29508 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

1See Committee on Payment and Settlement 

Systems and Technical Committee of the 

International Organization of Securities 

Commissions (‘‘CPSS–IOSCO’’), Principles for 

Financial Market Infrastructures (Apr. 16, 2012), 

available at http://www.bis.org/publ/cpss101a.pdf 

(‘‘PFMI Report’’). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–71699; File No. S7–03–14] 

RIN 3235–AL48 

Standards for Covered Clearing 

Agencies 

Republication 

Editorial Note: Proposed rule document 

2014–05806 was originally published on 

pages 16865 through 16975 in the issue of 

Wednesday, March 26, 2014. In that 

publication the footnotes contained 

erroneous entries. The corrected document is 

republished in its entirety. 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

proposes to amend Rule 17Ad–22 and 

add Rule 17Ab2–2 pursuant to Section 

17A of the Securities Exchange Act of 

1934 (‘‘Exchange Act’’) and the 

Payment, Clearing, and Settlement 

Supervision Act of 2010 (‘‘Clearing 

Supervision Act’’), adopted in Title VIII 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act of 2010 

(‘‘Dodd-Frank Act’’). Among other 

things, the proposed rules would 

establish standards for the operation 

and governance of certain types of 

registered clearing agencies that meet 

the definition of a ‘‘covered clearing 

agency.’’ 

DATES: Submit comments on or before 

May 27, 2014. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/proposed.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

03–14 on the subject line; or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments to Kevin M. 

O’Neill, Deputy Secretary, Securities 

and Exchange Commission, 100 F Street 

NE., Washington, DC 20549–1090. All 

submissions should refer to File 

Number S7–03–14. 

To help us process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/proposed.shtml). 

Comments are also available for Web 

site viewing and printing in the 

Commission’s Public Reference Room, 

100 F Street NE., Washington, DC 20549 

on official business days between the 

hours of 10:00 a.m. and 3:00 p.m. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Katherine Martin, Senior Special 

Counsel; Stephanie Park, Special 

Counsel; Mark Saltzburg, Special 

Counsel; Matthew Lee, AttorneyAdviser; and Abraham Jacob, AttorneyAdviser; Office of Clearance and 

Settlement, Division of Trading and 

Markets, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–7010, at (202) 

551–5710. 

SUPPLEMENTARY INFORMATION: The 

Commission proposes to amend Rule 

17Ad–22 to add new Rule 17Ad–22(e) 

to establish requirements for risk 

management, operations, and 

governance of registered clearing 

agencies that meet the definition of a 

‘‘covered clearing agency.’’ Covered 

clearing agencies would include 

registered clearing agencies that (i) have 

been designated as systemically 

important by the Financial Stability 

Oversight Council (‘‘FSOC’’) and for 

which the Commission is the 

supervisory agency, pursuant to the 

Clearing Supervision Act (‘‘designated 

clearing agencies’’), (ii) provide central 

counterparty (‘‘CCP’’) services for 

security-based swaps or are involved in 

activities the Commission determines to 

have a more complex risk profile, where 

in either case the Commodity Futures 

Trading Commission (‘‘CFTC’’) is not 

the supervisory agency for such clearing 

agency as defined in Section 803(8) of 

the Clearing Supervision Act, or (iii) are 

otherwise determined to be covered 

clearing agencies by the Commission. 

The Commission also proposes to add 

new Rule 17Ad–22(f) to codify the 

Commission’s statutory authority and 

new Rule 17Ab2–2 to establish 

procedures for making determinations 

regarding covered clearing agencies 

under proposed Rule 17Ad–22(e). The 

Commission also proposes to amend 

existing Rule 17Ad–22(d) to limit its 

application to clearing agencies other 

than covered clearing agencies and to 

revise existing Rule 17Ad–22(a) to add 

15 new definitions. The Commission 

has begun, and intends to continue, 

consultation with the FSOC and the 

Board of Governors of the Federal 

Reserve System (‘‘the Board’’) and has 

considered the relevant international 

standards as required by Section 

805(a)(2)(A) of the Clearing Supervision 

Act.1

Table of Contents 

I. Current Regulatory Framework for Clearing 

Agencies 

A. Section 17A of the Exchange Act 

B. OTC Swaps Clearing and the DoddFrank Act 

1. Title VII of the Dodd-Frank Act 

2. Title VIII of the Dodd-Frank Act 

C. Rule 17Ad–22 Under the Exchange Act 

D. Relevant International Standards 

II. Discussion of the Proposed Amendments 

To Rule 17AD–22 and Proposed Rule 

17AB2–2 

A. Overview 

1. Scope of Proposed Rule 17Ad–22(e) 

2. Role of Written Policies and Procedures 

3. Frequency of Review Required Under 

Certain Policies and Procedures 

4. Anticipated Impact of Proposed Rule 

17Ad–22(e) 

5. General Request for Comments 

B. Proposed Rule 17Ad–22(e) 

1. Proposed Rule 17Ad–22(e)(1): Legal Risk 

2. Proposed Rule 17Ad–22(e)(2): 

Governance 

3. Proposed Rule 17Ad–22(e)(3): 

Framework for the Comprehensive 

Management of Risks 

a. Policies and Procedures Requirements, 

Periodic Review, and Annual Board 

Approval 

b. Recovery and Orderly Wind-Down Plans 

c. Risk Management and Internal Audit 

d. Request for Comments 

4. Proposed Rules 17Ad–22(e)(4) through 

(7): Financial Risk Management 

a. Overview of Financial Risks Faced by 

Clearing Agencies 

b. Current Financial Risk Management 

Requirements for CCPs 

c. Proposed Rule 17Ad–22(e)(4): Credit 

Risk 

i. Prefunded Financial Resources 

ii. Combined or Separately Maintained 

Clearing or Guaranty Funds 

iii. Testing the Sufficiency of Financial 

Resources 

iv. Annual Conforming Model Validation 

d. Proposed Rule 17Ad–22(e)(5): Collateral 

e. Proposed Rule 17Ad–22(e)(6): Margin 

i. Active Management of Model Risk 

ii. Collection of Margin 

iii. Ninety-Nine Percent Confidence Level 

iv. Price Data Source 

v. Method for Measuring Credit Exposure 

vi. Backtesting and Sensitivity Analysis 

vii. Annual Conforming Model Validation 

f. Proposed Rule 17Ad–22(e)(7): Liquidity 

Risk 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29509 

i. Sufficient Liquid Resources 

ii. Qualifying Liquid Resources 

iii. Access to Account Services at a Federal 

Reserve Bank or Other Relevant Central 

Bank 

iv. Liquidity Providers 

v. Maintenance and Annual Testing of 

Liquidity Provider Procedures and 

Operational Capacity 

vi. Testing the Sufficiency of Liquid 

Resources 

vii. Annual Conforming Model Validation 

viii. Address Liquidity Shortfalls and Seek 

to Avoid Unwinding Settlement 

ix. Replenishment of Liquid Resources 

x. Feasibility Analysis for ‘‘Cover Two’’ 

g. Request for Comments 

5. Proposed Rule 17Ad–22(e)(8): 

Settlement Finality 

6. Proposed Rule 17Ad–22(e)(9): Money 

Settlements 

7. Proposed Rule 17Ad–22(e)(10): Physical 

Delivery Risks 

8. Proposed Rule 17Ad–22(e)(11): Central 

Securities Depositories 

a. Controls to Safeguard the Rights of 

Securities Issuers and Holders and 

Prevent the Unauthorized Creation or 

Deletion of Securities 

b. Periodic and At Least Daily 

Reconciliation of Securities Maintained 

c. Protect Assets against Custody Risk 

d. Request for Comments 

9. Proposed Rule 17Ad–22(e)(12): 

Exchange-of-Value Settlement Systems 

10. Proposed Rule 17Ad–22(e)(13): 

Participant-Default Rules and Procedures 

a. Address Allocation of Credit Losses 

b. Describe Replenishment of Financial 

Resources 

c. Test Default Procedures Annually and 

Following Material Changes 

d. Request for Comments 

11. Proposed Rule 17Ad–22(e)(14): 

Segregation and Portability 

12. Proposed Rule 17Ad–22(e)(15): General 

Business Risk 

a. Determining Liquid Net Assets for 

Recovery and an Orderly Wind-Down 

b. Requirements for Liquid Net Assets 

c. Plan for Raising Additional Equity 

d. Request for Comments 

13. Proposed Rule 17Ad–22(e)(16): 

Custody and Investment Risks 

14. Proposed Rule 17Ad–22(e)(17): 

Operational Risk Management 

15. Proposed Rule 17Ad–22(e)(18): Access 

and Participation Requirements 

16. Proposed Rule 17Ad–22(e)(19): Tiered 

Participation Agreements 

17. Proposed Rule 17Ad–22(e)(20): Links 

18. Proposed Rule 17Ad–22(e)(21): 

Efficiency and Effectiveness 

19. Proposed Rule 17Ad–22(e)(22): 

Communication Procedures and 

Standards 

20. Proposed Rule 17Ad–22(e)(23): 

Disclosure of Rules, Key Procedures, and 

Market Data 

a. Comprehensive Public Disclosure 

b. Updates to the Comprehensive Public 

Disclosure 

c. Request for Comments 

C. Proposed Rule 17Ab2–2 

1. Determination that a Registered Clearing 

Agency is a Covered Clearing Agency 

2. Determination that a Covered Clearing 

Agency Is Systemically Important in 

Multiple Jurisdictions 

3. Determination that a Clearing Agency 

Has a More Complex Risk Profile 

4. Request for Comments 

D. Proposed Rule 17Ad–22(f) 

E. Proposed Amendment to Rule 17Ad– 

22(d) 

III. Paperwork Reduction Act 

A. Overview and Organization 

B. Summary of Collection of Information 

and Proposed Use of Information for 

Proposed Rule 17Ad–22(e) and Proposed 

Rule 17Ab2–2 

1. Proposed Rules 17Ad–22(e)(1) through 

(3): General Organization 

a. Proposed Rule 17Ad–22(e)(1) 

b. Proposed Rule 17Ad–22(e)(2) 

c. Proposed Rule 17Ad–22(e)(3) 

2. Proposed Rules 17Ad–22(e)(4) through 

(7): Financial Risk Management 

a. Proposed Rule 17Ad–22(e)(4) 

b. Proposed Rule 17Ad–22(e)(5) 

c. Proposed Rule 17Ad–22(e)(6) 

d. Proposed Rule 17Ad–22(e)(7) 

3. Proposed Rules 17Ad–22(e)(8) through 

(10): Settlement 

a. Proposed Rule 17Ad–22(e)(8) 

b. Proposed Rule 17Ad–22(e)(9) 

c. Proposed Rule 17Ad–22(e)(10) 

4. Proposed Rules 17Ad–22(e)(11) through 

(12): CSDs and Exchange-of-Value 

Settlement Systems 

a. Proposed Rule 17Ad–22(e)(11) 

b. Proposed Rule 17Ad–22(e)(12) 

5. Proposed Rules 17Ad–22(e)(13) through 

(14): Default Management 

a. Proposed Rule 17Ad–22(e)(13) 

b. Proposed Rule 17Ad–22(e)(14) 

6. Proposed Rules 17Ad–22(e)(15) through 

(17): General Business and Operational 

Risk Management 

a. Proposed Rule 17Ad–22(e)(15) 

b. Proposed Rule 17Ad–22(e)(16) 

c. Proposed Rule 17Ad–22(e)(17) 

7. Proposed Rules 17Ad–22(e)(18) through 

(20): Access 

a. Proposed Rule 17Ad–22(e)(18) 

b. Proposed Rule 17Ad–22(e)(19) 

c. Proposed Rule 17Ad–22(e)(20) 

8. Proposed Rules 17Ad–22(e)(21) through 

(22): Efficiency 

a. Proposed Rule 17Ad–22(e)(21) 

b. Proposed Rule 17Ad–22(e)(22) 

9. Proposed Rule 17Ad–22(e)(23): 

Disclosure 

10. Proposed Rule 17Ab2–2 

C. Respondents 

D. Total Annual Reporting and 

Recordkeeping Burden for Proposed Rule 

17Ad–22(e) 

1. Proposed Rules 17Ad–22(e)(1) through 

(3): General Organization 

a. Proposed Rule 17Ad–22(e)(1) 

b. Proposed Rule 17Ad–22(e)(2) 

c. Proposed Rule 17Ad–22(e)(3) 

2. Proposed Rules 17Ad–22(e)(4) through 

(7): Financial Risk Management 

a. Proposed Rule 17Ad–22(e)(4) 

b. Proposed Rule 17Ad–22(e)(5) 

c. Proposed Rule 17Ad–22(e)(6) 

d. Proposed Rule 17Ad–22(e)(7) 

3. Proposed Rules 17Ad–22(e)(8) through 

(10): Settlement 

a. Proposed Rule 17Ad–22(e)(8) 

b. Proposed Rule 17Ad–22(e)(9) 

c. Proposed Rule 17Ad–22(e)(10) 

4. Proposed Rules 17Ad–22(e)(11) through 

(12): CSDs and Exchange-of-Value 

Settlement Systems 

a. Proposed Rule 17Ad–22(e)(11) 

b. Proposed Rule 17Ad–22(e)(12) 

5. Proposed Rules 17Ad–22(e)(13) through 

(14): Default Management 

a. Proposed Rule 17Ad–22(e)(13) 

b. Proposed Rule 17Ad–22(e)(14) 

6. Proposed Rules 17Ad–22(e)(15) through 

(17): General Business and Operational 

Risk Management 

a. Proposed Rule 17Ad–22(e)(15) 

b. Proposed Rule 17Ad–22(e)(16) 

c. Proposed Rule 17Ad–22(e)(17) 

7. Proposed Rules 17Ad–22(e)(18) through 

(20): Access 

a. Proposed Rule 17Ad–22(e)(18) 

b. Proposed Rule 17Ad–22(e)(19) 

c. Proposed Rule 17Ad–22(e)(20) 

8. Proposed Rules 17Ad–22(e)(21) through 

(22): Efficiency 

a. Proposed Rule 17Ad–22(e)(21) 

b. Proposed Rule 17Ad–22(e)(22) 

9. Proposed Rule 17Ad–22(e)(23): 

Disclosure 

10. Total Burden for Proposed Rule 17Ad– 

22(e) 

E. Total Annual Reporting and 

Recordkeeping Burden for Proposed Rule 

17Ab2–2 

F. Collection of Information is Mandatory 

G. Confidentiality 

H. Request for Comments 

IV. Economic Analysis 

A. Introduction 

B. Economic Baseline 

1. Overview 

2. Current Regulatory Framework for 

Clearing Agencies 

a. Basel III Capital Requirements 

b. Other Regulatory Efforts 

3. Current Practices 

a. General Organization 

i. Legal Risk 

ii. Governance 

iii. Framework for the Comprehensive 

Management of Risks 

b. Financial Risk Management 

i. Credit Risk 

ii. Collateral and Margin 

iii. Liquidity Risk 

c. Settlement 

d. CSDs and Exchange-of-Value Settlement 

Systems 

i. CSDs 

ii. Exchange-of-Value Settlement Systems 

e. Default Management 

i. Participant-Default Rules and Procedures 

ii. Segregation and Portability 

f. General Business and Operational Risk 

Management 

i. General Business Risk 

ii. Custody and Investment Risks 

iii. Operational Risk 

g. Access 

i. Access and Participation Requirements 

ii. Tiered Participation Arrangements 

iii. Links 

h. Efficiency 

i. Efficiency and Effectiveness 

ii. Communication Procedures and 

Standards 

i. Transparency 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29510 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

2See 15 U.S.C. 78q–1; Report of the Senate 

Committee on Banking, Housing & Urban Affairs, S. 

Rep. No. 94–75, at 4 (1975) (urging that ‘‘[t]he 

Committee believes the banking and security 

industries must move quickly toward the 

establishment of a fully integrated national system 

for the prompt and accurate processing and 

settlement of securities transactions’’). 3See 15 U.S.C. 78q–1(a)(2)(A). 4Section 3(a)(23)(A) of the Exchange Act defines 

the term ‘‘clearing agency’’ to mean any person who 

acts as an intermediary in making payments or 

deliveries or both in connection with transactions 

in securities or who provides facilities for the 

comparison of data regarding the terms of 

settlement of securities transactions, to reduce the 

number of settlements of securities transactions, or 

for the allocation of securities settlement 

responsibilities. Such term also means any person, 

such as a securities depository, who acts as a 

custodian of securities in connection with a system 

for the central handling of securities whereby all 

securities of a particular class or series of any issuer 

deposited within the system are treated as fungible 

and may be transferred, loaned or pledged by 

bookkeeping entry without physical delivery of 

securities certificates, or otherwise permits or 

facilitates the settlement of securities transactions 

or the hypothecation or lending of securities 

without physical delivery of securities certificates. 

See 15 U.S.C. 78c(a)(23)(A). 

5See id.; see also Exchange Act Release No. 34– 

68080 (Oct. 22, 2012), 77 FR 66219, 66221–22 (Nov. 

2, 2012) (‘‘Clearing Agency Standards Release’’). An 

entity that acts as a CCP for securities transactions 

is a clearing agency as defined in the Exchange Act 

and is required to register with the Commission. For 

further discussion of the economic effects of CCPs, 

see infra notes 19, 563, and accompanying text. 

6See Risk Management Supervision of Designated 

Clearing Entities (July 2011), Report by the 

Commission, the Board & CFTC to the Senate 

Committees on Banking, Housing & Urban Affairs 

and Agriculture in fulfillment of Section 813 of 

Title VIII of the Dodd-Frank Act, at 3 (stating that 

designated clearing entities ‘‘play a vital role in the 

proper functioning of financial markets and are 

increasingly important given the mandated central 

clearing of certain swaps and security-based swaps 

that is required by the [Dodd-Frank] Act’’) (‘‘Risk 

Management Supervision Report’’). 

7See id. at 12 (describing the risk management 

practices of designated clearing entities and the 

economic and legal incentives for sound risk 

management). 

8See 15 U.S.C. 78q–1(b) and 17 CFR 240.17Ab2– 

1 thereunder; see also infra notes 20–23 and 

accompanying text (noting that the Dodd-Frank Act 

also added new paragraphs (g), (i), and (j) to Section 

17A of the Exchange Act to establish requirements 

for any entity that performs the functions of a 

clearing agency for security-based swaps). 

9A clearing agency can be registered with the 

Commission only if the Commission makes a 

determination that the clearing agency satisfies the 

requirements set forth in Section 17A(b)(3)(A) 

through (I) of the Exchange Act. See 15 U.S.C. 78q– 

1(b)(3)(A) through (I). In 1980, the Commission 

published a statement of the views and positions of 

the Commission staff regarding the requirements of 

Section 17A in its Announcement of Standards for 

the Registration of Clearing Agencies. See Exchange 

Act Release No. 34–16900 (June 17, 1980), 45 FR 

41920 (June 23, 1980). 

10Under the Clearing Supervision Act, the 

supervisory agency must consult annually with the 

Board regarding the scope and methodology of onsite examinations of designated FMUs, and those 

examinations may include participation by the 

Board, if requested. See infra note 32 and 

accompanying text; see also 15 U.S.C. 78u(a) 

(providing the Commission with authority to 

initiate and conduct investigations to identify 

potential violations of the federal securities laws); 

15 U.S.C. 78s(h) (providing the Commission with 

authority to institute civil actions seeking 

injunctive and other equitable remedies and/or 

administrative proceedings). 

4. Determinations by the Commission 

C. Consideration of Benefits, Costs, and the 

Effect on Competition, Efficiency, and 

Capital Formation 

1. General Economic Considerations 

a. Systemic Risk 

b. Discretion 

c. Market Integrity 

d. Concentration 

e. Qualifying CCP Status and Externalities 

on Clearing Members 

2. Effect on Competition, Efficiency, and 

Capital Formation 

a. Competition 

b. Efficiency 

c. Capital Formation 

3. Effect of Proposed Amendments to Rule 

17Ad–22 and Proposed Rule 17Ab2–2 

a. Proposed Rule 17Ad–22(e) 

i. Proposed Rule 17Ad–22(e)(1): Legal Risk 

ii. Proposed Rule 17Ad–22(e)(2): 

Governance 

iii. Proposed Rule 17Ad–22(e)(3): 

Comprehensive Framework for the 

Management of Risks 

iv. Proposed Rules 17Ad–22(e)(4) through 

(7): Financial Risk Management 

(1) Proposed Rule 17Ad–22(e)(4): Credit 

Risk 

(2) Proposed Rule 17Ad–22(e)(5): Collateral 

(3) Proposed Rule 17Ad–22(e)(6): Margin 

(4) Proposed Rule 17Ad–22(e)(7): Liquidity 

Risk 

(5) Testing and Validation of Risk Models 

v. Proposed Rules 17Ad–22(e)(8) through 

(10): Settlement and Physical Delivery 

vi. Proposed Rule 17Ad–22(e)(11): CSDs 

vii. Proposed Rule 17Ad–22(e)(12): 

Exchange-of-Value Settlement Systems 

viii. Proposed Rule 17Ad–22(e)(13): 

Participant-Default Rules and Procedures 

ix. Proposed Rule 17Ad–22(e)(14): 

Segregation and Portability 

x. Proposed Rule 17Ad–22(e)(15): General 

Business Risk 

xi. Proposed Rule 17Ad–22(e)(16): Custody 

and Investment Risks 

xii. Proposed Rule 17Ad–22(e)(17): 

Operational Risk Management 

xiii. Proposed Rules 17Ad–22(e)(18) 

through (20): Membership Requirements, 

Tiered Participation, and Linkages 

(1) Proposed Rule 17Ad–22(e)(18): Member 

Requirements 

(2) Proposed Rule 17Ad–22(e)(19): Tiered 

Participation Arrangements 

(3) Proposed Rule 17Ad–22(e)(20): Links 

xiv. Proposed Rule 17Ad–22(e)(21): 

Efficiency and Effectiveness 

xv. Proposed Rule 17Ad–22(e)(22): 

Communication Procedures and 

Standards 

xvi. Proposed Rule 17Ad–22(e)(23): 

Disclosure of Rules, Key Procedures, and 

Market Data 

b. Proposed Rule 17Ab2–2 

c. Proposed Rule 17Ad–22(f) 

d. Quantifiable Costs and Benefits 

D. Request for Comments 

V. Regulatory Flexibility Act Certification 

A. Registered Clearing Agencies 

B. Certification 

VI. Small Business Regulatory Enforcement 

Fairness Act 

VII. Statutory Authority and Text of 

Amended Rule 17AD–22 and Proposed 

Rule 17AB2–2 

I. Current Regulatory Framework for 

Clearing Agencies 

A. Section 17A of the Exchange Act 

When Congress added Section 17A to 

the Exchange Act as part of the 

Securities Acts Amendments of 1975, it 

directed the Commission to facilitate the 

establishment of a national system for 

the prompt and accurate clearance and 

settlement of securities transactions.2 In 

Section 17A of the Exchange Act, 

Congress directed the Commission to 

have due regard for the public interest, 

the protection of investors, the 

safeguarding of securities and funds, 

and maintenance of fair competition 

among brokers and dealers, clearing 

agencies, and transfer agents.3 The 

Commission’s ability to achieve these 

goals and its supervision of securities 

clearance and settlement systems is 

based upon the regulation of clearing 

agencies registered with the 

Commission (‘‘registered clearing 

agencies’’). Clearing agencies are 

broadly defined under the Exchange Act 

and undertake a variety of functions.4

One such function is to act as a CCP, 

which is an entity that interposes itself 

between the counterparties to a trade.5

Over the years, registered clearing 

agencies have become an essential part 

of the infrastructure of the U.S. 

securities markets.6 Registered clearing 

agencies help reduce the costs and 

increase the safety and efficiency of 

securities trading and are required to be 

structured to manage and reduce 

counterparty risk.7

Section 17A of the Exchange Act and 

Rule 17Ab2–1 require entities to register 

with the Commission prior to 

performing the functions of a clearing 

agency.8 Under the statute, the 

Commission is not permitted to grant 

registration unless it determines that the 

rules and operations of the clearing 

agency meet the standards set forth in 

Section 17A of the Exchange Act.9 If the 

Commission registers a clearing agency, 

the Commission oversees the clearing 

agency to facilitate compliance with the 

Exchange Act using various tools that 

include, among other things, the rule 

filing process for self-regulatory 

organizations (‘‘SROs’’) and on-site 

examinations by Commission staff.10

The Commission also oversees 

registered clearing agencies through 

regular contact, including onsite visits, 

by Commission staff with clearing 

agency senior management and other 

personnel and ongoing interactions of 

Commission staff with the registered 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29511 

11The Commission authorized five entities to 

clear CDS. See Exchange Act Release Nos. 60372 

(July 23, 2009), 74 FR 37748 (July 29, 2009), 61973 

(Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010) and 

63389 (Nov. 29, 2010), 75 FR 75520 (Dec. 3, 2010) 

(CDS clearing by ICE Clear Europe Limited); 60373 

(July 23, 2009), 74 FR 37740 (July 29, 2009), 61975 

(Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010) and 

63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 3, 2010) 

(CDS clearing by Eurex Clearing AG); 59578 (Mar. 

13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 

14, 2009), 74 FR 67258 (Dec. 18, 2009), 61803 (Mar. 

30, 2010), 75 FR 17181 (Apr. 5, 2010) and 63388 

(Nov. 29, 2010), 75 FR 75522 (Dec. 3, 2010) (CDS 

clearing by Chicago Mercantile Exchange, Inc.); 

59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 

61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009), 

61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010) 

and 63387 (Nov. 29, 2010), 75 FR 75502 (Dec. 3, 

2010) (CDS clearing by ICE Trust US LLC); 59164 

(Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (temporary 

CDS clearing by LIFFE A&M and LCH.Clearnet Ltd.) 

(collectively ‘‘CDS clearing exemption orders’’). 

LIFFE A&M and LCH.Clearnet Ltd. allowed their 

orders to lapse without seeking renewal. 

12See Dodd-Frank Act, Public Law 111–203, 124 

Stat. 1376 (2010). 

13See id. 

14From their beginnings in the early 1980s, the 

notional value of these markets grew to 

approximately $693 trillion globally by June 2013. 

See Bank for International Settlements (‘‘BIS’’), 

Statistical Release: OTC Derivatives Statistics at 

End-June 2013, at 2 (Nov. 2013), available at http:// 

www.bis.org/publ/otc_hy1311.pdf. 

15See Dodd-Frank Act, 124 Stat. at 1641–1802. 

16Section 712(d) of the Dodd-Frank Act provides 

that the Commission and the CFTC, in consultation 

with the Board, shall further define the terms 

‘‘swap,’’ ‘‘security-based swap,’’ ‘‘swap dealer,’’ 

‘‘security-based swap dealer,’’ ‘‘major swap 

participant,’’ ‘‘major security-based swap 

participant,’’ ‘‘eligible contract participant,’’ and 

‘‘security-based swap agreement.’’ 124 Stat. at 1644. 

The Commission and the CFTC jointly adopted 

rules to further define the terms ‘‘swap dealer,’’ 

‘‘security-based swap dealer,’’ ‘‘major swap 

participant,’’ ‘‘major security-based swap 

participant,’’ and ‘‘eligible contract participant,’’ as 

well as rules to further define the terms ‘‘swap,’’ 

‘‘security-based swap,’’ and ‘‘security-based swap 

agreement’’ and to govern the regulation of mixed 

swaps. See Exchange Act Release Nos. 34–67453 

(July 18, 2012), 77 FR 48208 (Aug. 13, 2012); 34– 

66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012). 

17See, e.g., Exchange Act Release No. 34–60372 

(July 23, 2009), 74 FR 37748 (July 29, 2009), at 

37748 n.2 (discussing credit default swaps). 

18See 15 U.S.C. 78c–3; see also Exchange Act 

Release No. 34–67286 (June 28, 2012), 77 FR 41602 

(July 13, 2012) (adopting rules establishing a 

process for submissions for review of security-based 

swaps for mandatory clearing); Exchange Act 

Release No. 34–63556 (Dec. 15, 2010), 75 FR 79992 

(Dec. 21, 2010) (proposing an end-user exception to 

the mandatory clearing requirement). 

19See Stephen G. Cecchetti, Jacob Gyntelberg & 

Marc Hollanders, Central Counterparties for Overthe-Counter Derivatives, BIS Q. Rev., Sept. 2009, at 

46, available at http://www.bis.org/publ/qtrpdf/r_

qt0909f.pdf (stating that the structure of a CCP ‘‘has 

three clear benefits. First, it improves the 

management of counterparty risk. Second, it allows 

the CCP to perform multilateral netting of exposures 

as well as payments. Third, it increases 

transparency by making information on market 

activity and exposures—both prices and 

quantities—available to regulators and the public’’) 

(emphasis omitted); see also Exchange Act Release 

No. 34–60372, supra note 17, at 37749 (discussing 

the benefits of using well-regulated CCPs to clear 

transactions in credit default swaps). But see infra 

note 563 and accompanying text (discussing the 

limits of clearing through central counterparties). 

20See 15 U.S.C. 78q–1(g); Dodd-Frank Act, Sec. 

763(b), Public Law 111–203, 124 Stat. 1376, 1768 

(2010) (adding paragraph (g) to Section 17A of the 

Exchange Act). Pursuant to Section 774 of the 

Dodd-Frank Act, the requirement in Section 17A(g) 

of the Exchange Act for security-based swap 

clearing agencies to be registered with the 

Commission took effect on July 16, 2011. See 124 

Stat. at 1802. 

21See 15 U.S.C. 78q–1(i), (j); Dodd-Frank Act, 

Sec. 763(b), 124 Stat. at 1768–69 (adding paragraphs 

(i) and (j) to Section 17A of the Exchange Act). 

22See supra note 9 (describing the requirements 

under Section 17A(b)(3) of the Exchange Act, 15 

U.S.C. 78q–1(b)(3)). 

23See 15 U.S.C. 78q–1(i) (stating that, in 

establishing standards for security-based swap 

clearing agencies, and in the exercise of its 

oversight of such a clearing agency pursuant to this 

title, the Commission may conform such standards 

or oversight to reflect evolving United States and 

international standards). 

24See Dodd-Frank Act, Sec. 712(a)(2), 124 Stat. at 

1641–42. 

clearing agencies regarding current and 

expected proposed rule changes under 

Section 19(b) of the Exchange Act. 

B. OTC Swaps Clearing and the DoddFrank Act 

The Commission drew on its 

experience regulating clearing agencies 

to address recent developments in the 

over-the-counter (‘‘OTC’’) derivatives 

markets. In December 2008, the 

Commission acted to facilitate the 

central clearing of credit default swaps 

(‘‘CDS’’) by permitting certain entities 

that performed CCP services to clear and 

settle CDS on a temporary, conditional 

basis.11 Consequently, some CDS 

transactions were centrally cleared prior 

to the enactment of the Dodd-Frank Act. 

On July 21, 2010, President Barack 

Obama signed the Dodd-Frank Act into 

law.12 The Dodd-Frank Act was enacted, 

among other reasons, to promote the 

financial stability of the United States 

by improving accountability and 

transparency in the financial system.13

It is intended, among other things, to 

bolster the existing regulatory structure 

and provide regulatory tools to address 

risks in the OTC derivatives markets, 

which have experienced dramatic 

growth in recent years and are capable 

of affecting significant sectors of the 

U.S. economy.14

1. Title VII of the Dodd-Frank Act 

Title VII of the Dodd-Frank Act 

(‘‘Title VII’’) provides the Commission 

and the CFTC with enhanced authority 

to regulate certain OTC derivatives in 

response to the 2008 financial crisis.15

Title VII provides that the CFTC will 

regulate ‘‘swaps,’’ the Commission will 

regulate ‘‘security-based swaps,’’ and 

both the CFTC and the Commission will 

regulate ‘‘mixed swaps.’’ 16 Title VII 

provides the Commission with new 

regulatory authority over security-based 

swaps by requiring, among other things, 

that security-based swaps generally be 

cleared and that clearing agencies for 

security-based swaps register with the 

Commission. 

The swap and security-based swap 

markets traditionally have been 

characterized by privately negotiated 

transactions entered into by two 

counterparties, in which each assumes 

the credit risk of the other 

counterparty.17 Title VII amended the 

Exchange Act to require that 

transactions in security-based swaps be 

cleared through a clearing agency if they 

are of a type that the Commission 

determines must be cleared, unless an 

exemption from mandatory clearing 

applies.18 When structured and 

operated appropriately, clearing 

agencies may improve the management 

of counterparty risk in security-based 

swap markets and may provide 

additional benefits, such as the 

multilateral netting of trades.19

Title VII also added new provisions to 

the Exchange Act that require entities 

performing the functions of a clearing 

agency with respect to security-based 

swaps (‘‘security-based swap clearing 

agencies’’) to register with the 

Commission and require the 

Commission to adopt rules with respect 

to security-based swap clearing 

agencies.20 Specifically, new Section 

17A(j) requires the Commission to adopt 

rules governing security-based swap 

clearing agencies, and new Section 

17A(i) gives the Commission authority 

to promulgate rules that establish 

standards for security-based swap 

clearing agencies.21 Compliance with 

any such rules is a prerequisite to the 

registration of a clearing agency that 

clears security-based swaps with the 

Commission and is also a condition to 

maintain its continued registration.22

Section 17A(i) also provides that the 

Commission, in establishing clearing 

agency standards and in its oversight of 

clearing agencies, may conform such 

standards and such oversight to reflect 

evolving international standards.23

Before commencing any rulemaking 

regarding, among other things, securitybased swap clearing agencies, Title VII 

provides that the Commission shall 

consult and coordinate, to the extent 

possible, with the CFTC and the 

prudential regulators for the purpose of 

assuring regulatory consistency and 

comparability, to the extent possible.24

Title VII further provides that some of 

the entities that the Commission 

permitted to clear and settle CDS on a 

temporary, conditional basis prior to the 


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25See 15 U.S.C. 78q–1(l). The deemed registered 

provision applies to certain depository institutions 

that cleared swaps as multilateral clearing 

organizations and certain derivatives clearing 

organizations (‘‘DCOs’’) that cleared swaps pursuant 

to an exemption from registration as a clearing 

agency before the date of enactment of the DoddFrank Act. Under the deemed registered provision, 

such a clearing agency is deemed registered for the 

purpose of clearing security-based swaps and is 

therefore required to comply with all requirements 

of the Exchange Act, and the rules thereunder, 

applicable to registered clearing agencies, 

including, for example, the obligation to file 

proposed rule changes under Section 19(b) of the 

Exchange Act. See infra note 96 (describing the 

requirements in Section 19(b) of the Exchange Act). 

26The definition of ‘‘financial market utility’’ in 

Section 803(6) of the Clearing Supervision Act 

contains a number of exclusions that include, but 

are not limited to, certain designated contract 

markets, registered futures associations, swap data 

repositories, swap execution facilities, national 

securities exchanges, national securities 

associations, alternative trading systems, securitybased swap data repositories, security-based swap 

execution facilities, brokers, dealers, transfer agents, 

investment companies and futures commission 

merchants. See 12 U.S.C. 5462(6)(B). 

27Pursuant to Section 803(9) of the Clearing 

Supervision Act, an FMU is systemically important 

if the failure of or a disruption to the functioning 

of such FMU could create or increase the risk of 

significant liquidity or credit problems spreading 

among financial institutions or markets and thereby 

threaten the stability of the U.S. financial system. 

See 12 U.S.C. 5462(9). 

28See 76 FR 44763 (July 27, 2011). Under Section 

804 of the Clearing Supervision Act, the FSOC has 

the authority, on a non-delegable basis and by a 

vote of no fewer than two-thirds of the members 

then serving, including the affirmative vote of its 

chairperson, to designate those FMUs that the FSOC 

determines are, or are likely to become, 

systemically important. See 12 U.S.C. 5463. The 

FSOC may, using the same procedures as discussed 

above, rescind such designation if it determines that 

the FMU no longer meets the standards for systemic 

importance. Before making either determination, 

the FSOC is required to consult with the Board and 

the relevant supervisory agency (as determined in 

accordance with Section 803(8) of the Clearing 

Supervision Act). See id. Finally, Section 804 of the 

Clearing Supervision Act sets forth the procedures 

for giving entities a 30-day notice and the 

opportunity for a hearing prior to a designation or 

rescission of the designation of systemic 

importance. See id. 

29See 12 U.S.C. 5465(e)(1)(A). 

30Section 803(8) of the Clearing Supervision Act 

defines the term ‘‘supervisory agency’’ in reference 

to the primary regulatory authority for the FMU. For 

example, it provides that the Commission is the 

supervisory agency for any FMU that is a registered 

clearing agency. See 12 U.S.C. 5462(8). To the 

extent that an entity is both a clearing agency 

registered with the Commission and registered with 

another agency, such as a DCO registered with the 

CFTC, the statute requires the two agencies to agree 

on one agency to act as the supervisory agency, and 

if the agencies cannot agree on which agency has 

primary jurisdiction, the FSOC shall decide which 

agency is the supervisory agency for purposes of the 

Clearing Supervision Act. See 12 U.S.C. 5462(8). 

31See Exchange Act Release No. 34–67286 (June 

28, 2012), 77 FR 41602 (July 13, 2012). 

32See 12 U.S.C. 5466. 

33See 12 U.S.C. 5468. 

34See id. 

35See 12 U.S.C. 5472; see also Risk Management 

Supervision Report, supra note 6. 

36 12 U.S.C. 5464(a). 

37See 12 U.S.C. 5464(a)(2) (stating that these 

regulations may govern the operations related to 

payment, clearing, and settlement activities of such 

designated clearing entities, and the conduct of 

designated activities by such financial institutions). 

PCS activities are defined in Section 803(7) of the 

Clearing Supervision Act. See 12 U.S.C 5462(7). 

38See U.S. Treasury Dep’t, Financial Stability 

Oversight Council Makes First Designations in 

Effort to Protect Against Future Financial Crises 

(July 18, 2012), http://www.treasury.gov/presscenter/press-releases/Pages/tg1645.aspx; see also 

12 U.S.C. 5321 (establishing the FSOC and 

designating its voting and non-voting members); 12 

U.S.C. 5463 (describing the designation of systemic 

importance by the FSOC); supra note 28 (describing 

the process by which the FSOC would make or 

rescind a designation of systemic importance). 

Section 804 of the Clearing Supervision Act, 12 

U.S.C. 5463, further sets forth procedures that give 

entities 30 days advance notice and an opportunity 

for a hearing prior to being designated as 

systemically important. See FSOC, 2012 Annual 

Report, at app. A, available at http://

www.treasury.gov/initiatives/fsoc/Documents/

2012%20Annual%20Report.pdf. 

39See supra note 30 (discussing designation as 

the supervisory agency); see also FSOC, 2013 

Annual Report, at 99–101, 113 (further discussing 

the same), available at http://www.treasury.gov/

initiatives/fsoc/Documents/FSOC%202013%20

Annual%20Report.pdf. 

July 21, 2010 enactment of the DoddFrank Act are deemed under the DoddFrank Act to be registered clearing 

agencies (the ‘‘deemed registered 

provision’’).25 As a result, the Chicago 

Mercantile Exchange, Inc. (‘‘CME’’), ICE 

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

Europe LLC (‘‘ICEEU’’) became clearing 

agencies deemed registered with the 

Commission on July 16, 2011, solely for 

the purpose of clearing security-based 

swaps. 

2. Title VIII of the Dodd-Frank Act 

The Clearing Supervision Act, 

adopted in Title VIII of the Dodd-Frank 

Act (‘‘Title VIII’’), provides for enhanced 

regulation of financial market utilities 

(‘‘FMUs’’), such as clearing agencies that 

manage or operate a multilateral system 

for the purpose of transferring, clearing, 

or settling payments, securities, or other 

financial transactions among financial 

institutions or between financial 

institutions and the FMU.26 The 

enhanced regulatory regime in Title VIII 

applies only to FMUs that the FSOC 

designates as systemically important (or 

likely to become systemically 

important) in accordance with Section 

804 of the Clearing Supervision Act.27

On July 11, 2011, the FSOC published 

a final rule concerning its authority to 

designate FMUs as systemically 

important.28

Section 806(e) of the Clearing 

Supervision Act requires FMUs 

designated as systemically important to 

file 60 days advance notice of changes 

to its rules, procedures, or operations 

that could materially affect the nature or 

level of risk presented by the FMU 

(‘‘Advance Notice’’).29 In addition, 

Section 806(e) requires each supervisory 

agency to adopt rules, in consultation 

with the Board, that define and describe 

when a designated FMU is required to 

file an Advance Notice with its 

supervisory agency.30 The Commission 

published a final rule concerning the 

Advance Notice process for designated 

clearing agencies on June 28, 2012.31 In 

evaluating an Advance Notice filed with 

the Commission, the Commission would 

assess, among other things, the 

consistency of the Advance Notice with 

the rules proposed herein, if adopted. 

The Clearing Supervision Act also 

provides for enhanced coordination 

between the Commission, the Board, 

and the CFTC by facilitating 

examinations and information sharing. 

Under Section 807 of the Clearing 

Supervision Act, the Commission and 

the CFTC must consult annually with 

the Board regarding the scope and 

methodology of any examination of a 

designated FMU, and the Board is 

authorized to participate in any such 

examination.32 Section 809 of the 

Clearing Supervision Act authorizes the 

Commission, the Board, and the CFTC 

to disclose to each other copies of 

examination reports or similar reports 

regarding any designated FMU.33 It 

further authorizes the Commission, the 

Board, and the CFTC to promptly notify 

each other of material concerns about a 

designated FMU and share appropriate 

reports, information, or data relating to 

such concerns.34 Section 813 of the 

Clearing Supervision Act requires the 

Commission and the CFTC to coordinate 

with the Board to develop risk 

management supervision programs for 

designated clearing agencies.35

Section 805(a) of the Clearing 

Supervision Act 36 also provides that the 

Commission may prescribe risk 

management standards governing the 

operations related to payment, clearing, 

and settlement activities (‘‘PCS 

activities’’) of designated FMUs for 

which it acts as the supervisory agency, 

in consultation with the FSOC and the 

Board and taking into consideration 

relevant international standards and 

existing prudential requirements.37

On July 18, 2012, the FSOC 

designated as systemically important 

the following registered clearing 

agencies: CME, The Depository Trust 

Company (‘‘DTC’’), Fixed Income 

Clearing Corporation (‘‘FICC’’), ICE, 

National Securities Clearing Corporation 

(‘‘NSCC’’), and The Options Clearing 

Corporation (‘‘OCC’’).38 Under the 

Clearing Supervision Act, the 

Commission is the supervisory agency 

for DTC, FICC, NSCC, and OCC.39 The 


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40As a member of the U.S. Federal Reserve 

System and a limited purpose trust company under 

New York State banking law, DTC is subject to 

regulation by the Board. 41 In addition, the Commission jointly regulates 

ICEEU, which is not currently designated as 

systemically important by the FSOC, with the CFTC 

and the Bank of England. 42See Clearing Agency Standards Release, supra 

note 5. 43See id. at 66225, 66263–64. 44See Clearing Agency Standards Release, supra 

note 5, at 66225. 45Rules 17Ad–22(b)(1) through (4) contain 

several requirements that address risk management 

practices by registered clearing agencies that 

provide CCP services. Rules 17Ad–22(b)(5) through 

(7) establish certain requirements regarding access 

to registered clearing agencies that provide CCP 

services. Rule 17Ad–22(c) requires that a registered 

clearing agency providing CCP services calculate 

and maintain a record of its financial resources and 

requires each registered clearing agency to publish 

annual audited financial statements. Rule 17Ad– 

22(d) sets forth certain minimum standards for the 

operations of registered clearing agencies providing 

CCP or central securities depository (‘‘CSD’’) 

services. See infra Part II.B.4.b (discussing the 

current requirements for CCPs under Rule 17Ad– 

22); see also Clearing Agency Standards Release, 

supra note 5 (adopting the existing standards under 

Rule 17Ad–22). 

46See supra note 9 (describing the requirements 

under Section 17A(b)(3) of the Exchange Act, 15 

U.S.C. 78q–1(b)(3)) and infra note 96 (further 

describing the Commission’s framework for 

regulation of SROs and the SRO rule filing process). 

47See, e.g., Exchange Act Release No. 34–44188 

(Apr. 17, 2001), 66 FR 20494 (Apr. 23, 2011) (the 

Omgeo exemption); Exchange Act Release No. 34– 

39643 (Feb. 11, 1998), 63 FR 8232 (Feb. 18, 1998) 

(the Euroclear exemption); Exchange Act Release 

No 34–38328 (Feb. 24, 1997), 62 FR 9225 (Feb. 28, 

1997) (the Clearstream exemption). 

48See supra note 36. In addition, the Basel 

Committee on Banking Supervision (‘‘BCBS’’), the 

international body that sets standards for the 

regulation of banks, published in July 2012 the 

Capital Requirements for Bank Exposures to Central 

Counterparties (‘‘Basel III capital requirements’’). 

The Basel III capital requirements set forth interim 

rules governing the capital charges arising from 

bank exposures to CCPs related to OTC derivatives, 

exchange-traded derivatives, and securities 

financing transactions (which term, as used 

throughout this release, refers generally to 

repurchase agreements and securities lending). 

Among other things, the Basel III framework 

imposes lower capital requirements on CCPs that 

obtain ‘‘qualifying CCP’’ (‘‘QCCP’’) status and 

would apply QCCP status only to CCPs that are 

subject to a regulatory framework consistent with 

the standards set forth in the PFMI Report. See 

BCBS, Capital Requirements for Bank Exposures to 

Central Counterparties (July 2012), available at 

http://www.bis.org/publ/bcbs227.pdf (setting forth 

he interim requirements set forth in this report, 

currently under revision by the BCBS, in 

consultation with CPSS and IOSCO). See also 

BCBS, Capital Treatment of Bank Exposures to 

Central Counterparties: Consultative Document 

(rev. July 2013), available at http://www.bis.org/

publ/bcbs253.pdf; BIS, Basel III: A Global 

Regulatory Framework for More Resilient Banks 

and Banking Systems (rev. June 2011), available at 

http://www.bis.org/publ/bcbs189.htm (‘‘Basel III 

framework’’). The Basel III capital requirements are 

one component of the Basel III framework. 

49See supra note 1. 

The PFMI Report defines a ‘‘financial market 

infrastructure’’ (‘‘FMI’’) as a multilateral system 

among participating institutions, including the 

operator of the system, used for the purposes of 

clearing, settling, or recording payments, securities, 

derivatives, or other financial transactions. See id. 

at 7; FMIs include CCPs, CSDs, securities settlement 

systems (‘‘SSSs’’), and trade repositories (‘‘TRs’’). 

Cf. 12 U.S.C. 5462(6)(B), supra note 30 (defining 

‘‘financial market utility’’ under the Clearing 

Supervision Act). 

The PFMI Report presumes that all CSDs, SSSs, 

CCPs, and TRs are systemically important in their 

home jurisdiction. See PFMI Report, supra note 1, 

at 131 & n.177 (noting the ‘‘presumption . . . that 

all CSDs, SSSs, CCPs, and TRs are systemically 

important because of their critical roles in the 

markets they serve,’’ but also noting that ultimately 

‘‘national law will dictate the criteria to determine 

whether an FMI is systemically important’’). 

The Commission notes that the PFMI Report’s 

definition of ‘‘financial market infrastructure’’ is 

consistent with the Commission’s prior use of the 

term. See Study of Unsafe and Unsound Practices 

of Brokers and Dealers, H.R. Doc. No. 231, 92d 

Cong., 1st Sess. 13 (1971) (defining ‘‘financial 

market infrastructure’’ as a multilateral system 

among participating institutions, including the 

operator of the system, used for the purposes of 

clearing, settling, or recording payments, securities, 

derivatives, or other financial transactions). 

50The CPSS–IOSCO Recommendations are 

available at http://www.iosco.org/library/pubdocs/

pdf/IOSCOPD123.pdf and http://www.iosco.org/

library/pubdocs/pdf/IOSCPD176.pdf. 

The Board applies these standards in its 

supervisory process and expects systemically 

important FMUs, as determined by the Board and 

subject to its authority, to complete a selfassessment against the standards set forth in the 

policy. See Financial Market Utilities, 77 FR 45907 

(Aug. 2, 2012) (the Board adopting Regulation HH 

for FMUs) (‘‘Reg. HH’’); Policy on Payments System 

Risk, 72 FR 2518 (Jan. 12, 2007). 

The Board has proposed to amend the standards 

in Regulation HH to replace the current standards 

for payment systems with standards based those set 

forth in the PFMI Report. It has also proposed to 

amend its Policy on Payments System Risk. See 

infra note 53. 

51Commission staff co-chaired the Editorial 

Team, a working group within CPSS–IOSCO that 

drafted both the consultative and final versions of 

the PFMI Report. 

52See 15 U.S.C. 78q–1; 15 U.S.C. 78s(b). 

53See CPSS–IOSCO, Implementation Monitoring 

of PFMIs—Level 1 Assessment Report (Aug. 2013), 

available at http://www.bis.org/publ/cpss111.pdf 

(describing efforts by various jurisdictions to adopt 

standards for FMIs in line with the PFMI Report) 

(‘‘PFMI Implementation Monitoring Report’’); see 

also Reg. HH, supra note 50; Financial Market 

Utilities, 79 FR 3665 (Jan. 22, 2014) (the Board 

proposing to amend Reg. HH) (‘‘proposed Reg. 

HH’’); Policy on Payment System Risk, 79 FR 2838 

(Jan. 16, 2014) (the Board proposing to amend its 

Federal Reserve Policy on Payments System Risk) 

(‘‘proposed PSR Policy’’); Derivatives Clearing 

Organizations and International Standards, 78 FR 

72475 (Dec. 2, 2013) (CFTC adopting rules for DCOs 

Continued 

Commission jointly regulates DTC with 

the Board and OCC with the CFTC.40

The Commission also jointly regulates 

CME and ICE with the CFTC, which 

serves as their supervisory agency.41

C. Rule 17Ad–22 Under the Exchange 

Act 

On October 22, 2012, the Commission 

adopted Rule 17Ad–22 under the 

Exchange Act.42 Through Rule 17Ad– 

22, the Commission sought to 

strengthen the substantive regulation of 

registered clearing agencies, promote 

the safe and reliable operation of 

registered clearing agencies, and 

improve efficiency, transparency, and 

access to registered clearing agencies by 

establishing minimum requirements 

with due consideration given to 

observed practices and international 

standards.43 At that time, the 

Commission noted that the 

implementation of Rule 17Ad–22 would 

be an important first step in developing 

the regulatory changes contemplated by 

Titles VII and VIII of the Dodd-Frank 

Act.44 Rule 17Ad–22 requires all 

registered clearing agencies to establish, 

implement, maintain and enforce 

written policies and procedures that are 

reasonably designed to meet certain 

minimum requirements for their 

operations and risk management 

practices on an ongoing basis.45 These 

requirements are designed to work in 

tandem with the SRO rule filing process 

and the requirement in Section 17A of 

the Exchange Act that the Commission 

must make certain determinations 

regarding a clearing agency’s rules and 

operations for purposes of initial and 

ongoing registration.46 Rule 17Ad–22 

does not apply to entities that are 

operating pursuant to an exemption 

from registration as a clearing agency 

granted by the Commission,47 and it 

does not give particular consideration to 

issues relevant to clearing agencies 

designated as systemically important 

FMUs. 

D. Relevant International Standards 

In proposing amendments to Rule 

17Ad–22, the Commission considered 

international standards, as required by 

Section 805(a) of the Clearing 

Supervision Act, that are relevant to its 

supervision of covered clearing 

agencies.48 CPSS–IOSCO published in 

April 2012 the PFMI Report 49 to replace 

previous standards applicable to 

clearing agencies contained in two 

earlier reports: Recommendations for 

Securities Settlement Systems (2001) 

(‘‘RSSS’’) and Recommendations for 

Central Counterparties (2004) (‘‘RCCP’’) 

(collectively ‘‘CPSS–IOSCO 

Recommendations’’).50 Commission 

staff participated in the development 

and drafting of the PFMI Report,51 and 

the Commission believes that the 

standards set forth in the PFMI Report 

are generally consistent with the 

requirements applicable to clearing 

agencies set forth in the Exchange Act.52

Regulatory authorities around the world 

are in various stages of updating their 

regulatory regimes to adopt measures 

that are in line with the standards set 

forth in the PFMI Report.53 The rule 


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in line with international standards) (‘‘DCO Int’l 

Standards Release’’); Enhanced Risk Management 

Standards for Systemically Important Derivatives 

Clearing Organizations, 78 FR 49663 (Aug. 15, 

2013) (CFTC adopting rules for systemically 

important DCOs) (‘‘SIDCO Release’’); Derivatives 

Clearing Organization General Provisions and Core 

Principles, 76 FR 69334 (Nov. 8, 2011) (CFTC 

adopting rules for DCOs); (‘‘DCO Principles 

Release’’). 

In addition, the Board and the Office of the 

Comptroller of the Currency have adopted rules 

implementing the material elements of the BCBS 

interim framework for capitalization of bank 

exposures to CCPs. See Regulatory Capital Rules: 

Regulatory Capital, Implementation of Basel III, 

Capital Adequacy, Transition Provisions, Prompt 

Corrective Action, Standardized Approach for Riskweighted Assets, Market Discipline and Disclosure 

Requirements, Advanced Approaches Risk-Based 

Capital Rule, and Market Risk Capital Rule, 76 FR 

62017, 62099 (Oct. 11, 2013) (‘‘Regulatory Capital 

Rules’’). The Board also noted the ongoing 

international discussions on this topic and stated 

that it intends to revisit its rules once the Basel III 

capital framework is revised. See id. The Board and 

the Office of the Comptroller of the Currency’s final 

rules define ‘‘QCCP’’ to mean, among other things, 

a designated FMU under the Clearing Supervision 

Act. See 12 CFR 217.2; see also Regulatory Capital 

Rules, supra, at 62100. 

54See 15 U.S.C. 78q–1(a)(2)(A). 

55See 15 U.S.C. 78q–1(a)(3)(A), (F). 

56See 15 U.S.C. 78q–1(b)(3)(I). 

57See Clearing Agency Standards Release, supra 

note 5, at 66224–25. 

58See id. (contemplating future Commission 

action on clearing agency standards). 

59See Clearing Agency Standards Release, supra 

note 5, at 66227 (stating that Rule 17Ad–22 

generally codifies existing practices that reflect the 

CPSS–IOSCO Recommendations published in 2001 

and 2004). 

60See infra Part II.E (discussing the proposed 

language amending Rule 17Ad–22(d) to apply to 

registered clearing agencies that are not covered 

clearing agencies). 

61The standards in Rules 17Ad–22(b) and (c) 

were also adopted by the Commission in 2012. See 

17 CFR 240.17Ad–22(b), (c); see also Clearing 

Agency Standards Release, supra note 5. 

