation with the 
board of directors or the senior officer, the CCO also would be 
required to resolve any conflicts of interest that may arise. These 
conflicts would include: Conflicts between business considerations and 
compliance requirements; conflicts between the consideration to 
restrict clearing membership to certain types of clearing members and 
the requirement that a DCO provide fair and open access; conflicts 
between and among different categories of clearing members of the DCO; 
conflicts between a DCO's clearing members and its management; and 
conflicts between a DCO's management and members of the board of 
directors.
    Proposed Sec. Sec.  39.10(c)(2)(iii) and (iv) would require the CCO 
to administer each policy and procedure that is required under Section 
5b of the CEA, and ensure compliance with the CEA and Commission 
regulations relating to agreements, contracts, or transactions, and 
with Commission regulations under Section 5b of the CEA, respectively. 
Under proposed Sec.  39.10(c)(2)(v), the CCO also would establish 
procedures for the remediation of noncompliance issues identified by 
the CCO through a compliance office review, look-back, internal or 
external audit finding, self-reported error, or validated complaint. 
Finally, under proposed Sec.  39.10(c)(2)(vi), a CCO would establish 
and follow appropriate procedures for the handling, management 
response, remediation, retesting, and closing of noncompliance issues.
    In addition to the duties set forth in the Dodd-Frank Act, proposed 
Sec.  39.10(c)(2)(vii) would require a CCO to develop a compliance 
manual designed to promote compliance with the applicable laws, rules, 
and regulations, and a code of ethics designed to prevent ethical 
violations and to promote ethical conduct. The Commission believes that 
these tools are essential to a CCO's ability to fulfill the duties 
imposed by the CEA and the Commission's regulations.
    Section 725(b) of the Dodd-Frank Act requires a CCO to prepare an 
annual report that describes the DCO's compliance with the CEA, 
regulations promulgated under the CEA, and each policy and procedure of 
the DCO, including the code of ethics and conflicts of interest 
policies.\37\ Proposed Sec.  39.10(c)(3) would codify these 
requirements.
---------------------------------------------------------------------------

    \37\ See Section 5b(i)(3) of the CEA; 7 U.S.C. 7a-1(i)(3).
---------------------------------------------------------------------------

    Proposed Sec.  39.10(c)(4) would establish requirements for 
submission of the annual report to the Commission. The rule would 
require the CCO to provide the annual report to the board or the senior 
officer for review prior to submitting the annual report to the 
Commission, and it would require the DCO to record such action in board 
minutes or otherwise, as evidence of compliance with this requirement. 
The proposed rule would further specify that the annual report be 
electronically provided to the Commission not more than 90 days after 
the end of the DCO's fiscal year,\38\ and that it be submitted 
concurrently with the fiscal year-end audited financial statement that 
is required to be furnished to the Commission pursuant to proposed 
Sec.  39.19(c)(3)(ii).\39\
---------------------------------------------------------------------------

    \38\ See also Sec.  1.10(b)(2)(ii) (90-day time period for an 
FCM to submit the Form 1-FR-FCM to the Commission).
    \39\ The annual reporting requirement of proposed Sec.  
39.19(c)(3)(ii) is being proposed by the Commission in a separate 
notice of proposed rulemaking.
---------------------------------------------------------------------------

    The Dodd-Frank Act requires the CCO's annual report to include a 
certification that, under penalty of law, the compliance report is 
accurate and complete.\40\ Proposed Sec.  39.10(c)(4)(ii) would codify 
this certification requirement.
---------------------------------------------------------------------------

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

    Proposed Sec.  39.10(c)(4)(iii) would require a DCO to promptly 
submit an amended annual report if material errors or omissions in the 
report are identified after the report is submitted to the Commission. 
If a DCO is unable to submit an annual report within 90 days after the 
end of the DCO's fiscal year, proposed Sec.  39.10(c)(4)(iv) would 
permit the DCO to request that the Commission extend the deadline, 
provided the DCO's failure to submit the report in a timely manner 
could not be avoided without unreasonable effort or expense. Extensions 
of the deadline would be granted at the discretion of the Commission.
    Proposed Sec.  39.10(c)(5) would require a DCO to maintain: (i) A 
copy of the policies and procedures adopted in furtherance of 
compliance with the CEA and Commission regulations; (ii) copies of 
materials, including written reports provided to the board of directors 
or the senior officer in connection with review of the annual report; 
and (iii) any records relevant to the DCO's annual report, including 
work papers and financial data. These records are designed to provide 
Commission staff with a basis upon which to determine whether the DCO 
has complied with the applicable Commission regulations and DCO rules 
and policies. The DCO would be required to maintain these records in 
accordance with Sec.  1.31 and proposed Sec.  39.20 of the Commission's 
regulations.
    The Commission specifically seeks comment on the degree of 
flexibility in the reporting structure for CCOs that should be afforded 
under the proposed rules. Specifically, the Commission requests comment 
on: (i) Whether it would be more appropriate for a CCO to report to the 
senior officer or the board of directors; (ii) whether the senior 
officer or board of directors generally is a stronger advocate of 
compliance matters within an organization; and (iii) whether the 
proposed rules allow for sufficient flexibility with regard to a DCO's 
business structure.
    The Commission also is seeking comment on whether additional 
limitations should be placed on the persons who may be designated as a 
CCO. For example, should the

[[Page 77582]]

Commission restrict the CCO position from being held by an attorney who 
represents the DCO or its board of directors, such as an in-house or 
general counsel? The rationale for such a restriction is based on the 
concern that the interests of defending the DCO would be in conflict 
with the duties of the CCO.
    The Commission specifically seeks comment on whether there is a 
need for a regulation requiring the DCO to insulate a CCO from undue 
pressure and coercion. Is it necessary to adopt rules to address the 
potential conflict between and among compliance interests, commercial 
interests, and ownership interests of a DCO? If there is no need for 
such a provision, how would such potential conflicts be addressed?
    The Commission additionally requests comment on an appropriate 
effective date for the CCO requirements. In particular, for a DCO that 
does not currently have an employee designated to perform the function 
of a CCO, what is a reasonable time frame for hiring a CCO and for 
implementing the required compliance policies and procedures set forth 
in Sec.  39.10?