The Commission is proposing to revise Rule 

17Ad–22(a) to account for new proposed 

definitions. See proposed revision of Rule 17Ad– 

22(a), infra Part VII. The existing definitions in 17 

CFR 240.17Ad–22(a) would be renumbered to 

account for new terms. In addition, the definition 

of ‘‘participant family’’ would be amended to 

include references to its use in proposed paragraphs 

(e)(4) and (e)(7). See proposed Rule 17Ad–22(a)(13), 

infra Part VII. 

62See Exchange Act Release No. 34–64017 (Mar. 

3, 2011), 76 FR 14474, 14477–83 (Mar. 16, 2011); 

see also Clearing Agency Standards Release, supra 

note 5, at 66244. 

63See infra Parts II.B.1–3 (discussing proposed 

Rules 17Ad–22(e)(1) (legal risk), 17Ad–22(e)(2) 

(governance), and 17Ad–22(e)(3) (framework for the 

comprehensive management of risk)). 

64See infra Part II.B.4 (discussing proposed Rules 

17Ad–22(e)(4) (credit risk), 17Ad–22(e)(5) 

(collateral), 17Ad–22(e)(6) (margin), and 17Ad– 

22(e)(7) (liquidity risk)). 

65See infra Parts II.B.5–7 (discussing proposed 

Rules 17Ad–22(e)(8) (settlement finality), 17Ad– 

proposals set forth below are a 

continuation of the Commission’s active 

efforts to foster the development of the 

national clearance and settlement 

system. 

II. Discussion of the Proposed 

Amendments to Rule 17Ad–22 and 

Proposed Rule 17Ab2–2 

The Commission is proposing to 

amend Rule 17Ad–22 and add Rule 

17Ab2–2 pursuant to Section 17A of the 

Exchange Act and the Clearing 

Supervision Act to provide a new 

regulatory framework for ‘‘covered 

clearing agencies,’’ as defined below. 

Generally, Section 17A directs the 

Commission to facilitate the 

establishment of a national system for 

the prompt and accurate clearance and 

settlement of securities transactions, 

having due regard for the public 

interest, the protection of investors, the 

safeguarding of securities and funds, 

and the maintenance of fair competition 

among brokers and dealers.54 It further 

requires that a clearing agency be so 

organized and have the capacity and 

rules designed to, among other things, 

facilitate the prompt and accurate 

clearance and settlement of securities 

transactions, and to comply with the 

provisions of the Exchange Act and the 

rules and regulations thereunder.55 In 

establishing a regulatory framework for 

clearance and settlement, the Exchange 

Act requires that a registered clearing 

agency’s rules not impose any burden 

on competition not necessary or 

appropriate in the furtherance of the 

purposes of the Exchange Act.56

Consistent with these statutory 

objectives, the Commission previously 

adopted Rule 17Ad–22(d) to establish 

minimum requirements for registered 

clearing agencies and indicated that it 

might consider further rulemaking at a 

later date.57 In furtherance of the 

provisions of Section 17A of the 

Exchange Act and the Clearing 

Supervision Act described above and as 

previously considered by the 

Commission, the Commission is 

proposing Rule 17Ad–22(e) to establish 

new requirements for covered clearing 

agencies, which the Commission 

preliminarily believes are appropriate 

given the risks that their size, operation, 

and importance pose to the U.S. 

securities markets, the risks inherent in 

the products they clear, and the goals of 

Title VII and the Exchange Act.58 In 

connection with its supervision of 

registered clearing agencies under 

Section 17A of the Exchange Act, 

including after the adoption of Rule 

17Ad–22,59 the Commission has 

considered whether enhanced 

requirements for covered clearing 

agencies could contribute to the stability 

of U.S. securities markets, as described 

further in Part IV, and has determined 

to issue this proposal for comment. 

The Commission has preliminarily 

chosen to retain Rule 17Ad–22(d) and to 

continue to apply it to registered 

clearing agencies that are not covered 

clearing agencies.60 The Commission 

preliminarily believes that retaining 

Rule 17Ad–22(d) ensures that clear, 

comprehensive, and transparent 

standards for registered clearing 

agencies that are not covered clearing 

agencies will continue to exist and, 

because they are narrower in scope, 

would thereby provide a more flexible 

regime for new entrants seeking to 

establish and operate registered clearing 

agencies, consistent with the continuing 

development of the national system for 

clearance and settlement, than would 

otherwise be the case with a single 

regime under proposed Rule 17Ad– 

22(e). 

The Commission notes that it is not 

proposing to alter the existing 

requirements under Rule 17Ad–22(b), 

which establishes risk-management and 

participant access requirements for 

registered clearing agencies that perform 

CCP services for security-based swaps, 

or Rule 17Ad–22(c), which requires 

registered clearing agencies that provide 

CCP services to maintain a record of 

financial resources and all registered 

clearing agencies to post on their Web 

sites annual audited financial 

statements.61 These requirements 

continue to be appropriate for all 

registered clearing agencies because 

they promote prompt and accurate 

clearance and settlement of securities 

and security-based swap transactions. 

Notably, Rule 17Ad–22(b) reduces the 

likelihood, in a participant default 

scenario, that losses from default would 

disrupt the operations of the clearing 

agency, and Rule 17Ad–22(c) provides 

an additional layer of information about 

the activities and financial strength of a 

registered clearing agency that market 

participants may find useful in 

assessing their use of the registered 

clearing agency’s services while also 

assisting the Commission in its 

oversight of registered clearing agencies’ 

compliance with Rule 17Ad–22 by 

providing a clear record of the method 

used by the clearing agency to, among 

other things, maintain sufficient 

financial resources.62

A. Overview 

The Commission is proposing Rule 

17Ad–22(e) to establish requirements 

for covered clearing agencies with 

respect to general organization,63

financial risk management,64

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22(e)(9) (money settlements), and 17Ad–22(e)(10) 

(physical delivery risks)). 

66See infra Parts II.B.8–9 (discussing proposed 

Rules 17Ad–22(e)(11) (CSDs) and 17Ad–22(e)(12) 

(exchange-of-value settlement systems)). 

67See infra Parts II.B.10–11 (discussing proposed 

Rules 17Ad–22(e)(13) (participant-default rules and 

procedures) and 17Ad–22(e)(14) (segregation and 

portability)). 

68See infra Parts II.B.12–14 (discussing proposed 

Rules 17Ad–22(e)(15) (general business risk), 

17Ad–22(e)(16) (custody and investment risk), and 

17Ad–22(e)(17) (operational risk management)). 

69See infra Parts II.B.15–17 (discussing proposed 

Rules 17Ad–22(e)(18) (access and participation 

requirements), 17Ad–22(e)(19) (tiered participation 

arrangements), and 17Ad–22(e)(20) (links)). 

70See infra Parts II.B.18–19 (discussing proposed 

Rules 17Ad–22(e)(21) (efficiency and effectiveness) 

and 17Ad–22(e)(22) (communication procedures 

and standards)). 

71See infra Part II.B.20 (discussing proposed Rule 

17Ad–22(e)(23) (disclosure of rules, key procedures, 

and market data)). 

72See infra Part II.A.4 (discussing the anticipated 

impact of proposed Rule 17Ad–22(e) given the 

existing requirements for registered clearing 

agencies under Rule 17Ad–22). 

73See supra Part I.B.2, in particular notes 36–37 

and accompanying text (discussing the 

requirements under Section 17A(i) of the Exchange 

Act, 15 U.S.C. 78q–1(i), and Section 805(a) of the 

Clearing Supervision Act, 12 U.S.C. 5464(a)). 

74See supra note 53 and accompanying text. 

75See infra Part IV.C.1.e (further discussing the 

economic effects of obtaining QCCP status under 

the Basel III capital requirements); see also supra 

note 48. 

76See proposed Rule 17Ad–22(a)(9), infra Part 

VII; see also 12 U.S.C. 5462(6) (defining ‘‘financial 

market utility’’ pursuant to the Clearing 

Supervision Act); supra note 26 (providing further 

explanation of ‘‘financial market utility’’). 

77See proposed Rule 17Ad–22(a)(8), infra Part 

VII. 

78Rule 17Ad–22 does not currently apply to 

entities operating pursuant to an exemption from 

clearing agency registration. The proposed 

amendments to Rule 17Ad–22 would not broaden 

the scope of Rule 17Ad–22 to an entity operating 

pursuant to an exemption from registration as a 

clearing agency granted by the Commission. 

79See proposed Rule 17Ad–22(a)(4), infra Part 

VII. 

80The Commission is proposing Rule 17Ab2–2 to 

establish a process for making determinations 

regarding clearing agencies involved in activities 

with a more complex risk profile. See infra Part II.C 

(further discussing the purpose, scope, and 

application of proposed Rule 17Ab2–2) and Part VII 

(proposed text of Rule 17Ab2–2). 

The Commission is also proposing Rule 17Ad– 

22(a)(16) to define ‘‘security-based swap’’ to mean 

security-based swap as defined in Section 3(a)(68) 

of the Exchange Act, 15 U.S.C. 78c(a)(68). See infra 

Part VII. 

81See proposed Rule 17ad–22(a)(7), infra Part VII. 

value settlement systems,66 default 

management,67 general business risk 

and operational risk management,68

access,69 efficiency,70 and 

transparency.71 The discussion below 

provides greater detail regarding each 

respective requirement in proposed 

Rule 17Ad–22(e). Several aspects of 

proposed Rule 17Ad–22(e) are similar to 

existing Rule 17Ad–22(d),72 but in 

general the Commission preliminarily 

notes that certain requirements under 

proposed Rule 17Ad–22(e) would 

require covered clearing agencies to 

consider and adopt policies and 

procedures more closely tailored to the 

risks that are posed by covered clearing 

agencies, which the Commission 

preliminarily identified as appropriate 

in connection with its experience in 

supervising registered clearing agencies 

under Section 17A of the Exchange Act, 

including since the adoption of Rule 

17Ad–22. 

The Commission preliminarily 

believes that the requirements of 

proposed Rule 17Ad–22(e) would help 

promote governance, operations, and 

risk management practices more closely 

tailored to the risks raised by registered 

clearing agencies that have been 

designated systemically important, are 

engaged in activities with a more 

complex risk profile, or are determined 

to be covered clearing agencies by the 

Commission, consistent with Section 

17A of the Exchange Act. The 

Commission preliminarily believes 

these requirements would also enable 

consistent supervision of designated 

FMUs and would reflect the 

Commission’s consideration of 

international standards, as 

contemplated by Section 17A(i) and the 

Clearing Supervision Act.73 While the 

Commission has made its own 

determination to issue the proposed 

rules for comment, the Commission 

preliminarily believes that generally 

updating its rules, where appropriate, to 

take into account the standards set forth 

in the PFMI Report would contribute to 

the efforts of regulators around the 

world, described above,74 to implement 

consistent standards for FMIs.75 The 

Commission also preliminarily believes 

that Rule 17Ad–22(e) would provide an 

additional benefit of providing support 

for a determination by foreign bank 

regulators that covered clearing agencies 

providing CCP services for derivatives 

and securities financing transactions 

meet the requirements for QCCP status 

under the Basel III framework and could 

therefore help reduce competitive 

frictions among CCPs in different 

jurisdictions. 

Part II.A first discusses the scope of 

proposed Rule 17Ad–22(e), the role that 

written policies and procedures play in 

framing the proposed rule, and the 

reasons for imposing certain frequency 

of review requirements throughout the 

proposed rules. It then discusses the 

anticipated impact of the proposed rules 

given the existing requirements 

applicable to registered clearing 

agencies under Rules 17Ad–22(b) 

through (d), with which a covered 

clearing agency must already be in 

compliance. 

Part II.B next discusses the proposed 

rules under Rule 17Ad–22(e). Finally, 

Parts II.C, D, and E discuss, in turn, 

proposed Rule 17Ab2–2, proposed Rule 

17Ad–22(f), and the proposed 

amendment to Rule 17Ad–22(d). 

1. Scope of Proposed Rule 17Ad–22(e) 

The Commission is proposing to add 

four terms to Rule 17Ad–22(a) to 

identify the registered clearing agencies 

that would be subject to proposed Rule 

17Ad–22(e). First, the Commission is 

proposing to add Rule 17Ad–22(a)(9) to 

define ‘‘financial market utility’’ 

(‘‘FMU’’) as defined in Section 803(6) of 

the Clearing Supervision Act.76 Second, 

the Commission is proposing Rule 

17Ad–22(a)(8) to define ‘‘designated 

clearing agency.’’ 77 A designated 

clearing agency would mean a clearing 

agency registered with the Commission 

under Section 17A of the Exchange Act 

that has been designated as a 

systemically important FMU by the 

FSOC and for which the Commission is 

the supervisory agency as defined in 

Section 803(8) of the Clearing 

Supervision Act.78 Third, the 

Commission is proposing to add Rule 

17Ad–22(a)(4) to define ‘‘clearing 

agency involved in activities with a 

more complex risk profile’’ 79 to mean a 

clearing agency registered with the 

Commission under Section 17A of the 

Exchange Act that either (i) provides 

central counterparty services for 

security-based swaps or (ii) has been 

determined by the Commission to be 

involved in activities with a more 

complex risk profile (‘‘complex risk 

profile clearing agency’’), either at the 

time of its initial registration or upon a 

subsequent determination by the 

Commission pursuant to proposed Rule 

17Ab2–2.80 Fourth, the Commission is 

proposing to add Rule 17Ad–22(a)(7) to 

define a ‘‘covered clearing agency’’ as a 

designated clearing agency, a complex 

risk profile clearing agency, or any 

clearing agency determined to be a 

covered clearing agency by the 

Commission pursuant to proposed Rule 

17Ab2–2.81

The Commission preliminarily 

believes there could be several different 

bases under which registered clearing 

agencies would be required to comply 

with proposed Rule 17Ad–22(e). For 

instance, because DTC, FICC, NSCC, 

and OCC are registered clearing agencies 

pursuant to Section 17A of the 

Exchange Act and are designated 

clearing agencies for which the 

Commission is the supervisory agency 


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29516 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

82See supra Part I.B.2. 

83See supra note 41 and accompanying text. 

84See 12 U.S.C. 5463. 

85See supra Part I.B.2; see also FSOC, 2013 

Annual Report, supra note 39, at 100. 

86See supra note 41 and accompanying text. 

87See 15 U.S.C. 78q–1(l). 

88 In 2008, NASDAQ OMX Group, Inc. acquired 

SCCP and BSECC. See Exchange Act Release No. 

34–58324 (Aug. 7, 2008), 73 FR 46936 (Aug. 12, 

2008) (order approving acquisition of BSECC); 

Exchange Act Release No. 34–58180 (July 17, 2008), 

73 FR 42890 (July 23, 2008) (order approving 

acquisition of SCCP). 

Both SCCP and BSECC are currently registered 

with the Commission as clearing agencies but 

conduct no clearing or settlement activities. See 

Exchange Act Release No. 34–63629 (Jan. 3, 2011), 

76 FR 1473 (Jan. 10, 2011); Exchange Act Release 

No. 34–63268 (Nov. 8, 2010), 75 FR 69730 (Nov. 15, 

2010). 

89See infra Parts II.C and VII (discussing 

determinations under proposed Rule 17Ab2–2 and 

providing rule text, respectively). 

90See supra note 27 and accompanying text. 

91See generally Gov’t Accountability Office, 

Systemic Risk: Regulatory Oversight and Recent 

Initiatives to Address Risk Posed by Credit Default 

Swaps (Mar. 2009), available at http://

www.gao.gov/new.items/d09397t.pdf. 

92See supra notes 54–61 and accompanying text. 

93See supra notes 2, 13–14, and accompanying 

text (noting the goals of, respectively, Section 17A 

of the Exchange Act and the Dodd-Frank Act). 

94See supra note 43 and accompanying text 

(noting the Commission’s intent in adopting Rule 

17Ad–22 in the Clearing Agency Standards 

Release). 

95See supra note 44 and accompanying text 

(noting further that the requirements adopted under 

Rule 17Ad–22 constituted an important first step to 

enhance the substantive regulation of registered 

clearing agencies pursuant to the Dodd-Frank Act); 

see also infra Part IV.C.1.a (addressing systemic risk 

in the context of discussing the general economic 

considerations undertaken by the Commission in 

proposing Rule 17Ad–22(e)). 

under the Clearing Supervision Act,82

they would be covered clearing agencies 

under proposed Rule 17Ad–22(a)(7) and 

would be subject to the requirements for 

covered clearing agencies in proposed 

Rule 17Ad–22(e). In addition, because 

ICEEU provides CCP services for 

security-based swaps and has been 

deemed registered with the Commission 

as a security-based swap clearing 

agency,83 it would be a complex risk 

profile clearing agency under proposed 

Rule 17Ad–22(a)(4) and also subject to 

the requirements for covered clearing 

agencies proposed in Rule 17Ad–22(e). 

By comparison, CME and ICE would 

not be subject to the proposed 

requirements for covered clearing 

agencies in Rule 17Ad–22(e) because (i) 

they have been designated as 

systemically important FMUs under 

Section 804 of the Clearing Supervision 

Act; 84 (ii) they are each dually 

registered with the Commission and the 

CFTC as a clearing agency and DCO, 

respectively; and (iii) the CFTC is their 

supervisory agency under the Clearing 

Supervision Act.85 The Commission 

preliminarily believes that, because 

CME and ICE would be subject to the 

CFTC’s requirements for systemically 

important DCOs,86 applying proposed 

Rule 17Ad–22(e) to them could impose 

duplicative requirements. Given the 

Commission’s existing regulatory 

authority under Section 17A(l) of the 

Exchange Act,87 however, CME and ICE 

would remain subject to the continuing 

requirements for registered clearing 

agencies in Rules 17Ad–22(b) through 

(d). 

Two dormant clearing agencies, the 

Stock Clearing Corporation of 

Philadelphia (‘‘SCCP’’) and the Boston 

Stock Exchange Clearing Corporation 

(‘‘BSECC’’), have not been designated 

systemically important by the FSOC and 

are not involved in activities with a 

more complex risk profile.88

Accordingly, each would also remain 

subject to the requirements in Rules 

17Ad–22(b) through (d). 

Further, proposed Rule 17Ab2–2 

would provide the Commission 

flexibility to determine that the 

operations or circumstances of a 

registered clearing agency, including a 

registered clearing agency that is exempt 

from certain requirements applicable to 

registered clearing agencies generally, 

warrant designation as a covered 

clearing agency.89 It would also provide 

flexibility to make determinations 

regarding newly registered clearing 

agencies. 

The Commission preliminarily 

believes the requirements proposed in 

Rule 17Ad–22(e) aid the regulation of 

covered clearing agencies by, as noted 

above, establishing requirements more 

closely tailored to the risks they pose to 

the U.S. securities markets. For 

example, designated clearing agencies 

are systemically important because of 

their significance to the U.S. financial 

system and the risk that the failure of, 

or a disruption to, their functioning 

would increase the risk of significant 

liquidity or credit problems spreading 

among financial institutions, thereby 

threatening the stability of the U.S. 

financial system.90 Similarly, the 

Commission preliminarily believes that 

complex risk profile clearing agencies, 

such as those providing CCP services for 

security-based swaps, subject the U.S. 

securities markets to a material level of 

systemic risk due to the nature of the 

products that they clear.91 The 

requirements proposed in Rule 17Ad– 

22(e) are intended to ensure that 

covered clearing agencies have robust 

policies and procedures that help 

promote sound governance, operations, 

and risk management. 

As noted above,92 the Commission 

preliminarily believes that establishing 

separate rules for covered clearing 

agencies and registered clearing 

agencies that are not covered clearing 

agencies is appropriate given the 

Commission’s goals to facilitate the 

development of a national system for 

the prompt and accurate clearance and 

settlement of securities consistent with 

Section 17A of the Exchange Act and to 

mitigate systemic risk consistent with 

Titles VII and VIII of the Dodd-Frank 

Act.93 In this regard, the Commission 

intends that Rule 17Ad–22(d) would 

continue to provide minimum 

requirements for the operation and 

governance of registered clearing 

agencies that also facilitate the entrance 

of new participants, as appropriate, into 

the market for clearance and settlement 

services.94 The Commission 

preliminarily believes that Rule 17Ad– 

22(e) would establish new requirements 

for established participants in the 

market for clearance and settlement 

services commensurate to the risks that 

their size, operation, and importance 

pose to the U.S. securities markets.95

Request for Comments. The 

Commission generally requests 

comments on all aspects of the scope of 

proposed Rule 17Ad–22(e), the 

relationship between proposed Rule 

17Ad–22(e) and Rule 17Ad–22(d), and 

on proposed Rules 17Ad–22(a)(4), (7), 

(8), and (9). In addition, the Commission 

requests comments on the following 

specific issues: 

• Is the scope of proposed Rule 

17Ad–22(e) appropriate? Why or why 

not? Is the scope sufficiently clear? Why 

or why not? Has the Commission 

provided sufficient guidance regarding 

the scope of the proposed rule? Are 

there aspects of the scope of the 

proposed rule for which the 

Commission should consider providing 

additional guidance? If so, please 

explain. 

• Given that all non-dormant 

registered clearing agencies would 

either be covered clearing agencies 

subject to Commission supervision or be 

subject to CFTC regulation as designated 

clearing entities for which the CFTC is 

the supervisory agency, should the 

Commission replace the existing 

requirements under Rule 17Ad–22(d) 

with the requirements proposed under 

Rule 17Ad–22(e)? Why or why not? 

• Is the Commission’s proposed 

definition of ‘‘financial market utility’’ 

appropriate and sufficiently clear given 

the proposed requirements? Why or 

why not? Should the definition be 

modified? If so, how? Is there an 


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96Registered clearing agencies are SROs as 

defined in Section 3(a)(26) of the Exchange Act, 15 

U.S.C. 78c(a)(26). After a clearing agency has been 

registered with the Commission, the clearing 

agency, as an SRO, must submit most proposed rule 

changes to the Commission, for approval pursuant 

to Rule 19b–4 under the Exchange Act. A stated 

policy, practice, or interpretation of an SRO, such 

as a clearing agency’s written policies and 

procedures, would generally be deemed to be a 

proposed rule change. See 17 CFR 240.19b–4. 

97See Clearing Agency Standards Release, supra 

note 5, at 66228–29 (describing the scope of Rule 

17Ad–22 at adoption). 

98Compare proposed Rule 17Ad–22(e)(23), infra 

Part VII (requiring public disclosure of, among other 

things, a covered clearing agency’s rules, policies, 

and procedures) with proposed Reg. HH, supra note 

53, at 3666–67, 3686–88, 3693 (the Board proposing 

disclosure requirements intended to be in line with 

the PFMI Report in Sec. 234.3(a)(23)); DCO Int’l 

Standards Release, supra note 53, at 72493–94, 

72521 (CFTC adopting disclosure requirements 

intended to be in line with the PFMI Report in Sec. 

39.37). 

99See supra note 96 (describing requirements for 

SROs under the Exchange Act and Rule 19b–4). 

100See proposed Rules 17Ad–22(e)(4)(vi)(A); 

17Ad–22(e)(6)(ii); 17Ad–22(e)(6)(vi)(A); 17Ad– 

22(e)(7); 17Ad–22(e)(7)(vi)(A); and 17Ad– 

22(e)(11)(ii), infra Part VII. 

101See proposed Rules 17Ad–22(e)(4)(vi)(B); 

17Ad–22(e)(4)(vi)(C); 17Ad–22(e)(6)(vi)(B); 17Ad– 

22(e)(6)(vi)(C); 17Ad–22(e)(7)(vi)(B); and 17Ad– 

22(e)(7)(vi)(C), infra Part VII. 

102See proposed Rules 17Ad–22(e)(3)(i); 17Ad– 

22(e)(4)(vii); 17Ad–22(e)(5); 17Ad–22(e)(6)(vii); 

17Ad–22(e)(7)(v); 17Ad–22(e)(7)(vii); 17Ad– 

22(e)(7)(x); 17Ad–22(e)(13)(iii); and 17Ad– 

22(e)(15)(iii), infra Part VII. 

alternative definition the Commission 

should consider? 

• Is the Commission’s proposed 

definition of ‘‘designated clearing 

agency’’ appropriate and sufficiently 

clear given the requirements proposed? 

Why or why not? Should the definition 

be modified? If so, how? Is there an 

alternative definition the Commission 

should consider? 

• Is the Commission’s proposed 

definition of ‘‘clearing agency involved 

in activities with a more complex risk 

profile’’ appropriate and sufficiently 

clear given the requirements proposed? 

Why or why not? Should the definition 

be modified? If so, how? Is there an 

alternative definition the Commission 

should consider? 

• Is the Commission’s proposed 

definition of ‘‘covered clearing agency’’ 

appropriate and sufficiently clear given 

the requirements proposed? Why or 

why not? Should the definition be 

modified? If so, how? Is there an 

alternative definition the Commission 

should consider? 

• Are the requirements in proposed 

Rule 17Ad–22(e) necessary, or do the 

existing provisions in Rule 17Ad–22(d) 

already sufficiently address the issues 

identified in this release as justification 

for increased regulation? 

2. Role of Written Policies and 

Procedures 

Proposed Rule 17Ad–22(e) would 

require covered clearing agencies to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to, as applicable, 

fulfill the requirements set forth in 

paragraphs (e)(1) through (23) of the 

proposed rule. The Commission 

preliminarily believes that this 

approach would facilitate the 

Commission’s supervision of covered 

clearing agencies, is appropriate given 

their role as SROs,96 and is consistent 

with the approach taken by the 

Commission elsewhere in Rule 17Ad– 

22.97 The Commission preliminarily 

believes that, by requiring written 

policies and procedures and, where 

appropriate, their disclosure, proposed 

Rule 17Ad–22(e) should help promote 

the development of improved standards 

for clearing agencies by allowing market 

participants to compare certain of the 

operations of covered clearing agencies 

with those of other clearing entities, 

which choose to make their policies and 

procedures publicly available or are 

required to do so by equivalent 

regulatory standards.98

The Commission is proposing to 

require policies and procedures 

developed by each covered clearing 

agency to fulfill the requirements of 

proposed Rule 17Ad–22(e) because the 

Commission preliminarily believes that 

it is important to allow covered clearing 

agencies enough flexibility to use their 

market experience and understanding of 

their institutions to shape the rules, 

policies, and procedures implementing 

proposed Rule 17Ad–22(e). This 

proposed approach is consistent with 

the Commission’s established approach 

for supervising SROs, and the 

Commission preliminarily believes 

continuing this practice under Rule 

17Ad–22(e) will allow the Commission 

to continue to perform its supervisory 

function through the SRO rule filing 

process under Section 19(b) of the 

Exchange Act and Rule 19b–4,99

periodic inspections and examinations, 

other monitoring of the activities of 

registered clearing agencies, and other 

established supervisory processes. 

Because of the importance the 

Commission gives to both maintaining 

clearing agency flexibility and to 

existing oversight mechanisms, the 

Commission preliminarily believes that 

the proposed approach is appropriate. 

The Commission anticipates that a 

covered clearing agency’s rules, 

policies, and procedures will need to 

evolve over time so that it can 

adequately respond to changes in 

technology, legal requirements, the 

needs of its members and their 

customers, trading volumes, trading 

practices, linkages between financial 

markets, and the financial instruments 

traded in the markets that a covered 

clearing agency serves. Accordingly, the 

Commission preliminarily believes that 

covered clearing agencies should 

continually evaluate and make 

appropriate updates and improvements 

to their operations and risk management 

practices to facilitate prompt and 

accurate clearance and settlement. 

3. Frequency of Review Required Under 

Certain Policies and Procedures 

Many of the policies and procedures 

requirements proposed in Rule 17Ad– 

22(e) specify a frequency of review. 

Generally, the proposed regularity of 

review falls into three categories— 

daily, monthly, or annually—and is 

based on the Commission’s 

understanding of the current review 

practices generally at covered clearing 

agencies. The Commission’s rationale 

for these differences is as follows: 

• Daily: For those activities that the 

Commission understands to be directly 

related to the day-to-day operations of a 

covered clearing agency,100 such as 

activities related to the calculation and 

collection of margin, the Commission 

preliminarily believes that a covered 

clearing agency should undertake a 

daily review and make decisions on a 

daily basis; 

• Monthly: For those activities that 

the Commission understands to 

coincide with and complement the 

review and reporting cycles of the 

governance structures related to the risk 

management function of the covered 

clearing agency,101 the Commission 

preliminarily believes that a covered 

clearing agency should undertake a 

monthly review; based on its 

supervisory experience, the Commission 

notes that well-functioning risk 

management committees of the board 

and similar management committees or 

other board or management committees 

commonly meet or receive reports and 

other risk management information from 

management on a monthly basis and the 

monthly requirement would be 

consistent with such meeting and 

reporting frequency; 

• Annually: For those activities that 

are less integral to day-to-day 

operations, involve issues that merit 

review of information collected over 

longer time periods, or require more 

high-level review and consideration by, 

for example, the full board of directors 

of a clearing agency,102 the Commission 


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29518 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

103The Commission notes that requirements 

under Rules 17Ad–22(b) apply only to registered 

clearing agencies that provide CCP services, the 

‘‘cover two’’ requirement under Rule 17Ad–22(b)(3) 

applies only to registered clearing agencies that 

provide CCP services for security-based swaps, and 

requirements under Rule 17Ad–22(d)(14) apply 

only to registered clearing agencies that provide 

CSD services. See infra Part II.B.4 (discussing, 

among other things, the relationship between 

existing requirements under Rule 17Ad–22 and 

proposed Rule 17Ad–22(e)(4)); see also 17 CFR 

240.17Ad–22; Clearing Agency Standards Release, 

supra note 5. 

104The Commission notes that the relevant 

requirement in Rule 17Ad–22(b)(4) concerns 

policies and procedures regarding an annual model 

validation for margin models while proposed Rule 

17Ad–22(e)(6) would impose, in addition to 

requiring policies and procedures regarding an 

annual model validation for margin models, 

additional requirements that do not appear in Rule 

17Ad–22(b)(4). See infra Part II.B.4.e (discussing 

the requirements under proposed Rule 17Ad– 

22(e)(6)). 

105Part II.B also contains additional requests for 

comments on each proposed rule regarding 

particular issues specific to each proposed rule. 

106For a complete discussion of the anticipated 

economic effect of the proposed rules, see Part IV. 

preliminarily believes that a covered 

clearing agency should undertake an 

annual review; additionally, the 

Commission preliminary believes that 

an annual cycle is appropriate in certain 

instances because other major reviews 

such as auditing of the financial 

statements of registered clearing 

agencies and their disclosure are 

required to occur on an annual basis. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of the 

frequency of review that would be 

required to be included in a covered 

clearing agency’s policies and 

procedures under each of the 

requirements in proposed Rule 17Ad– 

22(e). In addition, the Commission 

requests comments on whether its 

assessment of daily, monthly, and 

annual activities at covered clearing 

agencies is accurate and appropriate 

given the proposed rules. The 

Commission also requests comment on 

what factors should be considered in 

determining the nature, timing, and 

extent of the required reviews and 

whether other frequencies of review 

might be appropriate under some or all 

of the proposed rules. 

4. Anticipated Impact of Proposed Rule 

17Ad–22(e) 

Based on the Commission’s 

experience supervising registered 

clearing agencies, and given the current 

requirements applicable to registered 

clearing agencies under Rule 17Ad–22, 

the Commission preliminarily 

anticipates that the degree of changes 

that covered clearing agencies may need 

to make to their policies and procedures 

to satisfy the proposed requirements of 

Rule 17Ad–22(e) would vary among the 

particular provisions of the proposed 

rule and depend in part on the business 

model and operations of the clearing 

agency itself, as discussed below. The 

Commission preliminarily believes that, 

for the provisions in its proposal where 

a similar existing requirement has been 

identified, covered clearing agencies 

may need to make only limited changes 

to update their policies and procedures, 

and the table below provides summary 

information regarding the Commission’s 

preliminary assessment of the impact of 

the proposed rules: 

Proposed requirement Existing requirement 

Rule 17Ad–22(e)(1) .. Rule 17Ad–22(d)(1). 

Rule 17Ad–22(e)(2) .. Rule 17Ad–22(d)(8). 

Rule 17Ad–22(e)(3) .. None. 

Rule 17Ad–22(e)(4) .. Rules 17Ad–22(b)(1), 

(b)(3), (d)(14) 103. 

Rule 17Ad–22(e)(5) .. None. 

Rule 17Ad–22(e)(6) .. Rule 17Ad–22(b)(2), 

(b)(4) 104. 

Proposed requirement Existing requirement 

Rule 17Ad–22(e)(7) .. None. 

Rule 17Ad–22(e)(8) .. Rules 17Ad– 

22(d)(12). 

Rule 17Ad–22(e)(9) .. Rule 17Ad–22(d)(5). 

Rule 17Ad–22(e)(10) Rule 17Ad–22(d)(15). 

Rule 17Ad–22(e)(11) Rule 17Ad–22(d)(10). 

Rule 17Ad–22(e)(12) Rule 17Ad–22(d)(13). 

Rule 17Ad–22(e)(13) Rule 17Ad–22(d)(11). 

Rule 17Ad–22(e)(14) None. 

Rule 17Ad–22(e)(15) None. 

Rule 17Ad–22(e)(16) Rule 17Ad–22(d)(3). 

Rule 17Ad–22(e)(17) Rule 17Ad–22(d)(4). 

Rule 17Ad–22(e)(18) Rules 17Ad–22(b)(5) 

through (7), (d)(2). 

Rule 17Ad–22(e)(19) None. 

Rule 17Ad–22(e)(20) Rule 17Ad–22(d)(7). 

Rule 17Ad–22(e)(21) Rule 17Ad–22(d)(6). 

Rule 17Ad–22(e)(22) None. 

Rule 17Ad–22(e)(23) Rule 17Ad–22(d)(9). 

With respect to the provisions in its 

proposal where no similar existing 

requirement has been identified, the 

Commission preliminarily anticipates 

that covered clearing agencies may need 

to make more extensive changes to their 

policies and procedures (or implement 

new policies and procedures), and may 

need to take other steps, to satisfy the 

proposed requirements of Rule 17Ad– 

22(e). 

For further discussion of the 

anticipated impact and costs and 

benefits of proposed Rule 17Ad–22(e), 

see Part IV.C. 

5. General Request for Comments 

The Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e) and on all aspects of 

the definitions included in proposed 

Rule 17Ad–22(a), as discussed in more 

detail in Part II.B.105 In addition, the 

Commission requests comments on the 

following issues: 

• Is each aspect of proposed Rules 

17Ad–22(e)(1) through (23), including 

any terms used therein, sufficiently 

clear given the proposed requirements? 

Why or why not? Has the Commission 

provided sufficient guidance as to the 

meaning of each provision of the 

proposed rules? Are there aspects of the 

proposed rules for which the 

Commission should consider providing 

additional guidance? If so, please 

explain. 

• Are the Commission’s definitions in 

proposed Rule 17Ad–22(a) accurate, 

appropriate, and sufficiently clear? Why 

or why not? Should the definitions be 

modified? If so, how? Should the 

Commission adopt alternative 

definitions than those proposed? Are 

there additional terms used in Rule 

17Ad–22(e) that should be defined? 

Please explain. 

• Is the Commission’s use of certain 

terms it believes to be commonly 

understood (e.g., ‘‘high degree of 

confidence’’ or ‘‘due diligence’’) 

appropriate and accurate? Why or why 

not? 

• Would the proposed rules require 

covered clearing agencies to change 

their current practices? If so, how? What 

are the expected costs and benefits to 

covered clearing agencies in connection 

with adding or revising their current 

practices with respect to the 

implementation of the Commission’s 

proposed rules? 106

• Should the Commission consider an 

alternative approach with respect to 

written policies and procedures 

included in the proposed rules? Why or 

why not? If so, what alternative 

approaches should the Commission 

consider? Please explain in detail. 

• Should the Commission’s proposed 

rules be less or more prescriptive? Why 

or why not? If so, what alternative 

approaches should the Commission 

consider? Please explain in detail. 

• Are there any other factors that the 

Commission should take into 

consideration with respect to the 

requirements of the proposed rules? 

• Should there be a phase-in period 

with respect to any of the requirements 

of proposed Rule 17Ad–22(e) ? If so, 

what should the phase-in periods be? 

What facts and circumstances should 

the Commission consider in evaluating 

whether to adopt a potential phase-in 

period? Please explain in detail. 

• Could the proposed rules affect the 

ability of covered clearing agencies to 

compete for certain types of business 


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107See proposed Rule 17Ad–22(e)(1), infra Part 

VII. 

The Commission preliminarily believes that (i) 

the United States is the relevant jurisdiction for 

covered clearing agencies that perform the 

functions of a clearing agency in the United States 

for purposes of Rule 17Ad–22(e)(1), and (ii) that 

covered clearing agencies operating in multiple 

jurisdictions would be required to address any 

conflicts of laws issues that they may encounter. 

108Rule 17Ad–22(d)(1) requires a registered 

clearing agency to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to provide for a well-founded, 

transparent, and enforceable legal framework for 

each aspect of its activities in all relevant 

jurisdictions. See 17 CFR 240.17Ad–22(d)(1); see 

also Clearing Agency Standards Release, supra note 

5, at 66245–46. 

109See supra Part II.A.4. 

110See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

111The role of governance arrangements in 

promoting effective risk management has also been 

a focus of rules proposed by the Commission to 

mitigate conflicts of interest at certain registered 

clearing agencies. See Exchange Act Release No. 

34–64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 

2011) (proposing Rule 17Ad–23 to address conflicts 

of interest and Rule 17Ad–26 to require standards 

for board members or board committee directors at 

registered clearing agencies); Exchange Act Release 

No. 34–63107 (Oct. 14, 2010), 75 FR 65881, 65893 

(Oct. 26, 2010) (proposing Regulation MC to 

mitigate conflicts of interest at security-based swap 

clearing agencies). 

112See supra note 96 (describing the 

requirements in Section 19(b) of the Exchange Act). 

113Netting offsets obligations between or among 

participants in the netting arrangement, thereby 

reducing the number and value of payments or 

deliveries needed to settle a set of transactions. 

Netting can reduce potential losses in the event of 

a participant default and may reduce the probability 

of a default. Netting arrangements can differ as to 

both timing and the parties to the arrangement: (i) 

Certain netting arrangements net payments or other 

contractual obligations resulting from market trades 

(or both) on a continuous basis, while others closeout payments or obligations when an event such as 

insolvency occurs; and (ii) netting arrangement may 

net obligations bilaterally among two parties or 

multilaterally among multiple parties. 

114Collateral arrangements may involve either a 

pledge or a title transfer. Therefore, regarding 

pledged assets, a covered clearing agency would 

examine the degree of legal certainty that a pledge 

has been validly created in the relevant jurisdiction 

and, as appropriate, validly perfected. Regarding 

transfer of title to assets, a covered clearing agency 

would examine the degree of legal certainty that the 

transfer is validly created in the relevant 

jurisdiction and will be enforced. 

115Novation enables a clearing agency to act as 

a CCP. In novation, the original contract between 

the buyer and seller is discharged and two new 

contracts are created, one between the CCP and the 

buyer and the other between the CCP and the seller. 

The CCP thereby assumes the original parties’ 

contractual obligations to each other. Legal 

certainty regarding novation may reinforce market 

participants’ confidence regarding CCP support for 

or guarantee of the transaction. 

116See proposed Rule 17Ad–22(a)(20), infra Part 

VII; see also Parts II.B.2 and 7 (discussing proposed 

Rules 17Ad–22(e)(2) and (10), respectively). 

Separately, the Commission has proposed rules to 

require policies and procedures to protect the 

confidentiality of trading information and 

procedures. See Exchange Act Release No. 34– 

64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) 

(proposing Rule 17Ad–23). 

either within the United States or 

internationally? If so, how? Please 

provide specific examples and data. 

• Are there significant operational or 

legal impediments to implementing the 

proposed rules? Would the proposed 

rules impact the ability of covered 

clearing agencies to clear certain 

products? Are any additional rules or 

regulations needed to facilitate 

compliance with the proposed rules? 

• Are there any requirements under 

existing Rule 17Ad–22 that could be 

viewed as being consistent with the 

PFMI standards without being 

supplemented or replaced by new 

requirements in proposed Rule 17Ad– 

22(e)? Please explain in detail. 

B. Proposed Rule 17Ad–22(e) 

1. Proposed Rule 17Ad–22(e)(1): Legal 

Risk 

Proposed Rule 17Ad–22(e)(1) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for a 

well-founded, clear, transparent, and 

enforceable legal basis for each aspect of 

its activities in all relevant 

jurisdictions.107 Rule 17Ad–22(d)(1) 

currently requires a registered clearing 

agency’s policies and procedures to 

meet substantially the same 

requirement.108 Because the 

requirements under Rule 17Ad–22(d)(1) 

and proposed Rule 17Ad–22(e)(1) are 

substantially the same, the Commission 

anticipates that covered clearing 

agencies may need to make only limited 

changes to update their policies and 

procedures to comply with the proposed 

rule.109

Consistent with the Exchange Act 

requirements discussed above,110 the 

Commission is proposing Rule 17Ad– 

22(e)(1) to require that a covered 

clearing agency have a legal basis for 

each aspect of its activities in all 

relevant jurisdictions. The legal 

framework for a particular clearing 

agency may cover a broad array of areas 

and issues, in particular including but 

not limited to its (i) organizational and 

governance documents, such as its 

charter, bylaws, and any charters for 

board and management committees; 111

(ii) rules, policies, and procedures,112

including those regarding settlement 

finality, netting,113 default of a member, 

margin, collateral,114 payments, 

obligations to the participant or default 

fund, eligibility and participation 

requirements for members, and recovery 

and wind-down plans; (iii) contracts 

(notably including with service 

providers, settlement banks and 

liquidity providers); (vi) its use of 

novation or similar legal devices; 115 and 

(vii) service restrictions that may be 

imposed on participants such as 

restrictions on activities or access. 

In addition, the Commission is 

proposing to add Rule 17Ad–22(a)(20) 

to define ‘‘transparent’’ to mean, for 

proposed Rules 17Ad–22(e)(1), (2), and 

(10), that relevant documentation is 

disclosed, as appropriate, to the 

Commission and other relevant 

authorities, clearing members and 

customers of clearing members, the 

owners of the covered clearing agency, 

and the public, to the extent consistent 

with other statutory and Commission 

requirements.116 In proposing this 

definition, the Commission recognizes 

that certain types of information, such 

as confidential information, may not be 

appropriate for public disclosure or 

disclosure to certain third parties. 

Confidential information might include, 

for instance, policies and procedures 

with respect to the security of 

information technology or other critical 

systems or governance arrangements 

relating to the creation of special 

advisory committees by the board of 

directors. With regard to public 

disclosures contemplated by proposed 

Rule 17Ad–22(a)(20), a covered clearing 

agency could comply with the proposed 

requirement by posting the relevant 

documentation to a covered clearing 

agency’s Web site. The Commission 

preliminarily believes that these 

disclosures would support a 

participant’s ability to evaluate the risks 

associated with participating in the 

covered clearing agency. For example, 

disclosures that facilitate market 

participants’ understanding of the legal 

basis for a covered clearing agency’s 

activities and its governance 

arrangements may encourage 

participation in the covered clearing 

agency (with respect to prospective 

clearing members) and may encourage 

trading in the United States that would 

result in clearance and settlement 

through the covered clearing agency 

(with respect to prospective investors). 

As was the case when the 

Commission considered Rule 17Ad– 

22(d)(1), where a clearing agency is 

faced with significant uncertainty 

regarding legal risk, the Commission 

preliminary believes this uncertainty 

may undermine a covered clearing 

agency’s ability to provide prompt and 

accurate clearance and settlement, to 

safeguard securities and funds and to 

provide fair procedures, as required 

under Section 17A of the Exchange Act. 

For example, where a covered clearing 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29520 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

117 Issues addressed in such wind-down plans 

may include termination, netting, and the transfer 

of securities positions and assets. 

118Cf. PFMI Report, supra note 1, at 21–25 

(discussing Principle 1, legal basis). 

119See proposed Rule 17Ad–22(e)(2), infra Part 

VII. Proposed Rule 17Ad–22(e)(2) would 

complement other requirements that may apply 

separately, including requirements in proposed 

Rules 17Ad–25 and 17Ad–26, and requirements for 

security-based swap clearing agencies under 

Section 765 of the Dodd-Frank Act, 12 U.S.C. 8343. 

See supra note 111 (noting rules proposed by the 

Commission to address potential conflicts of 

interest). 

120Specifically, Rule 17Ad–22(d)(8) requires a 

registered clearing agency to establish, implement, 

maintain and enforce written policies and 

procedures reasonably designed to have governance 

arrangements that are clear and transparent to fulfill 

the public interest requirements in Section 17A of 

the Exchange Act applicable to clearing agencies, to 

support the objectives of owners and participants, 

and to promote the effectiveness of the clearing 

agency’s risk management procedures. See 17 CFR 

240.17Ad–22(d)(8); see also Clearing Agency 

Standards Release, supra note 5, at 66251–52. 

121See supra Part I.A and note 96 (describing the 

Commission’s framework for regulation of SROs 

and the SRO rule filing process). 

122See 15 U.S.C. 78q–1(a)(3)(F), (H). 

123See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

124See 15 U.S.C. 78q–1(a)(2)(A). 

agency’s procedures addressing a 

participant default and establishing a 

security interest in collateral lack clarity 

or there is significant uncertainty 

regarding enforceability, there is a risk 

the clearing agency may face claims to 

void, stay or reverse its actions, which 

could be made by a bankruptcy trustee 

or other type of receiver in an 

insolvency of a participant, 

undermining the clearing agency’s 

ability to safeguard securities and funds. 

As a similar example, if covered 

clearing agency netting activities are 

voided or reversed on legal grounds, 

which could involve a participant’s 

insolvency, clearing and settlement 

could be disrupted as participant 

accounts are rebalanced. Also, for 

example, if a covered clearing agency’s 

plan for recovery and wind-down is 

subject to legal uncertainty, the covered 

clearing agency or governmental 

authorities may be delayed in or 

prevented from taking appropriate 

actions, resulting in disorder that may 

undermine the provision of prompt and 

accurate clearance and settlement.117

Therefore, like Rule 17Ad–22(d)(1), 

the Commission preliminarily believes 

that proposed Rule 17Ad–22(e)(1) 

would support the effectiveness of a 

covered clearing agency’s risk 

management procedures in two ways. 

First, by imposing requirements 

addressing legal risk, it would continue 

to promote effective risk management at 

covered clearing agencies. Second, the 

proposed rule would reinforce covered 

clearing agency policies and procedures 

regarding risks other than legal risk, 

including, among others, credit, 

liquidity, operational, and general 

business risk.118

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(1) and proposed Rule 

17Ad–22(a)(20). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the proposed rule include 

more specific requirements based on the 

type of business or the types of services 

offered by covered clearing agencies 

and/or whether the covered clearing 

agency operates in multiple 

jurisdictions? If so, are there any 

considerations, such as those 

concerning compliance with regulations 

in other jurisdictions, the Commission 

should take into account for covered 

clearing agencies operating in multiple 

jurisdictions? 

• Should the Commission adopt more 

prescriptive or less prescriptive rules to 

define how covered clearing agencies 

would provide for a well-founded, clear, 

transparent, and enforceable legal basis? 

Why or why not? If so, what would 

those rules be? 

• Should the Commission require a 

covered clearing agency to maintain 

documentation to demonstrate the legal 

adequacy of the mechanisms at the 

clearing agency that are in place to 

handle participant defaults? If so, what 

kinds of documentation should the 

Commission require? 

• In proposing Rule 17Ad–22(a)(20), 

has the Commission taken the right 

approach with respect to requiring 

public disclosures? Why or why not? 

Should the Commission adopt rules that 

would require either more or less 

disclosure? Why or why not? 

• What should be the minimum level 

of public disclosure required of a 

covered clearing agency? What 

information should a covered clearing 

agency be permitted to withhold? What 

form should that disclosure take? What 

content should be required? Please 

explain in detail. 

2. Proposed Rule 17Ad–22(e)(2): 

Governance 

Proposed Rule 17Ad–22(e)(2)(i) 

through (iv) would require a covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide for governance arrangements 

that are clear and transparent, clearly 

prioritize the safety and efficiency of the 

covered clearing agency, and support 

the public interest requirements in 

Section 17A of the Exchange Act and 

the objectives of owners and 

participants.119 The proposed rule 

contains requirements similar to those 

currently applicable to registered 

clearing agencies under Rule 17Ad– 

22(d)(8), but the proposed rule also 

requires that a covered clearing agency’s 

policies and procedures provide for 

governance arrangements that clearly 

prioritize the safety and efficiency of the 

covered clearing agency.120

Governance arrangements are critical 

to the sound operation of SROs, 

including covered clearing agencies.121

The Exchange Act explicitly conditions 

clearing agency registration on a 

clearing agency having rules that (i) 

assure a fair representation of 

shareholders or members and 

participants in the selection of its 

directors and administration of affairs, 

(ii) facilitate prompt and accurate 

clearance and settlement, (iii) protect 

investors and the public interest, (iv) do 

not permit unfair discrimination in the 

use of the clearing agency by 

participants and (v) provide certain fair 

procedures regarding participants and 

other interested parties.122 Accordingly, 

the proper functioning of registered 

clearing agencies pursuant to the 

requirements of the Exchange Act is 

premised on the existence of a wellorganized and operating governance 

function. 

Consistent with these requirements 

and the Exchange Act requirements 

discussed above,123 the Commission 

preliminarily believes that the 

governance requirements proposed in 

Rule 17Ad–22(e)(2) are appropriate 

because governance arrangements are 

fundamental to the functioning of a 

covered clearing agency pursuant to 

Section 17A of the Exchange Act.124

Consistent with the Commission’s 

statutory mandate under the Exchange 

Act, the proposed rule would specify 

that governance arrangements also be 

consistent with the public interest 

requirements in Section 17A of the 

Exchange Act as applicable to clearing 

agencies. Because a covered clearing 

agency’s decisions can have widespread 

impact, affecting multiple market 

participants, financial institutions, 

markets, and jurisdictions, the 

Commission preliminarily believes it is 

important that each covered clearing 

agency place a high priority on the 

safety and efficiency of its operations 

and explicitly support the objectives of 

owners and participants. In addition, 

supporting the public interest is a broad 


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125See supra note 95 (describing requirements for 

SROs under the Exchange Act and Rule 19b–4). 

126See id. 

127See supra note 111 (discussing rules proposed 

by the Commission to mitigate conflicts of interest 

at clearing agencies as part of efforts to promote 

sound risk management and governance 

arrangements). 

128See proposed Rule 17Ad–22(e)(2), infra Part 

VII. 

129For a discussion of current practices at 

registered clearing agencies regarding boards of 

directors and senior management, and the 

anticipated impact of the proposed requirements for 

governance, see Parts IV.B.3.a.ii and IV.C.3.a.ii, 

respectively. 

concept that includes, for example, 

contributing to the ongoing 

development of the U.S. financial 

system, in particular the national 

clearance and settlement system 

contemplated by Section 17A of the 

Exchange Act, and protecting investors 

and fostering fair and efficient markets. 

The Commission believes that, by 

supporting the public interest, market 

participants can develop common 

processes that help reduce uncertainty 

in the market, such as industry 

standards and market protocols related 

to clearance and settlement that 

facilitate a common understanding and 

interactions among clearing agencies 

and their members. The Commission 

preliminarily believes that covered 

clearing agencies, as SROs, are 

appropriately positioned to determine, 

based on their experience in providing 

clearance and settlement services and 

based on information obtained from 

their members and other stakeholders, 

as appropriate in the circumstances, 

what governance arrangements 

appropriately support the public 

interest requirements in Section 17A 

applicable to clearing agencies 

consistent with the expectations of such 

stakeholders,125 balancing the 

potentially competing viewpoints of the 

various stakeholders. The Commission 

also preliminarily believes that 

mechanisms through which a covered 

clearing agency could support the 

objectives of owners and participants 

could potentially include representation 

on the board of directors, user 

committees, and various public 

consultation processes. 

As with Rule 17Ad–22(d)(8), the 

Commission preliminarily believes that 

requiring policies and procedures for 

clear and transparent governance 

arrangements support accountability in 

the decisions, rules, policies, and 

procedures of the covered clearing 

agency. Such policies and procedures 

requirements for governance 

arrangements provide owners, 

participants, and, if applicable, general 

members of the public, with an 

opportunity to comment on or otherwise 

provide input to governance 

arrangements and, in turn, provide a 

covered clearing agency with the 

opportunity to balance the potentially 

competing viewpoints of various 

stakeholders in its decision making.126

Similarly, these policies and procedures 

requirements for governance 

arrangements may promote the 

effectiveness of a covered clearing 

agency’s risk management procedures 

by fostering a focus on the critical role 

that risk management plays in 

promoting prompt and accurate 

clearance and settlement.127

In addition, proposed Rule 17Ad– 

22(e)(2)(iv) would require that the 

covered clearing agency establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for 

governance arrangements establishing 

that the board of directors and senior 

management have appropriate 

experience and skills to discharge their 

duties and responsibilities.128 The 

Commission preliminarily believes that 

these aspects of a covered clearing 

agency’s governance framework are 

particularly important and that 

establishing requirements in these areas 

would be appropriate given the risks 

that a covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets.129

The Commission preliminarily 

believes that directors serving on the 

board and board committees of a 

clearing agency play an important role 

in creating a framework that supports 

prompt and accurate clearance and 

settlement because of their role in the 

decision-making process within a 

clearing agency. Additionally, the 

Commission preliminarily believes that 

a covered clearing agency’s senior 

management has an important role in 

ensuring, under the board’s direction, 

that the clearing agency’s activities are 

consistent with the objectives, strategy, 

and risk tolerance of the clearing 

agency, as determined by the board. 

Accordingly, the expertise and skills of 

senior management and directors 

serving on the board of a covered 

clearing agency are likely to affect its 

effective operation. For example, a lack 

of expertise by board members may 

deter them from challenging decisions 

by management and lessen the potential 

that management would escalate 

appropriate issues to the board for the 

board’s consideration. Similarly, board 

members and management should not 

have conflicts of interests that could 

undermine the decision-making process 

within a covered clearing agency or 

interfere with fair representation and 

equitable treatment of clearing members 

or other market participants by a 

covered clearing agency. 

The Commission believes that 

covered clearing agencies are well 

positioned to determine which 

individuals would have the appropriate 

experience, skills, incentives and 

integrity to discharge their duties and 

responsibilities that reflect the 

particular characteristics of each 

covered clearing agency. Accordingly, 

the Commission preliminarily believes 

that the proposed requirement for 

policies and procedures would provide 

the covered clearing agency with a 

process to evaluate the expertise and 

skills of board members and senior 

management, consistent with the 

particular circumstances of the covered 

clearing agency. Such policies and 

procedures may include provisions 

requiring the covered clearing agency to 

consider, for example, the specific 

qualifications, experience, competence, 

character, skills, incentives, integrity or 

other relevant attributes to support a 

conclusion that an individual nominee 

can appropriately serve as a board 

member or on senior management. Such 

policies and procedures could also 

include, among other things, 

requirements as to industry experience 

relevant to the services provided by the 

covered clearing agency, educational 

background, the absence of a criminal or 

disciplinary record, or other factors 

relevant to the qualifications of 

nominees being considered. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(2). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to provide for governance 

arrangements that prioritize the safety 

and efficiency of the covered clearing 

agency? Why or why not? 

• The Commission is not proposing at 

this time to require a covered clearing 

agency’s policies and procedures 

provide for governance arrangements 

that also support the objectives of 

participants’ customers, securities 

issuers and holders, and other 

stakeholders. Should the Commission 

consider such a requirement? Why or 

why not? Are existing protections under 

the Exchange Act, such as those in 

Section 17A(b)(3)(H) (requiring clearing 

agency rules to provide fair procedures 

to persons with respect to access to 

services offered by the clearing 


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130See 15 U.S.C. 78q–1(b)(3)(H). 

131See 15 U.S.C. 78q–1(b)(5)(B). 

132See 15 U.S.C. 78s(d)(2). 

133See proposed Rule 17Ad–22(e)(3), infra Part 

VII. 

134See 17 CFR 240.17Ad–22(b), (d); see also 

Clearing Agency Standards Release, supra note 5, 

at 66230–43, 66244–58. Specifically, as examples, 

Rule 17Ad–22(d)(4) requires a registered clearing 

agency to have policies and procedures reasonably 

designed to address certain aspects of operational 

risk, and Rule 17Ad–22(d)(7) requires a registered 

clearing agency to have policies and procedures 

reasonably designed to address certain aspects of 

risks relating to linkages. See 17 CFR 240.17Ad– 

22(d)(4), (7). 

135See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

agency),130 Section 17A(b)(5)(B) 

(establishing requirements for clearing 

agencies when determining whether a 

person may be prohibited or limited 

with respect to services offered),131 and 

Section 19(d)(2) (persons aggrieved by 

SRO actions may apply to the 

Commission for review) 132 already 

satisfactory or would additional 

Commission governance requirements 

also be appropriate? What would be the 

possible advantages and disadvantages 

of expanding the scope of proposed 

Rule 17Ad–22(e)(2)(iii) to require 

covered clearing agency policies and 

procedures to consider the interests of 

persons other than owners and 

participants? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to provide for governance 

arrangements establishing that the board 

of directors and senior management 

have appropriate experience and skills 

to discharge their duties and 

responsibilities? Why or why not? Has 

the Commission provided sufficient 

guidance on what ‘‘experience and 

skills’’ would require? Why or why not? 

• Are there any other requirements 

that should be included in the rule to 

promote clear and transparent 

governance arrangements? 

• The Commission is not proposing at 

this time to require a covered clearing 

agency’s policies and procedures 

provide for governance arrangements to 

ensure that lines of responsibility and 

accountability at the covered clearing 

agency are clear and direct. Should the 

Commission consider such a 

requirement? Why or why not? 

• The Commission is not proposing at 

this time to require a covered clearing 

agency’s policies and procedures 

provide for governance arrangements 

that ensure major decisions of the board 

of directors are disclosed to the public. 

Should the Commission consider such a 

requirement? Why or why not? 

• Should there be a phase-in period 

for covered clearing agencies to comply 

with proposed Rule 17Ad–22(e)(2), such 

as until the next annual meeting of 

shareholders of the covered clearing 

agency or other time period? Why or 

why not? 

• Are the governance requirements in 

proposed Rule 17Ad–22(e)(2) necessary 

to achieve the benefits discussed in Part 

IV.C.3.a.ii? Why or why not? For 

example, how and why would 

particular features of the proposed rules, 

such as expectations that directors and 

officers of covered clearing agencies 

have certain skills and experience, 

contribute to greater market stability 

and reduced risk of insufficient internal 

controls endangering broader financial 

stability? Are there existing 

requirements under Section 17A of the 

Exchange Act, such as the ‘‘fair 

representation’’ requirement in Section 

17A(b)(3)(C), rules and regulations 

adopted by the Commission and 

applicable to SROs, or relevant 

interpretations published by the 

Commission that already provide a clear 

and sufficient basis for the Commission 

to supervise covered clearing agencies 

in the manner contemplated by 

proposed Rule 17Ad–22(e)(2) without 

adopting the proposed rule? What are 

the possible benefits of adopting the 

rule as proposed and what possible 

detriments may arise that the 

Commission should consider? 

• Are there disclosures that a covered 

clearing agency should be required to 

make with respect to its governance 

arrangements? Why or why not? If so, 

what should be the form and content of 

those disclosures? 

• Should the Commission require that 

the performance of the board of 

directors and senior management— 

individually and as a group—are 

reviewed on a regular basis? If so, how 

often should this review be conducted? 

Should this review be conducted 

independently? 

• Should the board of directors of 

covered clearing agencies include 

individuals who are not executives, 

officers, or employees of the covered 

clearing agency, or an affiliate of the 

covered clearing agency? Should the 

board of directors of covered clearing 

agencies include an independent audit 

committee? 

• Should the Commission be 

involved in and/or set requirements and 

standards with respect to board and 

management governance at covered 

clearing agencies? Does the Commission 

have the requisite statutory authority to 

adopt the rule proposals and matters 

addressed in the related questions set 

forth in this release as to governance 

arrangements, standards, composition, 

and qualifications of covered clearing 

agencies’ boards and management? Is 

the Commission’s oversight and 

establishment of corporate governance 

measures and standards at clearing 

agencies a proper and good use of 

Commission resources? What are the 

potential costs and benefits of these 

corporate governance provisions? 

3. Proposed Rule 17Ad–22(e)(3): 

Framework for the Comprehensive 

Management of Risks 

Proposed Rule 17Ad–22(e)(3) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain a 

sound risk management framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

investment, custody, and other risks 

that arise in or are borne by the covered 

clearing agency.133

Existing Rules 17Ad–22(b) and (d) 

require registered clearing agencies to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to meet several 

requirements that address risk 

management practices by registered 

clearing agencies that provide CCP 

services (Rules 17Ad–22(b)(1) through 

(4)), certain requirements regarding 

access to registered clearing agencies 

that provide CCP services (Rules 17Ad– 

22(b)(5) through (7)), and certain 

minimum standards for the operations 

of registered clearing agencies providing 

CCP or CSD services.134 Consistent with 

these requirements and the Exchange 

Act requirements discussed above, 135

the Commission preliminarily believes 

that proposed Rule 17Ad–22(e)(3) is 

appropriate and would require a 

covered clearing agency’s policies and 

procedures to take a broader, more 

comprehensive approach to risk 

management, which the Commission 

believes is fundamental to a covered 

clearing agency’s functioning given its 

size, operation, and importance in the 

U.S. securities markets. While existing 

rules under the Exchange Act already 

target certain aspects of risk 

management, the Commission 

preliminarily believes that 

comprehensive risk management 

policies and procedures established 

pursuant to proposed Rule 17Ad– 

22(e)(3) would further support the 

examination of risks, the assessment of 

their probability and impact, and the 


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136See 15 U.S.C. 78q–1(a)(2). 

137See id. 

138See proposed Rule 17Ad–22(e)(3), infra Part 

VII. 

139See generally Clearing Agency Standards 

Release, supra note 5, at 66283 (noting, in 

discussing Rule 17Ad–22(d)(11), that having 

policies and procedures ‘‘allow[s] a clearing agency 

to wind down positions in an orderly way and 

continue to perform its obligations in the event of 

a participant default, assuring continued 

functioning of the securities market in times of 

stress and reducing systemic risk’’). 

identification of linkages to other 

entities that in turn pose risks to the 

covered clearing agency. The 

Commission also believes that 

comprehensive risk management 

policies and procedures would facilitate 

the development of mechanisms to 

better prioritize, manage, and monitor 

risks, and to measure the covered 

clearing agency’s risk tolerance and 

capacity. In proposing Rule 17Ad– 

22(e)(3), the Commission is emphasizing 

a comprehensive approach to risk 

management that would require risk 

management policies and procedures be 

designed holistically, be consistent with 

each other, and work effectively 

together in order to mitigate the risk of 

financial losses to covered clearing 

agencies’ members and participants in 

the markets they serve. 

In addition, policies and procedures 

for the comprehensive management of 

risks have the potential to play an 

important role in making sure that 

covered clearing agencies better fulfill 

the Exchange Act requirements that the 

rules of a clearing agency be designed to 

protect investors and the public 

interest.136 Similarly, these 

requirements may promote the 

effectiveness of a covered clearing 

agency’s risk management procedures 

by fostering a focus on the critical role 

that risk management plays in 

promoting prompt and accurate 

clearance and settlement. Accordingly, 

the Commission preliminarily believes 

that it is important that covered clearing 

agencies have policies and procedures 

that enable them to identify, monitor, 

and manage the range of risks that arise 

in or are borne by all aspects of their 

clearance and settlement activities. 

In addition, the Commission is 

proposing the requirements described 

below, which do not appear in existing 

Rules 17Ad–22(b) or (d). The 

Commission preliminarily believes 

these requirements would be 

appropriate for covered clearing 

agencies given the risks that their size, 

operation, and importance pose to the 

U.S. securities markets. 

a. Policies and Procedures 

Requirements, Periodic Review, and 

Annual Board Approval 

Proposed Rule 17Ad–22(e)(3)(i) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for risk 

management policies, procedures, and 

systems designed to identify, measure, 

monitor, and manage the range of risks 

that arise in or are borne by the covered 

clearing agency, and subject them to 

review on a specified periodic basis and 

approval by the board of directors 

annually.137

The Commission preliminarily 

believes periodic review of the risk 

management policies and procedures 

would allow covered clearing agencies 

to assess whether the risk management 

policies and procedures should be 

updated to account for changing factors 

in the market and to address and codify 

in a uniform way the approach to new 

risks taken since the last periodic 

review. The Commission preliminarily 

believes that the board of directors of a 

covered clearing agency should be 

required to approve the risk 

management policies and procedures. 

The Commission preliminarily believes 

that, in complying with this 

requirement, a board of directors may 

want to subject all material components 

of the covered clearing agency’s risk 

management policies and procedures to 

review pursuant to Rule 17Ad– 

22(e)(3)(i) due to the critical role that 

risk management plays in promoting 

prompt and accurate clearance and 

settlement. 

b. Recovery and Orderly Wind-Down 

Plans 

Proposed Rule 17Ad–22(e)(3)(ii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure it 

establishes plans for the recovery and 

orderly wind-down of the covered 

clearing agency necessitated by credit 

losses, liquidity shortfalls, losses from 

general business risk, or any other 

losses.138

Securities exchanges, market 

participants, and investors rely upon the 

safe, sound, and efficient operations of 

covered clearing agencies, and 

accordingly the Commission 

preliminarily believes that a disorderly 

wind-down of a covered clearing agency 

would have systemic consequences.139

The Commission preliminarily believes 

that a recovery plan designed to deal 

with possible scenarios that may 

threaten or potentially prevent a 

covered clearing agency from being able 

to provide its critical operations and 

services as a going concern and that 

assesses a full range of options for 

recovery could mitigate the impact of a 

near failure of a covered clearing 

agency. 

Based on its supervisory experience, 

the Commission recognizes that covered 

clearing agencies operating in the 

market today each have relevant 

standards and practices relating to 

recovery and orderly wind-down with 

differing degrees of formality. The 

Commission therefore preliminarily 

expects that Rule 17Ad–22(e)(3)(ii) 

would require covered clearing agencies 

to review such standards and practices 

for sufficiency with respect to the safe 

operation of the covered clearing agency 

and revise such practices in a manner 

consistent with the findings of such 

review consistent with the proposed 

rule, if adopted, and the requirements of 

the Exchange Act. 

c. Risk Management and Internal Audit 

Proposed Rule 17Ad–22(e)(3)(iii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide risk 

management and internal audit 

personnel with sufficient authority, 

resources, independence from 

management, and access to the board of 

directors. The Commission 

preliminarily believes that a covered 

clearing agency could satisfy the 

policies and procedures requirement for 

independence from management by, for 

example, providing reporting lines for 

risk management functions that are clear 

and separate from those for other 

operations and providing for direct 

reporting to the board of directors or a 

relevant committee of the board. In that 

regard, proposed Rule 17Ad–22(e)(3)(iv) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide risk 

management and internal audit 

personnel with oversight by and a direct 

reporting line to a risk management 

committee and an audit committee of 

the board of directors, respectively. 

Furthermore, proposed Rule 17A– 

22(e)(3)(v) would require a covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide for an independent audit 

committee. 

The Commission preliminarily 

believes that a covered clearing agency 

should have an effective internal audit 

function in order to provide, among 

other things, a rigorous and 

independent assessment of the 

effectiveness of the clearing agency’s 


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140See 17 CFR 240.10A–3. 

141 In this context, the clearing agency’s credit 

risk is closely related to the participant’s market 

risk. A participant’s ability to meet its obligations 

to the clearing agency may be affected by the 

participant’s exposure to fluctuations in the market 

value of the participant’s open positions. In 

addition, fluctuations in the market value of the 

collateral posted by the participant may require the 

clearing agency to obtain additional margin from 

the participant. 142See 17 CFR 240.17Ad–22(b)(1). 

risk management and control processes, 

and should have an independent audit 

committee overseeing the internal audit 

function in order to help promote the 

integrity and efficiency of the audit 

process and strengthen internal 

controls. In order to satisfy the 

independence requirement for an audit 

committee under proposed Rule 17Ad– 

22(e)(2), a covered clearing agency 

could use such independence criteria as 

are established by its board of directors. 

The Commission further preliminarily 

believes that policies and procedures for 

risk management are important to the 

effective operation of a covered clearing 

agency. 

d. Request for Comments 

The Commission generally requests 

comments on all aspects of Proposed 

Rule 17Ad–22(e)(3). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to maintain a sound risk 

management framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

investment, custody, and other risks 

that arise in or are borne by the covered 

clearing agency? Why or why not? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures include plans for the 

recovery and orderly wind-down of the 

covered clearing agency necessitated by 

credit losses, liquidity shortfalls, losses 

from general business risk, or any other 

losses? Why or why not? 

• How and to whom should the board 

of directors communicate the results of 

its review of the risk management 

framework, if at all? 

• Are there any other requirements 

that should be included in the rule to 

facilitate policies and procedures that 

maintain a sound risk management 

framework, including the proposed 

requirements for policies and 

procedures regarding board review and 

approval of risk management policies 

and policies and procedures with 

respect to recovery and orderly winddown plans? Why or why not? For 

example, should the Commission 

require a covered clearing agency’s 

policies and procedures to identify, 

measure, monitor, and manage the 

material risks that it poses to other 

entities, such as other financial market 

utilities, settlement banks, liquidity 

providers, or service providers, as a 

result of interdependencies? Why or 

why not? 

• The Commission is not proposing at 

this time to require a covered clearing 

agency’s policies and procedures to, in 

its comprehensive risk management 

framework, provide for criteria for the 

independence of audit committee 

members. Should the Commission 

consider requirements that specify such 

criteria? Why or why not? If so, should 

those criteria be similar to the audit 

committee independence requirements 

for listed companies in Rule 10A–3 

under the Exchange Act? 140 In order to 

satisfy the policies and procedures 

requirement for independence of the 

audit committee under proposed Rule 

17Ad–22(e)(3), should a covered 

clearing agency be allowed to use such 

independence criteria as are established 

by its board of directors? 

4. Proposed Rules 17Ad–22(e)(4) 

through (7): Financial Risk Management 

a. Overview of Financial Risks Faced by 

Clearing Agencies 

Covered clearing agencies face a 

variety of financial risks from their 

participants and service providers, 

including credit or counterparty default 

risk, market risk, and liquidity risk. For 

example, for clearing agencies that 

provide CSD services, credit risk arises 

from the potential that a participant will 

not pay what it owes for securities that 

it has purchased or will not deliver 

securities that it has sold. For clearing 

agencies that clear and settle derivatives 

contracts, credit risk arises from the 

potential that a participant will not meet 

its margin or settlement obligations or 

pay any other amounts owed to the 

covered clearing agency.141 Credit risk 

also arises for clearing agencies of any 

type from commercial banks or 

custodians that the covered clearing 

agency uses to effect money transfers 

among participants, to hold overnight 

deposits, or to safeguard cash or other 

collateral. 

Clearing agencies that provide CCP 

services take offsetting positions as the 

substituted counterparty to a transaction 

and, therefore, do not ordinarily face 

market risk except in the event of a 

participant default. In such an event, 

market risk takes two forms. First, the 

clearing agency may need to liquidate 

collateral posted by the defaulting 

participant. The clearing agency is 

therefore exposed to volatility in the 

market price of the defaulting 

participant’s non-cash collateral that 

could result in the clearing agency 

having insufficient financial resources 

to cover the losses in the defaulting 

participant’s open positions. Second, a 

clearing agency providing CCP services 

is subject to volatility in the market 

price of the defaulting participant’s 

open positions during the interval 

between the point at which the clearing 

agency takes control of those positions 

and the point at which the clearing 

agency is able to offset, transfer, or 

liquidate those positions. A clearing 

agency faces the risk that its exposure to 

a participant can change as a result of 

a change in prices, positions, or both. 

A clearing agency must be able to 

measure the counterparty credit 

exposures that it is expected to manage 

effectively. A clearing agency can 

ascertain its current credit exposure to 

each participant by marking each 

participant’s outstanding positions to 

current market prices and (to the extent 

permitted by a clearing agency’s rules 

and supported by law) netting any gains 

against any losses. 

In addition to credit risk and market 

risk, clearing agencies also face liquidity 

or funding risk. Currently, to complete 

the settlement process, clearing agencies 

generally rely on incoming payments 

from participants in net debit positions 

in order to make payments to 

participants in net credit positions. If a 

participant does not have sufficient 

funds to make an incoming payment 

immediately when it is due (even 

though it may be able to pay at some 

future time), or if a settlement bank is 

unable to make an incoming payment 

on behalf of a participant, the clearing 

agency faces a funding shortfall. A 

clearing agency typically holds 

additional financial resources to cover 

potential funding shortfalls such as 

margin collateral or lines of credit. 

However, if collateral cannot be 

liquidated within a short time, or if 

lines of credit are unavailable, liquidity 

risk would be exacerbated. 

b. Current Financial Risk Management 

Requirements for CCPs 

Rules 17Ad–22(b)(1) through (4) 

concern risk management requirements 

for clearing agencies that perform CCP 

services (hereinafter ‘‘CCPs’’ in this 

part). Rule 17Ad–22(b)(1) requires that 

CCPs establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

measure their credit exposures at least 

once per day.142 Rule 17Ad–22(b)(2) 

requires that CCPs establish, implement, 

maintain and enforce written policies 


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143See 17 CFR 240.17Ad–22(b)(2). 

144See 17 CFR 240.17Ad–22(b)(3). 

145See 17 CFR 240.17Ad–22(b)(4). 

146See proposed Rule 17Ad–22(e)(4), infra Part 

VII. 

147See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

148See, e.g., Arthur S. Goldberger, A Course in 

Econometrics 122–23 (Harvard Univ. Press, 2003) 

(defining confidence intervals for parameter 

estimates). 

149See supra Part II.B.4.a (noting that a clearing 

agency must be able to measure the counterparty 

credit exposures in order to manage risk 

effectively). 

150The Commission notes that, with the 

exception of security–based swap clearing agencies, 

all registered clearing agencies providing CCP 

services are all currently required to meet a ‘‘cover 

one’’ standard under Rule 17Ad–22(b)(3), and 

therefore the Commission anticipates that covered 

clearing agencies may need to make only limited 

changes to policies and procedures to satisfy the 

proposed requirement, if adopted. See infra Parts 

IV.B.3.b.i and IV.C.3.a.iv(1) (discussing current 

practices at registered clearing agencies relating to 

credit risk and the anticipated economic effect of 

the proposed requirement, respectively). 

151See supra Part II.A.1 (discussing the scope of 

proposed Rule 17Ad–22(e)); supra notes 79–80 and 

accompanying text. 

152See proposed Rule 17Ad–22(a)(19), infra Part 

VII; see also infra Parts II.C and VII (discussing the 

determinations process under proposed Rule 

17Ab2–2 and providing proposed rule text). 

153See 17 CFR 240.17Ad–22(b)(3); see also infra 

Part II.A.1 (discussing the scope of proposed Rule 

17Ad–22(e)); Clearing Agency Standards Release, 

supra note 5, at 66233–36 (discussing proposed 

Rule 17Ad–22(b)(3)). 

and procedures reasonably designed to 

use margin requirements to limit their 

exposures to participants.143 This 

margin can also be used to reduce a 

CCP’s losses in the event of a participant 

default. Rule 17Ad–22(b)(3) requires 

that CCPs establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

maintain sufficient financial resources 

to withstand, at a minimum, a default 

by the participant family to which a 

CCP has the largest exposure in extreme 

but plausible market conditions, except 

that CCPs clearing security-based swap 

transactions must maintain additional 

financial resources sufficient to 

withstand the simultaneous default by 

the two participant families to which a 

CCP has the largest exposures.144

Finally, Rule 17Ad–22(b)(4) requires 

that CCPs establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide for an annual model validation 

that consists of evaluating the 

performance of a clearing agency’s 

margin models and the related 

parameters and assumptions associated 

with such models and that is performed 

by a qualified person who is free from 

influence from the persons responsible 

for development or operation of the 

models being validated.145

c. Proposed Rule 17Ad–22(e)(4): Credit 

Risk 

Proposed Rule 17Ad–22(e)(4) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to effectively 

identify, measure, monitor, and manage 

its credit exposures to participants and 

those exposures arising from its 

payment, clearing, and settlement 

processes.146 The Commission 

preliminarily believes the proposed rule 

is consistent with the requirements of 

the Exchange Act discussed above.147

Proposed Rule 17Ad–22(e)(4)(i) 

would require a covered clearing to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain 

sufficient financial resources to cover its 

credit exposure to each participant fully 

with a high degree of confidence. The 

Commission’s intention in proposing 

the term ‘‘high degree of confidence’’ is 

to refer to the statistical meaning of this 

term.148 The proposed rule would 

require a covered clearing agency to use 

statistical methods to develop models in 

order to estimate the financial resources 

required under proposed Rule 17Ad– 

22(e)(4)(ii) and (iii),149 and to comply 

with the requirements of proposed Rule 

17Ad–22(e)(4)(ii) and (iii), while 

recognizing that such an approach is 

necessarily imprecise to at least some 

degree. 

Proposed Rule 17Ad–22(e)(4)(ii) 

would require a covered clearing agency 

that provides CCP services, and that is 

‘‘systemically important in multiple 

jurisdictions’’ or ‘‘a clearing agency 

involved in activities with a more 

complex risk profile,’’ to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to maintain 

additional financial resources, to the 

extent not already maintained pursuant 

to proposed Rule 17Ad–22(e)(4)(i), at a 

minimum level necessary to enable it to 

cover a wide range of foreseeable stress 

scenarios, including but not limited to 

the default of the two participant 

families that would potentially cause 

the largest aggregate credit exposure for 

the covered clearing agency in extreme 

but plausible market conditions 

(hereinafter the ‘‘cover two’’ 

requirement). 

Proposed Rule 17Ad–22(e)(4)(iii) 

would require a covered clearing agency 

that is not subject to proposed Rule 

17Ad–22(e)(4)(ii) to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to maintain 

additional financial resources, to the 

extent not already maintained pursuant 

to proposed Rule 17Ad–22(e)(4)(i), at 

the minimum to enable it to cover a 

wide range of foreseeable stress 

scenarios, including the default of the 

participant family that would 

potentially cause the largest aggregate 

credit exposure for the covered clearing 

agency in extreme but plausible market 

conditions (hereinafter the ‘‘cover one’’ 

requirement).150 The Commission notes 

that the requirement in proposed Rules 

17Ad–22(e)(4)(ii) and (iii) to examine 

exposure under foreseeable stress 

scenarios including extreme but 

plausible market conditions means the 

covered clearing agency may need to 

use models to determine how its 

estimated exposure under such 

conditions differs from its actual 

exposure to positions of such 

participants, which it would be required 

to measure under proposed Rule 17Ad– 

22(e)(4)(i). 

Also, as previously discussed, the 

Commission is proposing Rule 17Ad– 

22(a)(4) to define ‘‘clearing agency 

involved in activities with a more 

complex risk profile.’’ 151 The 

Commission is also proposing Rule 

17Ad–22(a)(19) to define ‘‘systemically 

important in multiple jurisdictions’’ to 

mean a covered clearing agency that has 

been determined by the Commission to 

be systemically important in more than 

one jurisdiction pursuant to Rule 

17Ab2–2.152

Like the ‘‘cover two’’ requirement in 

Rule 17Ad–22(b)(3), which applies to 

registered clearing agencies that provide 

CCP services for security-based 

swaps,153 proposed Rule 17Ad– 

22(e)(4)(ii) would impose a ‘‘cover two’’ 

requirement to address credit risk of 

certain covered clearing agencies: Those 

systemically important in multiple 

jurisdictions and those involved in 

activities with a more complex risk 

profile. The Commission notes that the 

set of complex risk profile clearing 

agencies subject to this requirement 

would include, as of the date of this 

proposal, only registered clearing 

agencies that provide CCP services for 

security-based swaps, which are already 

subject to the ‘‘cover two’’ requirement 

in Rule 17Ad–22(b)(3). In addition, the 

Commission notes that no covered 

clearing agency would be systemically 

important in multiple jurisdictions 

unless and until the Commission made 

such a determination pursuant to 


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154See infra Parts II.C and VII (discussing the 

determinations process under proposed Rule 

17Ab2–2 and providing proposed rule text). 

155See supra Part II.B.4.b. 

156See proposed Rule 17Ad–22(e)(4)(iv), infra 

Part VII. 

157See generally 12 U.S.C. 5461 (Congress 

finding, among other things, that enhancements to 

the regulation and supervision of systemically 

important FMUs and the conduct of systemically 

important PCS activities by financial institutions 

are necessary, under Title VIII, to provide 

consistency, to promote robust risk management 

and safety and soundness, to reduce systemic risks, 

and to support the stability of the broader financial 

system). 

158See proposed Rule 17Ad–22(e)(4)(v), infra Part 

VII. 

159Rule 17Ad–22(b)(3) currently also permits a 

security-based swap clearing agency to have 

policies and procedures reasonably designed to 

maintain financial resources generally or in 

separately maintained funds. See 17 CFR 

240.17Ad–22(b)(3); see also Clearing Agency 

Standards Release, supra note 5, at 66233–236. 

160See proposed Rule 17Ad–22(e)(4)(vi), infra 

Part VII. 

proposed Rule 17Ab2–2.154 For any 

covered clearing agency not currently 

subject to a ‘‘cover two’’ requirement 

that could be determined by the 

Commission in the future to be either 

systemically important in multiple 

jurisdictions or involved in activities 

with a more complex risk profile, the 

Commission believes that requiring 

such entities to improve their resilience 

to offset increased risk and to prepare 

for extreme but plausible market 

conditions is appropriate because it 

could decrease the likelihood that 

systemic events in other jurisdictions or 

extreme volatility in more complex 

financial instruments would result in 

interruptions to the provision of 

clearance and settlement services in the 

U.S. securities markets. 

In addition, the Commission is 

proposing the requirements described 

below. In discussing these requirements, 

the below sections describe how they 

differ from existing requirements in 

Rules 17Ad–22(b)(1) through (4) 

applicable to security-based swap 

clearing agencies, previously discussed 

above.155

i. Prefunded Financial Resources 

Proposed Rule 17Ad–22(e)(4)(iv) 

would require a covered clearing agency 

providing CCP services that is either 

systemically important in multiple 

jurisdictions or a complex risk profile 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

include prefunded financial resources, 

excluding assessments for additional 

guaranty fund contributions or other 

resources that are not prefunded, when 

calculating the financial resources 

available to meet the standards under 

proposed Rules 17Ad–22(e)(4)(i) 

through (iii), as applicable.156 The 

Commission preliminarily believes that 

prefunding default obligations is 

appropriate because of the importance 

of the ability of a covered clearing 

agency to meet its default resource 

obligations to the clearance and 

settlement system, given the risks that 

its size, operation, and importance pose 

to the U.S. securities markets.157

Immediately available financial 

resources are necessary to ensure that a 

covered clearing agency can meet its 

financial obligations on an ongoing 

basis. Without prefunded financial 

resources, a covered clearing agency 

may be unable to meet its financial 

obligations in stressed market 

conditions, when clearing members may 

be unwilling or unable to contribute to 

the clearing agency’s guaranty fund in 

the event of a member default. 

The Commission notes that while the 

ability to assess participants for 

contributions under applicable covered 

clearing agency governing documents, 

rules, or agreements could not be 

included in this calculation, previously 

paid-in participant contributions into a 

covered clearing agency default fund 

could be counted to the extent the 

clearing agency’s rules, policies, or 

procedures permit such resources to be 

used in a manner equivalent to other 

financial resources in the default fund. 

Other sources of prefunded resources, 

such as margin previously posted to the 

clearing agency by participants, could 

also be treated in this manner. In 

addition, while the ability to draw down 

under a revolving loan facility could not 

be counted towards prefunded resources 

because funds from such loan facility 

would not be in the covered clearing 

agency’s immediate possession, the 

covered clearing agency could count 

borrowed funds already drawn down, 

such as under a term loan or other credit 

facility. 

Existing requirements under Rule 

17Ad–22 do not include requirements 

for prefunded financial resources at 

registered clearing agencies. The 

proposed requirement reflects the 

Commission’s recognition of the 

importance of a covered clearing agency 

meeting its default resource obligations, 

given the risks that its size, operation, 

and importance pose to the U.S. 

securities markets. 

ii. Combined or Separately Maintained 

Clearing or Guaranty Funds 

Proposed Rule 17Ad–22(e)(4)(v) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain the 

financial resources required under 

proposed Rules 17Ad–22(e)(4)(i) 

through (iii) in combined or separately 

maintained clearing or guaranty 

funds.158 The proposed rule makes clear 

that a covered clearing agency may 

choose to maintain a separate default 

fund for purposes of complying with 

proposed Rules 17Ad–22(e)(4)(i) 

through (iii). 

This requirement would be similar to 

the requirement in Rule 17Ad–22(b)(3) 

requiring a security-based swap clearing 

agency to have policies and procedures 

reasonably designed to maintain 

financial resources generally or in 

separately maintained funds.159 The 

Commission believes that this approach 

facilitates the operations of clearing 

agencies. For example, clearing agencies 

may maintain separate default funds for 

each product or asset type cleared, in 

order to more appropriately tailor risk 

management requirements or contain 

losses from a default to that fund. 

iii. Testing the Sufficiency of Financial 

Resources 

Proposed Rule 17Ad–22(e)(4)(vi) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to test the 

sufficiency of its total financial 

resources available to meet the 

minimum financial resource 

requirements under proposed Rules 

17Ad–22(e)(4)(i) through (iii), as 

applicable, by conducting a stress test of 

its total financial resources at least once 

each day using standard predetermined 

parameters and assumptions.160

Registered clearing agencies are not 

subject to requirements for testing the 

sufficiency of their financial resources 

under existing Rule 17Ad–22. 

The proposed rule would also require 

a covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to conduct a 

comprehensive analysis on at least a 

monthly basis of the existing stress 

testing scenarios, models, and 

underlying parameters and 

assumptions, and consider 

modifications to ensure they are 

appropriate for determining the covered 

clearing agency’s required level of 

default protection in light of current 

market conditions. When the products 

cleared or markets served by a covered 

clearing agency display high volatility, 

become less liquid, or when the size or 

concentration of positions held by the 

entity’s participants increases 


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161See proposed Rule 17Ad–22(a)(18), infra Part 

VII. 

162See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

163See proposed Rule 17Ad–22(e)(4)(vii), infra 

Part VII. 

164See 17 CFR 240.17Ad–22(c)(2). 

165See proposed Rule 17Ad–22(a)(5), infra Part 

VII. 

166See Clearing Agency Standards Release, supra 

note 5, at 66238. 

167Rule 17Ad–22(b)(4) requires a security-based 

swap clearing agency to establish, implement, 

maintain and enforce written policies and 

procedures reasonably designed to provide for an 

annual model validation consisting of evaluating 

the performance of the clearing agency’s margin 

models and the related parameters and assumptions 

associated with such models by a qualified person 

who is free from influence from the persons 

responsible for the development or operation of the 

models being validated. See 17 CFR 240.17Ad– 

22(b)(4); see also Clearing Agency Standards 

Release, supra note 5, at 66236–238. 

In contrast to proposed Rules 17Ad–22(a)(5) and 

(e)(4)(vii), Rule 17Ad–22(b)(4) requires only a 

model validation for margin models and does not 

specify the general elements of a model validation. 

168See generally Clearing Agency Standards 

Release, supra note 5, at 66238. 

significantly, the proposed rule would 

specifically require a covered clearing 

agency to have policies and procedures 

for conducting comprehensive analyses 

of stress testing scenarios, models, and 

underlying parameters and assumptions 

more frequently than monthly. The 

Commission preliminarily believes that 

what constitutes ‘‘high volatility’’ and 

‘‘low liquidity’’ would vary across asset 

classes that a covered clearing agency 

might clear. Accordingly, the 

Commission preliminarily believes that 

a clearing agency would need flexibility 

to address changing circumstances and 

is therefore not proposing to prescribe 

triggers for any particular circumstance. 

The proposed rule would also require 

a covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for the 

reporting of the results of this analysis 

to the appropriate decision makers at 

the covered clearing agency, including 

its risk management committee or board 

of directors, and to require the use of the 

results to evaluate the adequacy of and 

to adjust its margin methodology, model 

parameters, and any other relevant 

aspects of its credit risk management 

policies and procedures, in supporting 

compliance with the minimum financial 

resources requirements discussed above. 

The Commission is also proposing to 

add Rule 17Ad–22(a)(18) to define 

‘‘stress testing’’ to mean the estimation 

of credit and liquidity exposures that 

would result from the realization of 

extreme but plausible price changes or 

changes in other valuation inputs and 

assumptions.161 The Commission 

preliminarily believes that stress testing 

is an important component of the 

proposed rules because stress testing 

may enable a covered clearing agency to 

be prepared for an extreme event that 

may not be anticipated or expected 

based solely on current market 

conditions or from a sample of historical 

data. 

The Commission preliminarily 

believes that the requirements in 

proposed Rule 17Ad–22(e)(4)(vi) are 

appropriate for testing the sufficiency of 

the financial resources of covered 

clearing agencies because, in certain 

market conditions, such as periods of 

high volatility or diminished liquidity, 

existing stress scenarios, models, or 

underlying parameters may no longer be 

valid or appropriate. Based on its 

supervisory experience, the Commission 

believes that certain, but not all, covered 

clearing agencies adjusted their stress 

testing scenarios following the 2008 

financial crisis to incorporate larger 

debt, equity, and credit market shocks 

similar to those experienced during the 

crisis. Accordingly, the Commission 

preliminarily believes that specific 

policies and procedures contemplating 

actions to be taken by all covered 

clearing agencies in such circumstances 

are necessary to ensure the safe 

functioning of the covered clearing 

agencies as required by the Exchange 

Act,162 and that requiring periodic 

feedback and analysis on the strength of 

credit risk management policies and 

procedures would improve the 

reliability of those policies and 

procedures. The Commission also 

preliminarily believes that the rule 

would provide a covered clearing 

agency with the flexibility to use stress 

scenarios that are appropriately tailored 

to current market conditions and that 

can be revised over time as markets 

change and believes that such flexibility 

is appropriate to achieve the objectives 

of the Exchange Act. 

iv. Annual Conforming Model 

Validation 

Proposed Rule 17Ad–22(e)(4)(vii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to require a 

conforming model validation for its 

credit risk models to be performed not 

less than annually or more frequently as 

may be contemplated by the covered 

clearing agency’s risk management 

policies and procedures.163 The 

Commission preliminary believes that 

an annual cycle is appropriate for the 

reasons described in Part II.A.3. The 

Commission notes that other important 

reviews such as auditing of the financial 

statements of registered clearing 

agencies and their disclosure are 

required to occur on an annual basis as 

well.164

The Commission is proposing to add 

Rule 17Ad–22(a)(5) to define 

‘‘conforming model validation’’ to mean 

an evaluation of the performance of 

each material risk management model 

used by a covered clearing agency, along 

with the related parameters and 

assumptions associated with such 

models.165 Such model validation 

would apply to models that would 

include initial margin models, liquidity 

risk models, and models used to 

generate clearing or guaranty fund 

requirements. A conforming model 

validation would also require that the 

model validation be performed by a 

qualified person who is free from 

influence from the persons responsible 

for the development or operation of the 

models or policies being validated so 

that credit risk models can be candidly 

assessed.166 Generally, the Commission 

considers that a person is free from 

influence when that person does not 

perform functions associated with the 

clearing agency’s models (except as part 

of the annual model validation) and 

does not report to a person who 

performs these functions. The 

Commission generally would not expect 

that it would be necessary for policies 

and procedures adopted pursuant to this 

proposed requirement to require the 

clearing agency to separate 

organizationally model review from 

model development or to maintain two 

separate quantitative teams. 

The proposed rule differs from the 

existing requirement for security-based 

swap clearing agencies in Rule 17Ad– 

22(b)(4) by defining in explicit terms the 

requirements for a conforming model 

validation and by requiring it for credit 

risk models.167 The proposed rule 

would also apply to any covered 

clearing agency, and not only securitybased swap clearing agencies. The 

Commission preliminarily believes, 

because credit risk models play an 

important role in limiting systemic risk, 

that it is important to create a 

consistent, clear, and uniformly applied 

minimum standard for model validation 

across all covered clearing agencies.168

The Commission also preliminarily 

believes that annual conforming model 

validation would provide unbiased 

feedback on the performance of such 

models and policies, and therefore 

could improve their reliability. 


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169See proposed Rule 17Ad–22(e)(5), infra Part 

VII. 

170Registered clearing agencies are currently 

subject to requirements under Rule 17Ad–22(d)(3), 

which requires registered clearing agencies to hold 

assets in a manner that minimizes risk of loss or risk 

of delay in access to them and invest assets in 

instruments with minimal credit, market, and 

liquidity risk. See 17 CFR 240.17Ad–22(d)(3); see 

also Clearing Agency Standards Release, supra note 

5, at 66247–48; infra Part II.B.13 (discussing 

proposed Rule 17Ad–22(e)(16)). 

Similarly, the Commission preliminarily believes 

that appropriately conservative haircuts and 

concentration limits would require a covered 

clearing agency to value assets in a manner that 

minimizes risk of loss or risk of delay in access to 

them. 

171See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

172See, e.g., Mark Roe, Clearinghouse 

Overconfidence (Aug. 11, 2013), available at 

http://ssrn.com/abstract=2224305 (discussing the 

risks posed to clearing agencies by asset price 

deterioration). 

173See proposed Rule 17Ad–22(e)(5), infra Part 

VII. 

174See supra Part II.A.3 (discussing the 

Commission’s rationale for imposing varying 

frequencies of review under certain policies and 

procedures requirements of the proposed rules). 

175See proposed Rule 17Ad–22(e)(6), infra Part 

VII. 176See 17 CFR 240.17Ad–22(b)(2). 177Similar to Rule 17Ad–22(b)(2), proposed Rule 

17Ad–22(e)(6)(vi) would require a covered clearing 

agency to conduct on at least a monthly basis a 

conforming sensitivity analysis of its margin 

resources and its parameters and assumptions for 

backtesting. See infra Parts II.B.4.e.vi and VII. 

178See proposed Rule 17Ad–22(e)(6)(i), infra Part 

VII. 

d. Proposed Rule 17Ad–22(e)(5): 

Collateral 

Proposed Rule 17Ad–22(e)(5) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to limit the assets 

it accepts as collateral to those with low 

credit, liquidity, and market risks, and 

also require policies that set and enforce 

appropriately conservative haircuts and 

concentration limits if the covered 

clearing agency requires collateral to 

manage its own or its participants’ 

credit exposures.169 The proposed rule 

includes requirements similar to those 

applicable to registered clearing 

agencies under Rule 17Ad–22(d)(3) but 

would, in addition, require a covered 

clearing agency’s policies and 

procedures to set and enforce 

appropriately conservative haircuts and 

concentration limits if the covered 

clearing agency requires collateral to 

manage its own or its participants’ 

credit exposures.170

The Commission is proposing Rule 

17Ad–22(e)(5) to require policies and 

procedures with respect to specific 

practices to be followed by a covered 

clearing agency when managing 

collateral to ensure the safeguarding of 

funds, consistent with the requirements 

under the Exchange Act discussed 

above.171 In doing so, proposed Rule 

17Ad–22(e)(5) would promote 

confidence that covered clearing 

agencies are able to meet their 

settlement obligations by reducing the 

likelihood that assets securing 

participant obligations to the covered 

clearing agency would be unavailable or 

insufficient when the covered clearing 

agency needs to draw on them. 

Specifically, such requirements 

recognize the role played by systemwide asset price deterioration in 

generating systemic risk and the 

vulnerability a covered clearing agency 

could face if posted collateral were 

concentrated in assets that subsequently 

experience such deterioration in 

price.172 The Commission preliminarily 

believes the proposed rule is 

appropriate given the risks that its size, 

operation, and importance pose to the 

U.S. securities markets, thereby 

promoting stability in the national 

system for clearance and settlement by 

increasing the likelihood collateral 

holdings will function as designed 

when faced with stressed market 

conditions. 

In addition, the Commission is 

proposing that a covered clearing 

agency establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

include a not-less-than-annual review of 

the sufficiency of a covered clearing 

agency’s collateral haircuts and 

concentration limits.173 Rule 17Ad– 

22(d) does not impose a similar 

requirement on registered clearing 

agencies. The Commission preliminarily 

believes that the proposed approach is 

appropriate because of the importance 

of collateral haircuts and concentration 

limits to a covered clearing agency’s risk 

management policies and procedures. 

Because of the role collateral plays in a 

default, a covered clearing agency needs 

assurance of its value in the event of 

liquidation, as well as the capacity to 

draw upon that collateral promptly. The 

Commission preliminarily believes, 

given the risks that a covered clearing 

agency’s size, operation, and importance 

pose to the U.S. securities markets, that 

it is important to require policies and 

procedures for a not-less-than-annual 

review of the sufficiency of its collateral 

haircuts and concentration limits.174

e. Proposed Rule 17Ad–22(e)(6): Margin 

Generally, proposed Rule 17Ad– 

22(e)(6) would require a covered 

clearing agency that provides CCP 

services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

cover its credit exposures to its 

participants by establishing a risk-based 

margin system that is monitored by 

management on an ongoing basis and 

regularly reviewed, tested, and 

verified.175

Rule 17Ad–22(b)(2) currently requires 

registered clearing agencies that provide 

CCP services to use risk-based models 

and parameters to set margin 

requirements, and to review such 

margin requirements and the risk-based 

models and parameters at least 

monthly,176 and the proposed rule 

would impose substantially the same 

requirements.177 Rule 17Ad–22(b)(4) 

also currently requires a registered 

clearing agency that provides CCP 

services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide for an annual model validation 

consisting of evaluating the performance 

of the clearing agency’s margin models 

and the related parameters and 

assumptions associated with such 

models by a qualified person who is free 

from influence from the persons 

responsible for the development or 

operation of the models being validated. 

The Commission notes that proposed 

Rule 17Ad–22(e)(6) is different from 

these existing requirements under Rule 

17Ad–22, as discussed below. The 

proposed requirements reflect more 

specific recognition by the Commission 

of the importance margin plays in risk 

management by covered clearing 

agencies. The Commission preliminarily 

believes that these requirements for a 

covered clearing agency to periodically 

verify and modify margin requirements 

in light of changing market conditions 

would be appropriate to mitigate the 

risks posed by a covered clearing agency 

to financial markets in periods of 

financial stress considering the risks 

that its size, operation, and importance 

pose to the U.S. securities markets. 

i. Active Management of Model Risk 

Proposed Rule 17Ad–22(e)(6)(i) 

would require a covered clearing agency 

that provides CCP services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to result in a 

margin system that at a minimum 

considers, and produces margin levels 

commensurate with, the risks and 

particular attributes of each relevant 

product, portfolio, and market.178 The 

complexity and product risk 


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179See proposed Rule 17Ad–22(e)(6)(ii), infra 

Part VII. 

180See Clearing Agency Standards Release, supra 

note 5, at 66231. 

181See proposed Rule 17Ad–22(e)(6)(iii), infra 

Part VII. 

182See proposed Rule 17Ad–22(a)(14), infra Part 

VII. 

183See Clearing Agency Standards Release, supra 

note 5, at 66226 (describing the history of usage for 

a 99% confidence interval). A 99% confidence level 

would represent one day of actual trading losses 

that exceeded the results predicted by the model (as 

revealed by backtesting) for every 100 days that 

trading occurred. See id. Requiring a covered 

clearing agency to have policies and procedures 

with a higher or lower confidence level than that 

currently used by its clearing members could 

potentially create incentives or disincentives for 

clearing members to clear based on the statistical 

confidence level alone. 

184See supra Part I.A (discussing the regulatory 

framework under Section 17A of the Exchange Act); 

supra note 96 (describing the requirements in 

Section 19(b) of the Exchange Act). 

185See proposed Rule 17Ad–22(e)(6)(iv), infra 

Part VII. 

186Cf. PFMI Report, supra note 1, at 51 

(discussing Principle 6, margin). 

characteristics of the cleared product 

and underlying instrument can 

influence the margin requirements 

necessary to manage the credit 

exposures posed by a covered clearing 

agency’s participants. Additionally, the 

volume of trading may also influence 

the margin requirements necessary to 

manage the credit exposures proposed 

by a covered clearing agency’s 

participants. The Commission 

preliminarily believes that expressly 

requiring policies and procedures 

regarding the active management of a 

covered clearing agency’s margin system 

to account for those factors and 

differences would help ensure the 

effectiveness of a covered clearing 

agency’s risk management practices. 

ii. Collection of Margin 

Proposed Rule 17Ad–22(e)(6)(ii) 

would require a covered clearing agency 

that provides CCP services to establish 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to ensure that the 

margin system would mark participant 

positions to market and collect margin, 

including variation margin or equivalent 

charges if relevant, at least daily, and 

include the authority and operational 

capacity to make intraday margin calls 

in defined circumstances.179 The 

Commission preliminarily believes that 

marking each participant’s outstanding 

positions to current market prices is an 

important feature of an effective margin 

system because adverse price 

movements can rapidly increase a 

covered clearing agency’s exposures to 

its participants. Rule 17Ad–22(b)(2) 

requires registered clearing agencies that 

provide CCP services to calculate 

margin requirements daily. The 

Commission preliminarily believes that 

requiring a covered clearing agency to 

have the authority and operational 

capacity to make intraday margin calls 

in defined circumstances will benefit 

covered clearing agencies by covering 

settlement risk created by intraday price 

movements. By being more specific with 

respect to its expectations for collecting 

sufficient margin and having other 

liquid resources at its disposal, the 

Commission expects that a covered 

clearing agency will be better able to 

organize its practices accordingly, to 

limit its exposures to potential losses 

from defaults by clearing members in 

normal market conditions considering 

the risks that its size, operation, and 

importance pose to the U.S. securities 

markets.180

iii. Ninety-Nine Percent Confidence 

Level 

Proposed Rule 17Ad–22(e)(6)(iii) 

would require a covered clearing agency 

that provides CCP services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to calculate margin 

sufficient to cover its potential future 

exposure to participants in the interval 

between the last margin collection and 

the close out of positions following a 

participant default.181 The Commission 

is proposing to add Rule 17Ad–22(a)(14) 

to define ‘‘potential future exposure’’ to 

mean the maximum exposure estimated 

to occur at a future point in time with 

an established single-tailed confidence 

level of at least 99% with respect to the 

estimated distribution of future 

exposure.182 The Commission 

preliminarily believes that a 99% 

confidence level is an appropriately 

conservative setting that is also 

consistent with the international 

standard for bank capital requirements, 

which requires banks to measure market 

risks at a 99% confidence interval when 

determining regulatory capital 

requirements.183

The Commission preliminarily 

believes that, rather than establish 

specific criteria in advance, it is more 

appropriate to address liquidation 

periods separately with respect to each 

covered clearing agency through the 

Commission’s supervisory process 

under Sections 17A and 19 of the 

Exchange Act,184 so that the length of 

the liquidation period can be 

appropriately tailored to the 

characteristics of the products cleared 

by the covered clearing agency as 

financial markets evolve. 

iv. Price Data Source 

Proposed Rule 17Ad–22(e)(6)(iv) 

would require a covered clearing agency 

that provides CCP services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to ensure that it 

uses reliable sources of timely price data 

and procedures and sound valuation 

models for addressing circumstances in 

which pricing data are not readily 

available or reliable.185 The Commission 

preliminarily believes that a covered 

clearing agency should use reliable 

sources of timely price data because its 

margin system needs such data to 

operate with a high degree of accuracy 

and reliability, given the risks that the 

covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets.186 Based on its 

supervisory experience, the Commission 

preliminarily believes that reliable data 

sources may include the following 

features, among other things: (i) 

Provision of data by the data source that 

is accurate, complete, and timely; (ii) 

capability of the data source to provide 

broad data sets to the covered clearing 

agency; and (iii) limited need for 

manual intervention by the clearing 

agency. In some situations, price data 

may not be available or reliable, such as 

in instances where third party data 

providers experience lapses in service 

or where limited liquidity otherwise 

makes price discovery difficult. 

Establishing appropriate procedures and 

sound valuation models is a useful step 

a covered clearing agency can take to 

help protect itself in such situations. 

The Commission preliminarily believes, 

in selecting price data sources, a 

covered clearing agency should consider 

the likelihood of the data being 

provided under a variety of market 

conditions and not select price data 

sources based on their cost alone. 

v. Method for Measuring Credit 

Exposure 

Proposed Rule 17Ad–22(e)(6)(v) 

would require a covered clearing agency 

that provides CCP services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to ensure the use of 

an appropriate method for measuring 

credit exposure that accounts for 

relevant product risk factors and 

portfolio effects across products. 

Measuring such portfolio effects means 

a covered clearing agency may take into 

account certain netting procedures or 


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187See proposed Rule 17Ad–22(e)(6)(v), infra Part 

VII. 

188See proposed Rule 17Ad–22(e)(6)(vi), infra 

Part VII. 

189See proposed Rule 17Ad–22(a)(1), infra Part 

VII. 190See proposed Rule 17Ad–22(a)(17), infra Part 

VII. 191See, e.g., Alexander J. McNeil, Ru ̈diger Frey & 

Paul Embrechts, Quantitative Risk Management: 

Concepts, Techniques, and Tools, at 35 (Princeton 

Univ. Press, 2005) (defining ‘‘factor-sensitivity 

measures’’ as a change in portfolio value given a 

predetermined change in one of the underlying risk 

factors). 

192See id. 

193See proposed Rule 17Ad–22(a)(6), infra Part 

VII. 

194See proposed Rule 17Ad–22(e)(6)(vi), infra 

Part VII. 

offsets through which credit exposure 

may be reduced in measuring credit 

exposure, including the use of portfolio 

margining procedures across products 

where applicable.187 The Commission 

preliminarily believes that this 

proposed requirement that covered 

clearing agencies contemplate both 

product level and portfolio level effects 

when considering and measuring their 

credit exposure is appropriate, given 

that the method for measuring credit 

exposure will determine the accuracy of 

a covered clearing agency’s 

measurements in practice. 

vi. Backtesting and Sensitivity Analysis 

Under proposed Rule 17Ad– 

22(e)(6)(vi), in addition to the 

requirement discussed above in relation 

to monitoring by management on an 

ongoing basis, a covered clearing agency 

that provides CCP services would be 

required to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

regularly review, test, and verify its riskbased margin system by conducting 

backtests at least once each day and 

conducting a conforming sensitivity 

analysis of its margin resources and its 

parameters and assumptions for 

backtesting at least monthly, and 

consider modifications to ensure the 

backtesting practices are appropriate for 

determining the adequacy of its margin 

resources.188 The Commission 

preliminarily believes that, since margin 

positions must be calculated at least 

daily, policies and procedures should 

also provide for daily backtesting. The 

Commission preliminarily believes that 

requiring, on at least a monthly basis, a 

conforming sensitivity analysis of 

margin resources and parameters and 

assumptions for backtesting would 

appropriately balance cost concerns 

with the interest of assuring that risk 

margin methodologies continue to 

reflect current conditions. The 

Commission notes that, based on its 

supervisory experience, risk 

management committees of the board 

and similar management committees of 

registered clearing agencies commonly 

meet on a monthly basis, and therefore 

the proposed requirement of a monthly 

sensitivity analysis would be consistent 

with such meeting frequency. 

Backtesting is a technique used to 

compare the potential losses forecasted 

by a model with the actual losses that 

participants incurred, and is intended to 

reveal the accuracy of models. 

Misspecified or miscalibrated models 

may lead to errors in decision making. 

The Commission is proposing to require 

policies and procedures that provide for 

backtesting the margin models used by 

covered clearing agencies to help 

uncover and address possible errors in 

model design, misapplication of models, 

or errors in the inputs to, and 

assumptions underlying, margin 

models. The Commission is also 

proposing to add Rule 17Ad–22(a)(1) to 

define ‘‘backtesting’’ to mean an ex-post 

comparison of actual outcomes with 

expected outcomes derived from the use 

of margin models.189 Additionally, the 

Commission is proposing to add Rule 

17Ad–22(a)(17) to define ‘‘sensitivity 

analysis’’ to mean an analysis that 

involves analyzing the sensitivity of a 

model to its assumptions, parameters, 

and inputs.190 The Commission 

preliminarily understands that these 

terms and definitions are commonly 

accepted among, and employed by, 

market participants.191

The Commission is also proposing to 

add Rule 17Ad–22(a)(6) to define 

‘‘conforming sensitivity analysis’’ to 

mean a sensitivity analysis that 

considers the impact on the model of 

both moderate and extreme changes in 

a wide range of inputs, parameters, and 

assumptions, including correlations of 

price movements or returns if relevant, 

which reflect a variety of historical and 

hypothetical market conditions and 

actual and hypothetical portfolios of 

proprietary positions and, where 

applicable, customer positions. The 

Commission notes that ‘‘sensitivity 

analysis’’ is a commonly understood 

term among industry participants,192

and the Commission intends for the 

proposed definition to ensure that the 

specified minimum requirements are 

met in performing sensitivity analyses. 

Under the proposed definition, a 

conforming sensitivity analysis, when 

performed by or on behalf of a covered 

clearing agency involved in activities 

with a more complex risk profile, would 

consider the most volatile relevant 

periods, where practical, that have been 

experienced by the markets served by 

the clearing agency. Under the proposed 

definition, a conforming sensitivity 

analysis would also test the sensitivity 

of the model to stressed market 

conditions, including the market 

conditions that may ensue after the 

default of a member and other extreme 

but plausible conditions as defined in a 

covered clearing agency’s risk 

policies.193

Under proposed Rule 17Ad– 

22(e)(6)(vi), the policies and procedures 

for model review, testing, and 

verification requirements would include 

policies and procedures for conducting 

a conforming sensitivity analysis more 

frequently than monthly when the 

products cleared or markets served 

display high volatility, become less 

liquid, or when the size or 

concentration of positions held by 

participants increases or decreases 

significantly.194 The proposed rule 

would also require a covered clearing 

agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

report the results of such conforming 

sensitivity analysis to appropriate 

decision makers at the covered clearing 

agency, including its risk management 

committee or board of directors, and use 

these results to evaluate the adequacy of 

and adjust its margin methodology, 

model parameters, and any other 

relevant aspects of its credit risk 

management policies and procedures. 