F. Rule Enforcement Requirements

    Section 725(c) of the Dodd-Frank Act amended Core Principle H, Rule 
Enforcement, to require a DCO to maintain adequate arrangements and 
resources for the effective monitoring and enforcement of compliance 
with its rules and resolution of disputes.\41\ Proposed Sec.  
39.17(a)(1) would codify these requirements. Section 725(c) of the 
Dodd-Frank Act also required a DCO to have the authority and ability to 
discipline, limit, suspend, or terminate the activities of a member or 
participant due to a violation by the member or participant of any rule 
of the derivatives clearing organization.\42\ Proposed Sec.  
39.17(a)(2) would codify this requirement. Additionally, pursuant to 
the reporting requirement of Core Principle H, proposed Sec.  
39.17(a)(3) would cross-reference the proposed rule enforcement 
reporting requirements of proposed Sec.  39.19(c)(4)(xiii).\43\
---------------------------------------------------------------------------

    \41\ Core Principle H provides that:
    Each derivatives clearing organization shall--
    (i) maintain adequate arrangements and resources for--
    (I) the effective monitoring and enforcement of compliance with 
the rules of the derivatives clearing organization; and
     (II) the resolution of disputes;
    (ii) have the authority and ability to discipline, limit, 
suspend, or terminate the activities of a member or participant due 
to a violation by the member or participant of any rule of the 
derivatives clearing organization; and
    (iii) report to the Commission regarding rule enforcement 
activities and sanctions imposed against members and participants as 
provided in clause (ii).
    See Section 5b(c)(2)(H) of the CEA; 7 U.S.C. 7a-1(c)(2)(H).
    \42\ Id.
    \43\ The Commission is proposing reporting requirements in a 
separate notice of proposed rulemaking.
---------------------------------------------------------------------------

    Under proposed Sec.  39.17(b), the board of directors of a DCO may 
delegate to the DCO's Risk Management Committee responsibility for 
compliance with the requirements of paragraph (a) of Sec.  39.17, 
unless the responsibilities are otherwise required to be carried out by 
the CCO.
    Finally, proposed Sec.  39.17(c) would cross-reference proposed 
Sec.  39.10(c)(2)(ii), which provides the CCO with the duty to resolve 
conflicts of interest.\44\
---------------------------------------------------------------------------

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

G. Antitrust Considerations

    Section 725(c) of the Dodd-Frank Act amended Core Principle N, 
Antitrust Considerations, conforming the standard for DCOs to the 
standard applied to DCMs under Core Principle 19.\45\ Proposed Sec.  
39.23 would codify Core Principle N as amended by the Dodd-Frank Act. 
The Commission is taking the same approach with respect to DCM Core 
Principle 19, but requests comment on whether there are additional 
standards or requirements that should be imposed to more effectively 
implement the purposes of DCO Core Principle N.
---------------------------------------------------------------------------

    \45\ Core Principle N provides as follows: ``Unless necessary or 
appropriate to achieve the purposes of this Act, a derivatives 
clearing organization shall not--(i) adopt any rule or take any 
action that results in any unreasonable restraint of trade; or (ii) 
impose any material anticompetitive burden.'' See Section 
5b(c)(2)(N) of the CEA; 7 U.S.C. 7a-1(c)(2)(N). See also Section 
5(d)(19) of the CEA; 7 U.S.C. 7(d)(19) (DCM Core Principle 19); and 
proposed Sec.  38.100 of the Commission's regulations, which is 
being proposed by the Commission in a separate notice of proposed 
rulemaking.
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H. Legal Risk Requirements

    Section 725(c) of the Dodd-Frank Act set forth a new Core Principle 
R, Legal Risk. Pursuant to Core Principle R, ``[e]ach derivatives 
clearing organization shall have a well-founded, transparent, and 
enforceable legal framework for each aspect of the activities of the 
derivatives clearing organization.'' \46\ This core principle is 
consistent with the recommendations of CPSS-IOSCO, which conclude that 
``if the legal framework [of a central counterparty (CCP), in this 
case, a DCO] is underdeveloped, opaque or inconsistent, the resulting 
legal risk could undermine the [CCP]'s ability to operate 
effectively,'' and increase the likelihood that market participants may 
suffer a loss because the CCP's rules, procedures, and contracts that 
support its activities, property rights, and other interests are not 
supported by relevant laws and regulations.\47\
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    \46\ Section 5b(c)(2)(R) of the CEA; 7 U.S.C. 7a-1(c)(2)(R).
    \47\ See Comm. on Payment & Settlement Sys. & Technical Comm. of 
the Int'l Org. of the Sec. Comm'ns CPSS-IOSCO, Recommendations for 
Central Counterparties, at 13, CPSS Publication No. 64 (Nov. 2004). 
In November 2004, the CPSS-IOSCO Task Force on Securities Settlement 
Systems issued Recommendations for Central Counterparties. The CPSS-
IOSCO recommendations identify legal risk as the risk that a CCP's 
rules, procedures, and contracts are not supported by relevant laws 
and regulations. Id. at 9. Under CPSS-IOSCO Recommendation 1, a CCP 
should mitigate legal risk through the development of a sound, legal 
framework. Id. at 4, 13. The Commission notes that CPSS and IOSCO 
are currently reviewing this standard and it may be revised.
---------------------------------------------------------------------------

    Proposed Sec.  39.27(a) would address these concerns, in part, by 
requiring a DCO to be duly organized, legally authorized to conduct 
clearing business in the relevant jurisdiction, and to remain in good 
standing at all times. The proposed rule also would require a DCO that 
provides clearing services outside the United States to be duly 
organized to conduct business in the relevant jurisdiction, to remain 
in good standing at all times, and to be authorized by the appropriate 
foreign licensing authority.
    Proposed Sec.  39.27 would set forth requirements for various 
activities of a DCO, as applicable. Proposed Sec.  39.27(b)(1) would 
require the legal framework of a DCO to provide for the DCO to act as a 
counterparty, including novation. Through novation, the DCO is 
substituted as the counterparty to both the buyer and the seller of the 
original contract.
    Proposed Sec.  39.27(b)(2) would require the legal framework of a 
DCO to address netting arrangements. Netting reduces the number and 
value of deliveries and payments needed to settle a set of transactions 
and reduces the potential losses to a DCO in the event of a clearing 
member's default.
    Proposed Sec.  39.27(b)(3) would require the legal framework to 
provide for the DCO's interest in collateral. Generally, collateral 
arrangements involve either a pledge or a title transfer. In either 
case, a DCO should have a high degree of assurance that its interest 
has been validly created in the relevant jurisdiction, validly 
perfected, if necessary, and is enforceable under applicable law.
    Proposed Sec.  39.27(b)(4) would require the legal framework to 
provide for the steps that the DCO would take to address the default of 
a clearing member, including but not limited to, the unimpeded ability 
to liquidate

[[Page 77583]]

collateral and close out or transfer positions in a timely manner. A 
DCO must act quickly in the event of a clearing member's default, and 
ambiguity over the enforceability of its procedures could delay, and 
possibly prevent altogether, a DCO from taking actions that fulfill its 
obligations to non-defaulting clearing members or minimize its 
potential losses.
    A critical issue in a DCO's settlement arrangements is the timing 
of the finality of funds transfers between the DCO's settlement 
accounts and the accounts of its clearing members. To address this, 
proposed Sec.  39.27(b)(5) would require the legal framework of a DCO 
to ensure that its settlement bank arrangements provide that funds 
transfers are final, i.e., irrevocable and unconditional, when the 
DCO's accounts are debited and credited.
    In circumstances where a DCO crosses borders through linkages, 
remote clearing members, or the taking of collateral, the rules 
governing the DCO's activities should clearly indicate the law that is 
intended to apply to each aspect of a DCO's operations. Potential 
conflicts of law should be identified and the DCO should address 
conflict of law issues when there is a difference in the substantive 
laws of the jurisdictions that have potential interests in a DCO's 
activities. Proposed Sec.  39.27(c)(1) would require the legal 
framework of a DCO that provides clearing services outside the United 
States to identify and address any conflict of law issues and, in 
entering into cross-border agreements, to specify a choice of law.
    Proposed Sec.  39.27(c)(2) would require a DCO to be able to 
demonstrate the enforceability of its choice of law in relevant 
jurisdictions and that its rules, procedures and contracts are 
enforceable in all relevant jurisdictions. This could be accomplished, 
for example, by means of a legal opinion.
    The Commission solicits comment as to the legal risks addressed in 
proposed Sec.  39.27 and whether the rule should address additional 
legal risks.

III. Technical Amendments

    Section 39.3(a) currently requires that an organization applying 
for DCO registration must ``file electronically an application for 
registration with the Secretary of the Commission at its Washington, 
DC, headquarters.'' The Commission is proposing to revise this 
provision and Sec. Sec.  39.3(c) (withdrawal of an application for 
registration) and 39.3(f) (request for vacation of registration) by 
instructing applicants to file electronically an application for 
registration with the Secretary in the form and manner provided by the 
Commission. Given the shift from paper-based to electronic submissions, 
it is no longer necessary to specify the location of the Secretary. 
Moreover, because the Commission may modify procedures for electronic 
submissions from time to time, the proposed rule would not specify 
filing instructions. The Commission's filing procedures will be posted 
on its Web site and any further questions can be addressed to the 
Office of the Secretary.
    The Commission also is proposing conforming amendments to 
paragraphs (a)(1), (c), (e), and (g) of Sec.  39.3, to reflect the 
deletion of current paragraphs (a)(3) and (b) related to the 
elimination of the 90-day expedited review period for DCO applications.
    In addition, the Commission is proposing amendments to the 
delegation provision of current paragraph (g), to correct the reference 
to ``delegates,'' by substituting the word ``designee,'' in reference 
to action taken by the Director of the Division of Clearing and 
Intermediary Oversight or the Director's designee with the concurrence 
of the General Counsel or the General Counsel's designee.
    The Commission is proposing to revise Sec.  39.4(c)(2) to remove 
the reference to accepting for clearing a new product that is not 
traded on a ``derivatives transaction execution facility'' and 
inserting in its place a reference to a ``swap execution facility.''

IV. Effective Date

    The Commission is proposing that the effective date for the 
proposed regulations, except those relating to the CCO under proposed 
Sec.  39.3(c), be 30 days after publication of final rules in the 
Federal Register. The Commission is proposing that the requirements for 
CCOs become effective not more than 180 days from the date the final 
rules are published in the Federal Register. The Commission believes 
that this would give DCOs adequate time to implement the CCO 
regulations which, depending on the DCO, might include hiring a CCO and 
putting into place a compliance program. The Commission requests 
comment on whether the proposed effective dates are appropriate and, if 
not, the Commission further requests comment on possible alternative 
effective dates and the basis for any such alternative dates.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \48\ requires Federal 
agencies, in promulgating regulations, to consider the impact of those 
regulations on small businesses. The regulations adopted herein will 
affect DCOs. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its regulations on small entities in 
accordance with the RFA,\49\ and it has previously determined that DCOs 
are not small entities for the purpose of the RFA.\50\ Accordingly, 
pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of the Commission, 
certifies that the proposed regulations will not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \48\ 5 U.S.C. 601 et seq.
    \49\ ``Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act,'' 
47 FR 18618 (Apr. 30, 1982).
    \50\ See ``A New Regulatory Framework for Clearing 
Organizations,'' 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \51\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number. OMB has not yet assigned a control number to the 
new collection.
---------------------------------------------------------------------------