The Commission preliminary believes 

that the requirement to report to 

appropriate decision makers at the 

covered clearing agency, including its 

risk management committee or board of 

directors, is important to ensure that 

such risk management requirements and 

compliance therewith are addressed at 

the most senior levels of the governance 

framework of the covered clearing 

agency, commensurate with the 

importance of said requirements. 

By proposing the requirement for 

conducting a conforming sensitivity 

analysis, the Commission expects that 

feedback generated by these analyses 

would improve the performance of riskbased margin systems used by covered 

clearing agencies and therefore better 

ensure the safe functioning of covered 

clearing agencies. Additionally, the 

Commission preliminarily believes that 

conforming sensitivity analysis may 

help a covered clearing agency discover 

and address shortcomings in its margin 

models that would not otherwise be 

revealed through backtesting and is 

accordingly appropriate given the risks 


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195Cf. PFMI Report, supra note 1, at 56 

(discussing Principle 6, margin). 

196See proposed Rule 17Ad–22(e)(6)(vii), infra 

Part VII; see also supra Part II.B.4.c.iv and infra Part 

VII (defining ‘‘conforming model validation’’ under 

proposed Rule 17Ad–22(a)(5) and providing the 

definition text, respectively). 

197See supra Part II.B.4.c.iv (describing a person 

who is free from influence in the context of the 

policy and procedure requirement for an annual 

conforming model validation addressing credit 

risk). 

198See proposed Rule 17Ad–22(e)(7), infra Part 

VII; see also infra Parts II.B.4.f.i–x. 

199See proposed Rule 17Ad–22(e)(7)(ii), infra 

Part VII. In other words, if payment obligations 

were denominated in U.S. dollars, the minimum 

liquidity resource requirement would refer to a U.S. 

dollar amount. 

200See proposed Rule 17Ad–22(a)(15), infra Part 

VII. 

201The Commission preliminarily believes that 

the creditworthiness of commercial banks should be 

considered by a covered clearing agency after 

considering its particular circumstances and those 

of its members and the markets which it services. 

Accordingly, in complying with the requirements of 

proposed Rule 17Ad–22(e)(7) and proposed Rule 

17Ad–22(a)(15), a covered clearing agency’s 

policies and procedures for determining whether a 

commercial bank is creditworthy may reflect such 

circumstances. 

202See id. The Commission notes that such access 

to routine credit at a relevant central bank and the 

collateral required by such central bank to be 

posted to secure a loan may be determined at the 

Continued 

that its size, operation, and importance 

pose to the U.S. securities markets.195

vii. Annual Conforming Model 

Validation 

Rule 17Ad–22(b)(4) currently requires 

a registered clearing agency that 

provides CCP services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for an 

annual model validation consisting of 

evaluating the performance of the 

clearing agency’s margin models and the 

related parameters and assumptions 

associated with such models by a 

qualified person who is free from 

influence from the persons responsible 

for the development or operation of the 

models being validated. Under proposed 

Rule 17Ad–22(e)(6)(vii), a covered 

clearing agency that provides CCP 

services would be required to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to require not less 

than annually a conforming model 

validation of the covered clearing 

agency’s margin system and related 

models.196 As previously discussed, the 

model validation would be required to 

include initial margin models, liquidity 

risk models, and models used to 

generate clearing or guaranty fund 

requirements. Also, for a model 

validation to be considered a 

conforming model validation under the 

proposed rule, it would have to be 

performed by a qualified person who is 

free from influence from the persons 

responsible for the development or 

operation of the models or policies 

being validated.197

The Commission preliminarily 

believes the proposed approach of 

requiring policies and procedures that 

subject a covered clearing agency’s 

models to review by such parties would 

be relevant to ensuring the safe 

operation of covered clearing agencies 

and will help to ensure that covered 

clearing agencies have the opportunity 

to benefit from the views of a qualified 

person free from influence and 

incorporate alternative risk management 

methodologies into their models as 

appropriate. The Commission 

preliminarily believes this is important 

for covered clearing agencies given the 

risks that a covered clearing agency’s 

size, operation, and importance pose to 

the U.S. securities markets. 

f. Proposed Rule 17Ad–22(e)(7): 

Liquidity Risk 

Proposed Rule 17Ad–22(e)(7) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to effectively 

measure, monitor, and manage the 

liquidity risk that arises in or is borne 

by it, by meeting, at a minimum, the ten 

requirements specified below.198

Liquidity risk describes the risk that 

an entity will be unable to meet 

financial obligations on time due to an 

inability to deliver funds or securities in 

the form required though it may possess 

sufficient financial resources in other 

forms. Although Rule 17Ad–22(d)(11) 

currently requires, among other things, 

that a registered clearing agency 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to take timely 

action to contain liquidity pressures and 

to continue to meet obligations in the 

event of a participant default, the 

Commission does not currently have 

requirements for policies and 

procedures of registered clearing 

agencies regarding the management of 

liquidity risk with the level of 

specificity proposed in Rule 17Ad– 

22(e)(7). Given the risks that a covered 

clearing agency’s size, operation, and 

importance pose to the U.S. securities 

markets, the proposed requirements 

would require a covered clearing agency 

to maintain sufficient liquidity 

resources to ensure they are prepared to 

meet their payment obligations in order 

to facilitate the prompt and accurate 

clearance and settlement of securities 

transactions. 

i. Sufficient Liquid Resources 

Proposed Rule 17Ad–22(e)(7)(i) 

would require that a covered clearing 

agency’s policies and procedures be 

reasonably designed to ensure that it 

maintains sufficient liquid resources in 

all relevant currencies to effect sameday and, where appropriate, intraday 

and multiday settlement of payment 

obligations with a high degree of 

confidence under a wide range of 

potential stress scenarios that includes 

the default of the participant family that 

would generate the largest aggregate 

payment obligation for it in extreme but 

plausible market conditions. As noted 

above, maintaining sufficient liquidity 

resources helps ensure that a covered 

clearing agency is prepared to meet its 

payment obligations in order to 

facilitate the prompt and accurate 

clearance and settlement of securities 

transactions 

ii. Qualifying Liquid Resources 

Proposed Rule 17Ad–22(e)(7)(ii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure it holds 

qualifying liquid resources sufficient to 

meet the minimum liquidity resource 

requirement in each relevant currency 

for which the covered clearing agency 

has payment obligations owed to 

clearing members.199 The Commission 

is also proposing to add Rule 17Ad– 

22(a)(15) to define ‘‘qualifying liquid 

resources.’’ 200 For any covered clearing 

agency, in each relevant currency, 

qualifying liquid resources would 

include three types of assets: 

• Cash held either at the central bank 

of issue or at creditworthy commercial 

banks; 201

• assets that are readily available and 

convertible into cash through either: 

Æ Prearranged funding arrangements 

without material adverse change 

limitations, such as committed lines of 

credit, foreign exchange swaps, and 

repurchase agreements, or 

Æ other prearranged funding 

arrangements determined to be highly 

reliable even in extreme but plausible 

market conditions by the board of 

directors of the covered clearing agency 

following a review conducted for this 

purpose not less than annually; and 

• other assets that are readily 

available and eligible for pledging to (or 

conducting other appropriate forms of 

transactions with) a relevant central 

bank, if the covered clearing agency has 

access to routine credit at such central 

bank.202


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discretion of the central bank, and accordingly the 

practical application of the definition of qualifying 

liquid resources would be subject to variation based 

on those decisions. The Commission preliminarily 

believes that inclusion of assets eligible for pledging 

to any central bank, as opposed to only to a Federal 

Reserve Bank, is appropriate because, in practice, 

a covered clearing agency may need access to liquid 

resources in currencies other than U.S. dollars. 

203Cf. PFMI Report, supra note 1, at 60 

(discussing Principle 7, liquidity risk). 

204See infra notes 561–562 and accompanying 

text (discussing the volume of transactions 

processed by U.S. clearing agencies). 

205See ICMA Eur. Repo Council, The 

Interconnectivity of Central and Commercial Bank 

Money in the Clearing and Settlement of the 

European Repo Market, at 10–11 (Sept. 2011) 

(indicating that access to central bank credit is 

important and may cause banks to use either central 

bank settlement services or cash settlement banking 

services of a commercial bank, depending on 

availability of, and the terms of, central bank 

credit). 

206See Peter Allsopp, Bruce Summers & John 

Veale, The Evolution of Real-Time Gross 

Settlement: Access, Liquidity and Credit, and 

Pricing, at 15 (World Bank, Feb. 2009) (indicating 

that CCPs in the Eurozone have access to central 

bank settlement account services and routine 

credit). 

207The Commission notes that, based on the 

types of assets that may be considered qualifying 

liquid resources, for purposes of complying with 

proposed Rule 17Ad–22(e)(7)(ii), factors that may 

be relevant for a covered clearing agency to take 

into account include (i) the portion of its default 

fund that is held as cash, (ii) the portion of its 

default fund that is held as securities, (iii) the 

portion of any excess default fund contributions 

held as cash that could be used by the covered 

clearing agency to meet liquidity needs, (iv) the 

portion of any excess default fund contributions 

held as securities that could be used by the covered 

clearing agency to meet liquidity needs, (v) the 

amount at any given time of securities or cash 

delivered by members that a covered clearing 

agency may be able to use to meet liquidity needs 

upon the default of a member, and (vi) the 

borrowing limits under any committed funding 

arrangement. 

208Cf. PFMI Report, supra note 1, at 57 

(discussing Principle 7, liquidity risk, at Key 

Consideration 5). 

209The Commission also preliminarily notes that 

the term ‘‘central bank’’ in the proposed definition 

of ‘‘qualifying liquid resources’’ is not limited to a 

Federal Reserve Bank, and accordingly covered 

clearing agencies based in or operating outside of 

the United States that have access to routine credit 

at other central banks would be able to take that 

into consideration when assessing the amount of 

their qualifying liquid resources. 

210See infra Part IV.C.3.a.iv(4) (discussing the 

relative cost of central bank credit). Section 806(b) 

of the Clearing Supervision Act states that the 

Board may authorize a Federal Reserve Bank to 

The Commission preliminarily 

believes that this requirement is 

appropriate, given the risks that its size, 

operation, and importance pose to the 

U.S. securities markets, and will help 

ensure that a covered clearing agency 

has sufficient liquid resources, as 

determined by stress testing, to effect 

settlement of payment obligations with 

a high degree of confidence under a 

wide range of potential stress 

scenarios.203 Furthermore, the 

Commission preliminarily believes this 

requirement is appropriate given the 

specific circumstances of the U.S. 

securities markets. U.S. securities 

markets are among the largest and most 

liquid in the world, and CCPs operating 

in the United States are also among the 

largest in the world.204 The resulting 

peak liquidity demands of CCPs are 

therefore proportionately large on both 

an individual and an aggregate basis, 

and the ability of CCPs to satisfy a 

requirement limiting qualifying liquid 

resources to committed facilities could 

be constrained by the capacity of 

traditional liquidity sources in the U.S. 

banking sector in certain circumstances. 

Therefore, the Commission is proposing 

to include in the definition of qualifying 

liquid resources other prearranged 

funding arrangements determined to be 

highly reliable even in extreme but 

plausible market conditions. 

For similar reasons, the Commission 

preliminarily believes it is appropriate 

to include in the definition of qualifying 

liquid resources assets that a central 

bank would permit a covered clearing 

agency to use as collateral, to the extent 

such covered clearing agency has access 

to routine credit at such central bank.205

The Commission preliminarily notes 

that, although covered clearing agencies 

do not currently have access to routine 

credit at Federal Reserve Banks, 

potential registrants that could be 

determined to be covered clearing 

agencies in the future may be operating 

in a jurisdiction where access to routine 

credit is provided to the potential 

registrant by that jurisdiction’s central 

bank.206

With regard to assets convertible into 

cash, the Commission preliminarily 

notes that the mere ownership of assets 

that a covered clearing agency may 

consider readily available and also may 

consider readily convertible into cash, 

based on factors such as the historical 

volume of trading in a particular market 

for such asset, may not be sufficient 

alone to make the assets count towards 

qualifying liquid resources unless one of 

the above-referenced prearranged 

funding arrangements is in place under 

which the covered clearing agency 

would receive cash in a timely manner. 

The prearranged funding arrangements 

would be in place to cover any shortfall. 

The Commission, however, 

preliminarily considers committed 

funding arrangements to be reasonably 

capable of being established by covered 

clearing agencies in the relevant 

commercial lending markets and other 

funding arrangements to be reasonably 

capable of being assessed for reliability 

by the boards of directors of covered 

clearing agencies following 

consideration of the relevant 

circumstances, and therefore 

preliminarily believes the standard to be 

sufficiently clear to allow for it to be 

interpreted and applied in practice by 

covered clearing agencies. Further, the 

Commission preliminarily notes that, in 

complying with proposed Rule 17Ad– 

22(e)(7), covered clearing agencies 

should consider the lower of the value 

of the assets capable of being pledged 

and the amount of the commitment (or 

the equivalent availability under a 

highly reliable prearranged facility) as 

the amount that counts towards 

qualifying liquid resources in the event 

there is any expected difference 

between the two.207 This may occur, for 

example, where the terms of the 

arrangement provide for overcollateralization or where the covered 

clearing agency lacks sufficient 

qualifying assets to make full use of an 

otherwise qualifying liquidity facility. 

In defining the proposed requirements 

for qualifying liquid resources, the 

Commission preliminarily believes that 

it would be appropriate to provide 

covered clearing agencies with the 

flexibility to use highly reliable funding 

arrangements in addition to committed 

arrangements for purposes of using 

assets other than cash to meet the 

proposed requirements of Rule 17Ad– 

22(e)(7).208 The Commission 

preliminarily believes that limiting the 

funding arrangements that are included 

within the definition of qualifying 

liquid resources to committed funding 

arrangements may not be necessary or 

appropriate in determining liquidity 

requirements for a covered clearing 

agency operating in the U.S. securities 

markets and expanding the concept of 

qualifying liquid resources to include 

other highly reliable funding 

arrangements is necessary and 

appropriate to ensure the proper 

functioning of covered clearing agencies 

as required by the Exchange Act. 

For similar reasons, the Commission 

preliminarily believes it is appropriate 

to include in the definition of qualifying 

liquid resources assets that a central 

bank would permit a covered clearing 

agency to use as collateral.209 The 

Commission notes that, although 

routine discount window borrowing at a 

Federal Reserve Bank is currently not 

available to covered clearing agencies, 

this provision will provide covered 

clearing agencies with additional 

flexibility in meeting the liquidity 

requirements of proposed Rule 17Ad– 

22(e)(7), should routine credit at a 

Federal Reserve Bank become available 

in the future.210


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provide to a designated FMU discount and 

borrowing privileges only in unusual and exigent 

circumstances, subject to certain conditions. See 12 

U.S.C. 5465(b). 

211See 12 U.S.C. 5465(a). 

212See proposed Rule 17Ad–22(e)(7)(iii), infra 

Part VII. 

213See Clearing Agency Standards Release, supra 

note 5, at 66268–69 & n.535. 

214See proposed Rule 17Ad–22(e)(7)(iv), infra 

Part VII. 

215The Commission preliminary believes that an 

annual cycle is appropriate for the reasons 

described in Part II.A.3. 216See proposed Rule 17Ad–22(e)(7)(v), infra Part 

VII. 

iii. Access to Account Services at a 

Federal Reserve Bank or Other Relevant 

Central Bank 

Proposed Rule 17Ad–22(e)(7)(iii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure it uses 

accounts and services at a Federal 

Reserve Bank, pursuant to Section 

806(a) of the Clearing Supervision 

Act,211 or other relevant central bank, 

when available and where determined 

to be practical by the board of directors 

of the covered clearing agency, in order 

to enhance its management of liquidity 

risk.212 The Commission notes that the 

proposed rule would not require using 

Federal Reserve Bank or other relevant 

central bank account services; it would 

only require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to consider and 

determine when and in what 

circumstances it chooses to do so, when 

the services are available and when 

considered to be practical. The 

Commission preliminarily believes that 

covered clearing agencies should be 

encouraged to actively consider using 

Federal Reserve Bank or other central 

bank accounts and services, as this is a 

valuable new tool made available under 

the Clearing Supervision Act.213 The 

Commission preliminarily believes, 

however, that it should also permit the 

use of commercial banks by covered 

clearing agencies holding cash as 

collateral or for other services related to 

clearance and settlement activity, even 

when comparable services are available 

from a central bank. 

iv. Liquidity Providers 

Proposed Rule 17Ad–22(e)(7)(iv) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure it 

undertakes due diligence to confirm that 

it has a reasonable basis to believe each 

of its liquidity providers, whether or not 

such liquidity provider is a clearing 

member, has sufficient information to 

understand and manage the liquidity 

provider’s liquidity risks, and the 

capacity to perform as required under 

its commitments to provide liquidity.214

The Commission preliminarily 

intends for the term ‘‘due diligence’’ to 

have the same meaning as what this 

term is commonly understood to mean 

by market participants. Consequently, in 

order to comply with the requirements 

of proposed Rule 17Ad–22(e)(7) and to 

form a reasonable basis regarding a 

liquidity provider’s understanding and 

management of liquidity risks and 

operational capacity, the Commission 

expects a covered clearing agency 

would ordinarily not rely on 

representations of the liquidity provider 

to this effect and instead conduct its 

own investigation into the liquidity 

provider’s business. A covered clearing 

agency should consider implementing 

due diligence procedures that provide a 

sufficient basis for its belief, given its 

business and the nature of its liquidity 

providers. Procedures for purposes of 

forming a reasonable basis could 

include, for example, interviewing the 

liquidity provider’s staff and reviewing 

both public and non-public documents 

that would allow the covered clearing 

agency to gather information about 

relevant factors, including but not 

limited to the strength of the liquidity 

provider’s financial condition, its risk 

management capabilities, and its 

internal controls. 

The Commission preliminarily 

believes that proposed Rule 17Ad– 

22(e)(7)(iv) is appropriate because a 

covered clearing agency needs to 

soundly manage its relationships with 

liquidity providers given the risks posed 

to the U.S. securities markets by its size, 

operation, and importance. In addition, 

Proposed Rule 17Ad–22(e)(7)(iv) would 

reinforce proposed Rule 17Ad– 

22(e)(7)(ii) and the definition of 

qualifying liquid resources in proposed 

Rule 17Ad–22(a)(15), which 

contemplate potential reliance on 

liquidity providers where a covered 

clearing agency would seek to use assets 

other than cash for purposes of 

complying with proposed Rule 17Ad– 

22(e)(7)(ii) and would need to transact 

with a liquidity provider to convert 

such assets into cash. Should a 

committed or prearranged funding 

arrangement prove to be unreliable at 

the time a covered clearing agency 

needs to utilize it because of liquidity 

problems at the lender itself, this failure 

may trigger a liquidity problem at the 

covered clearing agency, which would 

raise systemic risk concerns for the U.S. 

securities markets. These types of 

problems at a liquidity provider, by 

indirectly affecting a covered clearing 

agency, could undermine the national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions. 

v. Maintenance and Annual Testing of 

Liquidity Provider Procedures and 

Operational Capacity 

Proposed Rule 17Ad–22(e)(7)(v) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that the 

covered clearing agency maintains and, 

on at least an annual basis,215 tests with 

each liquidity provider, to the extent 

practicable, its procedures and 

operational capacity for accessing each 

type of relevant liquidity resource.216

In addition, proposed Rule 17Ad– 

22(e)(7)(v) would reinforce proposed 

Rule 17Ad–22(e)(7)(ii) and the 

definition of qualifying liquid resources 

in proposed Rule 17Ad–22(a)(15), 

which contemplate potential reliance on 

liquidity providers where a covered 

clearing agency would seek to use assets 

other than cash for purposes of 

complying with proposed Rule 17Ad– 

22(e)(7)(ii) and would need to transact 

with a liquidity provider to convert 

such assets into cash. If procedures or 

operational capacity for accessing 

liquidity under committed or 

prearranged funding arrangements fail 

to function as planned and in a timely 

manner, the covered clearing agency 

may fail to meet its payment obligation, 

which would raise systemic risk 

concerns for the U.S. markets and could 

undermine the national system for the 

prompt and accurate clearance and 

settlement of securities transactions. 

Proper preparation for a liquidity 

shortfall scenario could also promote 

members’ confidence in the ability of a 

covered clearing agency to perform its 

obligations, which can mitigate the risk 

of contagion during stressed market 

conditions. The Commission 

preliminarily believes this is important 

for covered clearing agencies given the 

risks that a covered clearing agency’s 

size, operation, and importance pose to 

the U.S. securities markets. 

The Commission preliminarily 

believes that testing of access to 

liquidity resources could include efforts 

by a covered clearing agency to verify 

that a liquidity provider is able to 

provide the relevant liquidity resource 

in the manner intended under the terms 

of the funding arrangement and without 


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29534 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

217The Commission preliminary believes that a 

daily cycle is appropriate for the reasons described 

in Part II.A.3. 

218The Commission preliminary believes that a 

monthly cycle is appropriate for the reasons 

described in Part II.A.3. 

219See proposed Rule 17Ad–22(e)(7)(vi), infra 

Part VII. 

220See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

221See proposed Rules 17Ad–22(a)(5) and 

(e)(7)(vii), infra Part VII. The Commission notes 

that, in contrast to proposed Rules 17Ad–22(a)(5) 

and (e)(7)(vii), Rule 17Ad–22(b)(4) requires only a 

undue delay, such as, for example, 

promptly funding a draw on the covered 

clearing agency’s credit facility. Testing 

procedures could include, for example, 

test draws funded by the liquidity 

provider or tests of electronic 

connectivity between the covered 

clearing agency and the liquidity 

provider. The Commission recognizes 

that testing with liquidity providers may 

not always be practicable in the absence 

of committed liquidity arrangements. 

The Commission preliminarily 

believes the proposed requirement that 

testing of a covered clearing agency’s 

access to liquidity be conducted at least 

annually with each liquidity provider to 

be a reasonable step to ensure the 

objectives of the Exchange Act are 

achieved in practice. The Commission 

understands such tests are routinely 

performed currently by certain 

registered clearing agencies but are 

subject to variation due, in part, to the 

absence of a regulatory requirement and 

the incremental time and attention 

needed to conduct the tests. The 

Commission preliminarily anticipates 

the effect of the proposed rule will be 

to require the development of more 

uniform liquidity testing practices by 

covered clearing agencies, and has 

accordingly proposed to allow covered 

clearing agencies to assess the 

practicability of such testing to provide 

them with reasonable flexibility to 

design the tests to suit the 

circumstances of the covered clearing 

agency and its particular liquidity 

arrangements. 

vi. Testing the Sufficiency of Liquid 

Resources 

Proposed Rule 17Ad–22(e)(7)(vi)(A) 

through (C) would require a covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

determine the amount and regularly test 

the sufficiency of the liquid resources 

held for purposes of meeting the 

minimum liquid resource requirement 

of proposed Rule 17Ad–22(e)(7)(i) by 

(A) conducting a stress test of its 

liquidity resources at least once each 

day using standard and predetermined 

parameters and assumptions; 217 (B) 

conducting a comprehensive analysis of 

the existing stress testing scenarios, 

models, and underlying parameters and 

assumptions used in evaluating 

liquidity needs and resources, and 

considering modifications to ensure 

they are appropriate for determining the 

covered clearing agency’s identified 

liquidity needs and resources in light of 

current and evolving market conditions 

at least once each month; 218 and (C) 

conducting a comprehensive analysis of 

the existing stress testing scenarios, 

models, and underlying parameters and 

assumptions used in evaluating 

liquidity needs and resources more 

frequently when products cleared or 

markets served display high volatility or 

become less liquid, when the size or 

concentration of positions held by 

participants increases significantly, or 

in other circumstances described in the 

covered clearing agency’s policies and 

procedures.219 Proposed Rule 17Ad– 

22(e)(7)(vi)(D) would also require a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to result in 

reporting the results of the analyses 

performed under proposed Rule 17Ad– 

22(e)(7)(vi)(B) and (C) to appropriate 

decision makers, including the risk 

management committee or board of 

directors, at the covered clearing agency 

for use in evaluating the adequacy of 

and adjusting its liquidity risk 

management framework. 

The Commission preliminarily 

believes that proposed Rules 17Ad– 

22(e)(7)(vi)(A) through (D) would 

require a covered clearing agency to take 

reasonable steps to ensure the adequacy 

of liquid resources in practice. Given 

the risks that a covered clearing 

agency’s size, operation, and importance 

pose to the U.S. securities markets, in 

addition to the potential consequences 

to the U.S. financial system of a failure 

of a covered clearing agency, the 

Commission preliminarily believes that 

requiring a covered clearing agency to 

devote additional time and attention to 

testing the sufficiency of its liquid 

resources, relative to a registered 

clearing agency generally, is 

appropriate. The Commission 

preliminarily believes that the 

requirements in proposed Rule 17Ad– 

22(e)(7)(vi) are appropriate for testing 

the sufficiency of liquid resources of 

covered clearing agencies because, in 

certain market conditions, such as 

periods of high volatility or diminished 

liquidity, existing stress scenarios, 

models, or underlying parameters may 

no longer be valid or appropriate. For 

example, covered clearing agencies may 

have adjusted their financial resources 

models following the 2008 financial 

crisis to account for larger debt, equity, 

and credit market shocks than would 

have been contemplated by those 

models prior to the crisis. Accordingly, 

the Commission preliminarily believes 

that specific policies and procedures 

specifying actions to be taken by 

covered clearing agencies to maintain 

sufficient liquid resources would 

contribute to the safe functioning of the 

covered clearing agency as required by 

the Exchange Act,220 and that requiring 

periodic feedback and analysis on the 

strength of liquidity risk management 

policies and procedures would improve 

the reliability of those policies and 

procedures. The Commission also 

preliminarily believes that covered 

clearing agencies should have the 

flexibility to use stress scenarios that are 

appropriately calibrated to the markets 

in which they operate and that they can 

be revised over time as those markets 

change. Proper preparation for a 

liquidity shortfall scenario could also 

promote a participant’s confidence in 

the ability of a covered clearing agency 

to perform its obligations, which can 

mitigate the risk of undue disruption 

during stressed market conditions. 

One of the appropriate methods of 

preparation by a covered clearing 

agency would be, in the Commission’s 

preliminary view, the testing of the 

sufficiency of liquidity that it might 

need under certain extreme but 

plausible parameters and assumptions. 

The Commission preliminarily believes 

that conducting stress testing of 

liquidity would allow a covered clearing 

agency to understand its level of 

resilience and adjust its operations 

accordingly to address areas of 

inadequacy. The Commission 

preliminarily believes that by testing 

under extreme but plausible scenarios, 

covered clearing agencies, and in 

particular those designated systemically 

important, would be better prepared in 

the event that equivalent or similar 

scenarios actually occurred. 

vii. Annual Conforming Model 

Validation 

Proposed Rule 17Ad–22(e)(7)(vii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to result in 

performing an annual or more frequent 

conforming model validation of its 

liquidity risk models.221


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29535 

model validation for margin models and does not 

specify the general elements of a model validation. 

See supra note 167 and accompanying text. 

In addition, the Commission preliminary believes 

that an annual cycle is appropriate for the reasons 

described in Part II.A.3. 

222See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

223See proposed Rule 17Ad–22(e)(7)(viii), infra 

Part VII. 

224See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

225See proposed Rule 17Ad–22(e)(7)(ix), infra 

Part VII. 

226See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

227See proposed Rule 17Ad–22(e)(7)(x), infra Part 

VII. 

228See Clearing Agency Standards Release, supra 

note 5, at 66235–36 (noting that the financial crisis 

of 2008 demonstrated the plausibility of the default 

of two large participants in a clearing agency over 

a brief period). 

229See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

The Commission preliminarily 

believes that such annual conforming 

model validation would provide 

feedback on the performance of such 

liquidity risk models conducted by a 

qualified person who is free from 

influence from the persons responsible 

for the development or operation of the 

liquidity risk model, as contemplated by 

the definition of ‘‘conforming model 

validation’’ in proposed Rule 17Ad– 

22(a)(5), and incorporate alternative 

liquidity risk management 

methodologies into their models as 

appropriate. Generally, the Commission 

preliminarily considers that a person is 

free from influence when that person 

does not perform functions associated 

with the clearing agency’s models 

(except as part of the annual model 

validation) and does not report to a 

person who performs these functions. 

Preliminarily, the Commission would 

not expect policies and procedures 

adopted pursuant to this proposed 

requirement to require the clearing 

agency to detach model review from 

model development or to maintain two 

separate quantitative teams. By reacting 

to such feedback, a covered clearing 

agency may improve the functioning of 

its liquidity risk model. The 

Commission notes that misspecified or 

miscalibrated liquidity risk models may 

lead to errors in decision making. The 

Commission preliminarily believes that 

the proposed rule is appropriate 

following consideration of the Exchange 

Act requirements discussed above 222

and the risks that a covered clearing 

agency’s size, operation, and importance 

pose to the U.S. securities markets. 

viii. Address Liquidity Shortfalls and 

Seek To Avoid Unwinding Settlement 

Proposed Rule 17Ad–22(e)(7)(viii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to address 

foreseeable liquidity shortfalls that 

would not be covered by its liquid 

resources and seek to avoid unwinding, 

revoking, or delaying the same-day 

settlement of payment obligations.223

The Commission preliminarily believes 

advance planning by a covered clearing 

agency with regard to liquidity 

shortfalls could further enhance the 

covered clearing agency’s ability to 

perform its payment obligations without 

delay and therefore support the ability 

of the clearing agency’s participants to 

function without disruption. 

Foreseeable liquidity shortfalls could 

include, for example, potential 

shortfalls that can be identified through 

testing a covered clearing agency’s 

financial resources in a manner 

consistent with the policies and 

procedures requirements in proposed 

Rule 17Ad–22(e)(7)(vi). The 

Commission recognizes that foreseeable 

liquidity shortfalls could occur even 

when a covered clearing agency is in 

compliance with the proposed 

requirements of Rule 17Ad–22(e)(7), 

such as when, for example, the covered 

clearing agency is unable to obtain 

liquidity pursuant to a prearranged 

funding arrangements that are 

uncommitted. The Commission 

preliminarily believes the proposed 

requirement is appropriate for covered 

clearing agencies given the risks that a 

covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets and are 

consistent with the Exchange Act 

requirements discussed above.224

ix. Replenishment of Liquid Resources 

Proposed Rule 17Ad–22(e)(7)(ix) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to describe its 

process for replenishing any liquid 

resources that it may employ during a 

stress event.225 The Commission 

preliminarily believes a covered 

clearing agency should specifically 

contemplate and memorialize its 

expectations for replenishing its 

financial resources when they are 

depleted so that its ability to withstand 

repeated stress events, such as multiple 

market shocks or sequential defaults of 

multiple participants is clearly 

understood and reflected in its planning 

for such events. The Commission 

preliminarily believes that the proposed 

requirement is appropriate given the 

risks that a covered clearing agency’s 

size, operation, and importance pose to 

the U.S. securities markets and is 

consistent with the Exchange Act 

requirements discussed above.226

x. Feasibility Analysis for ‘‘Cover Two’’ 

Proposed Rule 17Ad–22(e)(7)(x) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure it, at least 

once a year, evaluates the feasibility of 

maintaining sufficient liquid resources 

at a minimum in all relevant currencies 

to effect same-day and, where 

appropriate, intraday and multiday 

settlement of payment obligations with 

a high degree of confidence under a 

wide range of foreseeable stress 

scenarios that includes, but is not 

limited to, the default of the two 

participant families that would 

potentially cause the largest aggregate 

credit exposure for the covered clearing 

agency in extreme but plausible market 

conditions if the covered clearing 

agency provides CCP services and is 

either systemically important in 

multiple jurisdictions or a clearing 

agency involved in activities with a 

more complex risk profile.227

Rule 17Ad–22 does not currently 

provide specific requirements regarding 

the sizing and testing of liquid resources 

or what types of financial resources 

would qualify as liquid. However, the 

financial crisis of 2008 demonstrated 

the plausibility of the default of two 

large participants in a clearing agency 

over a brief period.228 Accordingly, the 

Commission preliminarily believes that 

its proposed approach is appropriate, 

given the need for more stringent 

financial resource requirements for a 

covered clearing agency due to the risks 

that its size, operation, and importance 

pose to the U.S. securities markets, and 

is consistent with the Exchange Act 

requirements discussed above.229 The 

Commission also believes that such 

financial resources must be robust 

enough to accommodate the risks that 

are particular to each market served and 

accordingly believes that a covered 

clearing agency should have the 

flexibility to determine that different 

standards are appropriate in different 

markets, given the variable nature and 


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230See generally Clearing Agency Standards 

Release, supra note 5, at 66234–36 (describing a 

‘‘cover two’’ requirement for credit risk). 

risks associated with the products 

cleared.230

The Commission also preliminarily 

believes that, with greater emphasis 

being placed on the role of CCPs in the 

financial system, the requirement in 

proposed Rule 17Ad–22(e)(7)(x) for 

CCPs to review and consider the 

feasibility of meeting a higher liquidity 

risk management standard is 

appropriate. While Rule 17Ad– 

22(e)(7)(x) would impose on certain 

covered clearing agencies’ policies and 

procedures requirements to conduct an 

annual analysis of the feasibility of 

maintaining ‘‘cover two’’ for liquidity, 

such covered clearing agencies would 

not be mandated to adopt a ‘‘cover two’’ 

approach regarding liquidity risk 

management. The responsibility for 

such a determination would remain 

with the boards of directors of covered 

clearing agencies following a review of 

the information produced pursuant to 

proposed Rule 17Ad–22(e)(7)(x). 

The Commission preliminarily 

believes that it may be appropriate for 

a covered clearing agency that provides 

CCP services to maintain liquidity 

coverage at levels higher than other 

clearing agencies due to the heightened 

need to ensure the safe operation of 

covered clearing agencies given their 

importance to the U.S. financial markets 

and the risks attributable to the products 

they clear, but also that covered clearing 

agencies not subject to a ‘‘cover two’’ 

requirement should have flexibility to 

evaluate the results of an annual 

feasibility study and to make their own 

determinations as to whether a ‘‘cover 

two’’ approach to liquidity risk 

management is necessary or 

appropriate. Furthermore, the 

Commission notes that if, following 

completion of a feasibility study as 

contemplated in proposed Rule 17Ad– 

22(e)(7)(x), a covered clearing agency 

makes a determination to move beyond 

‘‘cover one’’ for liquidity that would be 

required under proposed Rule 17Ad– 

22(e)(7)(i), such covered clearing agency 

would not be limited to sizing its 

qualifying liquid resources to cover the 

default of its two largest participant 

families. In such case, the covered 

clearing agency could select a level of 

liquid resources exceeding ‘‘cover one’’ 

that it deems most appropriate to the 

management of liquidity risk, which 

could be either less than, equal to, or 

more than ‘‘cover two.’’ 

Based on its supervisory experience, 

the Commission also preliminarily 

believes that, in sizing its liquid 

resources to exceed ‘‘cover one,’’ a 

covered clearing agency may take into 

account a variety of factors, including, 

but not limited to, (i) the business 

model of the covered clearing agency, 

such as a utility model (which may be 

also referred to as an ‘‘at cost’’ model) 

versus a for-profit model; (ii) 

diversification of its members’ business 

models as they impact the members’ 

ability to supply liquidity to the covered 

clearing agency; (iii) concentration of 

membership of the covered clearing 

agency, as the breadth of the 

membership may affect the ability to 

draw liquidity from members; (iv) levels 

of usage of the covered clearing agency’s 

services by members, as the 

concentration of demand on the covered 

clearing agency’s services may bear 

upon potential liquidity needs; (v) the 

relative concentration of members’ 

market share in the cleared products; 

(vi) the degree of alignment of interest 

between member ownership of the 

covered clearing agency and the 

provision of funding to the covered 

clearing agency; and (vii) the nature of, 

and risks associated with, the products 

cleared by the covered clearing agency. 

g. Request for Comments 

The Commission generally requests 

comments on all aspects of proposed 

Rules 17Ad–22(e)(4), (5), (6), and (7) 

and proposed Rules 17Ad–22(a)(5), (6), 

(14), (15), (17), (18), and (19). In 

particular, the Commission requests 

comments on the following issues: 

• Has the Commission provided 

sufficient guidance for Rule 17Ad– 

22(e)(4) regarding the meaning of the 

requirement to cover credit exposures to 

each participant ‘‘fully with a high 

degree of confidence’’? Has the 

Commission provided sufficient 

guidance regarding the meaning of the 

requirement to maintain the financial 

resources required under proposed 

Rules 17Ad–22(e)(4)(i) through (iii), as 

applicable, ‘‘in combined or separately 

maintained clearing or guaranty funds’’? 

Has the Commission provided sufficient 

guidance regarding the use of ‘‘high 

volatility’’ and ‘‘become less liquid’’? 

Why or why not? 

• Is the Commission’s proposed 

requirement to cover credit exposures to 

each participant ‘‘fully with a high 

degree of confidence’’ in proposed Rule 

17Ad–22(e)(4) appropriate? Why or why 

not? 

• Should a covered clearing agency’s 

policies and procedures provide for the 

measurement of credit exposures more 

frequently than once per day? Why or 

why not? If so, how frequently? What 

factors should be considered in 

determining the minimum frequency? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to limit the assets it accepts 

as collateral to those with low credit, 

liquidity, and market risks? Why or why 

not? Has the Commission provided 

sufficient guidance regarding what 

constitutes ‘‘low credit, liquidity, and 

market risks’’? Why or why not? If not, 

what additional guidance should the 

Commission consider providing? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to set and enforce 

appropriately conservative haircuts and 

concentration limits if the covered 

clearing agency requires collateral to 

manage its or its participants’ credit 

exposure? Why or why not? Has the 

Commission provided sufficient 

guidance on what would constitute 

‘‘appropriately conservative haircuts 

and concentration limits’’? Why or why 

not? Should the Commission adopt 

different standards? If so, what should 

those standards be? Please explain in 

detail. 

• Are there any other requirements 

that should be included in proposed 

Rule 17Ad–22(e)(5) to facilitate policies 

and procedures that address collateral? 

Why or why not? Are there any 

requirements that should be removed? 

Why or why not? For instance, should 

the Commission require policies and 

procedures that avoid concentrated 

holdings of any particular kind of asset, 

such as those that would significantly 

impair the covered clearing agency’s 

ability to liquidate such assets quickly 

without significant adverse price 

effects? Should the Commission require 

policies and procedures that avoid 

concentrated holdings under certain 

conditions? 

• Has the Commission provided 

sufficient guidance for Rule 17Ad– 

22(e)(6) regarding ‘‘margin levels 

commensurate with, the risks and 

particular attributes of each relevant 

product, portfolio, and market’’? Has the 

Commission provided sufficient 

guidance regarding what a ‘‘reliable’’ 

source of timely price data is? Why or 

why not? Should the Commission use a 

different standard? If so, what should 

that standard be? Please explain in 

detail. 

• Is the requirement in proposed Rule 

17Ad–22(e)(6)(i) regarding policies and 

procedures reasonably designed to 

result in a margin system that at a 

minimum considers, and produces 

margin levels commensurate with, the 

risks and particular attributes of each 

relevant product, portfolio, and market 

appropriate? Why or why not? 

• Is the Commission’s approach in 

proposed Rule 17Ad–22(e)(6)(iii), 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29537 

231For additional requests for comments relating 

to proposed Commission determinations under 

Rule 17Ab2–2, see Part II.C.4. 

232See proposed Rule 17Ad–22(e)(8), infra Part 

VII. 

233See 17 CFR 240.17Ad–22(d)(12); see also 

Clearing Agency Standards Release, supra note 5, 

at 66255–56. Rule 17Ad–22(d)(12) focuses on 

achieving settlement on the particular settlement 

date associated with the securities transaction or on 

an intraday or real-time basis (i.e., delivery versus 

payment) where those additional steps are 

necessary to reduce risks. See Clearing Agency 

Standards Release, supra note 5, at 66256. 

234Cf. PFMI Report, supra note 1, at 64. 

requiring a covered clearing agency’s 

policies and procedures to calculate 

margin sufficient to cover its potential 

future exposure to participants, and the 

definition of ‘‘potential future 

exposure’’ in proposed Rule 17Ad– 

22(a)(14) to mean the ‘‘maximum 

exposure estimated to occur at a future 

point in time with an established singletailed confidence interval of at least 

99% with respect to the estimated 

distribution of future exposure’’ 

appropriate and sufficiently clear? Why 

or why not? 

• Are there any other requirements 

that should be included in proposed 

Rule 17Ad–22(e)(6) to facilitate policies 

and procedures that address margin? 

Why or why not? For instance, should 

the Commission require policies and 

procedures that address minimum 

liquidation periods for products cleared 

by covered clearing agencies? Why or 

why not? 

• Has the Commission provided 

sufficient guidance for Rule 17Ad– 

22(e)(7) regarding what constitutes the 

‘‘relevant currency’’ in holding 

qualifying liquid resources? Has the 

Commission provided sufficient 

guidance regarding the ‘‘due diligence’’ 

with respect to liquidity providers? Has 

the Commission provided sufficient 

guidance regarding what constitutes 

‘‘foreseeable’’ liquidity shortfalls? Why 

or why not? 

• Has the Commission provided 

sufficient guidance regarding what 

constitutes ‘‘regularly’’ testing the 

sufficiency of liquid resources under 

proposed Rule 17Ad–22(e)(7)(vi)? Why 

or why not? How frequently should a 

covered clearing agency test the 

sufficiency of its liquid resources? 

Please explain. 

• Does the set of minimum 

requirements for policies and 

procedures under proposed Rule 17Ad– 

22(e)(7) sufficiently address liquidity 

risks? Why or why not? Should the 

Commission adopt other requirements 

for addressing liquidity risk? 

• Is the proposed definition of 

‘‘qualifying liquid resources’’ under 

Rule 17Ad–22(a)(15) accurate, 

appropriate, and sufficiently clear given 

the requirements proposed? Why or 

why not? Should all types of assets be 

subject to prearranged funding 

arrangements? Should the proposed 

definition distinguish among them by 

asset, product type, or liquidity? Are 

there alternative definitions the 

Commission should consider? 

• Is the meaning of the term ‘‘due 

diligence’’ under Rule 17Ad–22(7)(iv) 

sufficiently clear? Why or why not? 

• Is the proposed definition of 

‘‘systemically important in multiple 

jurisdictions’’ under Rule 17Ad– 

22(a)(19) accurate, appropriate, and 

sufficiently clear given the requirements 

proposed? Why or why not? Are there 

alternative definitions the Commission 

should consider? How should the 

Commission assess another regulator or 

jurisdiction’s determination that a 

covered clearing agency is systemically 

important in multiple jurisdictions? 

Please explain.231

• Is the Commission’s proposed 

approach to ‘‘cover one’’ and ‘‘cover 

two’’ with respect to credit risk 

appropriate? Should the Commission 

expand or contract the scope of covered 

clearing agencies subject to a ‘‘cover 

two’’ requirement beyond those 

systemically important in multiple 

jurisdictions or those involved in 

activities with a more complex risk 

profile? Why or why not? Is the ‘‘cover 

two’’ approach, in which the covered 

clearing agency must have policies and 

procedures requiring financial resources 

sufficient to cover the default of the two 

participant families that would 

potentially cause the largest aggregate 

credit exposure for the covered clearing 

agency in extreme but plausible market 

conditions, appropriate? Should the 

Commission require policies and 

procedures that provide for financial 

resources in excess of ‘‘cover two’’? 

Why or why not? If so, what would be 

the potential costs and benefits? 

• Is the Commission’s proposed 

approach to ‘‘cover one’’ and ‘‘cover 

two’’ with respect to liquidity risk 

appropriate? Should the Commission 

require policies and procedures that 

would provide for maintaining 

qualifying liquid resources equal to 

‘‘cover two,’’ rather than policies and 

procedures for a feasibility analysis with 

regard to ‘‘cover two’’? Why or why not? 

• Should the Commission include 

more specific requirements for policies 

and procedures regarding stress testing 

that take into account, for example, 

relevant peak historic price volatilities, 

shifts in other market factors such as 

price determinants and yield curves, 

multiple defaults over various time 

horizons, simultaneous pressures in 

funding and asset markets, or a 

spectrum of forward-looking stress 

scenarios in a variety of extreme but 

plausible market conditions? Why or 

why not? 

• Is the requirement to require 

policies and procedures for reporting 

the results of a conforming sensitivity 

analysis to the appropriate decision 

makers at the covered clearing agency 

appropriate? Why or why not? Has the 

Commission sufficiently described who 

the appropriate decision makers are? 

Please explain. 

• Do any of the proposed rules for 

financial risk management differentiate 

between clearing agencies based on 

factors that should not be determinative, 

i.e. whether a clearing agency is covered 

or uncovered, whether a clearing agency 

is systemically important in multiple 

jurisdictions, involved in activities with 

a more complex risk profile, or neither, 

and whether the clearing agency 

provides CCP services for security-based 

swaps or other securities? Should the 

Commission consider other factors in 

determining which clearing agencies 

should be subject to the proposed 

requirements? 

5. Proposed Rule 17Ad–22(e)(8): 

Settlement Finality 

Proposed Rule 17Ad–22(e)(8) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to define the point 

at which settlement is final no later than 

the end of the day on which the 

payment or obligation is due and, where 

necessary or appropriate, intraday or in 

real time.232

Rule 17Ad–22(d)(12) currently 

requires registered clearing agencies to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that final 

settlement occurs no later than the end 

of the settlement day and to require that 

intraday or real-time finality be 

provided where necessary to reduce 

risks.233 The Commission preliminarily 

believes that defining settlement finality 

with specific reference to the day on 

which the payment or obligation is due 

is appropriate because it better reflects 

the prevailing international convention 

and accordingly helps to ensure that 

covered clearing agencies can facilitate 

transactions globally.234 Because of the 

similarity between proposed Rule 

17Ad–22(e)(8) and Rule 17Ad– 

22(d)(12), the Commission anticipates 

that covered clearing agencies may need 

to make only limited changes to update 


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29538 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

235See supra Part II.A.4. 

236See proposed Rule 17Ad–22(e)(9), infra Part 

VII. 

The Commission notes that, in some cases, for 

example, the use of central bank money may not be 

practical, as direct access to all central bank 

accounts and payment services may not be available 

to certain clearing agencies or members, and, for 

clearing agencies working under different 

currencies, certain central bank accounts may not 

be operational at the time money settlements occur. 

237 In full, Rule 17Ad–22(d)(5) requires registered 

clearing agencies to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to employ money settlement 

arrangements that eliminate or strictly limit the 

clearing agency’s settlement bank risks, such as 

credit and liquidity risks from the use of banks to 

effect money settlements with its participants. See 

17 CFR 240.17Ad–22(d)(5); see also Clearing 

Agency Standards Release, supra note 5, at 66249– 

50. 

238See supra Part II.A.4 (noting the anticipated 

effect of the proposed rule) and infra Part IV.B.3.c 

(describing the current practices at registered 

clearing agencies regarding settlement). 

239See proposed Rule 17Ad–22(e)(9), infra Part 

VII. 

240See ICMA Eu. Repo Council, supra note 205, 

at 8–9 (noting that central bank money ‘‘can be 

regarded as completely safe in the jurisdiction of 

the central bank’’ and listing a number of 

advantages attributable to central bank money). 

their policies and procedures to comply 

with the proposed rule.235

As with Rule 17Ad–22(d)(12), the 

Commission preliminarily believes that 

proposed Rule 17Ad–22(e)(8) is 

appropriate for covered clearing 

agencies, given the risks that a covered 

clearing agency’s size, operation, and 

importance pose to the U.S. securities 

markets, for the following reasons. First, 

the Commission preliminarily believes 

that defining the point at which 

settlement is final may assist in the 

potential wind-down of a member in the 

event of insolvency because it provides 

the covered clearing agency with 

information regarding the member’s 

open positions. As an example, clearly 

defining the point at which settlement 

is final might include establishing a cutoff point after which unsettled 

payments, transfer instructions, or other 

obligations may not be revoked by a 

clearing member. Clearly defining the 

point at which settlement is final could 

also provide to clearing members the 

necessary guidance from the covered 

clearing agency to permit extensions for 

members with operating problems. For 

example, the covered clearing agency 

may establish rules governing the 

approval and duration of such 

extensions. 

Second, the Commission 

preliminarily believes that a covered 

clearing agency’s policies and 

procedures should require completing 

final settlement no later than the end of 

the day on which the payment or 

obligation is due and that practices 

creating material uncertainty regarding 

when final settlement will occur or 

permit the back-dating or ‘‘as of’’ dating 

of a transaction that settles after the end 

of the day on which the payment or 

obligation is due would not comply 

with this requirement. The Commission 

preliminarily believes that final 

settlement has the effect of reducing the 

buildup of exposures between clearing 

members and the clearing agency, and 

final settlement no later than the end of 

the day on which the payment or 

obligation is due limits these exposures 

to the change in price between valuation 

and the end of the day. Accordingly, 

deferring final settlement beyond the 

end of the day on which the payment 

or obligation is due would allow these 

exposures to increase in size, thereby 

creating the potential for credit and 

liquidity pressures for members and 

other market participants and 

potentially increasing systemic risk. 

Third, the Commission preliminarily 

believes that a covered clearing agency’s 

policies and procedures, where 

necessary and appropriate, should 

require intraday or real-time finality in 

order to reduce risk in circumstances 

where uncertainty regarding finality 

may impede the clearing agency’s 

ability to facilitate prompt and accurate 

clearance and settlement, cause the 

clearing agency’s members to fail to 

meet their obligations, or otherwise 

disrupt the securities markets. The 

Commission preliminarily believes that 

such efforts would be necessary and 

appropriate when, for example, the risks 

in question are material or when the 

opportunity to require intraday or realtime finality is available and it would be 

reasonable, whether in economic or 

other terms, to do so. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(8). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to define the point at which 

settlement is final no later than the end 

of the day on which the payment or 

obligation is due, as in the proposed 

rule, or no later than the end of the 

settlement date, as in existing Rule 

17Ad–22(d)(12) applicable to registered 

clearing agencies? Please explain. 

• What changes, if any, would be 

created by the proposed requirements 

for settlement finality? Does the 

proposed rule affect certain, identifiable 

categories of market participants 

differently than others, such as smaller 

entities or entities with limited 

operations in the United States? If so, 

how? 

• Are there operational, legal, or 

regulatory impediments to intraday or 

real-time settlement finality? Will the 

proposed standard make it harder for 

covered clearing agencies to conduct 

certain types of business for which 

intraday or real-time finality may be 

difficult? Are any additional rules or 

regulations needed to encourage 

intraday or real-time finality to reduce 

risks? 

• Are there circumstances when the 

requirements of intraday, real-time, or 

end-of-day settlement finality proposed 

by the rule are not feasible or are not 

beneficial? If so, in what circumstances? 

6. Proposed Rule 17Ad–22(e)(9): Money 

Settlements 

Proposed Rule 17Ad–22(e)(9) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure it 

considers conducting its money 

settlements in central bank money, 

where available and determined to be 

practical by the board of directors of the 

covered clearing agency, and minimizes 

and manages credit and liquidity risk 

arising from conducting its money 

settlements in commercial bank money 

if central bank money is not used by the 

covered clearing agency.236 Rule 17Ad– 

22(e)(9) contains requirements similar to 

those applied to registered clearing 

agencies under Rule 17Ad–22(d)(5), but 

would additionally require a covered 

clearing agencies to have policies and 

procedures for conducting money 

settlement in central bank money.237

Because this is the only requirement 

that differs between proposed Rule 

17Ad–22(e)(9) and existing Rule 17Ad– 

22(d)(5), the Commission anticipates 

that covered clearing agencies may need 

to make only limited changes to update 

their policies and procedures.238

As with Rule 17Ad–22(d)(5), the 

Commission is proposing Rule 17Ad– 

22(e)(9) to provide assurance that funds 

transfers are final when effected.239 The 

Commission preliminarily believes that 

the proposed requirement for policies 

and procedures for conducting money 

settlement in central bank money 

would, in addition, help to further 

reduce the risk that financial obligations 

related to the activities of a covered 

clearing agency are not settled in a 

timely manner or discharged with 

finality because settlement in central 

bank money eliminates settlement risk 

within the jurisdiction of the central 

bank.240

The Commission notes that there are 

a number of arrangements that a covered 


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241See 12 U.S.C. 5465(a); see also supra Parts 

II.B.4.d and II.B.4.f.iii (discussing access to account 

services at a Federal Reserve Bank, or other relevant 

central bank, pursuant to proposed Rules 17Ad– 

22(e)(5) and (7), respectively). 

242See proposed Rule 17Ad–22(e)(10), infra Part 

VII. 

243Registered clearing agencies are currently 

subject to existing Rule 17Ad–22(d)(15), which 

requires them to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to state to its participants the 

clearing agency’s obligations with respect to 

physical deliveries and identify and manage the 

risks from these obligations. See 17 CFR 240.17Ad– 

22(d)(15); see also Clearing Agency Standards 

Release, supra note 5, at 66257–58. 

244The Commission is proposing additional 

requirements regarding disclosures to participants 

and disclosure generally, pursuant to proposed 

Rules 17Ad–22(e)(1) (legal risk), (e)(2) (governance), 

and (e)(23) (disclosure of rules, key procedures, and 

market data). See infra Parts II.B.1, 2, and 20, 

respectively. 

clearing agency could employ to meet 

the requirements under the proposed 

rule. For example, pursuant to the 

Clearing Supervision Act, designated 

clearing agencies may obtain access to 

account services at a Federal Reserve 

Bank.241 The Commission preliminarily 

believes, however, that it may be 

appropriate for covered clearing 

agencies to use commercial banks for 

conducting money settlements even 

when comparable services are available 

from a central bank, and therefore the 

proposed rule would permit a covered 

clearing agency to decide for itself 

which service to use in those 

circumstances. If central bank account 

services are not available or used, then 

the covered clearing agency should 

consider establishing criteria for use of 

commercial banks to effect money 

settlements with its participants that 

address such commercial banks’ 

regulation and supervision, 

creditworthiness, capitalization, access 

to liquidity, and operational reliability. 

In addition, a covered clearing agency 

also could seek to ensure that its legal 

agreements with such commercial 

settlement banks support such riskreduction principles and commercial 

settlement bank criteria, including 

through provisions providing that funds 

transfers to the covered clearing agency 

are final when effected. 