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

    This proposed rulemaking would result in new collection of 
information requirements within the meaning of the PRA. The Commission 
therefore is submitting this proposal to the Office of Management and 
Budget (``OMB'') for review. If adopted, responses to this collection 
of information would be mandatory.
    The Commission will protect proprietary information according to 
the Freedom of Information Act and 17 CFR part 145, ``Commission 
Records and Information.'' In addition, Section 8(a)(1) of the Act 
strictly prohibits the Commission, unless specifically authorized by 
the Act, from making public ``data and information that would 
separately disclose the business transactions or market positions of 
any person and trade secrets or names of customers.'' The Commission 
also is required to protect certain information contained in a 
government system of records according to the Privacy Act of 1974, 5 
U.S.C. 552a.
1. Information Provided by Reporting Entities/Persons
    Section 725 of the Dodd-Frank Act and proposed regulations require 
each

[[Page 77584]]

respondent to file an annual report with the Commission. Commission 
staff estimates that each respondent would expend 40-80 hours to 
prepare each annual report, depending on the size of the DCO. 
Commission staff estimates that respondents could expend $4,000 to 
$8,000 annually, based on an hourly cost of $100, to comply with the 
proposed regulations.
    The proposed regulations also require each respondent to retain 
certain records. Each respondent must retain: (1) A copy of the 
policies and procedures adopted in furtherance of compliance with the 
CEA; (2) copies of materials, including written reports provided to the 
board of directors in connection with the board's review of the annual 
report; and (3) any records relevant to the annual report, including, 
but not limited to, work papers and other documents that form the basis 
of the report, and memoranda, correspondence, other documents, and 
records that are (a) created, sent or received in connection with the 
annual report and (b) contain conclusions, opinions, analyses, or 
financial data related to the annual report. Staff believes the cost of 
keeping these electronic documents will not exceed more than $1000 
annually.
2. Information Collection Comments
    The Commission invites the public and other federal agencies to 
comment on any aspect of the reporting and recordkeeping burdens 
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission 
solicits comments in order to: (i) Evaluate whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have practical utility; (ii) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collection of information; (iii) 
determine whether there are ways to enhance the quality, utility, and 
clarity of the information to be collected; and (iv) minimize the 
burden of the collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at 
OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy 
of submitted comments so that they can be summarized and addressed in 
the final rule. Refer to the Addresses section of this notice of 
proposed rulemaking for comment submission instructions to the 
Commission. A copy of the supporting statements for the collections of 
information discussed above may be obtained by visiting RegInfo.gov. 
OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is most assured of being fully effective 
if received by OMB (and the Commission) within 30 days after 
publication of this notice of proposed rulemaking.

C. Cost-Benefit Analysis

    Section 15(a) of the CEA \52\ requires the Commission to consider 
the costs and benefits of its actions before issuing a rulemaking under 
the CEA. By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of a rule or to determine whether the 
benefits of the rulemaking outweigh its costs; rather, it requires that 
the Commission ``consider'' the costs and benefits of its action. 
Section 15(a) further specifies that the costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission may in its discretion give 
greater weight to any one of the five enumerated areas and could in its 
discretion determine that, notwithstanding its costs, a particular rule 
is necessary or appropriate to protect the public interest or to 
effectuate any of the provisions or accomplish any of the purposes of 
the CEA.
---------------------------------------------------------------------------

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

Summary of Proposed Requirements
    Proposed amendments to part 39 of the Commission's regulations 
would establish the regulatory standards for compliance with DCO core 
principles regarding compliance, rule enforcement, antitrust, and legal 
risk, as well as CCO requirements set forth in Section 5b of the CEA. 
The proposed amendments to part 39 also would revise procedures for DCO 
applications, clarify procedures for the transfer of a DCO 
registration, and add requirements for approval of DCO rules 
establishing a portfolio margining program for customer accounts 
carried by an FCM/BD.
Costs
    The Commission has determined that the cost to market participants 
and the public if these rules are not adopted could be substantial. 
Significantly, without these rules to promote a culture of 
institutional ethics and compliance, sound risk management and the 
financial integrity of the futures markets would not be strengthened, 
to the detriment of market participants and the public. Moreover, 
competitiveness would be affected without the prohibition against DCO 
rules and other actions that would result in unreasonable restraints of 
trade or material, anticompetitive burdens.
Benefits
    With respect to benefits, the Commission has determined that the 
benefits of the proposed rules are many and substantial. DCO 
registration applications will be processed transparently and 
efficiently, making clearing services available to the futures and swap 
markets, in order to protect the integrity of these markets through the 
sound risk management practices associated with clearing and the 
efficiency that competition between clearinghouses will foster. The 
protection of market participants, financial integrity of the markets, 
and sound risk management will further be promoted by the compliance of 
each DCO with the rules and standards that are being adopted to 
implement the core principles, notably those associated with conflicts 
of interest, portfolio margining, financial safeguards, and legal 
certainty regarding margin, member defaults, settlement and funds 
transfers, and conflicts of law.
    Public Comment. The Commission invites public comment on its cost-
benefit considerations. Commenters are also invited to submit any data 
or other information that they may have quantifying or qualifying the 
costs and benefits of the Proposal with their comment letters.

List of Subjects

17 CFR Part 1

    Definitions, Commodity futures, and Swaps.