The proposed rule would also permit 

a covered clearing agency to use 

multiple settlement banks in order to 

monitor and manage concentration of 

payments among its commercial 

settlement banks. In those 

circumstances, policies and procedures 

would be required to consider the 

degree to which concentration of a 

covered clearing agency’s exposure to a 

commercial settlement bank is affected 

or increased by multiple relationships 

with the settlement bank, including (i) 

where the settlement bank is also a 

participant in the covered clearing 

agency, or (ii) where the settlement bank 

provides back-up liquidity resources to 

the covered clearing agency. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(9). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to conduct its money 

settlements in central bank money, 

where available and determined to be 

practical by the board of directors of the 

covered clearing agency? Why or why 

not? Has the Commission provided 

sufficient guidance on what would be 

‘‘practical’’ in this context? Why or why 

not? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to minimize and manage 

credit and liquidity risk arising from 

conducting its money settlements in 

commercial bank money if central bank 

money is not used by the covered 

clearing agency? Why or why not? 

• Are there other requirements that 

the Commission should apply to money 

settlements, such as requiring policies 

and procedures with respect to the 

minimum number of banks that a 

covered clearing agency may use to 

effect money settlements with its 

participants in order to avoid reliance 

on a small number of such banks? 

Should the Commission require policies 

and procedures specifying the 

characteristics of financial institutions 

that may be used by clearing agencies 

for settlement purposes? Why or why 

not? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to establish and monitor 

adherence to criteria based on high 

standards for the covered clearing 

agency’s settlement banks? For example, 

should the Commission require that 

criteria to consider the applicable 

regulatory and supervisory frameworks, 

creditworthiness, capitalization, access 

to liquidity, and operational reliability? 

Why or why not? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to monitor and manage the 

concentration of credit and liquidity 

exposures to its commercial settlement 

banks? Why or why not? 

• Should rules for money settlements 

established by the Commission be 

uniform for all types of money 

settlements, or are there circumstances 

in which it would be appropriate for 

covered clearing agencies to accept a 

higher degree of money settlement risk, 

such as when transacting in certain 

product categories or with certain types 

of customers? Why or why not? 

7. Proposed Rule 17Ad–22(e)(10): 

Physical Delivery Risks 

Proposed Rule 17Ad–22(e)(10) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to establish and 

maintain transparent written standards 

that state its obligations with respect to 

the delivery of physical instruments and 

operational practices that identify, 

monitor, and manage the risk associated 

with such physical deliveries.242

The proposed requirement is similar 

to the requirement applicable to 

registered clearing agencies in Rule 

17Ad–22(d)(15), but the proposed rule 

also requires that such standards be 

transparent at covered clearing 

agencies.243 Considering the risks that a 

covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets, the Commission 

preliminarily believes that the proposed 

new requirement for transparent 

standards is appropriate. Physical 

delivery may require the involvement of 

multiple parties, including the clearing 

agency itself, its members, customers, 

custodians, and transfer agents, and 

failures to deliver physical instruments 

can threaten the integrity and smooth 

functioning of the financial system. By 

requiring policies and procedures to 

include transparent written standards at 

covered clearing agencies, the proposed 

rule helps to mitigate physical delivery 

risks. 

The Commission preliminarily 

believes that the proposed requirement 

for a covered clearing agency to 

maintain transparent written standards 

that state its obligations with respect to 

physical deliveries would help to 

ensure that members and their 

customers have information that is 

likely to enhance their understanding of 

their rights and responsibilities with 

respect to using the clearance and 

settlement services of a covered clearing 

agency.244 The Commission 

preliminarily believes that such 

information, when available to members 

and their customers through the covered 

clearing agency’s policies and 

procedures, would promote a shared 

understanding regarding physical 

delivery practices between the covered 

clearing agency and its members. The 

requirement for policies and procedures 

with transparent written standards may 

further facilitate prompt and accurate 


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29540 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

245The proposed rule would provide covered 

clearing agencies with flexibility to achieve clear 

and transparent standards but would necessarily 

require an approach that provides sufficient notice 

to its participants regarding the covered clearing 

agency’s obligations. See infra Parts II.B.20 and VII 

(discussing a covered clearing agency’s disclosure 

obligations pursuant to proposed Rule 17Ad– 

22(e)(23) and providing proposed rule text). 

The Commission notes that CDS employing the 

contractual term ‘‘physical delivery’’ or similar 

language, which upon an event of default are settled 

by ‘‘physical delivery’’ of the instrument (as such 

terms are used in the agreement) to the protection 

seller by the protection buyer are not within the 

scope of this rule merely because of such 

contractual terminology where they are not 

delivered in paper form (but are delivered through 

book entry or electronic transfer). 

246See proposed Rule 17Ad–22(e)(10), infra Part 

VII. 

247See supra note 243. 

248See 15 U.S.C. 78q–1(b)(3)(F). 

249 In addition, the Commission is proposing Rule 

17Ad–22(e)(17) to establish minimum requirements 

for operational risk management. See infra Parts 

IV.C.3.a.xii and VII (further discussing the proposed 

requirements and providing proposed rule text). 

250See proposed Rule 17Ad–22(a)(3), infra Part 

VII (defining ‘‘central securities depository 

services’’). In the United States, DTC is currently 

the only registered clearing agency that provides 

CSD services. 

This definition is currently codified at 17 CFR 

240.17Ad–22(a)(2). See supra note 61 (noting that 

17 CFR 240.17Ad–22(a) is being revised to 

incorporate additional terms). 251See proposed Rule 17Ad–22(e)(11), infra Part 

VII. 252 In full, existing Rule 17Ad–22(d)(10) requires 

registered clearing agencies that provide CSD 

services to establish, implement, maintain and 

enforce written policies and procedures reasonably 

designed to immobilize or dematerialize securities 

certificates and transfer them by book entry to the 

greatest extent possible. See 17 CFR 240.17Ad– 

22(d)(10); see also Clearing Agency Standards 

Release, supra note 5, at 66253–54. 

253 Immobilization refers to any circumstance 

where an investor does not receive a physical 

certificate upon the purchase of shares or is 

required to physically deliver a certificate upon the 

sale of shares. Dematerialization is the process of 

eliminating physical certificates as a record of 

security ownership. 

The Commission notes that, while registered 

clearing agencies that provide CSD services are 

already subject to this requirement under Rule 

17Ad–22(d)(10), the Commission is proposing Rule 

17Ad–22(e)(10) as part of a comprehensive set of 

rules for regulating covered clearing agencies. 

Because Rule 17Ad–22(d)(10) already contains this 

requirement, however, the Commission anticipates 

that covered clearing agencies may need to make 

only limited changes to update their policies and 

procedures to comply with this requirement under 

the proposed rule. See supra Part II.A.4. 

clearance and settlement and mitigate 

physical delivery risks. 

The Commission acknowledges that 

practices regarding physical delivery 

vary based on the types of assets that a 

covered clearing agency settles.245 A 

covered clearing agency would be 

required, however, to state clearly 

which asset classes it accepts for 

physical delivery and the procedures 

surrounding the delivery of each. The 

Commission notes that there are a 

number of arrangements that a covered 

clearing agency could employ pursuant 

to the requirements of the proposed 

rule. For example, if a covered clearing 

agency takes physical delivery of 

securities from its members in return for 

payments of cash, then it should inform 

its members of the extent of the clearing 

agency’s obligations to make payment. 

The Commission envisions that one 

possible approach a covered clearing 

agency could take in fulfillment of the 

proposed requirement would be to 

employ policies and procedures that 

clearly state any obligations it incurs to 

members for losses incurred in the 

delivery process. In addition, its 

policies and procedures could clearly 

state rules or obligations regarding 

definitions for acceptable physical 

instruments, the location of delivery 

sites, rules for storage and warehouse 

operations, and the timing of delivery. 

The proposed rule would also require 

a covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to identify, 

monitor, and manage the risks that arise 

in connection with their obligations for 

physical deliveries.246 The Commission 

notes that this is similar to the 

requirement for a registered clearing 

agency’s policies and procedures to 

identify and manage the risks from its 

obligations in Rule 17Ad–22(d)(15).247

As with Rule 17Ad–22(d)(15), the 

Commission believes that requiring a 

clearing agency’s policies and 

procedures to identify, monitor, and 

manage these risks facilitates its ability 

to deal preemptively with potential 

issues with physical delivery, in line 

with Exchange Act requirements to 

facilitate prompt and accurate clearance 

and settlement and the safeguarding of 

assets.248

The Commission preliminarily notes 

that certain risks associated with 

physical deliveries could stem from 

operational limitations with respect to 

assuring receipt of and processing of 

physical deliveries. Other operational 

risks may relate to personnel, which can 

be mitigated by having policies and 

procedures designed to review and 

assess the qualifications of potential 

employees, including reference and 

background checks and employee 

training, among other things. Further 

operational risks include theft, loss, 

counterfeiting, and deterioration of or 

damage to assets.249 Insurance coverage 

may be one way to mitigate such risk of 

theft, loss, counterfeiting, fraud, and 

damage to assets. Other appropriate 

methods to identify, monitor, and 

manage risks related to delivery and 

storage of physical assets may include 

ensuring records of physical assets 

received and held accurately reflect 

holdings and that employee duties for 

such recordkeeping for and holding of 

physical assets are separated. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(10). In addition, the 

Commission requests comments on the 

following specific issue: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to establish and maintain 

transparent written standards that state 

its obligations with respect to the 

delivery of physical instruments? Why 

or why not? Are there physical delivery 

obligations that a covered clearing 

agency’s policies and procedures should 

not be required to state through 

transparent written standards? If so, 

please explain. 

8. Proposed Rule 17Ad–22(e)(11): 

Central Securities Depositories 

Proposed Rule 17Ad–22(e)(11) would 

apply only to a covered clearing agency 

providing CSD services (hereinafter a 

‘‘covered CSD’’ in this part).250

Proposed Rule 17Ad–22(e)(11)(i) would 

require a covered CSD to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to maintain 

securities in an immobilized or 

dematerialized form for their transfer by 

book entry, ensure the integrity of 

securities issues, and minimize and 

manage the risks associated with the 

safekeeping and transfer of securities.251

While Rule 17Ad–22(d)(10) similarly 

requires registered clearing agencies that 

provide CSD services to have policies 

and procedures reasonably designed to 

immobilize or dematerialize securities 

certificates and transfer them by book 

entry to the greatest extent possible, 252

proposed Rule 17Ad–22(e)(11) would 

also require a covered CSD to have 

policies and procedures that ensure the 

integrity of securities issues, and 

minimize and manage the risks 

associated with the safekeeping and 

transfer of securities. The Commission 

preliminarily believes these additional 

requirements are appropriate for 

covered CSDs given the risks that a 

covered CSD’s size, operation, and 

importance pose to the U.S. securities 

markets. 

Like existing Rule 17Ad–22(d)(10), 

proposed Rule 17Ad–22(e)(11)(i) would, 

among other things, require a covered 

CSD to have policies and procedures to 

maintain securities in an immobilized 

or dematerialized form for transfer by 

book entry.253 The Commission 


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254By concentrating the location of physical 

securities in a CSD, clearing agencies are able to 

achieve efficiencies in clearance and settlement by 

streamlining transfer. Virtually all mutual fund 

securities, government securities, options, and 

municipal bonds in the United States are 

dematerialized and most of the equity and corporate 

bonds in the U.S. market are either immobilized or 

dematerialized. While the U.S. markets have made 

great strides in achieving immobilization and 

dematerialization for institutional and broker-tobroker transactions, many industry representatives 

believe that the small percentage of securities held 

in certificated form imposes unnecessary risk and 

expense to the industry and to investors. See 

Exchange Act Release No. 34–49405 (Mar. 11, 

2004), 69 FR 12922, 12933 (Mar. 18, 2004). 

255See 15 U.S.C. 78q–1(e). 

256See infra Parts II.B.9 (discussing proposed 

Rule 17Ad–22(e)(12) for exchange-of-value 

settlement systems) and IV.C.3.a.vi (noting that the 

economic effect of book-entry transfer in a delivery 

versus payment system is to allow securities to be 

credited to an account immediately upon debiting 

the account for the payment amount and that it 

thereby helps reduce trade failures). 

257See 15 U.S.C. 77e. 

258See 17 CFR 230.144(a)(3). 

259See 17 CFR 230.144A; see also Exchange Act 

Release No. 34–59384 (Feb. 11, 2009), 74 FR 7941 

(Feb. 20, 2009); DTC, Operational Arrangements, 

Secs. I.A.2 & I.B.5 (Jan. 2012), available at http:// 

www.dtcc.com/. 

260 In the absence of a federal or state 

requirement, an issuer could limit its issuance of 

certain types of securities to book-entry only form 

through its own charter, bylaws, or policies. 

261 Issuers of American depositary receipts 

(‘‘ADRs’’), whether in programs sponsored or 

unsponsored by a foreign issuer, may hold the 

underlying shares of the foreign issuer (which may 

be in paper certificate form and are commonly 

referred to as American depositary shares) to which 

the ADRs relate in the ultimate custody of a covered 

CSD. 

262The Commission is proposing additional 

requirements under Rule 17Ad–22(e)(11) to further 

address the integrity of securities issues. See infra 

Part II.B.8.a. 

263The Commission is proposing additional 

requirements under Rule 17Ad–22(e)(11) to further 

address custody risk at covered CSDs. See infra Part 

II.B.8.c. 

264See infra Parts IV.B.3.d.i (discussing the 

current practices of registered CSDs in the United 

States) and IV.C.3.a.vi (discussing the anticipated 

economic effect of the proposed rule). 

preliminarily believes this approach 

would continue to promote a reduction 

in securities transfer processing costs, as 

well as the risks associated with 

securities settlement and custody, such 

as destruction or theft, by removing the 

need to hold and transfer many, if not 

most, physical certificates.254 In 

addition, the Commission preliminarily 

believes the requirement would 

continue to promote prompt and 

efficient settlement processes through 

the potential for increased automation 

and may also help reduce the risk of 

error and delays in securities 

processing. The Commission also 

preliminarily believes the proposed rule 

would, like Rule 17Ad–22(d)(10), 

further the objectives in Section 17A of 

the Exchange Act requiring the 

Commission to end the physical 

movement of securities certificates in 

connection with settlement among 

brokers and dealers.255 Further, the 

Commission preliminarily believes that 

the proposed rule, by continuing to 

facilitate book-entry transfer, may also 

continue to facilitate the use of 

exchange-of-value settlement systems, 

which help to reduce settlement risk 

pursuant to proposed Rule 17Ad– 

22(e)(12).256

As with Rule 17Ad–22(d)(10), the 

Commission notes that the proposed 

requirement for policies and procedures 

to cover maintaining securities in an 

immobilized form is not intended to 

prohibit a covered CSD from holding 

physical securities certificates on behalf 

of its members for purposes other than 

to facilitate immobilization where such 

securities currently continue to exist in 

paper form. In this regard, the 

Commission believes it would be useful 

to describe three relevant features of the 

current U.S. market. First, in order for 

securities to be offered and sold 

publicly, the offer or sale of the 

securities generally must be registered 

with the Commission or subject to an 

exemption from registration.257

Securities sold in an exempt transaction 

may be subject to restrictions. For 

example, securities acquired from the 

issuer in a transaction not involving any 

public offering are restricted 

securities,258 are subject to restrictions 

on resale, often bear legends that 

discuss such restrictions, and often are 

in paper certificate form in current 

market practice. The restrictions on 

such securities may make more complex 

the immobilization or ultimate 

dematerialization of these paper 

certificates. For instance, registered 

CSDs in the United States currently do 

not provide book-entry transfer for all 

restricted securities.259

Second, U.S. law generally does not 

provide for a federal corporate law or 

corporate charter. Instead, states 

currently permit corporations to issue 

stock certificates to registered owners. 

While the market in the United States 

has made advances in immobilizing and 

dematerializing securities, no federal 

statute or regulation prohibits the 

issuance of paper certificates to 

registered owners of a class of securities 

registered under the Exchange Act or 

companies that file periodic reports 

with the Commission. Accordingly, the 

Commission’s rules do not prohibit, and 

in some respects contemplate, the 

issuance of securities certificates.260 As 

a result, some registered owners may 

hold securities in paper certificate form. 

Third, some broker-dealers in the 

United States no longer operate vaults 

in which to hold securities certificates 

registered in the names of their 

customers where such customers seek a 

third-party to physically hold their 

certificates. In such cases, brokerdealers (without an in-house vault) may 

utilize the vault services of the CSD of 

which they are a participant in order to 

be able to offer such custody service to 

their customers. 

The Commission also notes that the 

proposed rule is not intended to alter 

the following practices in the U.S. 

market. Proposed Rule 17Ad–22(e)(11) 

would not prohibit a covered CSD from 

providing custody-only services for 

purposes not intended to promote 

immobilization to facilitate street name 

transfer but solely to hold these 

securities for third parties. Likewise, 

proposed Rule 17Ad–22(e)(11) would 

not prohibit a covered CSD from 

holding American depositary shares in 

custody.261

In addition, the Commission 

preliminarily believes that the policies 

and procedures of a covered CSD should 

be required to ensure the integrity of 

securities issues and minimize and 

manage the risks associated with the 

safekeeping and transfer of securities, 

given the risks that a covered CSD’s 

size, operation, and importance pose to 

the U.S. securities markets, for the 

following reasons. First, the 

preservation of the rights of issuers and 

holders of securities is necessary for the 

orderly functioning of the securities 

markets.262 The integrity of a securities 

issue can be undermined, for instance, 

if a covered CSD does not prohibit 

overdrafts and debit balances in 

securities accounts, which can create 

unauthorized issuances of securities 

that undermine the integrity of the 

covered CSD’s services. Second, 

minimizing and managing the risks 

associated with the safekeeping and 

transfer of securities promotes risk 

management policies and procedures 

that address custody risk.263

In addition, the Commission is 

proposing the requirements described 

below. Although Rule 17Ad–22(d)(10) 

does not include similar requirements, 

the Commission anticipates that, based 

on the current practices of registered 

CSDs in the United States, a registered 

CSD may need to make only limited 

changes to update its policies and 

procedures to comply with the below 

proposed requirements.264


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29542 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

265See proposed Rule 17Ad–22(e)(11), infra Part 

VII. The Commission preliminary believes that 

daily reconciliation is appropriate for the reasons 

described in Part II.A.3. 

266For a description of DTC’s rules relating to 

FAST, see Exchange Act Release Nos. 34–64191 

(Apr. 5, 2011), 76 FR 20061 (Apr. 11, 2011); 34– 

61800 (Mar. 30, 2010), 75 FR 17196 (Apr. 5, 2010); 

34–60196 (Jun. 30, 2009), 74 FR 33496 (Jul. 13, 

2009); 34–46956 (Dec. 2, 2002), 67 FR 77115 (Dec. 

16, 2002); 34–31941 (Mar. 3, 1993); 34–21401 (Oct. 

16, 1984); 34–14997 (Jul. 26, 1978); and 34–13342 

(Mar. 8, 1977). 

267Commonly, the entity performing the registrar 

and transfer services for an issue would be the 

same. Both functions are functions that place an 

entity within the definition of ‘‘transfer agent’’ 

pursuant to Section 3(a)(25) of the Exchange Act 

and the related regulatory regime for transfer agents. 

See 15 U.S.C. 78c(a)(25). 

268See proposed Rule 17Ad–22(e)(11), infra Part 

VII. For example, in the United States, additional 

safekeeping requirements may apply under state 

law. See, e.g., N.Y. UCC Law 8–504 (requires 

securities intermediaries, including clearing 

corporations, to exercise due care in accordance 

with reasonable commercial standards to obtain and 

maintain the financial asset). 

269See 15 U.S.C. 78q–1(b)(3)(F). 

270See supra Part II.B.7 and infra Part VII 

(discussing the requirements under proposed Rule 

17Ad–22(e)(10) and providing proposed rule text). 

271The Commission is also proposing Rule 17Ad– 

22(e)(17) to establish minimum standards for 

operational risk management. See infra Parts II.B.14 

and VII. 

272The Commission is also proposing Rule 17Ad– 

22(e)(16) to establish minimum standards for 

custody and investment risk. See infra Parts II.B.13 

and VII. 

a. Controls To Safeguard the Rights of 

Securities Issuers and Holders and 

Prevent the Unauthorized Creation or 

Deletion of Securities 

Proposed Rule 17Ad–22(e)(11)(ii) 

would require a covered CSD to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to implement 

internal auditing and other controls to 

safeguard the rights of securities issuers 

and holders and prevent the 

unauthorized creation or deletion of 

securities. 

The Commission preliminarily 

believes that the proposed requirement 

to safeguard the rights of issuers and 

holders is appropriate because, while 

issuers and holders may not be 

participants in a covered CSD, they 

access its services through covered CSD 

immobilization or dematerialization of 

securities and thus a failure to safeguard 

securities by the CSD may adversely 

affect issuers or holders, including for 

example by creating legal problems 

related to unauthorized issuance of 

securities, dilution of a holder’s 

ownership interest or the holder’s claim 

on the security as beneficial owner 

where holding indirectly through a 

member of the CSD. 

As noted above, the preservation of 

the rights of securities issuers and 

holders is necessary for the orderly 

functioning of the securities markets. 

Accordingly, the Commission 

preliminarily believes the proposed rule 

is appropriate to help ensure that a 

covered clearing agency can verify that 

its records are accurate and provide a 

complete accounting of its securities 

issues. 

b. Periodic and at Least Daily 

Reconciliation of Securities Maintained 

Proposed Rule 17Ad–22(e)(11)(ii) 

would require a covered CSD to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to conduct periodic 

and at least daily reconciliation of 

securities issues it maintains.265 The 

Commission preliminarily believes that 

the proposed requirement to reconcile 

on a daily basis securities maintained 

would (i) support the safeguarding of 

securities because, through such 

internal control procedures, accurate 

record-keeping is promoted and thereby 

safe, accurate, and effective clearing and 

settlement is also promoted, and (ii) 

further benefit issuers and holders, as 

discussed above, by potentially 

preventing unauthorized issuance of 

securities, dilution of a holder’s 

positions, or the holder’s claim on the 

security as beneficial owner where 

holding indirectly through a member of 

the CSD. 

The Commission notes that CSDs in 

the United States currently do not 

provide registrar or transfer agent 

services to record name owners of 

securities. CSD services that facilitate 

book-entry transfer are limited to 

holding jumbo/global certificates in 

custody or, through sub-custodian 

relationships with the transfer agent for 

a particular issuer via the Fast 

Automated Securities Transfer 

(‘‘FAST’’) system, which is used to 

maintain jumbo/global record 

ownership position balances of the 

CSD’s holdings in a particular issue.266

In both cases, custody or sub-custody 

facilitates book-entry transfer for 

ultimate beneficial owners as the CSD 

credits and debits the accounts of its 

members, which then maintain records 

of ownership and send account 

statements to their customers that are 

the ultimate beneficial owners. Since 

the registrar maintaining the security 

holder list for an issuer is not the CSD, 

the daily reconciliation requirement 

applicable to a covered CSD reconciling 

CSD ownership positions (that facilitate 

book-entry transfer for ultimate 

beneficial owners) against the record of 

such CSD ownership positions on the 

security holder list could not be done 

solely in-house but would require the 

CSD to coordinate with the registrar 

maintaining the security holder list for 

each issue that has been 

immobilized.267

c. Protect Assets Against Custody Risk 

Proposed Rule 17Ad–22(e)(11)(iii) 

would require a covered CSD to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to protect assets 

against custody risk through appropriate 

rules and procedures consistent with 

relevant laws, rules, and regulations in 

jurisdictions where it operates.268 The 

Commission preliminarily believes the 

proposed requirement to address 

custody risk is appropriate because a 

covered CSD faces risks of negligence, 

misuse of assets, fraud, record-keeping 

or administrative failures, loss, 

destruction, damage, natural disaster, 

and theft or other crime regarding assets 

held in custody. The Commission 

preliminarily believes that the proposed 

rule would further support Section 

17A(b)(3)(F) of the Exchange Act, which 

requires the rules of a clearing agency to 

assure the safeguarding of securities and 

funds that are in the custody or control 

of the clearing agency or for which it is 

responsible.269

Such custody risk may be related to 

physical delivery risk, which proposed 

Rule 17Ad–22(e)(10) would require a 

covered clearing agency’s policies and 

procedures to identify, monitor, and 

manage.270 Operational risks may also 

be implicated, including those relating 

to personnel, which can be mitigated by 

having policies and procedures 

designed to review and assess the 

qualifications of potential employees, 

including reference and background 

checks and employee training, among 

other things. Additional operational 

risks include theft, loss, counterfeiting, 

and deterioration of or damage to 

assets.271 Insurance coverage may be 

one way to mitigate such risk of theft, 

loss, counterfeiting, fraud, and damage 

to assets. Other appropriate methods to 

monitor and manage custody risks may 

include ensuring records of securities 

held in custody accurately reflect 

holdings and that employee duties for 

such recordkeeping for and holding of 

securities are separated.272

The Commission also preliminarily 

notes that increased dematerialization 

would not eliminate the applicability of 

the requirement to protect assets against 

custody risk. When held in electronic 

custody through accounting entries, 

such as through electronic sub-custody 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29543 

273See proposed Rule 17Ad–22(e)(12), infra Part 

VII. 

274See id. 

275See 17 CFR 240.17Ad–22(d)(13); see also 

Clearing Agency Standards Release, supra note 5, 

at 66256. 

276See supra Part II.A.4. 

277See supra Parts II.B.1–3 and infra Parts II.B.14 

and VII (discussing proposed rules establishing 

minimum standards for legal risk and governance 

arrangements, requiring a comprehensive risk 

management framework, requiring minimum 

standards for operational risk management, and 

providing proposed rule text in each case, 

respectively). 

278See Arthur Levitt, Chairman, U.S. Securities 

and Exchange Commission, Speeding Up 

Settlement: The Next Frontier, Remarks before the 

Symposium on Risk Reduction in Payments, 

Clearance and Settlement Systems (Jan. 26, 1996), 

available at http://www.sec.gov/news/speech/

speecharchive/1996/spch071.txt. 

279See BIS, Delivery Versus Payment in 

Securities Settlement Systems (Sept. 1992), 

available at http://www.bis.org/publ/cpss06.pdf. 

Three different DVP models can be differentiated 

according to whether the securities and/or funds 

transfers are settled on a gross (trade-by-trade) basis 

or on a net basis. Proposed Rule 17Ad–22(e)(10), 

supra Part II.B.7 and infra Part VII, would establish 

minimum requirements for physical deliveries. 

of the CSD global/jumbo record 

ownership position with a transfer agent 

via FAST, assets may nevertheless 

remain subject to operational risks and 

may be subject to variations of such 

risks, such as hacking or digital piracy, 

that are different from those risks faced 

with respect to paper certificates. 

d. Request for Comments 

The Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(11). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered CSD’s policies and procedures 

to maintain securities in an immobilized 

or dematerialized form for their transfer 

by book entry? Why or why not? Are 

there any circumstances under which 

this would be inappropriate? Please 

explain. 

• Should the Commission require a 

covered CSD’s policies and procedures 

to ensure the integrity of securities 

issues? Why or why not? 

• Should the Commission require a 

covered CSD’s policies and procedures 

to protect assets against custody risk 

through appropriate rules and 

procedures consistent with relevant 

laws, rules, and regulations in 

jurisdictions where it operates? Why or 

why not? 

• Are there any other requirements 

that should be included in the proposed 

rule to promote sound practices at 

covered CSDs? For instance, should the 

Commission require a covered CSD’s 

policies and procedures to include 

provisions to identify, measure, 

monitor, and manage its risks from other 

activities that it may perform? Should 

the Commission require a covered CSD’s 

policies and procedures to employ a 

robust system that ensures segregation 

between the CSD’s own assets and the 

securities of its participants and 

segregation among the securities of 

participants? Why or why not? 

9. Proposed Rule 17Ad–22(e)(12): 

Exchange-of-Value Settlement Systems 

Proposed Rule 17Ad–22(e)(12) would 

apply to transactions cleared by a 

covered clearing agency that involve the 

settlement of two linked obligations.273

The proposed rule would require a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to eliminate 

principal risk by conditioning the final 

settlement of one obligation upon the 

final settlement of the other, regardless 

of whether the covered clearing agency 

settles on a gross or net basis and when 

finality occurs.274 The Commission 

preliminarily believes that the proposed 

rule is appropriate to help reduce the 

potential that delivery of a security is 

not appropriately matched with 

payment for the security, thereby 

impairing a covered clearing agency’s 

ability to facilitate prompt and accurate 

clearance and settlement. 

Rule 17Ad–22(d)(13) similarly 

requires that a registered clearing 

agency’s policies and procedures be 

reasonably designed to eliminate 

principal risk by linking securities 

transfers to funds transfers in a way that 

achieves delivery versus payment 

(‘‘DVP’’),275 though it does not specify 

that settlement should occur regardless 

of whether the clearing agency settles on 

a gross or net basis and when finality 

occurs. Because this is the only 

provision that differs between proposed 

Rule 17Ad–22(e)(12) and existing Rule 

17Ad–22(d)(13), the Commission 

anticipates that covered clearing 

agencies may need to make only limited 

changes to update their policies and 

procedures.276

The Commission notes that ensuring 

settlement finality only when settlement 

of the corresponding obligation is 

final—regardless of whether a covered 

clearing agency settles on a gross or net 

basis—may require corresponding 

policies and procedures that address 

legal, contractual, operational, and other 

risks.277 Given the risks that the size, 

operation, and importance of covered 

clearing agencies pose to the U.S. 

securities markets, the Commission 

preliminarily believes that this 

requirement is appropriate for covered 

clearing agencies. 

Market confidence, in addition to 

public confidence more generally, 

hinges in large part on the dependability 

and promptness of the clearing and 

settlement systems underlying a given 

market. If CCPs are unable to promptly 

and fully give to clearing members 

access to funds due, they and other 

market participants may lose confidence 

in the settlement process.278

As under Rule 17Ad–22(d)(13), a 

covered clearing agency can link 

securities transfers to funds transfers 

and mitigate principal risk in 

connection with settlement through 

DVP settlement mechanisms. DVP is 

achieved in the settlement process when 

the mechanisms facilitating settlement 

ensure that delivery occurs only if 

payment occurs.279 DVP eliminates the 

risk that a party would lose some or its 

entire principal because securities were 

delivered without payments being 

confirmed. The Commission notes that 

DVP settlement mechanisms are 

prevalent among registered clearing 

agencies because they eliminate 

principal risk and reduce the settlement 

risk that arises in a securities 

transaction. A counterparty default 

absent a DVP settlement mechanism 

may cause substantial losses and 

liquidity pressures. Further, a 

settlement default could result in high 

replacement costs because the 

unrealized gain on an unsettled contract 

or the cost of replacing the original 

contract at market prices may change 

rapidly during periods of market stress. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(12). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to, if the covered clearing 

agency settles transactions that involve 

the settlement of two linked obligations, 

eliminate principal risk by conditioning 

the final settlement of one obligation 

upon the final settlement of the other? 

Should the Commission impose this 

policy and procedure requirement 

regardless of whether the covered 

clearing agency settles on a gross or net 

basis, as proposed? Should the 

Commission impose this policy and 

procedure requirement regardless of 

when finality occurs, as proposed? Why 

or why not? 

• Does the proposed rule affect 

certain identifiable categories of covered 

clearing agencies differently than others, 

such as clearing agencies with more 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29544 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

280See proposed Rule 17Ad–22(e)(13), infra Part 

VII. The Commission is proposing Rule 17Ad– 

22(e)(13) as part of a comprehensive set of rules for 

regulating covered clearing agencies that is 

consistent with and comparable to other domestic 

and international standards for FMIs. 

281Rule 17Ad–22(d)(11) requires a registered 

clearing agency to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to establish default procedures 

that ensure that the clearing agency can take timely 

action to contain losses and liquidity pressures and 

to continue meeting its obligations in the event of 

a participant default. See 17 CFR 240.17Ad– 

22(d)(11); see also Clearing Agency Standards 

Release, supra note 5, at 66254–55. 

282See supra Part II.A.4. 

283The Commission is also proposing Rule 17Ad– 

22(e)(23) to require disclosure of rules, key 

procedures, and market data to members, market 

participants, and in certain circumstances the 

public. See infra Parts II.B.20 and VII (discussing 

the proposed rule and providing rule text, 

respectively). 284An operational default may occur when a 

participant is not able to meet its obligations due 

to an operational problem, such as a failure in 

information technology systems. The Commission 

is proposing Rule 17Ad–22(e)(17) to establish 

minimum standards for operational risk 

management. See infra Parts II.B.14 and VII 

(discussing the proposed rule and providing rule 

text, respectively). 

285 In this regard, the Commission notes that 

policies and procedures regarding participant 

default must satisfy the requirement for legal 

certainty in proposed Rule 17Ad–22(e)(1). See 

supra Part II.B.1. 

286See proposed Rule 17Ad–22(e)(13), infra Part 

VII. A clearing agency may be able to contain 

liquidity pressures it faces by taking actions to 

secure additional sources of liquidity or limiting 

transactions that potentially serve to drain liquidity 

resources. 

287See supra note 284 and accompanying text. 

The Commission has also proposed Regulation 

Systems Compliance and Integrity (‘‘Regulation 

SCI’’) to establish requirements for operational 

capacity. See infra note 326 and accompanying text. 

diversified post-trade services as 

compared to clearing agencies that 

specialize in fewer activities? If so, 

how? How should the proposed rule 

account for these differences? 

• Are there operational or legal 

impediments to implementing the 

proposed rule? Would the proposed rule 

make it more difficult for covered 

clearing agencies to conduct certain 

types of business that may require a 

longer settlement cycle, for reasons 

outside of their control? Are any 

additional rules or regulations needed to 

support achievement of the proposed 

rule? 

• Are there circumstances when 

ensuring that the settlement of an 

obligation is final if and only if the 

settlement of the corresponding 

obligation is final is not feasible or 

practicable? If so, when? 

10. Proposed Rule 17Ad–22(e)(13): 

Participant-Default Rules and 

Procedures 

Proposed Rule 17Ad–22(e)(13) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that the 

covered clearing agency has the 

authority and operational capacity to 

take timely action to contain losses and 

liquidity demands and continue to meet 

its obligations in the event of a 

participant default.280 Because Rule 

17Ad–22(d)(11) currently requires a 

registered clearing agency’s policies and 

procedures to meet substantially the 

same requirements,281 the Commission 

anticipates that covered clearing 

agencies may need to make only limited 

changes to update their policies and 

procedures to comply with the proposed 

rule.282

As with Rule 17Ad–22(d)(11), the 

Commission believes that proposed 

Rule 17Ad–22(e)(13) is appropriate 

given the importance of having 

established procedures in the event a 

covered clearing agency faces a member 

default. The proposed rule would 

continue to provide certainty and 

predictability to market participants 

about the measures a clearing agency 

will take in the event of a participant 

default as default procedures, among 

other things, are meant to reduce the 

likelihood that a default by one or more 

participants will disrupt the clearing 

agency’s operations. By establishing, 

implementing, maintaining and 

enforcing such policies and procedures, 

a covered clearing agency should be in 

a better position to continue providing 

its services in a manner that promotes 

prompt and accurate clearance and 

settlement during times of market 

stress.283 Accordingly, a covered 

clearing agency that has financial and 

operational triggers for default would 

need to ensure these are clearly 

defined.284 In addition, where triggers 

are not automatic through the 

application of objective standards or 

thresholds, the discretion afforded a 

covered clearing agency to declare 

defaults would need to be clearly 

defined.285 For example, a clear 

definition may include defining which 

person or group exercises discretionary 

authority in the event of default and 

providing specific examples of when the 

exercise of discretion is appropriate. 

The proposed rule would also require 

a covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to ensure that it 

can take timely action to contain losses 

and liquidity pressures and to continue 

meeting its obligations when due in the 

event of a member default.286 Default 

procedures are meant to reduce the 

likelihood that a default by a member, 

or multiple members, will disrupt the 

covered clearing agency’s operations. 

Based on its supervisory experience, the 

Commission preliminarily believes such 

policies and procedures would address, 

among other things, the following: (i) 

Accessing credit facilities, (ii) managing 

(which may include hedging open 

positions and funding collateral 

positions it is not prudent to close out 

immediately), transferring (such as 

through allocation or auction to other 

members) and/or closing out a 

defaulting member’s positions; and (iii) 

transferring and/or liquidating 

applicable collateral. By employing 

policies and procedures that are 

designed to permit a covered clearing 

agency to take actions to contain losses 

and liquidity pressures it faces in the 

event of a participant default while 

continuing to meet its obligations, a 

covered clearing agency should be in a 

better position to continue providing its 

services in a manner that promotes 

accurate clearance and settlement 

during times of market stress. 

A covered clearing agency should also 

have the operational capacity to comply 

with the proposed requirements to 

contain losses. The Commission 

preliminarily believes that the following 

measures would help promote such 

operational capacity: (i) Establishing 

training programs for employees 

involved in default matters to ensure 

policies are well implemented; (ii) 

developing a communications strategy 

for communicating with stakeholders, 

including the Commission, concerning 

defaults; and (iii) making sure the 

proper tools and resources (whether 

these are personnel or other) required 

are available to close out, transfer, or 

hedge open positions of a defaulting 

member promptly even in the face of 

rapid market movements.287

In addition, based on its supervisory 

experience, the Commission 

preliminarily believes that a covered 

clearing agency’s default procedures 

would generally include the following: 

(i) The action that may be taken (e.g., 

exercising mutualization of losses); (ii) 

who may take those actions (e.g., the 

division of responsibilities when 

clearing agencies operate links to other 

clearing agencies); (iii) the scope of the 

actions that may be taken (e.g., any 

limits on the total losses that would be 

mutualized); (iv) potential changes to 

the normal settlement practices, should 

these changes be necessary in extreme 

circumstances, to ensure timely 

settlement; (v) the management of 

transactions at different stages of 

processing; (vi) the sequencing of 

actions; (vii) the roles, obligations, and 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29545 

288See proposed Rule 17Ad–22(e)(13), infra Part 

VII. 

289See proposed Rule 17Ad–22(e)(13), infra Part 

VII. 

290See proposed Rule 17Ad–22(e)(13), infra Part 

VII. The Commission preliminary believes that an 

annual testing cycle is appropriate for the reasons 

described in Part II.A.3. 

responsibilities of the various parties, 

including non-defaulting members; 

(viii) the mechanisms to address a 

covered clearing agency’s obligations to 

non-defaulting members (e.g., the 

process for clearing trades guaranteed 

by the covered clearing agency to which 

a defaulting member is a party); and (ix) 

the mechanisms to address the 

defaulting member’s obligations to its 

customers (e.g., the process for dealing 

with a defaulting member’s accounts). 

In addition, proposed Rule 17Ad– 

22(e)(13) would include the 

requirements described below, for 

which no comparable requirements 

under Rule 17Ad–22(d) are applicable 

to registered clearing agencies. The 

Commission preliminarily believes the 

proposed requirements are appropriate 

for covered clearing agencies given the 

risks that a covered clearing agency’s 

size, operation, and importance pose to 

the U.S. securities markets. 

a. Address Allocation of Credit Losses 

Proposed Rule 17Ad–22(e)(13)(i) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to address the 

allocation of credit losses it may face if 

its collateral and other resources are 

insufficient to fully cover its credit 

exposures, including the repayment of 

any funds the covered clearing agency 

may borrow from liquidity providers.288

The Commission preliminarily 

believes that this requirement is 

appropriate because requiring that 

policies and procedures address key 

aspects of the allocation of credit losses 

would provide certainty and 

predictability about the measures 

available to a covered clearing agency in 

the event of a default. Such certainty 

and predictability would facilitate the 

orderly handling of member defaults 

and would enable members to 

understand their obligations to the 

covered clearing agency in extreme 

circumstances. In some instances, 

managing a member default may involve 

hedging open positions, funding 

collateral so that the positions can be 

closed out over time, or both. A covered 

clearing agency may also decide to 

auction or allocate open positions to its 

participants. To the extent possible, the 

Commission believes a covered clearing 

agency would allow non-defaulting 

members to continue to manage their 

positions in the ordinary course. By 

addressing the allocation of credit 

losses, the covered clearing agency 

would have policies and procedures 

intended to address the resolution of a 

member default where its collateral and 

other financial resources are insufficient 

to cover credit losses. 

b. Describe Replenishment of Financial 

Resources 

Proposed Rule 17Ad–22(e)(13)(ii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to describe its 

process to replenish any financial 

resources it may use following a 

member default or other event in which 

use of such resources is 

contemplated.289

The Commission preliminarily 

believes this requirement is appropriate 

because the absence of procedures to 

replenish resources may undermine a 

covered clearing agency’s ability to 

contain losses and liquidity pressures. 

The Commission also preliminarily 

believes that a covered clearing agency’s 

rules and procedures to draw on 

financial resources will support the 

proposed rule’s other requirements to 

contain losses and liquidity pressures. 

Such procedures commonly specify the 

order of use of different types of 

resources, including (i) assets provided 

by the defaulting member (such as 

margin or other collateral), (ii) the 

guaranty fund of the covered clearing 

agency, (iii) capital calls on members, 

and (iv) credit facilities. In addition, the 

Commission preliminarily believes a 

covered clearing agency could satisfy 

the proposed requirement by having 

policies and procedures that describe (i) 

how resources that have been depleted 

as a result of a member default would 

be replenished over time and (ii) what 

burdens a non-defaulting member may 

bear. 

c. Test Default Procedures Annually and 

Following Material Changes 

Proposed Rule 17Ad–22(e)(13)(iii) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to require its 

members and, when practicable, other 

stakeholders to participate in the testing 

and review of its default procedures, 

including any close out procedures. The 

proposed rule would also require 

policies and procedures providing for 

such testing and review to occur at least 

annually and following material 

changes thereto.290 The Commission 

preliminarily expects that covered 

clearing agencies would make efforts to 

secure the participation of all 

stakeholders in such testing and review 

of default procedures but recognizes 

that covered clearing agencies may have 

limited ability to require said 

participation by all such stakeholders, 

and therefore the proposed rule requires 

such participation by other stakeholders 

only when practicable. 

The Commission preliminarily 

believes that including members and 

other stakeholders in such testing will 

help to ensure that procedures will be 

practical and effective in the face of an 

actual default. In addition to the 

relevant employees, members, and other 

stakeholders that would be involved in 

testing default procedures, a covered 

clearing agency may determine, as 

appropriate, to include members of its 

board of directors or similar governing 

body, and to invite linked clearing 

agencies, significant indirect 

participants, providers of credit 

facilities, and other service providers to 

participate. The Commission 

preliminarily believes requiring member 

and, where practicable, stakeholder 

participation in periodic testing is 

appropriate because successful default 

management will require coordination 

among these parties, particularly during 

periods of market stress. 

d. Request for Comments 

The Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(13). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to ensure the covered 

clearing agency has the authority and 

operational capacity to take timely 

action to contain losses and liquidity 

demands and continue to meet its 

obligations? Should the proposed rule 

include minimum requirements, as 

proposed? Why or why not? 

• Should the Commission require a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to require its 

members and, when practicable, other 

stakeholders to participate in the testing 

and review of its default procedures? 

Why or why not? Is it appropriate for 

stakeholders other than a covered 

clearing agency’s participants to 

participate in the testing and review of 

its default procedures? Why or why not? 

Should the Commission require policies 

and procedures that would require 

stakeholders to be included in testing 

unless a determination is made by the 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29546 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

291See proposed Rule 17Ad–22(e)(14), infra Part 

VII. 

292See id. 

293Exchange Act Rule 15c3–3 requires brokerdealers that maintain custody of customer securities 

and cash (a ‘‘carrying broker-dealer’’) to take two 

primary steps to safeguard these assets. The steps 

are designed to protect customers by segregating 

their securities and cash from the broker-dealer’s 

proprietary business activities. If the broker-dealer 

fails financially, the securities and cash should be 

readily available to be returned to customers. In 

addition, if the failed broker-dealer is liquidated in 

a formal proceeding under the Securities Investor 

Protection Act of 1970, the securities and cash 

would be isolated and readily identifiable as 

‘‘customer property’’ and, consequently, available 

to be distributed to customers ahead of other 

creditors. 

The first step required by Rule 15c3–3 is that a 

carrying broker must maintain physical possession 

or control of all fully paid and excess margin 

securities of their customers. See 17 CFR 240.15c3– 

3. Physical possession or control means the brokerdealer must hold these securities in one of several 

locations specified in Rule 15c3–3 and free of liens 

or any other interest that could be exercised by a 

third party to secure an obligation of the brokerdealer. Permissible locations include a bank, as 

defined in section 3(a)(6) of the Exchange Act, and 

a clearing agency. As described herein, holding 

jumbo/global positions in the record name and 

custody of a clearing agency is a fundamental part 

of current U.S. market structure in which many 

holders hold indirectly through ‘‘street name.’’ 

The second step is that a carrying broker-dealer 

must maintain a reserve of cash or qualified 

securities in an account at a bank that is at least 

equal in value to the net cash owed to customers, 

including cash obtained from the use of customer 

securities. The account must be titled ‘‘Special 

Reserve Bank Account for the Exclusive Benefit of 

Customers.’’ The amount of net cash owed to 

customers is computed pursuant to a formula set 

forth in Exhibit A to Rule 15c3–3. Under the 

customer reserve formula, the broker-dealer adds up 

customer credit items (e.g. cash in customer 

securities accounts and cash obtained through the 

use of customer margin securities) and then 

subtracts from that amount customer debit items 

(e.g. margin loans). If credit items exceed debit 

items, the net amount must be on deposit in the 

customer reserve account in the form of cash and/ 

or qualified securities. A broker-dealer cannot make 

a withdrawal from the customer reserve account 

until the next computation and then even only if 

the computation shows that the reserve requirement 

has decreased. The broker-dealer must make a 

deposit into the customer reserve account if the 

computation shows an increase in the reserve 

requirement. See 17 CFR 240.15c3–3. 

In addition, records of customer positions are 

subject to broker-dealer recordkeeping rules. 

Exchange Act Rules 17a–3 and 17a–4 require 

records be kept for certain periods of time, such as 

three or six year periods depending upon the type 

of record. See 17 CFR 240.17a–3, 17a–4. 

See also 15 U.S.C. 78c–5 (providing for 

segregation with respect to security-based swaps 

pursuant to Section 3E of the Exchange Act); 

Exchange Act Release No. 34–68071 (Oct. 18, 2012), 

77 FR 70213, (Nov. 23, 2012) (proposing Rule 18a– 

4 under the Exchange Act for segregation with 

respect to security-based swaps). The Commission 

has also granted conditional relief under Sections 

3E(b), (d), and (e) of the Exchange Act to, among 

others, clearing entities dually registered with the 

Commission and the CFTC as registered clearing 

agencies and DCOs, respectively. See Exchange Act 

Release No. 34–68433 (Dec. 14, 2012), 77 FR 75211 

(Dec. 19, 2012). 

294 International standards recognize that regimes 

providing the same degree of protection as 

segregation and portability of customer positions at 

a CCP include the following features, in the event 

of a participant failure: (a) The customer positions 

can be identified timely, (b) customers will be 

protected by an investor protection scheme 

designed to move customer accounts from the failed 

participant to another participant in a timely 

manner, and (c) customer assets can be restored. 

See PFMI Report, supra note 1, at 83 (discussing 

Principle 14, Explanatory Note 3.14.6). The 

Commission preliminarily believes that the 

customer protections existing under the 

Commission’s regulatory regime for broker-dealers 

include each of these three features and that 

limiting the application of proposed Rule 17Ad– 

22(e)(14) in the manner described above is 

appropriate. 

The Commission also notes that, separately, it has 

proposed Rule 18a–4 to apply customer protection 

rules to security-based swap dealers and major 

security-based swap participants. The approach in 

proposed Rule 18a–4 was modeled on the customer 

protection scheme under Rule 15c3–3 for brokerdealers. See Exchange Act Release No. 34–68071 

(Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012). 

295See 15 U.S.C. 78eee et seq. Pursuant to SIPA, 

when a broker-dealer that is a member of the 

Securities Investor Protection Corporation (‘‘SIPC’’) 

fails and customer assets are missing, SIPC seeks to 

return customer cash and securities, and 

supplements the distribution of the remaining 

customer assets at the broker-dealer with SIPC 

reserve funds of up to $500,000 per customer, 

including a maximum of $250,000 for cash claims. 

296A customer of a member also would not have 

an account at the clearing agency where holding in 

record name (rather than through street name 

ownership). This is the case even where such 

record name owner-customer does not receive a 

paper security certificate but holds in book-entry 

form through the direct registration system, as 

direct registration system accounts are maintained 

by a transfer agent and not by the clearing agency. 

See Exchange Act Release No. 34–63320 (Nov. 16, 

2010), 75 FR 71473, 71474 (Nov. 23, 2010) 

(discussing the ability of registered owners to hold 

their assets on the records of transfer agents in 

book-entry form through the direct registration 

system). 

covered clearing agency that it would be 

impracticable to do so? 

• Should the Commission require 

policies and procedures regarding 

specific default procedures for covered 

clearing agencies, or should they have 

discretion to create their own default 

procedures consistent with the 

proposed rule? If the latter, how much 

flexibility should a covered clearing 

agency have in its policies and 

procedures regarding the time it takes to 

manage a default and liquidate 

positions? 

11. Proposed Rule 17Ad–22(e)(14): 

Segregation and Portability 

Proposed Rule 17Ad–22(e)(14) would 

apply to a covered clearing agency that 

is either a security-based swap clearing 

agency or a complex risk profile clearing 

agency.291 The proposed rule would 

require such a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to enable the 

segregation and portability of positions 

of a member’s customers and the 

collateral provided to the covered 

clearing agency with respect to those 

positions, and effectively protect such 

positions and related collateral from the 

default or insolvency of that member.292

The Commission notes that securitybased swap clearing agencies are 

currently not subject to rules regarding 

segregation and portability under 

existing Rule 17Ad–22. 

The Commission preliminarily 

believes that proposed Rule 17Ad– 

22(e)(14) is appropriate because it 

facilitates the protection of customer 

collateral and positions by requiring a 

covered clearing agency’s policies and 

procedures to prescribe means for 

holding or accounting for them 

separately from the assets of the clearing 

agency member providing services to 

the customer. 

The Commission preliminarily 

believes that proposed Rule 17Ad– 

22(e)(14) should apply only to securitybased swap clearing agencies and 

complex risk profile clearing agencies 

because existing rules applicable to 

broker-dealers address customer 

security positions and funds in cash 

securities and listed option markets, 

thereby promoting segregation and 

portability and protecting customer 

positions and funds.293 The 

Commission considered certain 

international standards, which 

recognize that cash market CCPs operate 

in legal regimes that achieve protection 

of customer assets by alternate means, 

in proposing Rule 17Ad–22(e)(14).294

The Commission further notes that 

customer security positions and funds 

in cash securities and listed options 

markets are further protected under the 

Securities Investor Protection Act of 

1970 (‘‘SIPA’’).295

In addition, in so limiting the scope 

of proposed Rule 17Ad–22(e)(14), the 

Commission intends to avoid requiring 

changes to the existing structure of cash 

securities and listed options markets in 

the United States where registered 

clearing agencies that provide CSD or 

CCP services play a central role. 

Transactions in the U.S. cash security 

and listed options markets are 

characterized by the following features: 

(i) Customers of members generally do 

not have an account at a clearing 

agency; 296 and (ii) the clearing agency 

is not able to identify which 

participants’ customers beneficially own 

the street name positions registered in 

the record name of the clearing agency 

(or its nominee) and the clearing agency 

has no recourse to funds of customers of 

members. Therefore, in part because 

neither portability nor segregation could 

occur as a practical matter under the 


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297See, e.g., Protection of Cleared Swaps 

Customer Contracts and Collateral; Conforming 

Amendments to the Commodity Broker Bankruptcy 

Provisions, 77 FR 6336 (Feb. 7, 2012) (CFTC 

adopting rules imposing on DCOs legal segregation 

with operational commingling (‘‘LSOC’’) for cleared 

swaps). 

298 In this regard, the Commission notes that 

policies and procedures regarding segregation and 

portability must satisfy the requirement for legal 

certainty in proposed Rule 17Ad–22(e)(1). See 

supra Part II.B.1. 

current cash securities and listed 

options markets structure, the 

Commission preliminarily believes that 

Proposed Rule 17Ad–22(e)(14) should 

apply only to a covered clearing agency 

that is either a security-based swap 

clearing agency or a complex risk profile 

clearing agency. 

The Commission notes that 

segregation can be achieved either 

through an omnibus account structure, 

as is common in the U.S. securities 

markets today, or an individual account 

structure. An omnibus account 

structure, where all collateral belonging 

to all customers of a particular member 

is commingled and held in a single 

account segregated from that of the 

member, might not be as operationally 

intensive as an individual account 

structure. Omnibus accounts may 

expose a customer to ‘‘fellow-customer 

risk’’ (i.e. the risk that another customer 

of the same member will default) in the 

event of a loss that exceeds the amount 

of available collateral posted by the 

fellow customer who has defaulted and 

the available resources of the member, 

in which case the remaining 

commingled collateral of the member’s 

non-defaulting customers may be 

exposed to the loss. Fellow-customer 

risk is of particular concern because 

customers may have limited ability to 

monitor or to manage the risk of their 

fellow customers. To mitigate this risk, 

omnibus account structures can be 

designed in a manner that operationally 

commingles collateral related to 

customer positions while protecting 

customers legally on an individual 

basis.297 This may require a covered 

clearing agency to rely on the records of 

its members or maintain its own books 

reflecting customer-level interest in the 

customer’s portion of collateral. 

An omnibus account structure may be 

more efficient when porting positions 

and collateral for a group of customers 

subject to a defaulting member (where 

there has been no customer default or 

where customer collateral is legally 

protected on an individual basis). 

Omnibus accounts may also foster 

portability depending on whether the 

covered clearing agency collects margin 

on a gross or net basis. Margin 

calculated on a gross basis to support 

individual customer portfolios may 

result in less efficient netting with 

respect to members; however, it may 

eliminate the possibility of undermargined customer positions when 

ported. As a result, a clearing agency 

may be able to port in bulk or piecemeal 

the positions of a customer of a member 

that has defaulted. When margin is 

collected on a net basis, there may be a 

risk that full portability cannot be 

achieved if under-margining means that 

porting will depend on the ability and 

willingness of customers to provide 

additional collateral where transferee 

members are unwilling to accept the 

porting to them of under-margined 

positions. 

Alternatively, an individual account 

structure may also provide a high degree 

of protection from the default of another 

customer of a member, as a customer’s 

collateral is intended to be used to cover 

losses associated solely with the default 

of that customer. In the event of a 

member failure (whether or not due to 

a customer default), clear and reliable 

identification of a customer’s collateral 

may promote portability of an 

individual customer’s positions and 

collateral or, alternatively, expedite 

their return to the customer. 