17 CFR Part 39

    Definitions, Commodity futures, Reporting and recordkeeping 
requirements, and Swaps.

    In light of the foregoing, the Commission hereby proposes to amend 
parts 1 and 39 of Title 17 of the Code of Federal Regulations as 
follows:

[[Page 77585]]

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

Authority and Issuance

    1. The authority for part 1 is revised to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 
13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Dodd-
Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-
203, 124 Stat. 1376 (2010).

    2. Amend Sec.  1.3 by revising paragraphs (c), (d), and (k), and 
adding paragraphs (jjj), (kkk), (lll), (mmm), (nnn), and (ooo) to read 
as follows:

Sec.  1.3  Definitions.

* * * * *
    (c) Clearing member. This term means any person that has clearing 
privileges such that it can process, clear and settle trades through a 
derivatives clearing organization on behalf of itself or others. The 
derivatives clearing organization need not be organized as a membership 
organization.
    (d) Clearing organization or derivatives clearing organization. 
This term means a clearinghouse, clearing association, clearing 
corporation, or similar entity, facility, system, or organization that, 
with respect to an agreement, contract, or transaction--
    (1) Enables each party to the agreement, contract, or transaction 
to substitute, through novation or otherwise, the credit of the 
derivatives clearing organization for the credit of the parties;
    (2) Arranges or provides, on a multilateral basis, for the 
settlement or netting of obligations resulting from such agreements, 
contracts, or transactions executed by participants in the derivatives 
clearing organization; or
    (3) Otherwise provides clearing services or arrangements that 
mutualize or transfer among participants in the derivatives clearing 
organization the credit risk arising from such agreements, contracts, 
or transactions executed by the participants.
    (4) Exclusions. The terms clearing organization and derivatives 
clearing organization do not include an entity, facility, system, or 
organization solely because it arranges or provides for--
    (i) Settlement, netting, or novation of obligations resulting from 
agreements, contracts or transactions, on a bilateral basis and without 
a central counterparty;
    (ii) Settlement or netting of cash payments through an interbank 
payment system; or
    (iii) Settlement, netting, or novation of obligations resulting 
from a sale of a commodity in a transaction in the spot market for the 
commodity.
* * * * *
    (k) Customer; commodity customer; swap customer. These terms have 
the same meaning and refer to a customer trading in any commodity named 
in the definition of commodity herein, or in any swap as defined in 
section 1a(47) of the Act: Provided, however, an owner or holder of a 
proprietary account as defined in paragraph (y) of this section shall 
not be deemed to be a customer within the meaning of section 4d of the 
Act, the regulations that implement sections 4d and 4f of the Act and 
Sec.  1.35, and such an owner or holder of such a proprietary account 
shall otherwise be deemed to be a customer within the meaning of the 
Act and Sec. Sec.  1.37 and 1.46 and all other sections of these rules, 
regulations, and orders which do not implement sections 4d and 4f of 
the Act.
* * * * *
    (jjj) Clearing initial margin. This term means initial margin 
posted by a clearing member with a derivatives clearing organization.
    (kkk) Customer initial margin. This term means initial margin 
posted by a customer with a futures commission merchant, or by a non-
clearing member futures commission merchant with a clearing member.
    (lll) Initial margin. This term means money, securities, or 
property posted by a party to a futures, option, or swap as performance 
bond to cover potential future exposures arising from changes in the 
market value of the position.
    (mmm) Margin call. This term means a request from a futures 
commission merchant to a customer to post customer initial margin; or a 
request by a derivatives clearing organization to a clearing member to 
post clearing initial margin or variation margin.
    (nnn) Spread margin. This term means reduced initial margin that 
takes into account correlations between certain related positions held 
in a single account.
    (ooo) Variation margin. This term means a payment made by a party 
to a futures, option, or swap to cover the current exposure arising 
from changes in the market value of the position since the trade was 
executed or the previous time the position was marked to market.

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

Authority and Issuance

    3. The authority for part 39 is revised to read as follows:

    Authority:  7 U.S.C. 2, 5, 6, 6d, 7a-1,7a-2, and 7b as amended 
by the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (2010).

    4. Amend Sec.  39.1 by:
    a. Redesignating the existing text as paragraph (a);
    b. Adding a new heading to newly designated paragraph (a); and
    c. Adding a new paragraph (b) to read as follows:

Sec.  39.1  Scope and Definitions.

    (a) Scope. * * *
    (b) Definitions. For the purposes of this part,
    Back test means a test that compares a derivatives clearing 
organization's initial margin requirements with historical price 
changes to determine the extent of actual margin coverage.
    Compliance policies and procedures means all policies, procedures, 
codes, including a code of ethics, safeguards, rules, programs, and 
internal controls that are required to be adopted or established by a 
derivatives clearing organization pursuant to the Act, Commission 
regulations, or orders, or that otherwise facilitate compliance with 
the Act and Commission regulations.
    Customer account or customer origin means a clearing member's 
account held on behalf of customers, as defined in Sec.  1.3(k) of this 
chapter. A customer account is also a futures account, as that term is 
defined by Sec.  1.3(vv) of this chapter.
    House account or house origin means a clearing member's combined 
proprietary accounts, as defined in Sec.  1.3(y) of this chapter.
    Key personnel means derivatives clearing organization personnel who 
play a significant role in the operations of the derivatives clearing 
organization, the provision of clearing and settlement services, risk 
management, or oversight of compliance with the Act and Commission 
regulations and orders. Key personnel include, but are not limited to, 
those persons who are or perform the functions of any of the following: 
chief executive officer; president; chief compliance officer; chief 
operating officer; chief risk officer; chief financial officer; chief 
technology officer; and emergency contacts or persons who are 
responsible for business continuity or disaster recovery planning or 
program execution.
    Stress test means a test that compares the impact of a potential 
price move, change in option volatility, or change in other inputs that 
affect the value of a position, to the financial resources of a 
derivatives clearing organization, clearing member, or large trader, to

[[Page 77586]]

determine the adequacy of such financial resources.
    Systemically important derivatives clearing organization means a 
financial market utility that is a derivatives clearing organization 
registered under section 5b of the Act (7 U.S.C. 7a-1), which has been 
designated by the Financial Stability Oversight Council to be 
systemically important.
    5. Amend Sec.  39.3 by revising paragraph (a)(1), removing 
paragraph (a)(3), removing and reserving paragraph (b), revising 
paragraphs (c), (e), (f), and (g)(1), and adding paragraph (h) to read 
as follows:

Sec.  39.3  Procedures for registration.

    (a) * * *
    (1) An organization desiring to be registered as a derivatives 
clearing organization shall file electronically an application for 
registration with the Secretary of the Commission in the form and 
manner provided by the Commission. The Commission will review the 
application for registration as a derivatives clearing organization 
pursuant to the 180-day timeframe and procedures specified in section 
6(a) of the Act. The Commission may approve or deny the application or, 
if deemed appropriate, register the applicant as a derivatives clearing 
organization subject to conditions.
    * * *
    (b) [Reserved].
    (c) Withdrawal of application for registration. An applicant for 
registration may withdraw its application submitted pursuant to 
paragraph (a) of this section by filing electronically such a request 
with the Secretary of the Commission in the form and manner provided by 
the Commission. Withdrawal of an application for registration shall not 
affect any action taken or to be taken by the Commission based upon 
actions, activities, or events occurring during the time that the 
application for registration was pending with the Commission.
* * * * *
    (e) Reinstatement of dormant registration. Before listing or 
relisting contracts for clearing, a dormant registered derivatives 
clearing organization as defined in Sec.  40.1 of this chapter must 
reinstate its registration under the procedures of paragraph (a) of 
this section; provided, however, that an application for reinstatement 
may rely upon previously submitted materials that still pertain to, and 
accurately describe, current conditions.
    (f) Request for vacation of registration. A registered derivatives 
clearing organization may vacate its registration under section 7 of 
the Act by filing electronically such a request with the Secretary of 
the Commission in the form and manner provided by the Commission. 
Vacation of registration shall not affect any action taken or to be 
taken by the Commission based upon actions, activities or events 
occurring during the time that the facility was registered by the 
Commission.
    (g) * * *
    (1) The Commission hereby delegates, until it orders otherwise, to 
the Director of the Division of Clearing and Intermediary Oversight or 
the Director's designee, with the concurrence of the General Counsel or 
the General Counsel's designee, the authority to notify an applicant 
seeking designation under section 6(a) of the Act that the application 
is materially incomplete and the running of the 180-day period is 
stayed.
* * * * *
    (h) Request for transfer of registration and open interest. (1) In 
anticipation of a corporate change that will result in the transfer of 
all or substantially all of a derivatives clearing organization's 
assets to another legal entity, the derivatives clearing organization 
shall submit a request for approval to transfer the derivatives 
clearing organization's registration and positions comprising open 
interest for clearing and settlement.
    (2) Timing of submission and other procedural requirements. (i) The 
request shall be submitted no later than three months prior to the 
anticipated corporate change, or as otherwise permitted under Sec.  
39.19(c)(4)(x)(C) of this part.
    (ii) The derivatives clearing organization shall submit a request 
for transfer by filing electronically such a request with the Secretary 
of the Commission in the form and manner provided by the Commission.
    (iii) The derivatives clearing organization shall submit a 
confirmation of change report pursuant to Sec.  39.19(c)(4)(x)(D) of 
this part.
    (3) Required information. The request shall include the following:
    (i) The underlying agreement that governs the corporate change;
    (ii) A narrative description of the corporate change, including the 
reason for the change and its impact on the derivatives clearing 
organization's financial resources, governance, and operations, and its 
impact on the rights and obligations of clearing members and market 
participants holding the positions that comprise the derivatives 
clearing organization's open interest;
    (iii) A discussion of the transferee's ability to comply with the 
Act, including the core principles applicable to derivatives clearing 
organizations, and the Commission's regulations thereunder;
    (iv) The governing documents of the transferee, including but not 
limited to articles of incorporation and bylaws;
    (v) The transferee's rules marked to show changes from the current 
rules of the derivatives clearing organization;
    (vi) A list of contracts, agreements, transactions or swaps for 
which the DCO requests transfer of open interest;
    (vii) A representation by the derivatives clearing organization 
that it is in compliance with the Act, including the core principles 
applicable to derivatives clearing organizations, and the Commission's 
regulations thereunder; and
    (viii) A representation by the transferee that it understands that 
the derivatives clearing organization is a regulated entity that must 
comply with the Act, including the core principles applicable to 
derivatives clearing organizations, and the Commission's regulations 
thereunder, in order to maintain its registration as a derivatives 
clearing organization; and further, that the transferee will continue 
to comply with all self-regulatory requirements applicable to a 
derivatives clearing organization under the Act and the Commission's 
regulations thereunder.
    (4) Commission determination. The Commission will review a request 
as soon as practicable, and based on the Commission's determination as 
to the transferee's ability to continue to operate the DCO in 
compliance with the Act and the Commission's regulations thereunder, 
such request will be approved or denied pursuant to a Commission order.
    6. Amend Sec.  39.4 by revising paragraph (c)(2) and adding 
paragraph (e) to read as follows:

Sec.  39.4  Procedures for implementing derivatives clearing 
organization rules and clearing new products.