Maintaining individual accounts, 

however, can be operationally and 

resource intensive for a covered clearing 

agency and could impact the overall 

efficiency of its clearing operations. An 

individual account structure may also 

impact margin collection practices at a 

covered clearing agency, as the 

individual account structure may be 

inconsistent with net collection of 

margin because it may be impractical for 

the covered clearing agency to allocate 

the net margin to individual customers 

rather than among omnibus accounts. 

The Commission preliminarily notes 

that a covered clearing agency subject to 

the proposed rule would be required to 

structure its portability arrangements in 

a way that makes it highly likely that 

the positions and collateral of a 

defaulting member’s customers will be 

effectively transferred to one or more 

other members. The Commission also 

preliminarily notes that the following 

methods may assist a covered clearing 

agency in achieving portability: (i) 

Identifying positions that belong to 

customers; (ii) identifying and asserting 

rights to related collateral held by or 

through the covered clearing agency; 

(iii) identifying potential members to 

accept the positions and collateral; (iv) 

disclosing relevant information to such 

members so that they can evaluate the 

counterparty credit and market risk 

associated with the customers and 

positions, respectively; (v) transferring 

positions and related collateral to one or 

more members; and (vi) carrying out 

default management procedures in an 

orderly manner. 

Finally, where a covered clearing 

agency’s policies and procedures 

facilitating portability permit a transfer 

of specific positions and collateral that 

is not performed with the consent of the 

member to whom they are transferred, 

the Commission preliminarily believes 

that a covered clearing agency could 

satisfy this requirement by having 

policies and procedures that set out the 

circumstances where this may occur. In 

addition, the Commission preliminarily 

notes that the portability requirement 

does not apply only upon default of a 

member; a covered clearing agency 

should have policies and procedures 

that facilitate porting in the normal 

course of business, such as when a 

customer ends its relationship with a 

member to start a new relationship with 

a different member, or as a result of 

other events, such as a merger involving 

the member.298

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(14). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to enable the segregation 

and portability of positions of a 

participant’s customers and the 

collateral provided to the covered 

clearing agency with respect to those 

positions? Why or why not? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to effectively protect the 

positions of a participant’s customers 

and related collateral from the default or 

insolvency of that participant? Why or 

why not? 

• Does the proposed rule affect 

certain identifiable categories of covered 

clearing agencies differently than others 

in ways not discussed in this proposing 

release? If so, how? Should the 

requirements under the proposed rule 

apply to certain identifiable categories 

of covered clearing agencies in addition 

to security-based swap and complex risk 

profile clearing agencies, as proposed? 

Please explain. 

12. Proposed Rule 17Ad–22(e)(15): 

General Business Risk 

Proposed Rule 17Ad–22(e)(15) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage its general 


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299See proposed Rule 17Ad–22(e)(15), infra Part 

VII. 

300 General business risk is the risk of potential 

losses arising from the covered clearing agency’s 

administration and operation as a business 

enterprise. Such losses are not related to member 

default under proposed Rule 17Ad–22(e)(13) nor 

covered by the financial resources required for 

credit and liquidity risk management under 

proposed Rules 17Ad–22(e)(4) and (7). See supra 

Parts II.B.4.c, II.B.4.f, and II.B.10 and infra Part VII 

(proposing rules for managing credit risk, liquidity 

risk, and participant default, and providing 

proposed rule text, respectively). 

301See id. 

302See proposed Rule 17Ad–22(e)(15), infra Part 

VII. 

303See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

304See proposed Rule 17Ad–22(e)(15)(i), infra 

Part VII. 

305See proposed Rule 17Ad–22(e)(15)(ii), infra 

Part VII; see also supra Part II.B.3.b (discussing 

recovery and wind-down plans under proposed 

Rule 17Ad–22(e)(3)(ii)). 

306See supra Parts II.B.4.c and f and infra Part VII 

(discussing requirements under proposed Rules 

17Ad–22(e)(4) and (e)(7), respectively, and 

providing proposed rule text). 

307Regarding marketable securities that may be 

included as cash equivalents within liquid net 

assets, the Commission has not proposed to require 

such assets to be readily available and convertible 

business risk and hold sufficient liquid 

net assets funded by equity to cover 

potential general business losses so that 

the covered clearing agency can 

continue operations and services as a 

going concern if those losses 

materialize.299 Registered clearing 

agencies are not subject to rules 

regarding general business risk under 

existing Rule 17Ad–22, but the 

Commission preliminarily believes the 

proposed rule is appropriate for covered 

clearing agencies given the risks that a 

covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets. 

Proposed Rule 17Ad–22(e)(15) is 

designed to help mitigate the potential 

impairment of a covered clearing 

agency’s status as a going concern 

resulting from general business losses, 

such as a decline in revenues or an 

increase in expenses resulting in 

expenses that exceed revenues and a 

loss that must be charged against the 

covered clearing agency’s capital.300

The Commission preliminarily believes 

that proposed Rule 17Ad–22(e)(15) is 

appropriate because it would help to 

mitigate the risk of a disruption in 

clearance and settlement services that 

might result from general business 

losses. The Commission preliminarily 

believes that such impairment could be 

caused by a variety of business factors, 

including poor execution of business 

strategy, negative cash flows, or 

unexpected and/or excessively large 

operating expenses. The Commission 

preliminarily believes that general 

business losses should be considered 

separately in the covered clearing 

agency’s risk management policies and 

procedures to promote effective and 

efficient measuring, monitoring, and 

management of general business risk. 

The risk of general business losses may 

require a firm to take into account past 

loss events and financial projections, 

events distinct from the risks that arise 

from member default, credit losses, or 

liquidity shortfalls.301 Proposed Rule 

17Ad–22(e)(15) would require a covered 

clearing agency to establish implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

address the management of general 

business risk and the development of a 

business risk profile to address these 

concerns.302

In addition, the Commission is 

proposing the requirements described 

below. Registered clearing agencies are 

not subject to similar rules under Rule 

17Ad–22, but the Commission 

preliminarily believes the proposed 

requirements are appropriate for 

covered clearing agencies given the risks 

that a covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets and are 

consistent with the Exchange Act 

requirements discussed above.303

a. Determining Liquid Net Assets for 

Recovery and an Orderly Wind-Down 

Proposed Rule 17Ad–22(e)(15)(i) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to determine the 

amount of liquid net assets funded by 

equity based upon its general business 

risk profile and the length of time 

required to achieve a recovery or orderly 

wind-down, as appropriate, of its 

critical operations and services if such 

action is taken.304 The Commission 

preliminarily believes that plans for 

orderly recovery and wind-down are 

critical to maintain functioning U.S. 

securities markets, particularly in times 

of market stress. Because of the reliance 

of securities markets, market 

participants, and investors on the safe, 

sound, and efficient operations of 

covered clearing agencies, the 

Commission believes that a disorderly 

failure of a covered clearing agency 

would have systemic consequences. 

Accordingly, the Commission is 

proposing to require liquid net assets 

funded by equity to ensure that the 

covered clearing agency can continue 

operations and services as a going 

concern in the event of general business 

losses. Equity allows a covered clearing 

agency to absorb losses on an ongoing 

basis and should therefore be 

permanently available for this purpose. 

The specific amount of liquid net assets 

funded by equity that a covered clearing 

agency should hold is discussed in more 

detail below. 

b. Requirements for Liquid Net Assets 

Proposed Rule 17Ad–22(e)(15)(ii) 

would require a clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for 

holding liquid net assets funded by 

equity equal to the greater of either six 

months of its current operating expenses 

or the amount determined by the board 

of directors to be sufficient to ensure a 

recovery or orderly wind-down of 

critical operations and services of the 

covered clearing agency, as 

contemplated by the plans established 

under proposed Rule 17Ad– 

22(e)(3)(ii).305 A clearing agency’s 

policies and procedures would require 

these liquid net assets to be held in 

addition to resources held to cover 

participant defaults or other risks 

covered under the credit risk standard 

in proposed Rules 17Ad–22(e)(4)(i) 

through (iii) and the liquidity risk 

standard in proposed Rules 17Ad– 

22(e)(7)(i) and (ii).306

The Commission preliminarily 

believes that the requirements for a 

covered clearing agency’s policies and 

procedures regarding liquid net assets 

are necessary to ensure that a covered 

clearing agency’s general business risk 

management is sufficiently robust to 

facilitate either its orderly recovery or 

wind-down. The Commission is 

proposing these requirements to ensure 

that a covered clearing agency’s policies 

and procedures clearly define what 

liquid net assets are sufficient under 

Rule 17Ad–22(e)(15) and to require a 

covered clearing agency to maintain, 

pursuant to its policies and procedures, 

liquid net assets appropriate to cover 

general business risk in addition to 

those resources appropriate for 

managing participant default, credit 

losses, or liquidity shortfalls. Based on 

its supervisory experience, the 

Commission preliminarily believes that 

a covered clearing agency could satisfy 

this requirement by having policies and 

procedures that limit appropriate liquid 

net assets to cash or cash equivalents 

because these types of assets would best 

facilitate continued operations if a 

clearing agency experienced general 

business losses.307 Further, the 


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into cash through certain funding arrangements as 

it has proposed under Rule 17Ad–22(e)(7)(ii) 

(which incorporates proposed Rule 17Ad–22(a)(15) 

defining ‘‘qualifying liquid resources’’). The 

Commission preliminarily believes the amount of 

liquidity needed to cover participant defaults in the 

context of proposed Rule 17Ad–22(e)(7) may be 

significantly greater than the amount of liquidity 

needed to cover general business losses, and it is 

therefore appropriate to permit the use of such 

assets in the context of proposed Rule 17Ad– 

22(e)(7)(ii), in order to provide greater flexibility to 

covered clearing agencies regarding liquidity risk 

management. 

308The Commission preliminarily believes it is 

appropriate to apply the limitation that liquid net 

assets be funded by equity in proposed Rule 17Ad– 

22(e)(15) but has not proposed such limitation in 

Rule 17Ad–22(e)(4) (regarding financial resources 

required to manage credit risk) or Rule 17Ad– 

22(e)(7)(ii) (regarding qualifying liquid resources in 

relevant currencies required to manage liquidity 

risk) because equity allows a covered clearing 

agency to absorb losses on an ongoing basis so that 

it can continue operations as a going concern. Cf. 

PFMI Report, supra note 1, at 90 & n.137. 

In addition, the Commission preliminarily 

believes a covered clearing agency may exclude 

depreciation and amortization expenses from its 

calculation of current operating expenses because 

depreciation and amortization expenses are noncash expenses and accordingly would not have an 

effect on a covered clearing agency’s cash flow, 

which might affect its ability to continue operations 

as a going concern. 

309See id. at 90. 

310See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

311See proposed Rule 17Ad–22(e)(15)(ii), infra 

Part VII. 

312See proposed Rule 17Ad–22(e)(15)(iii), infra 

Part VII. 

Commission preliminarily believes that 

a covered clearing agency could satisfy 

this requirement by having policies and 

procedures that fund liquid net assets 

by common stock, disclosed reserves, or 

other retained earnings in order to 

ensure that a covered clearing agency 

has a permanent source of capital from 

which to draw in order to continue as 

a going concern in the case of general 

business losses for at least a six month 

period or in accord with a 

determination of the board of directors 

of the covered clearing agency.308 Assets 

funded by debt or other less permanent 

sources of capital would not achieve 

this result and in some circumstances 

could further complicate the resolution 

process of a covered clearing agency. 

The Commission also preliminarily 

believes that a backward-looking 

calculation of operating expenses based 

on the income statement for the most 

recently ended fiscal year would not be 

the type of policy and procedure 

sufficient to comply with the proposed 

requirements regarding current 

operating expense.309 While reviewing 

past losses and past levels of operating 

expense may be a useful reference point, 

the Commission envisions that one 

possible approach a covered clearing 

agency could take in fulfillment of the 

proposed requirement would be to 

consider projected operating expense 

expected over some time period, as well 

as potential changes to the business 

environment of the covered clearing 

agency over that time period. Based on 

its supervisory experience, the 

Commission also believes that the 

following factors may materially affect 

current operating expenses, as 

compared to operating expense 

experienced in the past, that a covered 

clearing agency may need to take into 

account and therefore are likely to be 

important to the covered clearing 

agency’s forward-looking projections: (i) 

Expectations regarding expansion of its 

business including as a result of offering 

new services or clearing and settling 

new types of securities, (ii) expectations 

regarding contraction of its business 

including due to reduction in or loss of 

certain types of clearing and settlement 

activity or clearing members, (iii) 

potential risk of any large one-time or 

non-recurring types of losses, and (iv) 

the degree to which expected future 

losses may be covered by insurance or 

an indemnity provided by a third-party 

unaffiliated with the covered clearing 

agency. 

The proposed rule also requires a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for 

monitoring its business operations and 

reducing the likelihood of losses, which 

the Commission believes furthers the 

requirements of the Exchange Act 

discussed above.310

Because of the integral role that liquid 

net assets play in supporting the 

recovery or orderly wind-down of a 

covered clearing agency in the event of 

a business loss, the Commission is 

proposing requirements for a clearing 

agency’s policies and procedures to 

require liquid net assets, funded by 

equity, equal to the greater of six 

months of operating expenses or an 

amount determined by the board of 

directors to be sufficient to facilitate an 

orderly recovery or wind-down of 

critical operations and services. The 

Commission preliminarily believes this 

is appropriate because liquid net assets 

allow the covered clearing agency to 

continue operations as a going concern 

by acting as a cushion while the covered 

clearing agency is in recovery or winddown. 

c. Plan for Raising Additional Equity 

Proposed Rule 17Ad–22(e)(15)(iii) 

would further require a covered clearing 

agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide for maintaining a viable plan, 

approved by the board of directors and 

updated at least annually, for raising 

additional equity should its equity fall 

close to or below the amount required 

by the proposed rule as discussed 

above.311

As noted above, because of the 

reliance of securities markets, market 

participants, and investors on the safe, 

sound, and efficient operations of 

covered clearing agencies, a disorderly 

failure of a covered clearing agency 

would have systemic consequences. The 

proposed rule requires a covered 

clearing agency to maintain a viable 

plan to raise additional equity in the 

event that its liquid net assets funded by 

equity fall close to or below the amount 

required by the proposed rule.312 The 

Commission preliminarily believes that 

the proposed rule is necessary to 

facilitate ongoing management of a 

covered clearing agency’s general 

business risk and to provide a covered 

clearing agency with a mechanism for 

maintaining or replenishing appropriate 

levels of equity following business 

losses. 

d. Request for Comments 

The Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(15). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to identify, monitor, and 

manage the covered clearing agency’s 

general business risk? Why or why not? 

Are there other requirements that the 

Commission should include in 

proposed Rule 17Ad–22(e)(15) to 

address the general business risk 

management at covered clearing 

agencies? 

• Is the proposed requirement for a 

covered clearing agency’s policies and 

procedures to hold liquid net assets 

funded by equity equal to the greater of 

either (x) six months of the covered 

clearing agency’s current operating 

expenses or (y) the amount determined 

by the board of directors to be sufficient 

to ensure a recovery or orderly winddown of critical operations and services 

of the covered clearing agency 

appropriate? Why or why not? Under 

the proposed requirement for policies 

and procedures, is six months of 

operating expenses appropriate? Should 

the Commission adopt a different 

standard, such as three, nine, or twelve 


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313See, e.g., Commission Delegated Regulation 

No. 152/2013 of 19 December 2012, 2013 O.J. (L 52), 

at art. 1(3) (European Union requiring that, if the 

required amount of capital held by a CCP is lower 

than 110% of the capital requirements or lower 

than 110% of £7.5 million (the ‘‘notification 

threshold’’), the CCP shall immediately notify the 

competent authority and keep it updated at least 

weekly, until the amount of capital held by the CCP 

returns above the notification threshold). 

314See proposed Rule 17Ad–22(e)(16), infra Part 

VII. 

315See id. 

316Registered clearing agencies are currently 

subject to existing Rule 17Ad–22(d)(3), which 

requires them to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to hold assets in a manner that 

minimizes risk of loss or of delay in its access to 

them, and invest assets in instruments with 

minimal credit, market, and liquidity risks. See 17 

CFR 240.17Ad–22(d)(3); see also Clearing Agency 

Standards Release, supra note 5, at 66247–48. 317See supra Part II.A.4. 318The Commission preliminarily believes, 

however, that it should not indirectly prohibit the 

use of commercial banks by covered clearing 

agencies holding cash as collateral or for other 

services related to clearance and settlement activity 

when comparable services are available from a 

central bank. 

months? Please explain in detail why 

using an alternative standard would be 

appropriate. 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to hold liquid net assets in 

addition to resources held to cover 

participant defaults or other risks 

covered under the credit risk standard 

in Rule 17Ad–22(b)(3)? Under the credit 

risk standard in proposed Rules 17Ad– 

22(e)(4)(i) through (iii), as applicable? 

Under the liquidity risk standard in 

proposed Rules 17Ad–22(e)(7)(i) and 

(ii), as applicable? Why or why not? Has 

the Commission provided sufficient 

guidance regarding what constitutes 

‘‘liquid net assets’’? Why or why not? 

• Should a covered clearing agency 

be required to provide notice to the 

Commission at any time before its liquid 

net assets reach the minimum required 

amount? If so, at what amount should 

the requirement apply, e.g. at 110% of 

the minimum, 120% of the minimum, 

or some other amount? 313

• Regarding securities that are cash 

equivalents and therefore liquid net 

assets, should the Commission establish 

requirements for policies and 

procedures that discount the value of 

these securities compared to their fair 

value? 

13. Proposed Rule 17Ad–22(e)(16): 

Custody and Investment Risks 

Proposed Rule 17Ad–22(e)(16) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to safeguard its 

own and its participants’ assets and 

minimize the risk of loss and delay in 

access to these assets.314 It also requires 

a clearing agency to invest its own and 

its participants’ assets in instruments 

with minimal credit, market, and 

liquidity risks.315 Rule 17Ad–22(d)(3) 

currently requires similar policies and 

procedures of registered clearing 

agencies, but the proposed rule would 

further require a covered clearing 

agency to have policies and procedures 

designed to safeguard its own and its 

participants’ assets.316 The Commission 

preliminarily believes this additional 

specificity is appropriate for covered 

clearing agencies given the risks that a 

covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets. Because this is 

the only element of Rule 17Ad–22(e)(16) 

that differs from Rule 17Ad–22(d)(3), 

the Commission anticipates that covered 

clearing agencies may need to make 

only limited changes to update their 

policies and procedures to comply with 

the proposed rule.317

Custody risk is the risk of loss on 

assets held in custody in the event of a 

custodian’s (or subcustodian’s) 

insolvency, negligence, fraud, or poor 

administration. Investment risk is the 

risk of loss faced by a clearing agency 

when it invests its own or its 

participants’ assets. In each case, the 

risk is the likelihood that assets securing 

participant obligations to the covered 

clearing agency or otherwise needed for 

the clearing agency to meet its own 

obligations would be unavailable or 

insufficient when the covered clearing 

agency needs to draw on them. Failure 

by a clearing agency to hold assets in 

instruments with minimal credit, 

market, and liquidity risk may limit the 

clearing agency’s ability to retrieve these 

assets promptly. That, in turn, can cause 

the clearing agency to fail to meet its 

settlement obligations to its participants 

or cause the clearing agency’s 

participants to fail to meet their 

obligations. Accordingly, as under Rule 

17Ad–22(d)(3), the Commission believes 

it is appropriate to continue to limit 

such risks to ensure the proper 

functioning of a covered clearing agency 

pursuant to Section 17A of the 

Exchange Act.318 The Commission also 

preliminarily believes that requiring a 

covered clearing agency to have policies 

and procedures that safeguard its own 

and its participants’ assets further 

supports this objective. 

Under existing Rule 17Ad–22(d)(3), 

the members of a registered clearing 

agency typically deposit securities with 

the clearing agency, or the clearing 

agency holds assets that secure the 

participants’ obligations to it and may 

invest these assets. In such 

circumstances, the clearing agency is 

exposed to custody and investment risk. 

The Commission is aware that, 

currently, clearing agencies ordinarily 

seek to minimize the risk of loss or 

delay in access by holding assets that 

are highly liquid (e.g., cash, U.S. 

Treasury securities, or securities issued 

by a U.S. government agency) and by 

using only supervised and regulated 

entities such as banks to act as 

custodians for the assets and to facilitate 

settlement. Steps are also ordinarily 

taken to ensure assets held in custody 

are protected against claims of a 

custodian’s creditors through trust 

accounts or other equivalent 

arrangements. In addition, the use of 

individual custodians is subject to 

periodic assessment across several risk 

criteria and should remain within 

acceptable concentration limits. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(16). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to invest its own and its 

participants’ assets in instruments with 

minimal credit, market, and liquidity 

risks? Why or why not? 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to minimize the risk of loss 

and delay in access to its own and its 

participants’ assets? Why or why not? 

• Has the Commission provided 

sufficient guidance regarding what 

instruments have ‘‘minimal credit, 

market, and liquidity risks’’? Should the 

Commission further specify what kinds 

of assets would be appropriate under 

the proposed requirement, such as 

investments that are secured by, or are 

claims on, high-quality obligors and 

investments that allow for timely 

liquidation with little, if any, adverse 

price effect? Why or why not? 

• Should covered clearing agencies 

ever be permitted to hold assets in 

instruments that do not have minimal 

credit, market, and liquidity risk? If so, 

why and under what circumstances? 

What type of measures should covered 

clearing agencies have in place to 

minimize the risk of loss from delays in 

accessing these assets? Should the 

proposed rule specify any such 

requirements? Should the Commission 

develop more specific criteria regarding 

how covered clearing agencies may hold 

or invest assets? 


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319See proposed Rule 17Ad–22(e)(17), infra Part 

VII. 

320See proposed Rule 17Ad–22(e)(17)(i), infra 

Part VII. 

321See proposed Rule 17Ad–22(e)(17)(ii), infra 

Part VII. By requiring ‘‘adequate, scalable capacity,’’ 

the Commission preliminarily believes that a 

covered clearing agency should have operational 

systems that can be extended or expanded based on 

its anticipated business needs. 

322See proposed Rule 17Ad–22(e)(17)(iii), infra 

Part VII. 

323Rule 17Ad–22(d)(4) requires a registered 

clearing agency to establish policies and procedures 

reasonably designed to identify sources of 

operational risk and minimize them through the 

development of appropriate systems, controls, and 

procedures. It also requires registered clearing 

agencies to establish policies and procedures 

reasonably designed to implement systems that are 

reliable and secure, and have adequate, scalable 

capacity; and have business continuity plans that 

allow for timely recovery of operations and 

fulfillment of a clearing agency’s obligations. See 17 

CFR 240.17Ad–22(d)(4); see also Clearing Agency 

Standards Release, supra note 5, at 66248–49. 

324See Automated Systems of Self-Regulatory 

Organizations, Exchange Act Release No. 34–27445 

(Nov. 16, 1989), 54 FR 48703 (Nov. 24, 1989) (‘‘ARP 

I’’); Automated Systems of Self-Regulatory 

Organizations (II), Exchange Act Release No. 34– 

29815 (May 9, 1991), 56 FR 22489 (May 15, 1991) 

(‘‘ARP II’’). 

Generally, the guidance in ARP I and ARP II 

provides for the following activities by clearing 

agencies: (1) Performing periodic risk assessments 

of its automated data processing (‘‘ADP’’) systems 

and facilities; (2) providing for the selection of the 

clearing agency’s independent auditors by nonmanagement directors and authorizing such nonmanagement directors to review the nature, scope, 

and results of all audit work performed; (3) having 

an adequately staffed and competent internal audit 

department; (4) furnishing annually to participants 

audited financial statements and an opinion from 

an independent public accountant as to the clearing 

agency’s system of internal control—including 

unaudited quarterly financial statements also 

should be provided to participants upon request; 

and (5) developing and maintaining plans to assure 

the safeguarding of securities and funds, the 

integrity of the ADP system, and recovery of 

securities, funds, or data under a variety of loss or 

destruction scenarios. 

325See Exchange Act Release No. 34–47638 (Apr. 

7, 2003), 68 FR 17809 (Apr. 11, 2003), available at 

http://www.sec.gov/news/studies/34-47638.htm. 

326Proposed Rule 17Ad–22(e)(17) would not 

conflict with the Commission’s proposed 

Regulation SCI, should the Commission determine 

at a later date to adopt those rules as proposed. 

Proposed Regulation SCI would, however, subject 

all covered clearing agencies to certain 

requirements, including requirements for 

operational risk management and business 

continuity planning, in addition to those that 

appear in this proposal. See Exchange Act Release 

No. 34–69077 (Mar. 8, 2013), 78 FR 18083, 18091– 

141 (Mar. 25, 2013). 

14. Proposed Rule 17Ad–22(e)(17): 

Operational Risk Management 

Proposed Rule 17Ad–22(e)(17) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to manage the 

covered clearing agency’s operational 

risk.319 Operational risk involves, 

among other things, the likelihood that 

deficiencies in information systems or 

internal controls, human errors or 

misconduct, management failures, 

unauthorized intrusions into corporate 

or production systems, or disruptions 

from external events such as natural 

disasters, would adversely affect the 

functioning of a clearing agency. 

Proposed Rule 17Ad–22(e)(17)(i) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify the 

plausible sources of operational risk, 

both internal and external, and mitigate 

their impact through the use of 

appropriate systems, policies, 

procedures, and controls.320 Proposed 

Rule 17Ad–22(e)(17)(ii) would require 

the covered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to ensure that 

systems have a high degree of security, 

resiliency, operational reliability, and 

adequate, scalable capacity.321 Proposed 

Rule 17Ad–22(e)(17)(iii) further requires 

a covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for a 

business continuity plan that addresses 

events posing a significant risk of 

disrupting operations.322 Rule 17Ad– 

22(d)(4) currently requires a registered 

clearing agency to have policies and 

procedures that are substantially similar 

to those in proposed Rules 17Ad– 

22(e)(17)(i) through (iii).323 Although 

proposed Rules 17Ad–22(e)(17)(i) 

through (iii) differ from Rule 17Ad– 

22(d)(4) in contemplating both internal 

and external operational risks, a high 

degree of security and operational 

reliability for systems, and, in the 

context of business continuity plans, 

events posing a significant risk of 

disrupting operations, the Commission 

preliminarily believes that a covered 

clearing agency may need to make only 

limited changes to update its policies 

and procedures. The Commission 

preliminarily believes these 

requirements are appropriate for 

covered clearing agencies given the risks 

that a covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets. 

As with Rule 17Ad–22(d)(4), the 

Commission preliminarily believes that 

the requirements in proposed Rule 

17Ad–22(e)(17)(i) through (iii) should 

help covered clearing agencies and its 

participants continue to address and 

manage risks posed by potential 

operational deficiencies. Specifically, to 

help limit disruptions that may impede 

the proper functioning of a covered 

clearing agency, the Commission 

preliminarily believes it is imperative 

that covered clearing agencies review 

their operations for potential 

weaknesses and develop appropriate 

systems, controls, and procedures to 

address weaknesses the proposed rule 

seeks to mitigate. 

The Commission intends for proposed 

Rule 17Ad–22(e)(17) to supplement the 

existing guidance provided by the 

Commission in its Automation Review 

Policy (‘‘ARP’’) statements 324 and the 

Interagency White Paper on Sound 

Practices to Strengthen the Resilience of 

the U.S. Financial System.325 The 

Commission also preliminarily believes 

that the proposed rules are consistent 

with the Commission’s objectives in 

proposed Regulation SCI.326

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rules 17Ad–22(e)(17). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to manage its operational 

risks by establishing and maintaining a 

business continuity plan that addresses 

events posing a significant risk of 

disrupting operations? Why or why not? 

Has the Commission provided sufficient 

guidance on what an event ‘‘posing a 

significant risk of disrupting 

operations’’ would be? 

• Should the Commission’s proposal 

require a specific methodology to 

identify and mitigate operational risk? If 

so, what is the methodology and why 

should this methodology be imposed? 

• Is the Commission’s proposed 

approach with respect to ensuring that 

systems have a high degree of security, 

resiliency, and operational reliability 

appropriate and sufficiently clear? Why 

or why not? 

• Are there any other requirements 

that should be included in the rule to 

facilitate policies and procedures for 

operational risk management? Why or 

why not? 

• Should the Commission adopt 

additional policies and procedures 

requirements for business continuity 

planning? If so, please explain in detail. 

15. Proposed Rule 17Ad–22(e)(18): 

Access and Participation Requirements 

Proposed Rule 17Ad–22(e)(18) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to establish 

objective, risk-based, and publicly 


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29552 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

327The Commission notes that, in contrast to 

other requirements in Rule 17Ad–22(e) where 

‘‘transparent’’ is used and permits disclosure 

‘‘where appropriate’’ pursuant to Rule 17Ad– 

22(a)(20), the requirement here for policies and 

procedures designed to ensure ‘‘publicly disclosed’’ 

criteria for participation would require policies and 

procedures requiring such disclosure. 328See proposed Rule 17Ad–22(e)(18), infra Part 

VII. 329See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 330See 15 U.S.C. 78q–1(b)(3)(F). 331See, e.g., 17 CFR 240.17Ad–22(b)(5) through 

(7), (d)(2); Clearing Agency Standards Release, 

supra note 5, at 66238–43, 66246–47 (adopting 

minimum access and participation requirements for 

registered clearing agencies); Exchange Act Release 

No. 34–16900 (June 17, 1980), 45 FR 41920 (June 

23, 1980) (outlining staff guidance establishing 

minimum standards for participation and fair 

access necessary for registration as a clearing 

agency). 

332See 17 CFR 240.17Ad–22(b)(5) through (7); 

Clearing Agency Standards Release, supra note 5, 

at 66238–43. The Commission notes that covered 

clearing agencies providing CCP services would 

remain subject to the requirements under Rule 

17Ad–22(b), in addition to the requirements under 

proposed Rule 17Ad–22(e)(18). 333Rule 17Ad–22(d)(2) requires a registered 

clearing agency to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to (i) require participants to 

have sufficient financial resources and robust 

operational capacity to meet obligations arising 

from participation in the clearing agency; (ii) have 

procedures in place to monitor that participation 

requirements are met on an ongoing basis; (iii) have 

participation requirements that are objective and 

publicly disclosed, and permit fair and open access. 

See 17 CFR 240.17Ad–22(d)(2); see also Clearing 

Agency Standards Release, supra note 5, at 66246– 

47. 

The Commission notes that the elements of Rule 

17Ad–22(d)(2)(i), regarding policies and procedures 

requiring participants to have financial resources 

and robust operational capacity to meet obligations 

arising from participation are also reflected in other 

proposed rules, including Rules 17Ad–22(e)(4) and 

(17). See supra Parts II.B.4.c (requiring under 

proposed Rule 17Ad–22(e)(4) policies and 

procedures for testing the sufficiency of financial 

resources) and II.B.14 (requiring under proposed 

Rule 17Ad–22(e)(17) policies and procedures for 

operational risk management). 

334The Commission is proposing Rule 17Ad– 

22(e)(18) as part of a comprehensive set of rules for 

regulating covered clearing agencies that is 

consistent with and comparable to other domestic 

and international standards for FMIs. Because of the 

similarity between the existing requirement in Rule 

17Ad–22(d)(2)(iii) and these requirements under 

proposed Rule 17Ad–22(e)(18), the Commission 

anticipates that covered clearing agencies may need 

to make only limited changes to update their 

policies and procedures to comply with these 

requirements under the proposed rule. See supra 

Part II.A.4. 

335See supra note 333 and accompanying text. 

336See supra Part II.A.4 (noting the anticipated 

effect of the proposed rule) and infra Part IV.B.3.c 

(describing the current practices at registered 

clearing agencies regarding settlement). 

disclosed criteria for participation,327

which permit fair and open access by 

direct and, where relevant, indirect 

participants and other FMUs.328

In addition to the requirements 

described above,329 Section 17A of the 

Exchange Act requires registered 

clearing agencies to have rules not 

designed to permit unfair 

discrimination in the admission of 

participants.330 The Commission has 

historically used its authority to help 

ensure fair access and participation 

requirements.331 In this regard, the 

Commission notes that Rules 17Ad– 

22(b)(5) through (7) impose 

requirements regarding access and 

participation for the policies and 

procedures of registered clearing 

agencies that provide CCP services.332

Similarly, Rule 17Ad–22(d)(2) requires a 

registered clearing agency to establish 

policies and procedures for access and 

participation that require participants to 

have sufficient financial resources and 

robust operational capacity to meet 

obligations arising from participation in 

the CCP and have procedures in place 

to monitor that participation 

requirements are met on an ongoing 

basis.333

Appropriate minimum operational, 

legal, and capital requirements for 

membership that are maintained and 

enforced through the supervisory 

practices of a clearing agency help to 

ensure all members will be reasonably 

capable of meeting their various 

obligations to the clearing agency in 

stressed market conditions and upon 

member default. Member defaults 

challenge the safe functioning of a 

clearing agency by creating credit and 

liquidity risks, which impede a clearing 

agency’s ability to settle securities 

transactions in a timely manner. 

Ensuring that clearing members meet 

objective levels of operational and 

financial soundness helps to 

counterbalance the potential for 

cascading effects on other participants 

and limit the potential of a systemic 

disruption in the U.S. securities 

markets. Fair and open access to all 

parties meeting the objective criteria for 

participation similarly helps to ensure 

wide participation and thereby increase 

beneficial risk mitigating effects. 

Accordingly, the Commission 

preliminarily believes Rule 17Ad– 

22(e)(18) is appropriate because it 

would promote membership standards 

at covered clearing agencies that are 

likely to limit the potential for member 

defaults and, as a result, losses to nondefaulting members in the event of a 

member default. The proposed rule has 

similar requirements to those applied to 

registered clearing agencies under Rule 

17Ad–22(d)(2) but would also explicitly 

require a covered clearing agency’s 

policies and procedures to establish 

publicly disclosed criteria for 

participation, which permit fair and 

open access by direct and, where 

relevant, indirect participants and other 

FMUs, and also require that the criteria 

be risk-based, in addition to 

objective.334 The Commission 

preliminarily believes the requirement 

that policies and procedures for 

publicly disclosed criteria for 

participation that specify fair and open 

access by both direct and indirect 

participants and other FMUs is 

appropriate because of the size and 

reach of covered clearing agencies, 

which are likely to transact or link with 

many participants, both direct and 

indirect, as well as other FMUs. The 

Commission also preliminarily believes 

that the requirement for risk-based 

criteria helps protect investors and 

facilitates prompt and accurate 

clearance and settlement by helping to 

ensure that covered clearing agencies 

accept participants that are less prone to 

default. 

In addition, the Commission is 

proposing a requirement that covered 

clearing agencies establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

require participants to have sufficient 

financial resources and robust 

operational capacity to meet obligations 

arising from participation in the clearing 

agency and to monitor compliance with 

participation requirements on an 

ongoing basis. Rule 17Ad–22(d)(2)(i) 

and (ii) also require a registered clearing 

agencies to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

have procedures in place to require 

participants to have sufficient financial 

resources and robust operational 

capacity to meet obligations arising from 

participation in the clearing agency and 

to monitor that participation 

requirements are met on an ongoing 

basis.335 Because these other 

requirements in proposed Rule 17Ad– 

22(e)(18) are the same as those for 

registered clearing agencies more 

generally under existing Rule 17Ad– 

22(d)(2), the Commission anticipates 

that covered clearing agencies may need 

to make only limited changes to update 

their policies and procedures.336 As 

with Rule 17Ad–22(d)(2), the 

Commission believes these 

requirements are appropriate because 

they would further support membership 

standards at covered clearing agencies 

that are likely to limit the potential for 

member defaults and, as a result, losses 

to non-defaulting members in the event 

of a member default. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 


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337See proposed Rule 17Ad–22(e)(19), infra Part 

VII. Because proposed Rule 17Ad–22(e)(19) only 

addresses the situation where a covered clearing 

agency relies on direct participants, the proposed 

rule does not apply to a broker-dealer that is a 

member of a CSD and maintains accounts for retail 

customers. 

338See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

339See Exchange Act Release No. 34–63107 (Oct. 

14, 2010), 75 FR 65882 (Oct. 26, 2010) (proposing 

ownership limitations and governance requirements 

for security-based swap clearing agencies, securitybased swap execution facilities, and national 

securities exchanges with respect to security-based 

swaps under Regulation MC). 

340See proposed Rule 17Ad–22(e)(19), infra Part 

VII. 

341See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

342See 15 U.S.C 78q–1(b)(3)(A). 

343See proposed Rule 17Ad–22(e)(20), infra Part 

VII. 

Rule 17Ad–22(e)(18). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to monitor compliance with 

its participation requirements on an 

ongoing basis? Why or why not? Would 

a more specific monitoring requirement 

be appropriate? For example, should 

this requirement specify a frequency of 

review? Why or why not? If so, what 

would be the appropriate frequency of 

review? Please explain. 

• Would it be appropriate for the 

Commission to require a covered 

clearing agency’s policies and 

procedures to provide for different 

categories of participation? If so, please 

explain in detail what these different 

categories would be and why they 

would be appropriate. 

16. Proposed Rule 17Ad–22(e)(19): 

Tiered Participation Agreements 

Proposed Rule 17Ad–22(e)(19) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage the material risks 

to the covered clearing agency arising 

from arrangements in which firms that 

are indirect participants in the covered 

clearing agency rely on the services 

provided by direct participants in the 

covered clearing agency to access the 

covered clearing agency’s payment, 

clearing, or settlement facilities 

(hereinafter ‘‘tiered participation 

arrangements’’).337 The Commission 

preliminarily believes the proposed rule 

is appropriate due to the associated 

dependencies and risk exposures that 

tiered participation arrangements create, 

as discussed above. Such risks, 

including credit, liquidity, and 

operational risks, can undermine the 

operations of a covered clearing agency 

and pose risks to the operations of a 

clearing agency’s participants, both 

direct and indirect, and to the broader 

securities markets as well. 

Registered clearing agencies are 

currently not subject to rules regarding 

tiered participation arrangements under 

existing Rule 17Ad–22. The 

Commission preliminarily believes the 

proposed rule is appropriate for covered 

clearing agencies, given the risks that a 

covered clearing agency’s size, 

operation, and importance pose to the 

U.S. securities markets, and is 

consistent with the requirements of the 

Exchange Act discussed above.338

The Commission has previously noted 

that, in situations where direct access to 

clearing agencies is limited by 

reasonable participation standards, 

firms that do not meet these standards 

may still be able to access clearing 

agencies through correspondent clearing 

arrangements with direct 

participants.339 Such a process would 

involve the non-participant entering 

into a correspondent clearing 

arrangement with a participant so that 

the transaction may be submitted by the 

participant to the clearing agency. The 

dependencies and risk exposures, 

including credit, liquidity, and 

operational risks, inherent in tiered 

participation arrangements present risks 

to a clearing agency and its functioning, 

in addition to the direct participant. A 

covered clearing agency with direct 

participants that clear transactions on 

behalf of indirect participants with large 

values or volumes faces the risk of 

default by both the indirect participant 

itself and the direct participant through 

which those transactions are routed. 

Accordingly the Commission is 

proposing Rule 17Ad–22(e)(19) to 

promote the ongoing management of 

risks associated with such tiered 

participation arrangements. 

In addition, the Commission is 

proposing to require that a covered 

clearing agency establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

regularly review the material risks to the 

covered clearing agency arising from 

such tiered participation 

arrangements.340 The Commission 

preliminarily believes the proposed 

requirement is appropriate due to the 

ongoing dependencies and risk 

exposures that tiered arrangements 

present to the operation of a covered 

clearing agency and to the operation of 

a covered clearing agency’s participants. 

Registered clearing agencies are 

currently not subject to a similar 

requirement under existing Rule 17Ad– 

22, and that the proposed rule is 

appropriate for covered clearing 

agencies, given the risks that a covered 

clearing agency’s size, operation, and 

importance pose to the U.S. securities 

markets, and is consistent with the 

requirements of the Exchange Act 

discussed above.341

The operational, financial, and other 

interconnections between direct and 

indirect participants to tiered 

participation arrangements are subject 

to market forces and can therefore 

change over time. Because direct and 

indirect participants collectively 

contribute to the operational and 

financial stability of a covered clearing 

agency, the Commission preliminarily 

believes that the requirement to 

regularly review a covered clearing 

agency’s tiered participation 

arrangements supports the Exchange 

Act requirements that clearing agencies 

be able to facilitate prompt and accurate 

clearance and settlement, protect 

investors and the public interest, and 

ensure the safeguarding of securities 

and funds in the custody or control of 

the clearing agency or for which the 

clearing agency is responsible.342

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(19). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to identify, monitor and 

manage the material risks to the covered 

clearing agency arising from 

arrangements in which firms that are 

indirect participants in the covered 

clearing agency rely on the services 

provided by direct participants to access 

the covered clearing agency’s payment, 

clearing, or settlement facilities? Why or 

why not? 

• Has the Commission provided 

sufficient guidance regarding who 

would be ‘‘indirect participants’’ and 

‘‘direct participants’’? Why or why not? 

17. Proposed Rule 17Ad–22(e)(20): 

Links 

Proposed Rule 17Ad–22(e)(20) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage risks related to 

any link with one or more other clearing 

agencies, FMUs, or trading markets.343

Rule 17Ad–22(d)(7) requires registered 

clearing agencies to have policies and 


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344Rule 17Ad–22(d)(7) requires a registered 

clearing agency to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to evaluate the potential 

sources of risks that can arise when the clearing 

agency establishes links either cross-border or 

domestically to clear or settle trades, and ensure 

that the risks are managed prudently on an ongoing 

basis. See 17 CFR 240.17Ad–22(d)(7); see also 

Clearing Agency Standards Release, supra note 5, 

at 66250–51. 

345See proposed Rule 17Ad–22(a)(10), infra Part 

VII. 

346See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

347See 15 U.S.C. 78q–1(a)(2)(A)(ii); see also 15 

U.S.C. 78q–1(a)(1)(D) (Congress finding that the 

linking of all clearance and settlement facilities and 

the development of uniform standards and 

procedures for clearance and settlement will reduce 

unnecessary costs and increase the protection of 

investors and persons facilitating transactions by 

and acting on behalf of investors). 

348See supra Parts II.B.15 and 16 (discussing the 

access and participation requirements in proposed 

Rule 17Ad–22(e)(18) and requirements for tiered 

participation arrangements in proposed Rule 17Ad– 

22(e)(19)). 

349See proposed Rule 17Ad–22(e)(21), infra Part 

VII. 

350Rule 17Ad–22(d)(6) requires a registered 

clearing agency to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to be cost-effective in meeting 

the requirements of participants while maintaining 

safe and secure operations. See 17 CFR 240.17Ad– 

22(d)(6); see also Clearing Agency Standards 

Release, supra note 5, at 66250. 

351See proposed Rule 17Ad–22(e)(21), infra Part 

VII. 

352See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

353See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

354See 15 U.S.C. 78q–1(b)(3)(F). 

355See 15 U.S.C. 78q–1(a)(1)(B); see also 15 

U.S.C. 78q–1(a)(1)(C) (Congress finding that new 

procedures for evaluating the potential 

sources of risks that can arise from 

links.344 For the purposes of Rule 

17Ad–22(e)(20), however, the 

Commission would further define 

‘‘link’’ in proposed Rule 17Ad–22(a)(10) 

to mean any set of contractual and 

operational arrangements between a 

covered clearing agency and one or 

more other clearing agencies, FMUs, or 

trading venues that connect them 

directly or indirectly for the purposes of 

participating in settlement, cross 

margining, expanding its services to 

additional instruments and participants, 

or for any other purposes material to 

their business.345 The Commission 

preliminarily believes this expanded 

and more prescriptive approach to 

defining a link is appropriate for 

covered clearing agencies given their 

size, global operation, and importance 

to the U.S. securities markets. 

In addition to the requirements 

discussed above,346 Section 17A of the 

Exchange Act directs the Commission to 

facilitate the establishment of linked or 

coordinated facilities for clearance and 

settlement.347 Links between clearing 

agencies, FMUs, and trading markets 

develop in several circumstances for 

different reasons. A CCP may establish 

a link with another CCP to enable a 

participant in the first CCP to clear 

trades with a participant in the second 

CCP. Similarly, a CSD may establish a 

link with another CSD to enable its 

participants to access services provided 

by the other CSD. Clearing agencies may 

also generally establish links with trade 

repositories and trading markets to 

fulfill regulatory obligations. 

Accordingly, the Commission is 

proposing Rule 17Ad–22(e)(20) to 

ensure that covered clearing agencies 

identify and assess the potential sources 

of risk arising from a link arrangement 

and incorporate that analysis into its 

risk management policies and 

procedures. In certain cases, the 

creation of a link may raise risks similar 

to those raised by tiered participation 

arrangements and participant 

requirements, discussed above: Namely, 

the interconnections between the 

clearing agency and the other entity may 

increase the risks to the clearing agency 

stemming from, among other things, the 

risks of participant default, credit losses, 

or liquidity shortfalls arising through 

the linked entity rather than the clearing 

agency’s own operations.348 The range 

of implicated risks is broad; a clearing 

agency that operates links may increase 

its exposure to legal, operational, 

custody, settlement, credit, and 

liquidity risk depending on the nature 

and extent of the link involved. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(20) and 17Ad– 

22(a)(10). In addition, the Commission 

requests comments on the following 

specific issue: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to identify, monitor, and 

manage risks related to any link the 

covered clearing agency establishes with 

one or more other clearing agencies, 

FMUs, or trading markets? Why or why 

not? 

• Is the definition of ‘‘link’’ in 

proposed Rule 17Ad–22(a)(10) 

appropriate and sufficiently clear in 

light of the proposed requirements? 

Why or why not? Is there an alternative 

definition that the Commission should 

consider? 

18. Proposed Rule 17Ad–22(e)(21): 

Efficiency and Effectiveness 

Proposed Rule 17Ad–22(e)(21) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that it is 

efficient and effective in meeting the 

requirements of its participants and the 

markets it serves.349 Rule 17Ad–22(d)(6) 

similarly requires registered clearing 

agencies to have policies and 

procedures designed to be cost-effective 

in meeting the requirements of 

participants while maintaining safe and 

secure operations.350

Proposed Rule 17Ad–22(e)(21) would 

further require a covered clearing 

agency’s management to regularly 

review the efficiency and effectiveness 

of its (i) clearing and settlement 

arrangements; (ii) operating structure, 

including risk management policies, 

procedures, and systems; (iii) scope of 

products cleared, settled, or recorded; 

and (iv) use of technology and 

communication procedures.351 The 

Commission preliminarily believes this 

requirement for regular review is 

appropriate for covered clearing 

agencies given the risks that a covered 

clearing agency’s size, global operation, 

and importance pose to the U.S. 

securities markets.352

For purposes of the proposed rule, 

efficiency refers generally to the 

efficient use of resources by a clearing 

agency to perform its functions, and 

effectiveness refers to its ability to meet 

its intended goals and objectives. A 

covered clearing agency that operates 

inefficiently or functions ineffectively 

may distort financial activity and 

market structure, increasing not only the 

risks borne by its members, but also the 

risks of indirect participants, such as the 

customers of participants or other 

buyers and sellers of securities. If a 

covered clearing agency is inefficient, a 

participant may choose not to trade or 

may choose to settle bilaterally, which 

could potentially result in greater risks 

to the U.S. financial system than would 

otherwise occur in the presence of a 

more efficiently functioning covered 

clearing agency. 

In addition to the requirements 

discussed above,353 Section 17A of the 

Exchange Act requires that registered 

clearing agencies have rules designed to 

promote the prompt and accurate 

clearance and settlement of securities 

transactions,354 following a finding by 

Congress that inefficient procedures for 

clearance and settlement impose 

unnecessary costs on investors and 

persons facilitating transactions by and 

acting on behalf of investors.355 The 


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data processing and communications techniques 

create the opportunity for more efficient, effective, 

and safe procedures for clearance and settlement). 

356See proposed Rule 17Ad–22(e)(22), infra Part 

VII. 

357See generally Finacle, Messaging Standards in 

Financial Industry, (Infosys Thought Paper, 2012), 

available at http://www.infosys.com/finacle/

solutions/thought-papers/Documents/messagingstandards-financial-industry.pdf (describing 

messaging standards such as SWIFT, FIX, and 

Fpml). 

358See proposed Rule 17Ad–22(e)(23), infra Part 

VII; see also Parts II.B.20.a and b (discussing the 

specific disclosures enumerated in the proposed 

rule). 

The Commission is proposing Rule 17Ad– 

22(e)(23) as part of a comprehensive set of rules for 

regulating covered clearing agencies that is 

consistent with and comparable to other domestic 

and international standards for FMIs. 

The Commission notes that Rule 17Ad–22(c)(2) 

currently requires a registered clearing agency, 

within 60 days after the end of its fiscal year, to post 

on its Web site its annual audited financial 

statements. See 17 CFR 240.17Ad–22(c)(2); see also 

Clearing Agency Standards Release, supra note 5, 

at 66244. 

Commission preliminarily believes that 

proposed Rule 17Ad–22(e)(21) is 

appropriate because a covered clearing 

agency must be designed and operated 

to meet the needs of its participants and 

the markets it serves, while remaining 

sufficiently flexible to respond to 

changing demand and new 

technologies. 

The Commission is also proposing to 

require that a covered clearing agency 

regularly review the items identified in 

Rule 17Ad–22(e)(21)(i) through (iv) 

because the Commission preliminarily 

believes that they are reflective of key 

aspects of a clearing agency’s business 

necessary for efficient and effective 

operation. Moreover, because 

technology, sound practices, market 

forces, and the number and 

characteristics of participants may 

change over time, the Commission 

preliminarily believes that measures of 

efficiency and effectiveness must be 

subject to policies and procedures for 

regular review. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(21). In addition, the 

Commission requests comments on the 

following specific issues: 

• Has the Commission provided 

sufficient guidance on what policies and 

procedures would be necessary to 

ensure that a covered clearing agency is 

‘‘efficient and effective’’ in meeting the 

requirements of the proposed rule? Why 

or why not? 

• Is the proposed requirement for a 

covered clearing agency’s policies and 

procedures to regularly review the 

following aspects of its business and 

operations appropriate: Clearing and 

settlement arrangements; operating 

structure, including risk management 

policies, procedures, and systems; the 

scope of products cleared, settled, or 

recorded; and the use of technology and 

communication procedures? Why or 

why not? Should the Commission 

require that other aspects of a covered 

clearing agency’s business and 

operations be subject to regular review? 

19. Proposed Rule 17Ad–22(e)(22): 

Communication Procedures and 

Standards 

Proposed Rule 17Ad–22(e)(22) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that it 

uses, or at a minimum accommodates, 

relevant internationally accepted 

communication procedures and 

standards in order to facilitate efficient 

payment, clearing, and settlement.356

No comparable requirement exists for 

registered clearing agencies under Rule 

17Ad–22(d). The Commission 

preliminarily believes this proposed 

requirement is appropriate for covered 

clearing agencies given a covered 

clearing agency’s size and global 

operation. The Commission understands 

that covered clearing agencies currently 

use the relevant internationally 

accepted communication procedures 

and standards,357 so the Commission 

expects only limited changes may be 

necessary to satisfy the requirements of 

the proposed rule. 

The ability of participants to 

communicate with a covered clearing 

agency in a timely, reliable, and 

accurate manner is important to 

achieving prompt and accurate 

clearance and settlement. The 

Commission preliminarily believes that 

requiring policies and procedures in 

line with internationally accepted 

communication procedures and 

standards is appropriate for a covered 

clearing agency for two reasons. First, 

internationally accepted communication 

procedures and standards, because they 

are widely accepted and adopted 

standards, reduce the likelihood of 

errors and technical complexity in the 

clearance and settlement process, 

thereby reducing risks and costs, 

improving efficiency, and reducing 

barriers to entry. Such procedures and 

standards would include standardized 

protocols for exchanging messages and 

reference data for identifying financial 

instruments and counterparties. 

Second, internationally accepted 

communication procedures and 

standards ensure effective 

communication with direct and indirect 

participants, which the Commission 

preliminarily believes is important for 

covered clearing agencies, given the 

global nature of their businesses. 

Securities markets in the United States 

are among the largest and most actively 

traded in the world, with direct and 

indirect participants from numerous 

other countries that necessitate the 

development and use of internationally 

accepted communication procedures 

and standards. Accordingly, the 

Commission preliminarily believes that 

covered clearing agencies are likely to 

be engaged in transactions across 

borders, where standardized 

communications protocols and 

mechanisms are essential to ensure 

prompt and accurate clearance and 

settlement. 

Request for Comments. The 

Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(22). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to use, or at a minimum 

accommodate, relevant internationally 

accepted communication procedures 

and standards in order to facilitate 

efficient payment, clearing, and 

settlement? Why or why not? 

• Is the Commission’s assumption 

that covered clearing agencies are 

already using internationally accepted 

communication procedures correct? 

Why or why not? 

• Has the Commission provided 

sufficient guidance on what ‘‘relevant 

internationally accepted communication 

procedures and standards’’ would be 

appropriate under the proposed policies 

and procedures requirement? Why or 

why not? 

20. Proposed Rule 17Ad–22(e)(23): 

Disclosure of Rules, Key Procedures, 

and Market Data 

Proposed Rule 17Ad–22(e)(23) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain clear 

and comprehensive rules and 

procedures that provide for the specific 

disclosures enumerated in the rule, as 

discussed below.358 The proposed rule 

would require such policies and 

procedures to specifically require a 

covered clearing agency to (i) publicly 

disclose all relevant rules and material 

procedures, including key aspects of its 

default rules and procedures; (ii) 

provide sufficient information to enable 

participants to identify and evaluate the 

risks, fees, and other material costs they 


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359 In full, Rule 17Ad–22(d)(9) requires registered 

clearing agencies to establish, implement, maintain 

and enforce written policies and procedures 

reasonably designed to provide market participants 

with sufficient information for them to identify and 

evaluate the risks and costs associated with using 

its services. See 17 CFR 240.17Ad–22(d)(9); see also 

Clearing Agency Standards Release, supra note 5, 

at 66252–53. 

360See notes 54–56 and accompanying text; see 

also Parts I.A and B (generally discussing the 

regulatory framework under Section 17A of the 

Exchange Act, as amended by the Dodd-Frank Act). 

361See 15 U.S.C. 78q–1(b)(3)(F). 

362See 17 CFR 240.19b–4(l) (requiring an SRO to 

post each proposed rule change, and any 

amendments thereto, on its Web site within two 

business days of filing with the Commission); 17 

CFR 240.19b–4(i) (requiring SROs to retain for 

public inspection and copying all filings made 

pursuant to this section and all correspondence and 

other communications reduced to writing, 

including comment letters, to and from such SRO 

concerning any such filing). 

363See, e.g., DTC, Assessment of Compliance 

With Recommendations for Securities Settlement 

Systems (Dec. 2011), available at http://dtcc.com/

legal/policy-and-compliance.aspx. 

364As noted above, the Commission preliminarily 

believes that the proposed requirement for a 

comprehensive public disclosure is consistent with 

the requirements of the Exchange Act, Rule 19b–4, 

and the current practices of some clearing agencies 

that would be covered clearing agencies. See supra 

notes 362–363 and accompanying text; see also Part 

IV.B.3.i (discussing the current practices of 

registered clearing agencies with respect to 

transparency and disclosure). 