* * * * *
    (c) * * *
    (2) Acceptance of certain new products for clearing. A derivatives 
clearing organization that accepts for clearing a new product that is 
not traded on a designated contract market or a registered swap 
execution facility must submit to the Commission any rules establishing 
the terms and conditions of the product that make it acceptable for 
clearing with a certification that the clearing of the product and the 
rules and terms and conditions comply with the Act and the rules 
thereunder

[[Page 77587]]

pursuant to the procedures of Sec.  40.2 of this chapter.
* * * * *
    (e) Holding securities in a futures portfolio margining account. A 
derivatives clearing organization seeking to provide a portfolio 
margining program under which securities would be held in a futures 
account as defined in Sec.  1.3(vv) of this chapter, shall submit rules 
to implement such portfolio margining program for Commission approval 
in accordance with Sec.  40.5 of this chapter. Concurrent with the 
submission of such rules for Commission approval, the derivatives 
clearing organization shall petition the Commission for an order under 
section 4d of the Act.
    7. Add Sec.  39.10 to read as follows:

Sec.  39.10  Compliance with Core Principles.

    (a) To be registered and to maintain registration as a derivatives 
clearing organization, a derivatives clearing organization shall comply 
with each core principle set forth in section 5b(c)(2) of the Act and 
any requirement that the Commission may impose by rule or regulation 
pursuant to section 8a(5) of the Act; and
    (b) Subject to any rule or regulation prescribed by the Commission, 
a registered derivatives clearing organization shall have reasonable 
discretion in establishing the manner by which it complies with each 
core principle.
    (c) Chief Compliance Officer. (1) Designation. Each derivatives 
clearing organization shall establish the position of chief compliance 
officer, designate an individual to serve as the chief compliance 
officer, and provide the chief compliance officer with the full 
responsibility and authority to develop and enforce, in consultation 
with the board of directors or the senior officer, appropriate 
compliance policies and procedures, as defined in Sec.  39.1(b), to 
fulfill the duties set forth in the Act and Commission regulations.
    (i) The individual designated to serve as chief compliance officer 
shall have the background and skills appropriate for fulfilling the 
responsibilities of the position. No individual who would be 
disqualified from registration under sections 8a(2) or 8a(3) of the Act 
may serve as a chief compliance officer.
    (ii) The chief compliance officer shall report to the board of 
directors or the senior officer of the derivatives clearing 
organization. The board of directors or the senior officer shall 
approve the compensation of the chief compliance officer.
    (iii) The chief compliance officer shall meet with the board of 
directors or the senior officer at least once a year to discuss the 
effectiveness of the compliance policies and procedures, as well as the 
administration of those policies and procedures by the chief compliance 
officer.
    (iv) A change in the designation of the individual serving as the 
chief compliance officer of the derivatives clearing organization shall 
be reported to the Commission in accordance with the requirements of 
Sec.  39.19(c)(4)(xi) of this part.
    (2) Chief Compliance Officer Duties. The chief compliance officer's 
duties shall include, but are not limited to:
    (i) Reviewing the derivatives clearing organization's compliance 
with the core principles set forth in section 5b of the Act (7 U.S.C. 
7a-1), and the Commission's regulations thereunder;
    (ii) In consultation with the board of directors or the senior 
officer, resolving any conflicts of interest that may arise;
    (iii) Administering each policy and procedure that is required 
under section 5b of the Act (7 U.S.C. 7a-1);
    (iv) Ensuring compliance with the Act and Commission regulations 
relating to agreements, contracts, or transactions, and with Commission 
regulations prescribed under section 5b of the Act (7 U.S.C. 7a-1);
    (v) Establishing procedures for the remediation of noncompliance 
issues identified by the chief compliance officer through any 
compliance office review, look-back, internal or external audit 
finding, self-reported error, or validated complaint;
    (vi) Establishing and following appropriate procedures for the 
handling, management response, remediation, retesting, and closing of 
noncompliance issues; and
    (vii) Establishing a compliance manual designed to promote 
compliance with the applicable laws, rules, and regulations and a code 
of ethics designed to prevent ethical violations and to promote ethical 
conduct.
    (3) Annual report. The chief compliance officer shall, not less 
than annually, prepare and sign a written report that covers the most 
recently completed fiscal year of the derivatives clearing 
organization, and provide the annual report to the board of directors 
or the senior officer. The annual report shall, at a minimum:
    (i) Contain a description of the derivatives clearing 
organization's compliance with respect to the Act and Commission 
regulations, and each of the derivative clearing organization's 
compliance policies and procedures, including the code of ethics and 
conflict of interest policies;
    (ii) Review each core principle, and with respect to each:
    (A) Identify the compliance policies and procedures that ensure 
compliance with the core principle;
    (B) Provide an assessment as to the effectiveness of these policies 
and procedures;
    (C) Discuss areas for improvement, and recommend potential or 
prospective changes or improvements to the DCO's compliance program and 
resources allocated to compliance;
    (iii) List any material changes to compliance policies and 
procedures since the last annual report;
    (iv) Describe the financial, managerial, and operational resources 
set aside for compliance with the Act and Commission regulations;
    (v) Describe any material compliance matters, including incidents 
of noncompliance, since the date of the last annual report and describe 
the corresponding action taken; and
    (vi) Delineate the roles and responsibilities of the DCO's board of 
directors, relevant board committees, and staff in addressing any 
conflict of interest, including any necessary coordination with, or 
notification of, other entities, including regulators.
    (4) Submission of Annual Report to the Commission. (i) Prior to 
submitting the annual report to the Commission, the chief compliance 
officer shall provide the annual report to the board of directors or 
the senior officer of the derivatives clearing organization for review. 
Submission of the report to the board of directors or the senior 
officer shall be recorded in the board minutes or otherwise, as 
evidence of compliance with this requirement.
    (ii) The annual report shall be submitted electronically to the 
Commission not more than 90 days after the end of the derivatives 
clearing organization's fiscal year, concurrently with submission of 
the fiscal year-end audited financial statement that is required to be 
furnished to the Commission pursuant to Sec.  39.19(c)(3)(ii) of this 
part. The report shall include a certification by the chief compliance 
officer that, to the best of his or her knowledge and reasonable 
belief, and under penalty of law, the annual report is accurate and 
complete.
    (iii) The derivatives clearing organization shall promptly submit 
an amended annual report if material errors or omissions in the report 
are identified after submission. An amendment must contain the 
certification required under subparagraph (c)(4)(ii) of this section.
    (iv) A derivatives clearing organization may request from the 
Commission an extension of time to