365See proposed Rule 17Ad–22(e)(23)(iv), infra 

Part VI. 

incur by participating in the covered 

clearing agency; and (iii) publicly 

disclose relevant basic data on 

transaction volume and values.359 As 

with public disclosures contemplated 

under proposed Rule 17Ad–22(a)(20), a 

covered clearing agency could comply 

with the proposed requirement by 

posting the relevant documentation to 

its Web site. The Commission 

preliminarily believes the proposed rule 

is appropriate to promote continued 

transparency at covered clearing 

agencies and thereby continue to 

facilitate prompt and accurate clearance 

and settlement. 

Rule 17Ad–22(d)(9) currently requires 

registered clearing agencies to have 

policies and procedures to facilitate 

disclosures similar to proposed Rule 

17Ad–22(e)(23)(ii), but does not require 

policies and procedures similar to 

proposed Rules 17Ad–22(e)(23)(i) and 

(iii). The Commission preliminarily 

believes these additional requirements 

are appropriate for a covered clearing 

agency given the risks that a covered 

clearing agency’s size, operation, and 

importance pose to the U.S. securities 

markets because these disclosures 

provide the relevant authorities with 

information that further facilitates 

supervision of the covered clearing 

agency, including information that may 

allow the relevant authorities to better 

assess the covered clearing agency’s 

observance of risk management 

requirements and better identify 

possible risks posed by the covered 

clearing agency, and provide relevant 

stakeholders with information regarding 

risks associated with participation in a 

covered clearing agency. 

In addition to the Exchange Act 

requirements described above,360

Section 17A of the Exchange Act 

requires registered clearing agencies to 

have rules designed to foster 

cooperation and coordination with 

persons engaged in the clearance and 

settlement of securities transactions.361

The Commission preliminarily believes 

that requiring a covered clearing agency 

to have policies and procedures 

reasonably designed to disclose 

sufficient information so that 

participants can identify risks and costs 

associated with using the covered 

clearing agency would allow 

participants to make informed decisions 

about the use of the covered clearing 

agency and to take appropriate actions 

to mitigate their risks and to better 

understand the costs associated with 

their use of the covered clearing agency. 

Similarly, the Commission preliminarily 

believes that requiring a covered 

clearing agency to publicly disclose 

relevant basic data on transaction 

volume and values would allow 

regulators, market participants, and 

market observers to make informed 

decisions about the activities of the 

covered clearing agency and to take 

appropriate action, if necessary, in 

response. 

Pursuant to existing Commission 

regulations, changes to the rules of an 

SRO, including clearing agencies, are 

required to be available on the SRO’s 

Web site and are published by the 

Commission.362 The Commission’s 

proposed rule is designed to promote 

understanding among market 

participants of the policies and 

procedures of covered clearing agencies, 

and the Commission believes the 

proposed rule is consistent with existing 

requirements for SROs. Continued and 

improved understanding of the risks 

and costs associated with using a 

covered clearing agency’s services 

should promote confidence generally in 

the covered clearing agency’s ability to 

set and manage appropriately risks and 

costs, such as margin requirements, 

restrictions on or limitations of the 

covered clearing agency’s obligations, 

and conditions used by the covered 

clearing agency to test the adequacy of 

its financial resources. The Commission 

preliminarily believes these 

requirements are especially important 

for covered clearing agencies given their 

size and importance. 

The Commission notes that these 

policies and procedures requirements 

are intended in part to codify disclosure 

practices currently undertaken by some 

registered clearing agencies on an 

elective basis.363

Below is a discussion of the specific 

disclosures required under the proposed 

rule, which are not similarly required of 

registered clearing agencies under Rule 

17Ad–22(d)(9). The Commission 

preliminarily believes that these 

additions to a covered clearing agency’s 

disclosure practices are important to 

ensure clearing members and the public 

have access to up-to-date information 

about the covered clearing agency’s 

activities, policies, and procedures, 

which would promote confidence in its 

operations and thereby contribute to the 

prompt and accurate clearance and 

settlement of securities transactions.364

a. Comprehensive Public Disclosure 

Proposed Rule 17Ad–22(e)(23)(iv) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain clear 

and comprehensive rules and 

procedures that provide for a 

comprehensive public disclosure of its 

material rules, policies, and procedures 

regarding governance arrangements and 

legal, financial, and operational risk 

management, accurate in all material 

respects at the time of publication, 

including (i) a general background of the 

covered clearing agency, including its 

function and the market it serves, basic 

data and performance statistics on its 

services and operations, such as basic 

volume and value statistics by product 

type, average aggregate intraday 

exposures to its participants, and 

statistics on the covered clearing 

agency’s operational reliability, and a 

description of its general organization, 

legal and regulatory framework, and 

system design and operations; (ii) a 

standard-by-standard summary 

narrative for each applicable standard 

set forth in proposed Rules 17Ad– 

22(e)(1) through (22) with sufficient 

detail and context to enable the reader 

to understand its approach to 

controlling the risks and addressing the 

requirements in each standard; (iii) a 

summary of material changes since the 

last update of the disclosure; and (iv) an 

executive summary of the key points 

regarding each.365 The Commission is 

proposing to require that the 

comprehensive public disclosure 


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366See proposed Rule 17Ad–22(e)(23)(v), infra 

Part VI. 367See 15 U.S.C. 78q–1(b)(3)(F). 

368See proposed Rule 17Ab2–2, infra Part VII. 

369See proposed Rule 17Ab2–2(d), infra Part VII. 

provide basic data and performance 

statistics, such as statistics on the 

covered clearing agency’s operational 

reliability so that the relevant 

stakeholders and the general public 

have data regarding, for example, 

performance targets for systems and the 

actual performance of systems over 

specified periods and targets for 

recovery. The Commission is also 

proposing to require that the 

comprehensive public disclosure 

include a standard-by-standard 

summary narrative to elicit a summary 

discussion of a covered clearing 

agency’s implementation of policies and 

procedures requirements that would 

need to be established, implemented, 

maintained and enforced by a covered 

clearing agency in response to proposed 

Rules 17Ad–22(e)(1) through (23). In 

addition, the Commission is proposing 

to require a summary of material 

changes and would expect that a 

covered clearing agency should consider 

its particular circumstances, such as, for 

example, changes in the scope of 

services provided by the covered 

clearing agency, in satisfying this 

requirement. 

The Commission preliminarily 

believes that disclosure of the above 

required information will provide 

participants with the information 

necessary to, at a minimum, identify 

and evaluate the risks and costs 

associated with use of the covered 

clearing agency, thereby promoting 

transparency and enhancing 

competition and market discipline. The 

Commission preliminarily believes it 

would also provide other stakeholders, 

including regulators and the public, 

with information that facilitates 

informed oversight and decision-making 

regarding covered clearing agencies. 

b. Updates to the Comprehensive Public 

Disclosure 

Proposed Rule 17Ad–22(e)(23)(v) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure the 

comprehensive public disclosure 

required under proposed Rule 17Ad– 

22(e)(23)(iv) is updated not less than 

every two years, or more frequently 

following changes to its system or the 

environment in which it operates to the 

extent necessary, to ensure statements 

previously provided remain accurate in 

all material respects.366 The 

Commission preliminarily believes that 

ensuring statements previously 

provided remain accurate would require 

a covered clearing agency’s 

comprehensive public disclosure to 

provide statements that would provide 

a market participant with an accurate 

representation of the risks and costs of 

participating in the covered clearing 

agency. 

The Commission preliminarily 

believes that this requirement would 

help provide participants, regulators, 

other stakeholders, and the public with 

disclosures that are current, accurate, 

and comprehensive, thereby promoting 

transparency and enhancing 

competition and market discipline. The 

Commission preliminarily believes it 

would also provide other stakeholders, 

including regulators and the public, 

with timely information that facilitates 

informed oversight and decision-making 

regarding covered clearing agencies, 

thereby promoting the clearing agency 

obligations required under Section 17A 

of the Exchange Act.367

c. Request for Comments 

The Commission generally requests 

comments on all aspects of proposed 

Rule 17Ad–22(e)(23). In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission require a 

covered clearing agency’s policies and 

procedures to maintain clear and 

comprehensive rules and procedures 

that provide for the specific disclosures 

proposed under Rule 17Ad–22(e)(23)? 

Why or why not? Are there rules and 

procedures that should not be fully 

disclosed to participants? Please explain 

in detail what such rules and 

procedures would be and why they 

should not be disclosed to participants. 

• In imposing certain minimum 

requirements for policies and 

procedures regarding the 

comprehensive public disclosure, has 

the Commission provided sufficient 

guidance regarding what elements must 

appear in the disclosure? Should 

different elements appear? Should the 

Commission require policies and 

procedures to update the 

comprehensive public disclosure every 

two years, as proposed? Should the 

Commission require policies and 

procedures to update the 

comprehensive public disclosure more 

frequently following changes to its 

system or the environment in which it 

operates to the extent necessary to 

ensure the statements provided remain 

accurate in all material respects? Why or 

why not? 

• Are certain ways that covered 

clearing agencies communicate 

information to market participants more 

effective than others? For example, does 

including information in a covered 

clearing agency’s rulebook or published 

interpretive materials provide adequate 

notice of the risks and costs of being a 

participant to persons that are not 

currently participants in the covered 

clearing agency? Why or why not? 

• Should the types of information 

that a covered clearing agency discloses 

under the proposed rule be generally 

available to the public? Should any 

categories of the information required to 

be disclosed under the proposed rule be 

restricted to certain parties only, such as 

clearing members or the Commission 

itself? Why or why not? 

• Should the Commission require 

covered clearing agencies to make 

public disclosures of information 

contained in their audited financial 

statements that would provide a 

discussion and analysis of the covered 

clearing agency’s financial condition, in 

particular with respect to liquidity, 

capital resources, and results of 

operations, similar to the Management’s 

Discussion and Analysis of Financial 

Condition and Results of Operations 

disclosure required under Items 

303(a)(1) through (3) of Regulation S–K? 

• Should the Commission require that 

policies and procedures pursuant to 

proposed Rule 17Ad–22(e)(23) specify a 

certain form for the disclosures (e.g., 

using tagged or structured data)? Why or 

why not? What form should the 

proposed disclosures take? Please 

explain. 

C. Proposed Rule 17Ab2–2 

The Commission is proposing Rule 

17Ab2–2 to establish procedures for the 

Commission to make determinations 

affecting covered clearing agencies.368

Under the proposed rule, the 

Commission would make 

determinations in three cases, as 

discussed below. In each case, under 

proposed Rule 17Ab2–2(d), the 

Commission would publish notice of its 

intention to consider such 

determinations, together with a brief 

statement of the grounds under 

consideration, and provide at least a 30- 

day public comment period prior to any 

determination.369 The Commission may 

provide the clearing agency subject to 

the proposed determination opportunity 

for hearing regarding the proposed 

determination. Under proposed Rule 

17Ab2–2(e), notice of determinations in 

each case would be given by prompt 

publication thereof, together with a 


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370See proposed Rule 17Ab2–2(e), infra Part VII. 

371See supra notes 82–87 and accompanying text. 

As noted, the CFTC has been designated the 

supervisory agency for two registered clearing 

agencies, CME and ICE, which have been 

designated as systemically important by the FSOC 

pursuant to the Clearing Supervision Act, and 

accordingly they would not be covered clearing 

agencies under proposed Rules 17Ad–22(e) and 

17Ab2–2. 

372See supra note 88 and accompanying text. 

373See supra note 9 and accompanying text 

(discussing the requirements for registration as a 

clearing agency pursuant to Section 17A of the 

Exchange Act). 

374See proposed Rule 17Ab2–2(a), infra Part VII. 

375See Clearing Agency Standards Release, supra 

note 5, at 66234 n.162 (describing the risks that 

arise from financial instruments that are 

characterized by discrete jump-to-default price 

changes or that are highly correlated with potential 

participant defaults). 

376See supra Part I.A. 

377See supra Part I.B.1. 

378See supra Part I.B.2. 

379See proposed Rule 17Ab2–2(b), infra Part VII. 

380The Commission notes that this provision of 

proposed Rule 17Ab2–2(b) parallels the definition 

of systemic importance in Section 803(9) of the 

Clearing Supervision Act, which states that 

systemic importance means a situation where the 

failure of or a disruption to the functioning of an 

FMU could create, or increase, the risk of 

significant liquidity or credit problems spreading 

among financial institutions or markets and thereby 

threaten the stability of the financial system of the 

United States. See 12 U.S.C. 5462(9). 

381See 12 U.S.C. 5463(a)(2)(D) (listing, as one of 

the systemic importance criteria for the FSOC to 

consider, the effect that the failure of or a 

disruption to the FMU or PCS activity would have 

on critical markets, financial institutions, or the 

broader financial system). 

statement of written reasons supporting 

the determination.370

The Commission notes that under 

proposed Rule 17Ad–22(e), five active 

registered clearing agencies would meet 

the definition of a covered clearing 

agency without action under proposed 

Rule 17Ab2–2 by the Commission.371

Because the two dormant registered 

clearing agencies would not meet the 

definition of a covered clearing agency, 

if they elected to begin providing 

clearance and settlement services, they 

could potentially be subject to a 

determination under Rule 17Ab2–2.372

In addition, the Commission notes that 

it would consider, upon receiving an 

application for registration as a clearing 

agency, either making a determination 

regarding a registrant’s status as a 

covered clearing agency as part of the 

registration process, if the Commission 

believes the clearing agency already 

meets the definition of a covered 

clearing agency, or after registration, if 

the Commission determines that the 

clearing agency does not meet the 

definition of a covered clearing agency 

upon registration but does so at a later 

date, as either market conditions or the 

characteristics of the clearing agency 

itself change, pursuant to proposed Rule 

17Ab2–2.373

1. Determination That a Registered 

Clearing Agency Is a Covered Clearing 

Agency 

Under proposed Rule 17Ab2–2(a), the 

Commission may, if it deems 

appropriate, upon application by any 

registered clearing agency or member 

thereof, or on its own initiative, 

determine whether a registered clearing 

agency should be considered a covered 

clearing agency.374 In determining 

whether a registered clearing agency 

should be considered a covered clearing 

agency, the Commission may consider 

characteristics such as the clearing of 

financial instruments that are 

characterized by discrete jump-todefault price changes or that are highly 

correlated with potential participant 

defaults or other such factors as it 

deems appropriate in the circumstances. 

The Commission preliminarily believes 

it should reserve the right to make a 

determination on its own initiative in 

the event that it independently 

determines that a registered clearing 

agency meets the definition of a covered 

clearing agency, as either market 

conditions or the characteristics of the 

clearing agency itself change. The 

Commission preliminarily believes that 

the clearing of financial instruments 

that are characterized by discrete jumpto-default price changes or that are 

highly correlated with potential 

participant defaults are two factors that 

indicate a registered clearing agency 

may raise systemic risk concerns 

supporting application of the 

requirements under proposed Rule 

17Ad–22(e).375

The Commission preliminarily 

believes that proposed Rule 17Ab2–2(a) 

would provide the Commission with the 

flexibility necessary to achieve the goals 

of Section 17A of the Exchange Act,376

Title VII of the Dodd-Frank Act,377 and 

the Clearing Supervision Act,378 given 

the ever-changing nature of the U.S. 

securities markets, including the nature 

and character of participants in the 

market and the products required to be 

cleared and settled in practice. The 

Commission preliminarily believes that 

Rule 17Ab2–2(a) is necessary to ensure 

that a registered clearing agency not 

otherwise meeting the definition of 

either a designated clearing agency or a 

complex risk profile clearing agency can 

nonetheless be subject to the 

requirements for covered clearing 

agencies in proposed Rule 17Ad–22(e) 

upon a determination made by the 

Commission. The Commission 

preliminarily believes this is necessary 

to ensure that the Commission is 

appropriately able to respond to 

registered clearing agencies that raise 

systemic risk concerns supporting 

application of the requirements under 

proposed Rule 17Ad–22(e). 

2. Determination That a Covered 

Clearing Agency Is Systemically 

Important in Multiple Jurisdictions 

Under proposed Rule 17Ab2–2(b), the 

Commission may, if it deems 

appropriate, upon application by any 

clearing agency or member thereof, or 

on its own initiative, determine whether 

a covered clearing agency meets the 

definition of ‘‘systemically important in 

multiple jurisdictions.’’ 379 In 

determining whether a covered clearing 

agency is systemically important in 

multiple jurisdictions, the Commission 

may consider (i) whether the covered 

clearing agency is a designated clearing 

agency; (ii) whether the clearing agency 

has been determined to be systemically 

important by one or more jurisdictions 

other than the United States through a 

process that includes consideration of 

whether the foreseeable effects of a 

failure or disruption of the designated 

clearing agency could threaten the 

stability of each relevant jurisdiction’s 

financial system; 380 or (iii) such other 

factors as the Commission may deem 

appropriate in the circumstances. 

The Commission preliminarily 

believes that it should propose the 

procedures set forth in Rule 17Ab2–2(b) 

for designating a covered clearing 

agency as systemically important in 

multiple jurisdictions. Accordingly, the 

Commission is proposing Rule 17Ab2– 

2(b) to provide procedures for 

determining when a clearing agency has 

become systemically important in 

multiple jurisdictions. In this regard, the 

Commission preliminarily believes that 

proposed Rule 17Ab2–2(b)(ii) is 

consistent with Section 804(a)(2)(D) of 

the Clearing Supervision Act.381 The 

Commission is also proposing that it 

may consider additional factors in 

determining whether a covered clearing 

agency is systemically important in 

multiple jurisdictions, in addition to 

whether the foreseeable effects of a 

failure or disruption of the designated 

clearing agency could threaten the 

stability of multiple jurisdictions’ 

financial systems. Such analysis could 

include whether foreign regulatory 

authorities have designated the covered 

clearing agency as systemically 

important and whether any findings 

were made in anticipation of that 

designation. 


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382See proposed Rule 17Ab2–2(c), infra Part VII. 

383See supra note 375 and accompanying text. 

384See supra Part I.A. 

385See supra Part I.B.1. 

386See supra Part I.B.2. 

387See supra note 375 and accompanying text. 

388See 12 U.S.C. 5466(c); see also 12 U.S.C. 1818 

(relevant provisions under the Federal Deposit 

Insurance Act). 

3. Determination That a Clearing 

Agency Has a More Complex Risk 

Profile 

Under proposed Rule 17Ab2–2(c), the 

Commission may, if it deems 

appropriate, determine whether any of 

the activities of a clearing agency 

providing central counterparty services, 

in addition to clearing agencies 

registered with the Commission for the 

purpose of clearing security-based 

swaps, have a more complex risk 

profile.382 In determining whether a 

clearing agency’s activity has a more 

complex risk profile, the Commission 

may consider (i) characteristics such as 

the clearing of financial instruments 

that are characterized by discrete jumpto-default price changes or that are 

highly correlated with potential 

participant defaults; and (ii) such other 

characteristics as it deems appropriate 

in the circumstances. The Commission 

preliminarily believes that the clearing 

of financial instruments that are 

characterized by discrete jump-todefault price changes or that are highly 

correlated with potential participant 

defaults are two factors that indicate a 

registered clearing agency raises 

systemic risk concerns supporting 

application of the requirements under 

proposed Rule 17Ad–22(e).383

The Commission preliminarily 

believes that proposed Rule 17Ab2–2(c) 

would provide the Commission with the 

flexibility necessary to achieve the goals 

of Section 17A of the Exchange Act,384

Title VII of the Dodd-Frank Act,385 and 

the Clearing Supervision Act,386 given 

the dynamic nature of the U.S. 

securities markets, including the nature 

and character of participants in the 

market and the products required to be 

cleared and settled in practice, by 

permitting the Commission to determine 

that certain registered clearing agencies 

are complex risk profile clearing 

agencies. The Commission also 

preliminarily believes that activities 

involving a more complex risk profile, 

because they may involve the clearing of 

financial instruments that are 

characterized by discrete jump-todefault price changes or that are highly 

correlated with potential participant 

defaults, implicate systemic risk 

concerns supporting application of the 

requirements under proposed Rule 

17Ad–22(e).387

4. Request for Comments 

The Commission generally requests 

comments on all aspects of proposed 

Rule 17Ab2–2. In addition, the 

Commission requests comments on the 

following specific issues: 

• Should the Commission establish 

procedures for making determinations 

affecting covered clearing agencies? 

Why or why not? 

• In determining whether a clearing 

agency should be considered a covered 

clearing agency, should the Commission 

consider characteristics such as the 

clearing of financial instruments that are 

characterized by discrete jump-todefault price changes or that are highly 

correlated with potential participant 

defaults, as proposed? Why or why not? 

Are there particular other characteristics 

that the Commission should consider? If 

so, please explain the relevance of those 

characteristics in detail. 

• Does the proposed rule sufficiently 

describe the types of factors that would 

be considered when the Commission 

considers a determination that a 

registered clearing agency is a covered 

clearing agency? What factors should be 

considered? 

• Should the Commission, if it deems 

appropriate, determine whether a 

covered clearing agency is systemically 

important in multiple jurisdictions? 

Why or why not? If not, what alternative 

approach should the Commission use to 

assess whether a covered clearing 

agency is systemically important in 

multiple jurisdictions? For instance, 

what weight should the Commission 

give to determinations by other 

jurisdictions or regulators regarding the 

systemic importance in multiple 

jurisdictions of a covered clearing 

agency? Is it appropriate for the 

Commission to assess whether such 

determination was made through a 

process that includes consideration of 

whether the foreseeable effects of a 

failure or disruption of the designated 

clearing agency could threaten the 

stability of each relevant jurisdiction’s 

financial system, as proposed? Please 

explain. Are there particular other 

factors that the Commission should 

consider? If so, please explain the 

relevance of those characteristics in 

detail. 

• Does the proposed rule sufficiently 

describe the types of factors that would 

be considered when the Commission 

considers a determination that a covered 

clearing agency is systemically 

important in multiple jurisdictions? 

What factors should be considered? 

• In determining whether any of the 

activities of a clearing agency providing 

CCP services have a more complex risk 

profile, should the Commission 

consider characteristics such as the 

clearing of financial instruments that are 

characterized by discrete jump-todefault price changes or that are highly 

correlated with potential participant 

defaults, as proposed? Why or why not? 

Are there particular other characteristics 

that the Commission should consider? If 

so, please explain the relevance of those 

characteristics in detail. 

• Does the proposed rule sufficiently 

describe the types of factors that would 

be considered when the Commission 

considers a determination that a 

clearing agency is a complex risk profile 

clearing agency? What factors should be 

considered? 

• Does the proposed process for 

determinations under Rule 17Ab2–2 

conflict with the PFMI Report’s use of 

‘‘systemic importance in multiple 

jurisdictions’’ and ‘‘more complex risk 

profile’’ activities? If so, please explain. 

D. Proposed Rule 17Ad–22(f) 

The Commission is proposing Rule 

17Ad–22(f) to codify its special 

enforcement authority over designated 

clearing agencies for which the 

Commission acts as the supervisory 

agency, pursuant to the Clearing 

Supervision Act. Under Section 807(c) 

of the Clearing Supervision Act, for 

purposes of enforcing the provisions of 

the Clearing Supervision Act, a 

designated clearing agency is subject to, 

and the Commission has authority 

under, the provisions of subsections (b) 

through (n) of Section 8 of the Federal 

Deposit Insurance Act in the same 

manner and to the same extent as if a 

designated clearing agency were an 

insured depository institution and the 

Commission were the appropriate 

Federal banking agency for such insured 

depository institution.388

Request for Comments. The 

Commission requests comment on 

proposed Rule 17Ad–22(f), including 

whether the proposed rule is clear and 

consistent with the requirements of the 

Exchange Act and the Clearing 

Supervision Act. 

E. Proposed Amendment to Rule 17Ad– 

22(d) 

To facilitate consistency with 

proposed Rule 17Ad–22(e), the 

Commission is proposing to amend Rule 

17Ad–22(d). Rule 17Ad–22(d) sets forth 

certain minimum requirements for the 

operation and governance of registered 


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389See 17 CFR 240.17Ad–22(d); see also Clearing 

Agency Standards Release, supra note 5, at 66244– 

58. 

390See proposed amendment to Rule 17Ad–22(d), 

infra Part VII. 

391See supra notes 84–87 and accompanying text. 

392See supra note 88 and accompanying text 

(discussing SCCP and BSECC). 

393See supra Part II.A.1 (further discussing the 

scope of the proposed rules). 

394 44 U.S.C. 3501 et seq. 

395See 44 U.S.C. 3502(3). 

396See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR 

1320.5(a)(1)(iv). 

397See infra Part IV.B.3 (describing current 

practices at registered clearing agencies). 

398For a discussion of the differences between 

Rule 17Ad–22(d) and proposed Rule 17Ad–22(e), 

see Parts II.B.1–20. 

399See infra Parts III.D.6 (estimated burdens 

under proposed Rule 17Ad–22(e)(15)) and 7 

(estimated burdens under proposed Rule 17Ad– 

22(e)(19)). 

400See infra Part II.C (further discussing the 

purpose, scope, and application of proposed Rule 

17Ab2–2) and Part VII (proposed text of Rule 

17Ab2–2). 

clearing agencies.389 The first paragraph 

of Rule 17Ad–22(d) currently provides 

that a registered clearing agency shall 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to fulfill the 

requirements of Rule 17Ad–22(d), as 

applicable. The Commission is 

proposing to amend this first paragraph 

of Rule 17Ad–22(d) to state that Rule 

17Ad–22(d) applies to registered 

clearing agencies other than covered 

clearing agencies.390 As a result, the 

proposed amendment would limit the 

applicability of Rule 17Ad–22(d) to 

CME and ICE, as systemically important 

FMUs for which the CFTC is the 

supervisory agency under the Clearing 

Supervision Act,391 the two registered 

but dormant clearing agencies,392 and 

any clearing agency registered with the 

Commission in the future that is not one 

of the following: A designated clearing 

agency, a complex risk profile clearing 

agency, or a clearing agency that the 

Commission has otherwise determined 

to be a covered clearing agency pursuant 

to proposed Rule 17Ab2–2.393

Request for Comments. The 

Commission requests comment on the 

proposed amendment to Rule 17Ad– 

22(d), including whether the proposed 

amendment is clear and consistent with 

the requirements of the Exchange Act, 

the Clearing Supervision Act, and 

proposed Rule 17Ad–22(e) thereunder. 

III. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 394 imposes certain 

requirements on federal agencies in 

connection with the conducting or 

sponsoring of any ‘‘collection of 

information.’’ 395 More specifically, 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. Additionally, 44 U.S.C. 

3507(a)(1)(D) provides that before 

adopting (or revising) a collection of 

information requirement, an agency 

must, among other things, publish a 

notice in the Federal Register stating 

that the agency has submitted the 

proposed collection of information to 

the Office of Management and Budget 

(‘‘OMB’’) and setting forth certain 

required information, including (1) a 

title for the collection of information; (2) 

a summary of the collection 

information; (3) a brief description of 

the need for the information and the 

proposed use of the information; (4) a 

description of the likely respondents 

and proposed frequency of response to 

the collection of information; (5) an 

estimate of the paperwork burden that 

shall result from the collection of 

information; and (6) notice that 

comments may be submitted to the 

agency and director of OMB.396

Certain provisions of the proposed 

rules would impose new ‘‘collection of 

information’’ requirements within the 

meaning of the PRA. Accordingly, the 

Commission has submitted the 

information to the OMB for review in 

accordance with 44 U.S.C. 3507 and 5 

CFR 1320.11. A title and control number 

already exists for Rule 17Ad–22 adopted 

in October 2012 (OMB Control No. 

3235–0695 for ‘‘Clearing Agency 

Standards for Operation and 

Governance’’). Because the Commission 

is proposing to revise the collection of 

information under this proposed 

rulemaking for amendments to Rule 

17Ad–22, the Commission will use 

OMB Control No. 3235–0695 for the 

collections of information for proposed 

Rule 17Ad–22(e). 

Additionally, proposed Rule 17Ab2–2 

would contain a new collection of 

information requirement for PRA 

purposes. The title of the new collection 

of information under this proposed 

rulemaking is Determinations Affecting 

Covered Clearing Agencies (a proposed 

new collection of information). 

A. Overview and Organization 

The Commission preliminarily 

believes information that would be 

required to be collected by virtue of 

written policies and procedure 

requirements contained in this proposed 

rulemaking reflects to a degree existing 

practices at covered clearing 

agencies.397 In certain instances, 

however, the proposed requirements 

would require covered clearing agencies 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to comply with this 

proposed rulemaking. 

With regard to proposed Rule 17Ad– 

22(e), given that several provisions of 

the proposed rule are intended to be 

consistent with Rule 17Ad–22, the 

Commission preliminarily believes that 

covered clearing agencies currently in 

compliance with the requirements of 

existing Rule 17Ad–22 may already 

have some written rules and procedures 

similar to those in proposed Rule 17Ad– 

22(e). Accordingly, when covered 

clearing agencies review and update 

their policies and procedures in order to 

come into compliance with proposed 

Rule 17Ad–22(e), the Commission 

preliminarily believes that the PRA 

burden would vary across the 

requirements of proposed Rule 17Ad– 

22(e), based on the complexities of the 

requirements under each paragraph of 

the proposed rule and the extent to 

which covered clearing agencies 

currently comply with the proposed 

requirements under their existing 

policies and procedures.398

The portions of proposed Rule 17Ad– 

22(e) for which the PRA burden is 

preliminarily expected to be higher are 

the provisions contemplating 

requirements not addressed in Rule 

17Ad–22, as discussed in Part II.A.4. 

Because these proposed requirements 

may not reflect established practices of 

covered clearing agencies or reflect the 

normal course of their activities, the 

PRA burden for these proposed rules 

may entail both initial one-time burdens 

to create new written policies and 

procedures and ongoing burdens. The 

expected PRA burden for the proposed 

rules is discussed in detail below.399

In addition to the collection of 

information requirements imposed 

under proposed Rule 17Ad–22(e), 

proposed Rule 17Ab2–2 also would 

contain collection of information 

requirements for PRA purposes. 

Proposed Rule 17Ab2–2 establishes a 

process for making determinations 

regarding whether or not a clearing 

agency would be a covered clearing 

agency and whether a covered clearing 

agency is either involved in activities 

with a more complex risk profile or 

systemically important in multiple 

jurisdictions.400 The expected PRA 

burden for proposed Rule 17Ab2–2 is 

discussed below. 


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401Proposed Rule 17Ad–22(e) would require 

covered clearing agencies to establish, implement, 

maintain and enforce certain written policies and 

procedures that would be used, among other things, 

in connection with staff examinations. 

402See supra Part II.B.1 (discussing proposed 

Rule 17Ad–22(e)(1)) and infra Part VII (providing 

the proposed rule text). 

403See supra Part II.B.2 (discussing proposed 

Rule 17Ad–22(e)(2)) and infra Part VII (providing 

the proposed rule text). 

404See supra Part II.B.3 (discussing proposed 

Rule 17Ad–22(e)(3)) and infra Part VII (providing 

the proposed rule text). 

405See supra Part II.B.4.c (discussing proposed 

Rule 17Ad–22(e)(4)) and infra Part VII (providing 

the proposed rule text). 

B. Summary of Collection of 

Information and Proposed Use of 

Information for Proposed Rule 17Ad– 

22(e) 401 and Proposed Rule 17Ab2–2 

1. Proposed Rules 17Ad–22(e)(1) 

Through (3): General Organization 

a. Proposed Rule 17Ad–22(e)(1) 

Proposed Rule 17Ad–22(e)(1) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for a 

well-founded, clear, transparent and 

enforceable legal basis for each aspect of 

its activities in all relevant 

jurisdictions.402 The purpose of this 

collection of information is to reduce 

the legal risks involved in the clearance 

and settlement process and to ensure 

that a covered clearing agency’s policies 

and procedures do not cause legal 

uncertainty among participants due to a 

lack of clarity, completeness, or 

conflicts with applicable laws and 

judicial precedent. 

b. Proposed Rule 17Ad–22(e)(2) 

Proposed Rule 17Ad–22(e)(2) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for 

governance arrangements that are clear 

and transparent, clearly prioritize the 

safety and efficiency of the covered 

clearing agency, and support the public 

interest requirements of Section 17A of 

the Exchange Act, and the objectives of 

owners and participants. Proposed Rule 

17Ad–22(e)(2) would also require a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for 

governance arrangements reasonably 

designed to establish that the covered 

clearing agency’s board of directors and 

senior management have appropriate 

experience and skills to discharge their 

duties and responsibilities.403

The purpose of this collection of 

information is to promote boards of 

directors that are composed of qualified 

members and that exercise oversight of 

the covered clearing agency’s 

management, while also prioritizing the 

safety and efficiency of the covered 

clearing agency and supporting the 

public interest. 

c. Proposed Rule 17Ad–22(e)(3) 

Proposed Rule 17Ad–22(e)(3) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain a 

sound risk management framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

investment, custody, and other risks 

that arise in or are borne by the covered 

clearing agency. Under the proposed 

rule, risk management policies, 

procedures, and systems must provide 

for the identifying, measuring, 

monitoring, and managing of risks that 

arise in or are borne by the covered 

clearing agency. Such policies and 

procedures must be subject to review on 

a specified periodic basis and be 

approved by the board of directors 

annually. The proposed rule would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for plans 

for the recovery and orderly wind-down 

of the covered clearing agency in the 

event of credit losses, liquidity 

shortfalls, losses from general business 

risk, or any other losses. The proposed 

rule would also require a covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

establish that risk management and 

internal audit personnel have sufficient 

resources, authority, and independence 

from management. The proposed rule 

would further require a covered clearing 

agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

establish that risk management and 

internal audit personnel have a direct 

reporting line to, and are overseen by, 

a risk management committee and an 

audit committee of the board of 

directors, respectively. The proposed 

rule would also require policies and 

procedures providing for an 

independent audit committee.404

The purpose of this collection of 

information is to enhance a covered 

clearing agency’s ability to identify, 

monitor, and manage the risks clearing 

agencies face, including by subjecting 

the relevant policies and procedures to 

regular review, and to facilitate an 

orderly recovery and wind-down 

process in the event that a covered 

clearing agency is unable to continue 

operating as a going concern. 

2. Proposed Rules 17Ad–22(e)(4) 

Through (7): Financial Risk 

Management 

a. Proposed Rule 17Ad–22(e)(4) 

Proposed Rule 17Ad–22(e)(4) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to effectively 

identify, measure, monitor, and manage 

its credit exposures to each participant 

and those exposures arising from 

payment, clearing, and settlement 

processes. Proposed Rule 17Ad– 

22(e)(4)(i) would require a covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

maintain sufficient financial resources 

to cover its credit exposure to each 

member fully with a high degree of 

confidence. To the extent not already 

maintained pursuant to proposed Rule 

17Ad–22(e)(4)(i), a covered clearing 

agency that provides CCP services 

would also have to establish, 

implement, maintain, and enforce 

written policies and procedures to meet 

either the ‘‘cover one’’ requirement 

under proposed Rule 17Ad–22(e)(4)(iii) 

or, if it is a complex risk profile clearing 

agency or systemically important in 

multiple jurisdictions, the ‘‘cover two’’ 

requirement under proposed Rule 

17Ad–22(e)(4)(ii). 

Proposed Rule 17Ad–22(e)(4)(iv) 

would require covered clearing agencies 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to cover its credit 

exposures by including prefunded 

financial resources and excluding 

assessments for additional guaranty 

fund contributions or other resources 

that are not prefunded, when 

calculating financial resources available 

to meet the requirements under 

proposed Rules 17Ad–22(e)(4)(i) 

through (iii), as applicable.405

Proposed Rule 17Ad–22(e)(4)(v) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain the 

financial resources required under 

proposed Rules 17Ad–22(e)(4)(i) 

through (iii), as applicable, in combined 

or separately maintained clearing or 

guaranty funds, and to test the 

sufficiency of its total financial 

resources by conducting a stress test of 

total financial resources once each day 


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406See id. 

407See supra Part II.B.4.d (discussing proposed 

Rule 17Ad–22(e)(5)) and infra Part VII (providing 

the proposed rule text). 

408See supra Part II.B.4.e (discussing proposed 

Rule 17Ad–22(e)(6)) and infra Part VII (providing 

the proposed rule text). 409See id. 

using standard predetermined 

parameters and assumptions. 

Proposed Rule 17Ad–22(e)(4)(vi) 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to test the 

sufficiency of its total financial 

resources available to meet the 

minimum financial resource 

requirements under proposed Rules 

17Ad–22(e)(4)(i) through (iii), as 

applicable, by conducting stress tests 

and other comprehensive analyses. 

Specifically, those would include 

conducting a stress test of its total 

financial resources once each day using 

standard predetermined parameters and 

assumptions. It would also include 

conducting a comprehensive analysis on 

at least a monthly basis of the existing 

stress testing scenarios, models, and 

underlying parameters and 

assumptions, and considering 

modifications to ensure that they are 

appropriate for determining the covered 

clearing agency’s required level of 

default protection in light of current 

market conditions. It would also include 

conducting a comprehensive analysis of 

stress testing scenarios, models, and 

underlying parameters and assumptions 

more frequently than monthly when the 

products cleared or markets served 

display high volatility, become less 

liquid, or when the size or 

concentration of positions held by its 

participants increases significantly. It 

would also include reporting the results 

of this analysis to appropriate decision 

makers, including its risk management 

committee or board of directors, and to 

use these results to evaluate the 

adequacy of and adjust its margin 

methodology, model parameters, models 

used to generate clearing or guaranty 

fund requirements, and any other 

relevant aspects of its credit risk 

management policies and procedures, in 

supporting compliance with the 

minimum financial resources 

requirements discussed above. 

Finally, proposed Rule 17Ad– 

22(e)(4)(vii) would require a covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

require the covered clearing agency to 

perform a conforming model validation 

for its credit risk models at least 

annually, or more frequently if dictated 

by the covered clearing agency’s risk 

management policies and procedures 

established under proposed Rule 17Ad– 

22(e)(3).406

b. Proposed Rule 17Ad–22(e)(5) 

Rule 17Ad–22(e)(5) would require a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to limit the assets 

it accepts as collateral to those with low 

credit, liquidity, and market risks. It 

also would require policies that set and 

enforce appropriately conservative 

haircuts and concentration limits if the 

covered clearing agency requires 

collateral to manage its or its 

participants’ credit exposure and would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to require a notless-than-annual review of the 

sufficiency of its collateral haircut and 

concentration limits.407

c. Proposed Rule 17Ad–22(e)(6) 

Proposed Rule 17Ad–22(e)(6) would 

require a covered clearing agency that 

provides CCP services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to cover its credit 

exposures to its participants by 

establishing a risk-based margin system. 

The proposed rule would require such 

margin system to consider, and produce 

margin levels commensurate with, the 

risks and particular attributes of each 

relevant product, portfolio, and market. 

Furthermore, under the proposed rule 

the margin system would mark 

participant positions to market and 

collect margin, including variation 

margin or equivalent charges if relevant, 

at least daily, and include the authority 

and operational capacity to make 

intraday margin calls in defined 

circumstances. The proposed rule also 

requires policies and procedures with 

respect to the following: The calculation 

of margin sufficient to cover a covered 

clearing agency’s potential future 

exposure to participants in the interval 

between the last margin collection and 

close out of positions following a 

participant default; the use of reliable 

sources of timely price data and 

procedures and sound valuation models 

for addressing circumstances in which 

pricing data are not readily available or 

reliable; and the use of an appropriate 

method for measuring credit exposure 

that accounts for relevant product risk 

factors and portfolio effects across 

products.408

In addition to requiring policies and 

procedures with respect to a risk-based 

margin system, proposed Rule 17Ad– 

22(e)(6) would require a covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

regularly review, test, and verify riskbased margin systems by conducting 

backtests at least once each day and, at 

least monthly, a conforming sensitivity 

analysis of its margin resources and its 

parameters and assumptions for 

backtesting, and consider modifications 

to ensure the backtesting practices are 

appropriate for determining the 

adequacy of its margin resources. Such 

review, testing, and verification would 

include conducting a conforming 

sensitivity analysis more frequently 

than monthly when the products 

cleared or markets served display high 

volatility, become less liquid, or when 

the size or concentration of positions 

held by participants increase or 

decrease significantly. The proposed 

rule would also require a covered 

clearing agency providing CCP services 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to report the results 

of such conforming sensitivity analysis 

to appropriate decision makers, 

including its risk management 

committee or board of directors, and use 

these results to evaluate the adequacy of 

and adjust its margin methodology, 

model parameters, and any other 

relevant aspects of its credit risk 

management policies and procedures. 

Finally, under such policies and 

procedures, a not less than annual 

conforming model validation would be 

required for the covered clearing 

agency’s margin system and related 

models.409

d. Proposed Rule 17Ad–22(e)(7) 

Proposed Rule 17Ad–22(e)(7) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to effectively 

measure, monitor, and manage the 

liquidity risk that arises in or is borne 

by the covered clearing agency, 

including measuring, monitoring, and 

managing its settlement and funding 

flows on an ongoing and timely basis 

and its use of intraday liquidity. Under 

the proposed rule, a covered clearing 

agency would be required to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to maintain 

sufficient liquid resources in all relevant 

currencies to effect same-day and, 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29563 

410 12 U.S.C. 5465(a). 

411See supra Part II.B.4.f (discussing proposed 

Rule 17Ad–22(e)(7)) and infra Part VII (providing 

the proposed rule text). 412See id. 

413See id. 

414See supra Part II.B.5 (discussing proposed 

Rule 17Ad–22(e)(8)) and infra Part VII (providing 

the proposed rule text). 

where appropriate, intraday and 

multiday settlement of payment 

obligations with a high degree of 

confidence under a wide range of 

potential stress scenarios that includes 

the default of the participant family that 

would generate the largest aggregate 

payment obligation for it in extreme but 

plausible market conditions. Under 

such policies and procedures, use of 

access to accounts and services at a 

Federal Reserve Bank, pursuant to 

Section 806 of the Clearing Supervision 

Act,410 or other relevant central bank, 

when available and where determined 

to be practical by the board of directors 

of the covered clearing agency, would 

be required.411

For the purposes of meeting such 

liquid resource requirements, a covered 

clearing agency would be required to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to require the 

holding of qualifying liquid resources in 

each relevant currency for which 

clearing activities are performed, 

limited to (i) cash at the central bank of 

issue or at creditworthy commercial 

banks; (ii) assets that are readily 

available and convertible into cash 

through prearranged funding 

arrangements without material adverse 

change provisions, such as committed 

lines of credit, committed foreign 

exchange swaps, committed repurchase 

agreements, and other prearranged 

funding arrangements determined to be 

highly reliable even in extreme but 

plausible market conditions by the 

board of directors, following an annual 

review conducted for this purpose; and 

(iii) other assets that are readily 

available and eligible for pledging to (or 

conducting other appropriate forms of 

transactions with) a relevant central 

bank, provided that the covered clearing 

agency had access to routine credit at 

the central bank. 

With respect to a covered clearing 

agency’s sources of liquidity, the 

proposed rule would require a covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

undertake due diligence to confirm that 

it has a reasonable basis to believe each 

of its liquidity providers, whether or not 

such liquidity provider is a clearing 

member, has sufficient information to 

understand and manage the liquidity 

provider’s liquidity risks, and the 

capacity to perform as required under 

its commitments to provide liquidity. 

Furthermore, under such policies and 

procedures, on at least an annual basis, 

a covered clearing agency would be 

required to maintain and test with each 

liquidity provider to the extent 

practicable the covered clearing 

agency’s procedures and operational 

capacity for accessing each type of 

liquidity resource by conducting stress 

testing of its liquidity resources using 

standard and predetermined parameters 

and assumptions at least once each day. 

Additionally, a covered clearing agency 

would be required to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to determine the 

amount and regularly test the 

sufficiency of the liquid resources held 

for purposes of meeting the minimum 

liquid resource requirement by (i) 

conducting a stress test of its liquidity 

resources using standard and 

predetermined parameters and 

assumptions at least once each day; and 

(ii) conducting a comprehensive 

analysis of the existing stress testing 

scenarios, models, and underlying 

parameters and assumptions used in 

evaluating liquidity needs and 

resources, and considering 

modifications to ensure they are 

appropriate in light of current and 

evolving market conditions at least once 

a month and more frequently when 

products cleared or markets served 

display high volatility, become less 

liquid, or when the size or 

concentration of positions held by 

participants increase significantly.412

Under such policies and procedures 

required by the proposed rule, stress test 

results must be reported to appropriate 

decision makers, including the risk 

management committee or board of 

directors, at the covered clearing agency 

for use in evaluating the adequacy of 

and adjusting its liquidity risk 

management policies and procedures. A 

covered clearing agency would also be 

required to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

perform an annual conforming model 

validation of its liquidity risk models 

and would be required to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to address 

foreseeable liquidity shortfalls that 

would not be covered by its liquid 

resources and to seek to avoid 

unwinding, revoking, or delaying the 

same-day settlement of payment 

obligations. Additionally, a covered 

clearing agency would be required to 

establish, implement, maintain and 

enforce written policies and procedures 

that describe the covered clearing 

agency’s process to replenish any liquid 

resources that may be employed during 

a stress event.413

Finally, a covered clearing agency 

would be required to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to require the 

covered clearing agency to undertake an 

analysis at least once a year that 

evaluates the feasibility of maintaining 

sufficient liquid resources at a 

minimum in all relevant currencies to 

effect same-day and, where appropriate, 

intraday and multiday settlement of 

payment obligations with a high degree 

of confidence under a wide range of 

foreseeable stress scenarios that 

includes, but is not limited to, the 

default of the two participant families 

that would potentially cause the largest 

aggregate credit exposure for the 

covered clearing agency in extreme but 

plausible market conditions if the 

covered clearing agency provides 

central counterparty services and is 

either systemically important in 

multiple jurisdictions or a clearing 

agency involved in activities with a 

more complex risk profile. 

The purpose of this information 

collection is to enable a covered clearing 

agency to be able to effectively identify 

and limit exposures to participants, to 

maintain sufficient collateral or margin, 

and to satisfy all of its settlement 

obligations in the event of a participant 

default. 

3. Proposed Rules 17Ad–22(e)(8) 

Through (10): Settlement 

a. Proposed Rule 17Ad–22(e)(8) 

Proposed Rule 17Ad–22(e)(8) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to define the point 

at which settlement is final no later than 

the end of the day on which the 

payment or obligation is due and, where 

necessary or appropriate, either intraday 

or in real time.414

b. Proposed Rule 17Ad–22(e)(9) 

Proposed Rule 17Ad–22(e)(9) would 

require covered clearing agencies to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to have the covered 

clearing agency conduct its money 

settlements in central bank money, 

where available and determined to be 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29564 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

415See supra Part II.B.6 (discussing proposed 

Rule 17Ad–22(e)(9)) and infra Part VII (providing 

the proposed rule text). 

416See supra Part II.B.7 (discussing proposed 

Rule 17Ad–22(e)(10)) and infra Part VII (providing 

the proposed rule text). 

417See supra Part II.B.8 (discussing proposed 

Rule 17Ad–22(e)(11)) and infra Part VII (providing 

the proposed rule text). 

418See supra Part II.B.9 (discussing proposed 

Rule 17Ad–22(e)(12)) and infra Part VII (providing 

the proposed rule text). 

419See supra Part II.B.10 (discussing proposed 

Rule 17Ad–22(e)(13)) and infra Part VII (providing 

the proposed rule text). 

420See supra Part II.B.11 (discussing proposed 

Rule 17Ad–22(e)(14)) and infra Part VII (providing 

the proposed rule text). 

practical by the board of directors of the 

covered clearing agency, and minimize 

and manage credit and liquidity risk 

arising from the clearing agency’s 

money settlements in commercial bank 

money where central bank money is not 

used.415

c. Proposed Rule 17Ad–22(e)(10) 

Proposed Rule 17Ad–22(e)(10) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies reasonably 

designed to set forth transparent written 

standards regarding a clearing agency’s 

obligations with respect to the delivery 

of physical instruments, as well as 

operational practices that identify, 

monitor, and manage the risk associated 

with such physical deliveries.416

The purpose of this information 

collection is to promote consistent 

standards of timing and reliability in the 

settlement process, promote reliability 

in a covered clearing agency’s 

settlement operations, and to provide a 

covered clearing agency’s participants 

with information necessary to evaluate 

the risks and costs associated with 

participation in the covered clearing 

agency. 

4. Proposed Rules 17Ad–22(e)(11) 

Through (12): CSDs and Exchange-ofValue Settlement Systems 

The purpose of this collection of 

information is to reduce securities 

transfer processing costs and risks 

associated with securities settlement 

and custody, increase the speed and 

efficiency of the settlement process, and 

eliminate risk in transactions with 

linked obligations. 

a. Proposed Rule 17Ad–22(e)(11) 

Proposed Rule 17Ad–22(e)(11) would 

require a covered CSD to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to implement 

internal auditing and other controls to 

safeguard the rights of securities issuers 

and holders and prevent the 

unauthorized creation or deletion of 

securities. A covered CSD would also be 

required to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

conduct periodic and at least daily 

reconciliation of securities issues that 

the CSD maintains. Additionally, the 

proposed rule would require a covered 

CSD to establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

maintain securities in an immobilized 

or dematerialized form, ensure the 

integrity of securities issues, and 

minimize and manage the risks 

associated with the safekeeping and 

transfer of securities, as well as protect 

assets against custody risk.417

b. Proposed Rule 17Ad–22(e)(12) 

Proposed Rule 17Ad–22(e)(12) would 

require a covered clearing agency that 

settles transactions involving the 

settlement of two linked obligations to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to eliminate 

principal risk by conditioning the final 

settlement of one obligation upon the 

final settlement of the other, irrespective 

of whether the covered clearing agency 

settles on a gross or net basis and when 

finality occurs.418

5. Proposed Rules 17Ad–22(e)(13) 

Through (14): Default Management 

The purpose of this collection of 

information is to facilitate the 

functioning of a covered clearing agency 

in the event that a participant fails to 

meet its obligations, as well as limit the 

extent to which a participant’s failure 

can spread to other participants or the 

covered clearing agency itself, and to 

ensure the safe and effective holding 

and transfer of customers’ positions and 

collateral in the event of a participant’s 

default or insolvency. 

a. Proposed Rule 17Ad–22(e)(13) 

Proposed Rule 17Ad–22(e)(13) would 

require covered clearing agencies 

providing CCP services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to ensure that a 

covered clearing agency subject to this 

rule has sufficient authority and 

operational capability to contain losses 

and liquidity demands in a timely 

fashion and continue to meet its own 

obligations. The proposed rule would 

also require that a covered clearing 

agency subject to the rule establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to address the 

allocation of credit losses it may face if 

its collateral or other resources are 

insufficient to fully cover its credit 

exposures, describe the process whereby 

the clearing agency would replenish any 

financial resources it may use following 

a default or other event in which the use 

of such resources is contemplated, and 

require participants and other 

stakeholders, to the extent applicable, to 

participate in the testing and review of 

its default procedures, including any 

close out procedures. Under such 

policies and procedures, the testing and 

review must occur at least annually and 

following any material changes 

thereto.419

b. Proposed Rule 17Ad–22(e)(14) 

Proposed Rule 17Ad–22(e)(14) would 

require a covered clearing agency that 

provides CCP services for security-based 

swaps or engages in activities that the 

Commission has determined to have a 

more complex risk profile to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to enable the 

segregation and portability of positions 

of a participant’s customers and 

collateral and effectively protect such 

positions and collateral from the default 

or insolvency of that participant.420

6. Proposed Rules 17Ad–22(e)(15) 

Through (17): General Business and 

Operational Risk Management 

The purpose of this collection of 

information is to mitigate the potential 

impairment of a covered clearing agency 

as a result of a decline in revenues or 

increase in expenses, to limit 

disruptions that may impede the proper 

functioning of a covered clearing 

agency, and to improve the ability of a 

covered clearing agency to meet its 

settlement obligations. 

a. Proposed Rule 17Ad–22(e)(15) 

Proposed Rule 17Ad–22(e)(15) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage general business 

risk and hold sufficient liquid net assets 

funded by equity to cover potential 

general business losses so that the 

covered clearing agency can continue 

operations and services as a going 

concern if losses materialize. Covered 

clearing agencies would also be required 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to determine the 

amount of liquid net assets funded by 

equity based upon the general risk 

profile of that clearing agency and the 


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421See supra Part II.B.12 (discussing proposed 

Rule 17Ad–22(e)(15)) and infra Part VII (providing 

the proposed rule text). 

422See supra Part II.B.13 (discussing proposed 

Rule 17Ad–22(e)(16)) and infra Part VII (providing 

the proposed rule text). 

423See supra Part II.B.14 (discussing proposed 

Rule 17Ad–22(e)(17)) and infra Part VII (providing 

the proposed rule text). 

424See supra Part II.B.15 (discussing proposed 

Rule 17Ad–22(e)(18)) and infra Part VII (providing 

the proposed rule text). 

425See supra Part II.B.16 (discussing proposed 

Rule 17Ad–22(e)(19)) and infra Part VII (providing 

the proposed rule text). 

426See supra Part II.B.17 (discussing proposed 

Rule 17Ad–22(e)(20)) and infra Part VII (providing 

the proposed rule text). 

427See supra Part II.B.18 (discussing proposed 

Rule 17Ad–22(e)(21)) and infra Part VII (providing 

the proposed rule text). 

length of time necessary to achieve 

recovery or orderly wind-down. The 

proposed rule would also require a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to hold liquid net 

assets funded by equity in an amount 

equal to the greater of either six months 

of current operating expenses or the 

amount determined by the agency’s 

board of directors to be sufficient to 

ensure a recovery or orderly wind-down 

of critical operations and services. 

Under such policies and procedures, 

these resources are to be held in 

addition to resources held to cover 

participant default or other risks and 

must be of high quality and sufficiently 

liquid. Furthermore, under such 

policies and procedures, a covered 

clearing agency would be required to 

maintain a viable plan for raising 

additional equity in the event that its 

equity falls close to, or below, the 

required amount, and the plan would be 

required to be approved by the board of 

directors and updated at least 

annually.421

b. Proposed Rule 17Ad–22(e)(16) 

Proposed Rule 17Ad–22(e)(16) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to safeguard its 

own assets, as well as the assets of its 

participants, and to minimize the risk of 

loss and delay in access to such assets. 