[[Page 77588]]

submit its annual report in accordance with Sec.  39.19(c)(3) of this 
part.
    (5) Recordkeeping. (i) The derivatives clearing organization shall 
maintain:
    (A) A copy of the compliance policies and procedures, as defined in 
Sec.  39.1(b), and all other policies and procedures adopted in 
furtherance of compliance with the Act and Commission regulations;
    (B) Copies of materials, including written reports provided to the 
board of directors or the senior officer in connection with the review 
of the annual report under paragraph (c)(4)(i) of this section; and
    (C) Any records relevant to the annual report, including, but not 
limited to, work papers and other documents that form the basis of the 
report, and memoranda, correspondence, other documents, and records 
that are created, sent, or received in connection with the annual 
report and contain conclusions, opinions, analyses, or financial data 
related to the annual report.
    (ii) The derivatives clearing organization shall maintain records 
in accordance with Sec.  1.31 of this chapter and Sec.  39.20 of this 
part.
    8. Add Sec.  39.17 to read as follows:

Sec.  39.17  Rule enforcement requirements.

    (a) In general. Each derivatives clearing organization shall: (1) 
Maintain adequate arrangements and resources for the effective 
monitoring and enforcement of compliance with the rules of the 
derivatives clearing organization and the resolution of disputes;
    (2) Have the authority and ability to discipline, limit, suspend, 
or terminate the activities of a clearing member due to a violation by 
the clearing member of any rule of the derivatives clearing 
organization; and
    (3) Report to the Commission regarding rule enforcement activities 
and sanctions imposed against clearing members as provided in paragraph 
(a) (2) of this section, in accordance with Sec.  39.19(c)(4)(xiii) of 
this part.
    (b) Authority to enforce rules. The board of directors of the 
derivatives clearing organization may delegate responsibility for 
compliance with the requirements of paragraph (a) of this section to 
the Risk Management Committee, unless the responsibilities are 
otherwise required to be carried out by the chief compliance officer 
pursuant to the Act or this part.
    9. Add Sec.  39.23 to read as follows:

Sec.  39.23  Antitrust considerations.

    Unless necessary or appropriate to achieve the purposes of the Act, 
a derivatives clearing organization shall not adopt any rule or take 
any action that results in any unreasonable restraint of trade, or 
impose any material anticompetitive burden.
    10. Add Sec.  39.27 to read as follows:

Sec.  39.27  Legal risk considerations.

    (a) Legal Authorization. A derivatives clearing organization shall 
be duly organized, legally authorized to conduct business, and remain 
in good standing at all times in the relevant jurisdictions. If the 
derivatives clearing organization provides clearing services outside 
the United States, it shall be duly organized to conduct business and 
remain in good standing at all times in the relevant jurisdictions, and 
be authorized by the appropriate foreign licensing authority.
    (b) Legal framework. A derivatives clearing organization shall 
operate pursuant to a well-founded, transparent, and enforceable legal 
framework that addresses each aspect of the activities of the 
derivatives clearing organization. As applicable, the framework shall 
provide for:
    (1) The derivatives clearing organization to act as a counterparty, 
including novation;
    (2) Netting arrangements;
    (3) The derivatives clearing organization's interest in collateral;
    (4) The steps that a derivatives clearing organization would take 
to address a default of a clearing member, including but not limited 
to, the unimpeded ability to liquidate collateral and close out or 
transfer positions in a timely manner;
    (5) Finality of settlement and funds transfers that are irrevocable 
and unconditional when effected (when a derivatives clearing 
organization's accounts are debited and credited); and
    (6) Other significant aspects of the derivatives clearing 
organization's operations, risk management procedures, and related 
requirements.
    (c) Conflict of Laws. If a derivatives clearing organization 
provides clearing services outside the United States:
    (1) The derivatives clearing organization shall identify and 
address any conflict of law issues. The derivatives clearing 
organization's contractual agreements shall specify a choice of law.
    (2) The derivatives clearing organization shall be able to 
demonstrate the enforceability of its choice of law in relevant 
jurisdictions and that its rules, procedures, and contracts are 
enforceable in all relevant jurisdictions.

    Issued in Washington, DC, on December 1, 2010 by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to General Regulations and Derivatives Clearing 
Organizations--Commission Voting Summary and Statement of Chairman Gary 
Gensler

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, 
Sommers, Chilton and O'Malia voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule on legal and compliance matters for 
clearinghouses, which would revise procedures for derivatives 
clearing organization (DCO) applications, clarify procedures for the 
transfer of a DCO registration and add requirements for approval of 
DCO rules for portfolio margining of futures and securities in a 
futures account.
    The rule is intended to ensure that sufficient resources are 
devoted to compliance with laws and regulations, which is a core 
component of sound risk management practices. It would fulfill the 
Dodd-Frank Act's requirement that each DCO have a chief compliance 
officer who is responsible for establishing and administering 
compliance policies, as well as resolving certain conflicts of 
interest.
    Finally, the proposed rulemaking would implement DCO Core 
Principles for compliance, rule enforcement, antitrust consideration 
and legal risk, which would promote compliance with the CEA and 
would enhance the integrity of the clearing and settlement process.

[FR Doc. 2010-31029 Filed 12-10-10; 8:45 am]
BILLING CODE 6351-01-P
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