A covered clearing agency would be 

required to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

invest such assets in instruments with 

minimal credit, market and liquidity 

risks.422

c. Proposed Rule 17Ad–22(e)(17) 

Proposed Rule 17Ad–22(e)(17) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to manage 

operational risk. A covered clearing 

agency would be required to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to identify the 

plausible sources of operational risk, 

both internal and external, and mitigate 

their impact through the use of 

appropriate systems, policies, 

procedures, and controls. A covered 

clearing agency would also be required 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that 

systems have a high degree of security, 

resiliency, operational reliability, and 

adequate, scalable capacity. The 

proposed rule would also require a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to establish and 

maintain a business continuity plan that 

addresses events posing a significant 

risk of disrupting operations.423

7. Proposed Rules 17Ad–22(e)(18) 

Through (20): Access 

The purpose of the collection of 

information is to enable a covered 

clearing agency to ensure that only 

entities with sufficient financial and 

operational capacity are direct 

participants in the covered clearing 

agency while ensuring that all qualified 

persons can access a covered clearing 

agency’s services; to enable a covered 

clearing agency to monitor that 

participation requirements are met on 

an ongoing basis and to identify a 

participant experiencing financial 

difficulties before the participant fails to 

meet its settlement obligations; and to 

enable a covered clearing agency to 

identify and manage risks posed by nonmember entities. 

a. Proposed Rule 17Ad–22(e)(18) 

Proposed Rule 17Ad–22(e)(18) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to establish 

objective, risk-based, and publicly 

disclosed criteria for participation, 

which permit fair and open access by 

direct and, where relevant, indirect 

participants and other FMUs, and 

require participants to have sufficient 

financial resources and robust 

operational capacity to meet obligations 

arising from participation in the clearing 

agency. A covered clearing agency 

would also be required to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to monitor 

compliance with such participation 

requirements on an ongoing basis.424

b. Proposed Rule 17Ad–22(e)(19) 

Proposed Rule 17Ad–22(e)(19) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage the material risks 

to the covered clearing agency arising 

from arrangements in which firms that 

are indirect participants rely on services 

provided by direct participants to access 

the covered clearing agency’s payment, 

clearing, or settlement facilities.425

c. Proposed Rule 17Ad–22(e)(20) 

Proposed Rule 17Ad–22(e)(20) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage risks related to 

any link with one or more other clearing 

agencies, FMUs, or trading markets.426

8. Proposed Rules 17Ad–22(e)(21) 

Through (22): Efficiency 

The purpose of this collection of 

information is to ensure that the 

services provided by a covered clearing 

agency do not become inefficient and to 

promote the sound operation of a 

covered clearing agency. The collection 

of information is also intended to ensure 

the prompt and accurate clearance and 

settlement of securities transactions by 

enabling participants to communicate 

with a clearing agency in a timely, 

reliable, and accurate manner. 

a. Proposed Rule 17Ad–22(e)(21) 

Proposed Rule 17Ad–22(e)(21) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to require the 

covered clearing agency to be efficient 

and effective in meeting the 

requirements of its participants and the 

markets it serves. Additionally, the rule 

would require a covered clearing agency 

to establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to have the 

management of a covered clearing 

agency regularly review the efficiency 

and effectiveness of the covered clearing 

agency’s (i) clearing and settlement 

arrangement; (ii) operating structure, 

including risk management policies, 

procedures, and systems; (iii) scope of 

products cleared, settled, or recorded; 

and (iv) use of technology and 

communications procedures.427


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29566 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

428See supra Part II.B.19 (discussing proposed 

Rule 17Ad–22(e)(22)) and infra Part VII (providing 

the proposed rule text). 

429See supra Part II.B.20 (discussing proposed 

Rule 17Ad–22(e)(23)) and infra Part VII (providing 

the proposed rule text). 

430See infra Part II.C (further discussing the 

purpose, scope, and application of proposed Rule 

17Ab2–2) and Part VII (proposed text of Rule 

17Ab2–2). 

431See proposed Rule 17Ab2–2(a), infra Part VII. 

432See proposed Rule 17Ad–22(a)(7), infra Part 

VII; see also supra Part II.A.1 (describing the scope 

of proposed Rule 17Ad–22(e) and defining ‘‘covered 

clearing agency’’). 

433See proposed Rule 17Ad–22(a)(8), infra Part 

VII; see also supra Part II.A.1 (describing the scope 

of proposed Rule 17Ad–22(e) and defining 

‘‘designated clearing agency’’); supra Part I.B.2 

(describing designation as systemically important 

by the FSOC under the Clearing Supervision Act). 

434See supra note 38 and accompanying text. 

435See supra note 41 and accompanying text. 

436See supra notes 82, 84–87, and accompanying 

text. 

437See supra note 83 and accompanying text. 

438See supra Part I.B.2, in particular notes 27–28, 

38–41, and accompanying text. 

439See supra Part II.C (discussing the purpose, 

scope, and application of proposed Rule 17Ab2–2) 

and Part VII (proposed text of Rule 17Ab2–2). 

b. Proposed Rule 17Ad–22(e)(22) 

Proposed Rule 17Ad–22(e)(22) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to use, or at a 

minimum, accommodate, relevant 

internationally accepted communication 

procedures and standards in order to 

facilitate efficient payment, clearing, 

and settlement.428

9. Proposed Rule 17Ad–22(e)(23): 

Disclosure 

Proposed Rule 17Ad–22(e)(23) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to maintain clear 

and comprehensive rules and 

procedures that provide for (i) publicly 

disclosing all relevant rules and 

material procedures, including key 

aspects of default rules and procedures; 

(ii) providing sufficient information to 

enable participants to identify and 

evaluate the risks, fees, and other 

material costs incurred by participating 

in a covered clearing agency; and (iii) 

publicly disclosing relevant basic data 

on transaction volume and values. The 

proposed rule would also require a 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to maintain clear 

and comprehensive rules and 

procedures that provide for a 

comprehensive public disclosure of its 

material rules, policies, and procedures 

regarding governance arrangements and 

legal, financial, and operational risk 

management that is accurate in all 

material respects at the time of 

publication and to update this public 

disclosure every two years, or more 

frequently following changes to the 

clearing agency’s system or the 

environment in which it operates to the 

extent necessary to ensure that previous 

statements remain accurate in all 

material respects.429 The purpose of the 

collection of information is to ensure 

that participants, as well as prospective 

participants, are provided with a 

complete picture of the covered clearing 

agency’s operations and risk mitigation 

procedures in order to be able to fully 

and clearly understand the risks and 

responsibilities of participation in a 

clearing agency. 

10. Proposed Rule 17Ab2–2 

Proposed Rule 17Ab2–2 establishes a 

process for making determinations 

regarding whether a clearing agency is 

a covered clearing agency and whether 

a covered clearing agency is either 

involved in activities with a more 

complex risk profile or systemically 

important in multiple jurisdictions.430

Each of these determinations may be 

initiated by a registered clearing agency, 

a member of the clearing agency, or 

upon the Commission’s own 

initiative.431 In each case, under 

proposed Rule 17Ab2–2(d), the 

Commission would publish notice of its 

intention to consider such 

determinations, together with a brief 

statement of the grounds under 

consideration, and provide at least a 30- 

day public comment period prior to any 

determination. Under proposed Rule 

17Ab2–2(e), notice of determinations in 

each case would be given prompt 

publication by the Commission, together 

with a statement of written reasons 

supporting the determination. 

C. Respondents 

The Commission estimates that the 

majority of the proposed requirements 

under proposed Rule 17Ad–22(e) would 

apply to five registered clearing 

agencies. The proposed requirements in 

proposed Rules 17Ad–22(e)(1) through 

(23) would impose a PRA burden on 

covered clearing agencies. A covered 

clearing agency is defined under 

proposed Rule 17Ad–22(a)(7) as any 

designated clearing agency, clearing 

agency involved in activities with a 

more complex risk profile for which the 

CFTC is not the supervisory agency as 

defined in Section 803(8) of the Clearing 

Supervision Act, or a clearing agency 

determined by the Commission to be a 

covered clearing agency pursuant to 

proposed Rule 17Ab2–2.432 A 

designated clearing agency is defined 

under proposed Rule 17Ad–22(a)(8) as a 

registered clearing agency that has been 

designated systemically important by 

the FSOC.433 The FSOC has designated 

six registered clearing agencies as 

systemically important.434 The 

Commission is the supervisory agency 

with respect to four of these designated 

clearing agencies, and the CFTC is the 

supervisory agency for the remaining 

two.435 Accordingly, proposed Rule 

17Ad–22(e) would apply to the four 

designated clearing agencies for which 

the Commission is the supervisory 

agency.436

In addition to the four designated 

clearing agencies for which the 

Commission is the supervisory agency, 

a fifth clearing agency would also be 

subject to the proposed rules as a 

complex risk profile clearing agency 

that provides CCP services for securitybased swaps for which the CFTC is not 

the supervisory agency under the 

Clearing Supervision Act.437

While the proposed rules would be 

applicable to the five registered clearing 

agencies currently captured by the 

definition of covered clearing agency, 

the Commission estimates that two 

additional entities may seek to register 

with the Commission and that one of 

these entities may seek to register in 

order to provide CCP services for 

security-based swaps. Upon registration, 

these two entities may be deemed 

covered clearing agencies and would be 

subject to proposed Rule 17Ad–22(e). 

The number of covered clearing 

agencies subject to proposed Rule 

17Ad–22(e) could increase if the FSOC 

designates additional clearing agencies 

as systemically important.438

Additionally, the Commission could 

determine additional clearing agencies 

to be covered clearing agencies under 

proposed Rule 17Ab2–2,439 subjecting 

them to the provisions of proposed Rule 

17Ad–22(e). While the number of 

clearing agencies subject to proposed 

Rule 17Ad–22(e) could increase, the 

Commission is not able to predict 

whether the FSOC will exercise its 

authority in the future to designate 

additional clearing entities as 

systemically important FMUs or 

whether the Commission will determine 

additional clearing agencies to be 

covered clearing agencies. As a result, 

for the purposes of the PRA analysis, the 

Commission is preliminarily estimating 

that there would be seven respondents 

for a majority of the proposed 

requirements under proposed Rule 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29567 

440 In the case of proposed Rule 17Ad–22(e)(14), 

the Commission preliminarily believes that the 

current practices of covered clearing agencies 

already largely conform to the proposed 

requirement, and accordingly believes that covered 

clearing agencies may need to make only limited 

changes to update their policies and procedures 

pursuant to the proposed rule. See infra note 508 

and accompanying text; see also infra Parts 

IV.B.3.e.ii and IV.C.3.a.ix (discussing the current 

practices at registered clearing agencies regarding 

segregation and portability and the anticipated 

economic effect of the proposed rule, respectively). 

441 In the case of proposed Rule 17Ad–22(e)(22), 

the Commission preliminarily believes that the 

current practices of covered clearing agencies 

already largely conform to the proposed 

requirement, and accordingly believes that covered 

clearing agencies may need to make only limited 

changes to update their policies and procedures 

pursuant to the proposed rule. See supra Part 

II.B.19 (discussing the requirements under the 

proposed rule) and infra Parts IV.B.3.h.ii and 

IV.C.3.a.xv (discussing the current practices at 

registered clearing agencies regarding 

communication procedures and standards and the 

anticipated economic effect of the proposed rule, 

respectively). 442 In this regard, the Commission notes that its 

estimates for the initial one-time and ongoing 

burdens for proposed Rules 17Ad–22(e)(8) through 

(10) and (12) are the same across each of the 

proposed rules because the Commission 

preliminarily believes that the burdens associated 

with each would primarily constitute a review of 

the covered clearing agency’s policies and 

procedures to confirm that those policies and 

procedures satisfy the proposed requirement. 

443 In the case of Rule 17Ad–22(e)(23), registered 

clearing agencies are subject to existing 

requirements for disclosure under existing Rule 

17Ad–22, but new requirements under the 

proposed rule would impose greater burdens 

relative to other proposed rules that have similar 

requirements to those under existing Rule 17Ad–22. 

See supra Part II.B.20 (discussing the requirements 

under proposed Rule 17Ad–22(e)(23) and their 

relationship to requirements under existing Rule 

17Ad–22(d)(9)). 

444See 17 CFR 240.17Ad–22(d)(1); proposed Rule 

17Ad–22(e)(1), infra Part VII; see also supra Part 

II.B.1 (discussing the requirements under the 

proposed rule). 

445See Clearing Agency Standards Release, supra 

note 5, at 66260. 

446This figure was calculated as follows: 

((Assistant General Counsel for 2 hours) + 

(Compliance Attorney for 6 hours)) = 8 hours × 7 

respondent clearing agencies = 56 hours. 

17Ad–22(e). With regard to proposed 

Rule 17Ad–22(e)(6), the number of 

respondents would be six because the 

proposed rule would apply to covered 

clearing agencies that provide CCP 

services. With regard to proposed Rule 

17Ad–22(e)(11), the number of 

respondents would be one because the 

proposed rule would apply to covered 

clearing agencies that provide CSD 

services. With regard to proposed Rule 

17Ad–22(e)(14), the number of 

respondents would be two because the 

proposed rule would apply to covered 

clearing agencies that provide CCP 

services for security-based swaps. 

With regard to proposed Rule 17Ab2– 

2, the Commission preliminarily 

estimates for purposes of the PRA 

analysis that two registered clearing 

agencies or their members on their 

behalf will apply for a Commission 

determination, or may be subject to a 

Commission-initiated determination, 

regarding whether the registered 

clearing agency is a covered clearing 

agency, whether a registered clearing 

agency is involved in activities with a 

more complex risk profile, or whether a 

covered clearing agency is systemically 

important in multiple jurisdictions. 

D. Total Annual Reporting and 

Recordkeeping Burden for Proposed 

Rule 17Ad–22(e) 

The Commission preliminarily 

believes that the potential PRA burden 

imposed by the requirements under 

proposed Rule 17Ad–22(e) will vary 

depending on the requirement in 

question because registered clearing 

agencies are subject to existing 

requirements under Rule 17Ad–22 that, 

in some cases, are similar to those in 

proposed Rule 17Ad–22(e), as discussed 

in Part II. 

First, because proposed Rules 17Ad– 

22(e)(1), (8) through (10), (12), (14),440

(16), and (22) 441 contain requirements 

that are either substantially similar to 

those under existing Rule 17Ad–22 or 

have current practices that the 

Commission understands largely 

conform with the proposed rules, the 

Commission preliminarily believes that 

covered clearing agencies may need to 

make only limited changes to update 

their policies and procedures to satisfy 

these proposed requirements. In these 

cases, as an example, a covered clearing 

agency may need to conduct a review of 

the proposed rule against its existing 

policies and procedures to confirm that 

it satisfies the proposed 

requirements.442

Second, because proposed Rules 

17Ad–22(e)(2), (3), (5), (11), (13), (17), 

(18), (20), and (21) contain provisions 

that are similar to those under existing 

Rule 17Ad–22 but would impose 

additional requirements that do not 

appear in existing Rule 17Ad–22, the 

Commission preliminarily believes that 

covered clearing agencies may need to 

make changes to update their policies 

and procedures to satisfy the proposed 

requirements. In these cases, as an 

example, a covered clearing agency may 

need to review and amend its existing 

rule book, policies, and procedures but 

may not need to develop, design, or 

implement new operations and 

practices to satisfy the proposed 

requirements. 

Third, for proposed Rules 17Ad– 

22(e)(4), (6), (7), (15), (19), and (23), for 

which no similar existing requirements 

under Rule 17Ad–22 have been 

identified,443 the Commission 

preliminarily believes that covered 

clearing agencies may need to make 

more extensive changes to their policies 

and procedures (or implement new 

policies and procedures), and may need 

to take other steps to satisfy the 

proposed requirements. In these cases, 

the PRA burden would be greater since 

a covered clearing agency may need to, 

as an example, develop, design, and 

implement new operations and 

practices. With respect to these 

provisions, the PRA burden may be 

greater since these proposed 

requirements may not reflect established 

practices of covered clearing agencies or 

reflect the normal course of their 

activities, and the PRA burden for these 

proposed rules may therefore entail 

initial one-time burdens to create new 

written policies and procedures and 

ongoing burdens, including burdens 

associated with disclosure 

requirements. 

The Commission requests comment 

regarding the accuracy of the estimates 

discussed below. 

1. Proposed Rules 17Ad–22(e)(1) 

Through (3): General Organization 

a. Proposed Rule 17Ad–22(e)(1) 

Proposed Rule 17Ad–22(e)(1) contains 

substantially the same requirements as 

Rule 17Ad–22(d)(1).444 As a result, a 

respondent clearing agency would 

already have written rules, policies, and 

procedures substantially similar to the 

requirements that would be imposed 

under the proposed rule. The PRA 

burden imposed by the proposed rules 

would therefore be minimal and would 

likely be limited to the review of current 

policies and procedures and updating 

existing policies and procedures where 

appropriate in order to ensure 

compliance with the proposed rule. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(1),445 the Commission 

preliminarily believes that respondent 

clearing agencies would incur an 

aggregate one-time burden of 

approximately 56 hours to review and 

update existing policies and 

procedures.446

Proposed Rule 17Ad–22(e)(1) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed rule would require ongoing 

monitoring and compliance activities 

with respect to the written policies and 

procedures created in response to the 


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447Where the Commission refers to anticipated 

burdens related to ‘‘enforcement activities,’’ the 

Commission notes that such policies and 

procedures contemplate enforcement by the 

respondent clearing agency itself. See Clearing 

Agency Standards Release, supra note 5, at 66246 

(stating that ‘‘the clearing agency must be able to 

enforce its policies and procedures that 

contemplate enforcement by the clearing agency’’). 

448See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

449This figure was calculated as follows: 

(Compliance Attorney for 3 hours) × 7 respondent 

clearing agencies = 21 hours. 

450See 17 CFR 240.17Ad–22(d)(8); proposed Rule 

17Ad–22(e)(2), infra Part VII; see also supra Part 

II.B.2 (discussing the requirements under the 

proposed rule). 

451See Clearing Agency Standards Release, supra 

note 5, at 66260. 

452This figure was calculated as follows: 

((Assistant General Counsel for 24 hours) + 

(Compliance Attorney for 10 hours)) = 22 hours × 

7 respondent clearing agencies = 154 hours. 

453See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 454This figure was calculated as follows: 

(Compliance Attorney for 4 hours) × 7 respondent 

clearing agencies = 28 hours. 

455See proposed Rule 17Ad–22(e)(3), infra Part 

VII. 

456See 17 CFR 240.17Ad–22(d); see also Part 

II.B.3 (discussing the requirements under the 

proposed rule and their relationship to existing 

requirements under Rule 17Ad–22). 

457This figure was calculated as follows: 

((Assistant General Counsel for 25 hours) + 

(Compliance Attorney for 18 hours) + (Senior Risk 

Management Specialist for 7 hours) + (Computer 

Operations Manager for 7 hours)) = 57 hours × 7 

respondent clearing agencies = 399 hours. 

458See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

459This figure was calculated as follows: 

((Compliance Attorney for 8 hours) + 

(Administrative Assistant for 3 hours) + (Senior 

Business Analyst for 5 hours) + (Risk Management 

Specialist for 33 hours)) = 49 hours × 7 respondent 

clearing agencies = 343 hours. 

460See proposed Rule 17Ad–22(e)(4), infra Part 

VII; see also supra Part II.B.4.c (discussing the 

requirements under the proposed rule). 

461This figure was calculated as follows: 

((Assistant General Counsel for 60 hours) + 

(Compliance Attorney for 40 hours) + (Senior Risk 

Management Specialist for 30 hours) + (Computer 

Operations Manager for 45 hours) + (Chief 

Compliance Officer for 15 hours) + (Senior 

Programmer for 10 hours)) = 200 hours × 7 

respondent clearing agencies = 1,400 hours. 

proposed rule.447 Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,448 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(1) would impose an 

aggregate annual burden on respondent 

clearing agencies of 21 hours.449

b. Proposed Rule 17Ad–22(e)(2) 

Proposed Rule 17Ad–22(e)(2) contains 

some provisions that are similar to Rule 

17Ad–22(d)(8), but also adds additional 

requirements that do not appear in 

existing Rule 17Ad–22.450 As a result, a 

respondent clearing agency is required 

to have some written rules, policies, and 

procedures substantially similar to the 

requirements that would be imposed 

under proposed Rule 17Ad–22(e)(2) and 

would need to establish and implement 

a limited number of new policies and 

procedures. The PRA burden imposed 

by the proposed rule would therefore be 

associated with reviewing current 

policies and procedures and updating 

those policies and procedures or 

establishing new policies and 

procedures, where appropriate, in order 

to ensure compliance with the proposed 

rule. Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(8),451 the Commission 

preliminarily believes that respondent 

clearing agencies would incur an 

aggregate one-time burden of 

approximately 154 hours to review and 

update existing policies and procedures 

and to create new policies and 

procedures, as necessary.452

Proposed Rule 17Ad–22(e)(2) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed requirement would require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the proposed rule. Based on 

the Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,453 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(2) would impose an 

aggregate annual burden on respondent 

clearing agencies of 28 hours.454

c. Proposed Rule 17Ad–22(e)(3) 

Proposed Rule 17Ad–22(e)(3) would 

require a covered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for a 

sound risk management framework.455

Under Rule 17Ad–22(d), registered 

clearing agencies are required to have 

policies and procedures to manage 

certain risks faced by these entities,456

but the proposed rule would require a 

comprehensive framework for risk 

management that would require risk 

management policies and procedures be 

designed holistically, be consistent with 

each other, and work effectively 

together. Accordingly, the proposed rule 

may impose a PRA burden that would 

require respondent clearing agencies to 

update current policies and procedures 

in order to develop a more 

comprehensive framework that would 

include a periodic review thereof and a 

plan for orderly recovery and winddown of the covered clearing agency. As 

a result, the Commission preliminarily 

estimates that respondent clearing 

agencies would incur an aggregate onetime burden of 399 hours to review and 

update existing policies and procedures 

and to create new policies and 

procedures, as necessary.457

Proposed Rule 17Ad–22(e)(3) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed requirement would require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the proposed rule and 

activities related to preparing 

documents facilitating a periodic review 

of the risk management framework. 

Based on the Commission’s previous 

estimates for ongoing monitoring and 

compliance burdens with respect to 

existing Rule 17Ad–22,458 the 

Commission preliminarily estimates 

that the ongoing activities required by 

proposed Rule 17Ad–22(e)(3) would 

impose an aggregate annual burden on 

respondent clearing agencies of 343 

hours.459 The Commission notes that 

the estimated ongoing burden for 

Proposed Rule 17Ad–22(e)(3) is similar 

to the initial one-time burden because 

the proposed rule includes a specific 

requirement that policies and 

procedures for comprehensive risk 

management include review on a 

specified periodic basis and approval by 

the board of directors annually. 

2. Proposed Rules 17Ad–22(e)(4) 

Through (7): Financial Risk 

Management 

a. Proposed Rule 17Ad–22(e)(4) 

The Commission preliminarily 

believes that the estimated PRA burdens 

for proposed Rule 17Ad–22(e)(4) would 

be more significant, as changes to 

existing policies and procedures would 

involve more than adjustments and may 

require a respondent clearing agency to 

make substantial changes to its policies 

and procedures.460 In addition, 

proposed Rule 17Ad–22(e)(4) would 

require one-time systems adjustments 

related to the capability to test the 

sufficiency of financial resources and to 

perform an annual conforming model 

validation. As a result, the Commission 

preliminarily estimates that respondent 

clearing agencies would incur an 

aggregate one-time burden of 1,400 

hours.461

Proposed Rule 17Ad–22(e)(4) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed rule would require ongoing 

monitoring and compliance activities 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29569 

462See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

463This figure was calculated as follows: 

((Compliance Attorney for 24 hours) + 

(Administrative Assistant for 3 hours) + (Senior 

Business Analyst for 3 hours) + (Risk Management 

Specialist for 30 hours)) = 60 hours × 7 respondent 

clearing agencies = 420 hours. 

464See 17 CFR 240.17Ad–22(d)(3); proposed Rule 

17Ad–22(e)(5), infra Part VII; see also supra Part 

II.B.4.d (discussing the requirements under the 

proposed rule). 

465See Clearing Agency Standards Release, supra 

note 5, at 66260. 

466This figure was calculated as follows: 

((Assistant General Counsel for 16 hours) + 

(Compliance Attorney for 12 hours) + (Senior Risk 

Management Specialist for 7 hours) + (Computer 

Operations Manager for 7 hours)) = 42 hours × 7 

respondent clearing agencies = 294 hours. 

467See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

468This figure was calculated as follows: 

((Compliance Attorney for 6 hours) + (Risk 

Management Specialist for 30 hours)) = 36 hours × 

7 respondent clearing agencies = 252 hours. 

469See proposed Rule 17Ad–22(e)(6), infra Part 

VII; see also supra Part II.B.4.e (discussing the 

requirements under the proposed rule, including 

those that do not appear in existing Rule 17Ad–22). 

470This figure was calculated as follows: 

((Assistant General Counsel for 50 hours) + 

(Compliance Attorney for 40 hours) + (Senior Risk 

Management Specialist for 25 hours) + (Computer 

Operations Manager for 40 hours) + (Chief 

Compliance Officer for 15 hours) + (Senior 

Programmer for 10 hours)) = 180 hours × 6 

respondent clearing agencies = 1,080 hours. 

471See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

472This figure was calculated as follows: 

((Compliance Attorney for 24 hours) + 

(Administrative Assistant for 3 hours) + (Senior 

Business Analyst for 3 hours) + (Risk Management 

Specialist for 30 hours)) = 60 hours × 6 respondent 

clearing agencies = 360 hours. 

473See proposed Rule 17Ad–22(e)(7), infra Part 

VII; see also supra Part II.B.4.f (discussing the 

requirements under the proposed rule). 

474This figure was calculated as follows: 

((Assistant General Counsel for 95 hours) + 

(Compliance Attorney for 85 hours) + (Senior Risk 

Management Specialist for 45 hours) + (Computer 

Operations Manager for 60 hours) + (Chief 

Compliance Officer for 30 hours) + (Senior 

Programmer for 15 hours)) = 330 hours × 7 

respondent clearing agencies = 2,310 hours. 

475See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

with respect to the written policies and 

procedures created in response to the 

proposed rule and ongoing activities 

with respect to testing the sufficiency of 

financial resources and model 

validation. Based on the Commission’s 

previous estimates for ongoing 

monitoring and compliance burdens 

with respect to existing Rule 17Ad– 

22,462 the Commission preliminarily 

estimates that the ongoing activities 

required by proposed Rule 17Ad– 

22(e)(4) would impose an aggregate 

annual burden on respondent clearing 

agencies of 420 hours.463

b. Proposed Rule 17Ad–22(e)(5) 

Respondent clearing agencies that 

would be subject to proposed Rule 

17Ad–22(e)(5) may already have some 

written policies and procedures 

designed to address the collateral risks 

borne by these entities.464 As a result, 

the Commission preliminarily believes 

that a respondent clearing agency may 

need to review and update existing 

policies and procedures as necessary 

and may need to adopt new policies and 

procedures with respect to an annual 

review of the sufficiency of collateral 

haircuts and concentration limits. 

Accordingly, based on the similar 

policies and procedures requirements in 

and the Commission’s previous 

corresponding burden estimates for 

existing Rule 17Ad–22(d)(3),465 the 

Commission preliminarily believes that 

respondent clearing agencies would 

incur an aggregate one-time burden of 

approximately 294 hours to review and 

update existing policies and procedures 

and to create new policies and 

procedures, as necessary.466

Proposed Rule 17Ad–22(e)(5) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed requirement would require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the proposed rule and 

would also result in an annual review 

of collateral haircuts and concentration 

limits. Based on the Commission’s 

previous estimates for ongoing 

monitoring and compliance burdens 

with respect to existing Rule 17Ad– 

22,467 the Commission preliminarily 

estimates that the ongoing activities 

required by proposed Rule 17Ad– 

22(e)(5) would impose an aggregate 

annual burden on respondent clearing 

agencies of 252 hours.468 The 

Commission notes that the estimated 

ongoing burden for Proposed Rule 

17Ad–22(e)(5) is similar to the initial 

one-time burden because the proposed 

rule includes a specific requirement that 

policies and procedures for collateral 

include a not-less-than-annual review of 

the sufficiency of a covered clearing 

agency’s collateral haircuts and 

concentration limits. 

c. Proposed Rule 17Ad–22(e)(6) 

The Commission preliminarily 

believes that the estimated PRA burdens 

for proposed Rule 17Ad–22(e)(6) would 

be more significant and may require a 

respondent clearing agency to make 

substantial changes to its policies and 

procedures.469 In addition, proposed 

Rule 17Ad–22(e)(6) would require onetime systems adjustments related to the 

capability to perform daily backtesting 

and monthly (or more frequent than 

monthly) conforming sensitivity 

analyses. As a result, the Commission 

preliminarily estimates that respondent 

clearing agencies would incur an 

aggregate one-time burden of 1,080 

hours to review and update existing 

policies and procedures.470

Proposed Rule 17Ad–22(e)(6) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed requirement would require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the proposed rule and 

activities associated with the daily 

backtesting and monthly (or more 

frequent) sensitivity analysis 

requirements and annual model 

validation. Based on the Commission’s 

previous estimates for ongoing 

monitoring and compliance burdens 

with respect to existing Rule 17Ad– 

22,471 the Commission preliminarily 

estimates that the ongoing activities 

required by proposed Rule 17Ad– 

22(e)(6) would impose an aggregate 

annual burden on respondent clearing 

agencies of 360 hours.472

d. Proposed Rule 17Ad–22(e)(7) 

The Commission preliminarily 

believes that the estimated PRA burdens 

for proposed Rule 17Ad–22(e)(7) would 

be more significant and may require a 

respondent clearing agency to make 

substantial changes to its policies and 

procedures.473 In addition, proposed 

Rule 17Ad–22(e)(7) would require onetime systems adjustments related to the 

capability to perform an annual 

conforming model validation, the 

testing of sufficiency of liquid resources 

and the testing of access to liquidity 

providers. As a result, the Commission 

preliminarily estimates that respondent 

clearing agencies would incur an 

aggregate one-time burden of 2,310 

hours to review and update existing 

policies and procedures.474

Proposed Rule 17Ad–22(e)(7) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed requirement would require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the proposed rule as well as 

activities related to the testing of 

sufficiency of liquidity resources and 

the testing of access to liquidity 

providers. Based on the Commission’s 

previous estimates for ongoing 

monitoring and compliance burdens 

with respect to existing Rule 17Ad– 

22,475 the Commission preliminarily 

estimates that the ongoing activities 

required by proposed Rule 17Ad– 


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29570 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

476This figure was calculated as follows: 

((Compliance Attorney for 48 hours) + 

(Administrative Assistant for 5 hours) + (Senior 

Business Analyst for 5 hours) + (Risk Management 

Specialist for 60 hours) + (Senior Risk Management 

Specialist for 10 hours)) = 128 hours × 7 respondent 

clearing agencies = 896 hours. 

477See 17 CFR 240.17Ad–22(d)(12); proposed 

Rule 17Ad–22(e)(8), infra Part VII; see also supra 

Part II.B.5 (discussing the requirements under the 

proposed rule). 

478See Clearing Agency Standards Release, supra 

note 5, at 66260. 

479This figure was calculated as follows: 

((Assistant General Counsel for 2 hours) + 

(Compliance Attorney for 6 hours) + (Senior 

Business Analyst for 2 hours) + (Computer 

Operations Manager for 2 hours)) = 12 hours × 7 

respondent clearing agencies = 84 hours. 

480See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

481This figure was calculated as follows: 

(Compliance Attorney for 5 hours) × 7 respondent 

clearing agencies = 35 hours. 

482See 17 CFR 240.17Ad–22(d)(5); proposed Rule 

17Ad–22(e)(9), infra Part VII; see also supra Part 

II.B.6 (discussing the requirements under the 

proposed rule). 

483See Clearing Agency Standards Release, supra 

note 5, at 66260. 

484This figure was calculated as follows: 

((Assistant General Counsel for 2 hours) + 

(Compliance Attorney for 6 hours) + (Senior 

Business Analyst for 2 hours) + (Computer 

Operations Manager for 2 hours)) = 12 hours × 7 

respondent clearing agencies = 84 hours. 

485See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

486This figure was calculated as follows: 

(Compliance Attorney for 5 hours) × 7 respondent 

clearing agencies = 35 hours. 

487See 17 CFR 240.17Ad–22(d)(15); proposed 

Rule 17Ad–22(e)(10), infra Part VII; see also supra 

Part II.B.7 (discussing the requirements under the 

proposed rule). 488See Clearing Agency Standards Release, supra 

note 5, at 66260. 489This figure was calculated as follows: 

((Assistant General Counsel for 2 hours) + 

(Compliance Attorney for 6 hours) + (Senior 

Business Analyst for 2 hours) + (Computer 

Operations Manager for 2 hours)) = 12 hours × 7 

respondent clearing agencies = 84 hours. 

490See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

491This figure was calculated as follows: 

(Compliance Attorney for 5 hours) × 7 respondent 

clearing agencies = 35 hours. 

492See 17 CFR 240.17Ad–22(d)(10); proposed 

Rule 17Ad–22(e)(11), infra Part VII. 

22(e)(7) would impose an aggregate 

annual burden on respondent clearing 

agencies of 896 hours.476

3. Proposed Rules 17Ad–22(e)(8) 

Through (10): Settlement 

a. Proposed Rule 17Ad–22(e)(8) 

Proposed Rule 17Ad–22(e)(8) contains 

substantially similar provisions to Rule 

17Ad–22(d)(12).477 As a result, a 

respondent clearing agency would 

already have written rules, policies, and 

procedures substantially similar to the 

requirements that would be imposed 

under the proposed rule. In this regard, 

the Commission preliminarily believes 

that respondent clearing agencies would 

incur the incremental burdens of 

reviewing and updating existing 

policies and procedures as necessary. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(12),478 the 

Commission preliminarily believes that 

respondent clearing agencies would 

incur an aggregate one-time burden of 

approximately 84 hours to review and 

update existing policies and 

procedures.479

Proposed Rule 17Ad–22(e)(8) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed requirements would require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the proposed rules. Based 

on the Commission’s previous estimates 

for ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,480 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(8) would impose an 

aggregate annual burden on respondent 

clearing agencies of approximately 35 

hours.481

b. Proposed Rule 17Ad–22(e)(9) 

Proposed Rule 17Ad–22(e)(9) contains 

substantially similar provisions to Rule 

17Ad–22(d)(5).482 As a result, a 

respondent clearing agency would 

already have written rules, policies, and 

procedures substantially similar to the 

requirements that would be imposed 

under the proposed rule. In this regard, 

the Commission preliminarily believes 

that respondent clearing agencies would 

incur the incremental burdens of 

reviewing and updating existing 

policies and procedures as necessary. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(5),483 the Commission 

preliminarily believes that respondent 

clearing agencies would incur an 

aggregate one-time burden of 

approximately 84 hours to review and 

update existing policies and 

procedures.484

Proposed Rule 17Ad–22(e)(9) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed requirement would require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the proposed rule. Based on 

the Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,485 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(9) would impose an 

aggregate annual burden on respondent 

clearing agencies of approximately 35 

hours.486

c. Proposed Rule 17Ad–22(e)(10) 

Proposed Rule 17Ad–22(e)(10) 

contains substantially similar provisions 

to Rule 17Ad–22(d)(15).487 As a result, 

a respondent clearing agency would 

already have written rules, policies, and 

procedures substantially similar to the 

requirements that would be imposed 

under the proposed rule. In this regard, 

the Commission preliminarily believes 

that a respondent clearing agency would 

incur the incremental burdens of 

reviewing and updating existing 

policies and procedures as necessary. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(15),488 the 

Commission preliminarily believes that 

respondent clearing agencies would 

incur an aggregate one-time burden of 

approximately 84 hours to review and 

update existing policies and 

procedures.489

Proposed Rule 17Ad–22(e)(10) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed requirement would require 

ongoing monitoring and compliance 

activities with respect to the written 

policies and procedures created in 

response to the proposed rule. Based on 

the Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,490 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(10) would impose an 

aggregate annual burden on respondent 

clearing agencies of approximately 35 

hours.491

4. Proposed Rules 17Ad–22(e)(11) 

Through (12): CSDs and Exchange-ofValue Settlement Systems 

a. Proposed Rule 17Ad–22(e)(11) 

Proposed Rule 17Ad–22(e)(11) 

contains similar provisions to Rule 

17Ad–22(d)(10).492 As a result, a 

respondent clearing agency providing 

CSD services would already have 

written rules, policies, and procedures 

similar to the requirements that would 


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493See supra Part II.B.8 (discussing the 

requirements under the proposed rule and their 

relationship to existing requirements under Rule 

17Ad–22(d)(10)). 494See Clearing Agency Standards Release, supra 

note 5, at 66260. 495This figure was calculated as follows: 

((Assistant General Counsel for 20 hours) + 

(Compliance Attorney for 10 hours) + (Intermediate 

Accountant for 15 hours) + (Senior Business 

Analyst for 5 hours) + (Computer Operations 

Manager for 5 hours)) = 55 hours × 1 respondent 

clearing agency = 55 hours. 

496See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

497This figure was calculated as follows: 

(Compliance Attorney for 8 hours) × 1 respondent 

clearing agency = 8 hours. 

498See 17 CFR 240.17Ad–22(d)(13); proposed 

Rule 17Ad–22(e)(12), infra Part VII; see also supra 

Part II.B.9 (discussing the requirements under the 

proposed rule). 

499See Clearing Agency Standards Release, supra 

note 5, at 66260. 

500This figure was calculated as follows: 

((Assistant General Counsel for 2 hours) + 

(Compliance Attorney for 6 hours) + (Senior 

Business Analyst for 2 hours) + (Computer 

Operations Manager for 2 hours)) = 12 hours × 7 

respondent clearing agencies = 84 hours. 

501See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

502This figure was calculated as follows: 

(Compliance Attorney for 5 hours) × 7 respondent 

clearing agencies = 35 hours. 

503See 17 CFR 240.17Ad–22(d)(11); proposed 

Rule 17Ad–22(e)(13), infra Part VII; see also supra 

Part II.B.10 (discussing the requirements under the 

proposed rule and their relationship to existing 

Rule 17Ad–22(d)(11). 

504See Clearing Agency Standards Release, supra 

note 5, at 66260. 

505This figure was calculated as follows: 

((Assistant General Counsel for 20 hours) + 

(Compliance Attorney for 16 hours) + (Senior 

Business Analyst for 12 hours) + (Computer 

Operations Manager for 12 hours)) = 60 hours × 7 

respondent clearing agencies = 420 hours. 

506See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

507This figure was calculated as follows: 

(Compliance Attorney for 9 hours) × 7 respondent 

clearing agencies = 63 hours. 

508See, e.g., 77 FR 6336 (Feb. 7, 2012) (CFTC 

adopting rules imposing LSOC on DCOs for cleared 

swaps); see also supra Part II.B.11, in particular 

note 297 and accompanying text. Because the 

affected clearing agencies are subject to the CFTC’s 

segregation and portability requirements with 

respect to cleared swaps under LSOC, the 

Commission preliminarily believes the burden 

imposed by proposed Rule 17Ad–22(e)(14) would 

be limited. 

be imposed under the proposed rule but 

also imposes additional requirements 

that do not appear in existing Rule 

17Ad–22,493 and accordingly a covered 

clearing agency providing CSD services 

may need to update or amend existing 

policies and procedures, as necessary, to 

satisfy the proposed requirements and 

may need to create new policies and 

procedures. Based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(10),494 the 

Commission preliminarily believes that 

the respondent clearing agency would 

incur a one-time burden of 

approximately 55 hours to review and 

update existing policies and procedures 

and to create new policies and 

procedures, as necessary.495

Proposed Rule 17Ad–22(e)(11) would 

also impose ongoing burdens on the 

respondent clearing agency providing 

CSD services. The proposed 

requirement would require ongoing 

monitoring and compliance activities 

with respect to the written policies and 

procedures created in response to the 

proposed rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,496 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rules 

17Ad–22(e)(11) would impose a total 

annual burden on the respondent 

clearing agency of approximately 8 

hours.497

b. Proposed Rule 17Ad–22(e)(12) 

Proposed Rule 17Ad–22(e)(12) 

contains substantially similar provisions 

to Rule 17Ad–22(d)(13).498 As a result, 

a respondent clearing agency would 

already have written rules, policies, and 

procedures substantially similar to the 

requirements that would be imposed 

under the proposed rule. In this regard, 

the Commission preliminarily believes 

that a respondent clearing agency would 

incur the incremental burdens of 

reviewing and updating existing 

policies and procedures as necessary. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(13),499 the 

Commission preliminarily believes that 

respondent clearing agencies would 

incur an aggregate one-time burden of 

approximately 84 hours to review and 

update existing policies and 

procedures.500

Proposed Rule 17Ad–22(e)(12) would 

also impose ongoing burdens on a 

covered clearing agency. The proposed 

requirement would require ongoing 

monitoring and compliance activities 

with respect to the written policies and 

procedures created in response to the 

proposed rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,501 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(12) would impose an 

aggregate annual burden on respondent 

clearing agencies of approximately 35 

hours.502

5. Proposed Rules 17Ad–22(e)(13) 

Through (14): Default Management 

a. Proposed Rule 17Ad–22(e)(13) 

Proposed Rule 17Ad–22(e)(13) would 

require a respondent clearing agency to 

have written policies and procedures 

reasonably designed to address 

participant default and ensure that the 

clearing agency can contain losses and 

liquidity demands and continue to meet 

its obligations. Proposed Rule 17Ad– 

22(e)(13) contains similar provisions to 

Rule 17Ad–22(d)(11) but would also 

impose additional requirements that do 

not appear in existing Rule 17Ad–22.503

As a result, the Commission 

preliminarily believes that a respondent 

clearing agency would incur burdens of 

reviewing and updating existing 

policies and procedures in order to 

comply with the provisions of proposed 

Rule 17Ad–22(e)(13) and, in some cases, 

may need to create new policies and 

procedures. Accordingly, based on the 

similar policies and procedures 

requirements and the corresponding 

burden estimates previously made by 

the Commission for Rule 17Ad– 

22(d)(11),504 the Commission 

preliminarily believes that respondent 

clearing agencies would incur an 

aggregate one-time burden of 

approximately 420 hours to review and 

update existing policies and procedures 

and to create new policies and 

procedures, as necessary.505

Proposed Rule 17Ad–22(e)(13) would 

also impose ongoing burdens on a 

respondent clearing agency. 

Specifically, the proposed rule would 

require annual review and testing of a 

clearing agency’s default policies and 

procedures. Based on the Commission’s 

previous estimates for ongoing 

monitoring and compliance burdens 

with respect to existing Rule 17Ad– 

22,506 the Commission preliminarily 

believes that the ongoing activities 

required by proposed Rule 17Ad– 

22(e)(13) would impose an aggregate 

annual burden on respondent clearing 

agencies of approximately 63 hours.507

b. Proposed Rule 17Ad–22(e)(14) 

Registered clearing agencies that 

provide CCP services for security-based 

swaps generally have written policies 

and procedures regarding the 

segregation and portability of customer 

positions and collateral as a result of 

applicable regulations but not existing 

Rule 17Ad–22.508 As a result, 

respondent clearing agencies providing 

CCP services for security-based swaps 

would incur burdens of reviewing and 

updating existing policies and 


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509This figure was calculated as follows: 

((Assistant General Counsel for 12 hours) + 

(Compliance Attorney for 10 hours) + (Computer 

Operations Manager for 7 hours) + (Senior Business 

Analyst for 7 hours)) = 36 hours × 2 respondent 

clearing agency that provide, or would potentially 

provide, CCP services with respect to security-based 

swaps = 72 hours. 

510See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

511This figure was calculated as follows: 

(Compliance Attorney for 6 hours) × 2 respondent 

clearing agencies = 12 hours. 

512See proposed Rule 17Ad–22(e)(15), infra Part 

VII; see also supra Part II.B.12 (discussing the 

requirements under the proposed rule). 

513This figure was calculated as follows: 

((Assistant General Counsel for 40 hours) + 

(Compliance Attorney for 30 hours) + (Computer 

Operations Manager for 10 hours) + (Senior 

Business Analyst for 10 hours) + (Financial Analyst 

for 70 hours) + (Chief Financial Officer for 50 

hours)) = 210 hours × 7 respondent clearing 

agencies = 1,470 hours. 

514See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

515This figure was calculated as follows: 

((Compliance Attorney for 42 hours) + 

(Administrative Assistant for 3 hours) + (Senior 

Business Analyst for 3 hours)) = 48 hours × 7 

respondents clearing agencies = 336 hours. 

516See 17 CFR 240.17Ad–22(d)(3); proposed Rule 

17Ad–22(e)(16), infra Part VII; see also supra Part 

II.B.13 (discussing the requirements under the 

proposed rule). 

517See Clearing Agency Standards Release, supra 

note 5, at 66260. 

518This figure was calculated as follows: 

((Assistant General Counsel for 4 hours) + 

(Compliance Attorney for 8 hours) + (Senior 

Business Analyst for 4 hours) + (Computer 

Operations Manager for 4 hours)) = 20 hours × 7 

respondent clearing agencies = 140 hours. 

519See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

520This figure was calculated as follows: 

(Compliance Attorney for 6 hours) × 7 respondent 

clearing agencies = 42 hours. 

521See 17 CFR 240.17Ad–22(d)(4); proposed Rule 

17Ad–22(e)(17), infra Part VII; see also supra Part 

II.B.14 (discussing the requirements under the 

proposed rule). 

522See Clearing Agency Standards Release, supra 

note 5, at 66260. 

523This figure was calculated as follows: 

((Assistant General Counsel for 4 hours) + 

(Compliance Attorney for 8 hours) + (Computer 

Operations Manager for 6 hours) + (Senior Business 

Analyst for 4 hours) + (Chief Compliance Officer for 

procedures as necessary in order to 

comply with the proposed rule. The 

Commission preliminarily estimates 

that Rule 17Ad–22(e)(14) would impose 

on respondent clearing agencies an 

aggregate one-time burden of 72 hours 

to review and update existing policies 

and procedures.509

Proposed Rule 17Ad–22(e)(14) would 

also impose ongoing burdens on a 

respondent clearing agency that 

provides CCP services for security-based 

swaps. Based on the Commission’s 

previous estimates for ongoing 

monitoring and compliance burdens 

with respect to existing Rule 17Ad– 

22,510 the Commission preliminarily 

believes that the ongoing activities 

required by proposed Rule 17Ad– 

22(e)(14) would impose an aggregate 

annual burden on respondent clearing 

agencies of approximately 12 hours.511

6. Proposed Rules 17Ad–22(e)(15) 

Through (17): General Business and 

Operational Risk Management 

a. Proposed Rule 17Ad–22(e)(15) 

Respondent clearing agencies would 

be required to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

identify and manage general business 

risks borne by the clearing agency. 

Policies and procedures governing the 

identification and mitigation of general 

business risk are not currently required 

under existing Rule 17Ad–22 and, as a 

result, the Commission preliminarily 

believes that the estimated PRA burdens 

for proposed Rule 17Ad–22(e)(15) 

would be more significant and may 

require a respondent clearing agency to 

make substantial changes to its policies 

and procedures.512 The Commission 

preliminarily estimates that proposed 

Rule 17Ad–22(e)(15) would impose an 

aggregate one-time burden on 

respondent covered clearing agencies of 

1,470 hours to review and update 

existing policies and procedures and to 

create new policies and procedures, as 

necessary.513

Proposed Rule 17Ad–22(e)(15) would 

also imposed ongoing burdens on a 

respondent clearing agency. Proposed 

Rule 17Ad–22(e)(15) would require a 

respondent clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to maintain a 

viable plan, approved by its board of 

directors and updated at least annually, 

for raising additional equity in the event 

that the covered clearing agency’s liquid 

net assets fall below the level required 

by the proposed rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,514 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(15) would impose an 

aggregate annual burden on respondent 

clearing agencies of 336 hours.515

b. Proposed Rule 17Ad–22(e)(16) 

A registered clearing agency is 

currently required to have written 

policies and procedures reasonably 

designed to address, in large part, the 

safeguarding of assets of its assets and 

those of its participants under Rule 

17Ad–22(d)(3).516 Proposed Rule 17Ad– 

22(e)(16) contains substantially similar 

provisions. As a result, the Commission 

preliminarily believes that a respondent 

clearing agency would be required to 

conduct a review of current policies and 

procedures and update these existing 

policies and procedures where 

appropriate in order to ensure 

compliance with the proposed rule and 

that the PRA burden imposed by the 

proposed rule would be limited. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(3),517 the Commission 

preliminarily estimates that all 

respondent clearing agencies would 

incur an aggregate one-time burden of 

approximately 140 hours to review and 

update existing policies and 

procedures.518

Proposed Rule 17Ad–22(e)(16) would 

also impose ongoing burdens on a 

respondent clearing agency. It would 

require ongoing monitoring and 

compliance activities with respect to the 

policies and procedures implemented in 

response to the requirements of the 

proposed rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,519 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(16) would impose an 

aggregate annual burden on respondent 

clearing agencies of 42 hours.520

c. Proposed Rule 17Ad–22(e)(17) 

Proposed Rule 17Ad–22(e)(17) 

contains similar requirements to those 

under Rule 17Ad–22(d)(4) but would 

also impose additional requirements 

that do not appear in existing Rule 

17Ad–22.521 As a result, a respondent 

clearing agency is currently required to 

have some written rules, policies and 

procedures containing provisions 

similar to the requirements that would 

be imposed under the proposed rule, 

but it would also need to review and 

update existing policies and procedures, 

where necessary, and may need to 

create policies and procedures to 

address the additional requirements. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(4),522 the Commission 

preliminarily estimates that respondent 

clearing agencies would incur an 

aggregate one-time burden of 196 hours 

to review and update existing policies 

and procedures and to create new 

policies and procedures, as 

necessary.523


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4 hours) + (Senior Programmer for 2 hours)) = 28 

hours × 7 respondent clearing agency = 196 hours. 

524See Clearing Agency Standards Release, supra 

note 5, at 66260–63. 

525This figure was calculated as follows: 

(Compliance Attorney for 6 hours) × 7 respondent 

clearing agencies = 42 hours. 

526See 17 CFR 240.17Ad–22(b)(5) through (7) and 

(d)(2). 

527See proposed Rule 17Ad–22(e)(18), infra Part 

VII; see also supra Part II.B.15 (discussing the 

requirements under the proposed rule). 

528See Clearing Agency Standards Release, supra 

note 5, at 66260. 

529This figure was calculated as follows: 

((Assistant General Counsel for 10 hours) + 

(Compliance Attorney for 7 hours) + Computer 

Operations Manager for 15 hours) + (Senior 

Business Analyst for 5 hours) + (Chief Compliance 

Officer for 5 hours) + (Senior Programmer for 2 

hours)) = 44 hours × 7 respondent clearing agencies 

= 308 hours. 

530See Clearing Agency Standards Release, supra 

note 5, at 66260. 

531This figure was calculated as follows: 

(Compliance Attorney for 7 hours) × 7 respondent 

clearing agencies = 49 hours. 

532This figure was calculated as follows: 

((Assistant General Counsel for 10 hours) + 

(Compliance Attorney for 7 hours) + (Computer 

Operations Manager for 15 hours) + (Senior 

Business Analyst for 5 hours) + (Chief Compliance 

Officer for 5 hours) + (Senior Programmer for 2 

hours)) = 44 hours × 7 respondent clearing agencies 

= 308 hours. 

533See Clearing Agency Standards Release, supra 

note 5, at 66260. 

534This figure was calculated as follows: 

(Compliance Attorney for 7 hours) × 7 respondent 

clearing agencies = 49 hours. 

535See 17 CFR 240.17Ad–22(d)(7); proposed Rule 

17Ad–22(e)(20), infra Part VII; see also supra Part 

II.B.17 (discussing the requirements under the 

proposed rule). 

536See Clearing Agency Standards Release, supra 

note 5, at 66260. 

537This figure was calculated as follows: 

((Assistant General Counsel for 10 hours) + 

(Compliance Attorney for 7 hours) + (Senior 

Business Analyst for 5 hours) + (Computer 

Operations Manager for 15 hours) + (Chief 

Compliance Officer for 5 hours) + (Senior 

Programmer for 2 hours) = 44 hours × 7 respondent 

clearing agencies = 308 hours. 

Proposed Rule 17Ad–22(e)(17) would 

also impose ongoing burdens on a 

respondent clearing agency. 

Specifically, the proposed rule would 

require ongoing monitoring and 

compliance activities with respect to the 

written policies and procedures created 

in response to the rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,524 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(17) would impose an 

aggregate annual burden on respondent 

clearing agencies of 112 hours.525

7. Proposed Rules 17Ad–22(e)(18) 

Through (20): Access 

a. Proposed Rule 17Ad–22(e)(18) 

Proposed Rule 17Ad–22(e)(18) 

contains similar requirements to those 

in existing Rules 17Ad–22(b)(5) through 

(7) and (d)(2).526 As a result, a 

respondent clearing agency is currently 

required to have written rules, policies, 

and procedures containing provisions 

similar to the requirements that would 

be imposed under the proposed rule. 

Thus, for certain portions of proposed 

Rule 17Ad–22(e)(18), the Commission 

preliminarily believes that a respondent 

clearing agency would need to review 

and update existing policies and 

procedures where necessary. Because 

proposed Rule 17Ad–22(e)(18) also 

imposes additional requirements that do 

not appear in existing Rule 17Ad–22, 

however,527 a respondent clearing 

agency may be required to create 

policies and procedures to address these 

additional requirements. Accordingly, 

based on the similar policies and 

procedures requirements and the 

corresponding burden estimates 

previously made by the Commission for 

Rules 17Ad–22(b)(5) through (7) and 

(d)(2),528 the Commission preliminarily 

estimates that respondent clearing 

agencies would incur an aggregate onetime burden of 308 hours to review and 

update existing policies and procedures 

and to create new policies and 

procedures, as necessary.529

Proposed Rule 17Ad–22(e)(18) would 

also impose ongoing burdens on a 

respondent clearing agency. 

Specifically, the proposed rule would 

require ongoing monitoring and 

compliance activities with respect to the 

written policies and procedures created 

in response to the rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,530 the Commission 

preliminarily estimates that the ongoing 

activities required by the proposed rule 

would impose an aggregate annual 

burden on respondent clearing agencies 

of 49 hours.531

b. Proposed Rule 17Ad–22(e)(19) 

Respondent clearing agencies would 

be required to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

address material risks associated from 

tiered participation arrangements as 

required by proposed Rule 17Ad– 

22(e)(19). Tiered participation 

arrangements are not addressed in 

existing Rule 17Ad–22. To the extent 

that a respondent clearing agency has 

not addressed tiered participation 

arrangements in its policies and 

procedures, the Commission 

preliminarily believes that the 

respondent clearing agency would need 

to create policies and procedures to 

address these proposed requirements. In 

this regard, the PRA burden for 

proposed Rule 17Ad–22(e)(19) would 

impose one-time initial burdens to 

create policies and procedures. The 

Commission preliminarily estimates 

that proposed Rule 17Ad–22(e)(19) 

would impose an aggregate one-time 

burden on respondent clearing agencies 

of 308 hours to create said policies and 

procedures.532

Proposed Rule 17Ad–22(e)(19) would 

also impose ongoing burdens on a 

respondent clearing agency. 

Specifically, the proposed rule would 

require ongoing monitoring and 

compliance activities with respect to the 

written policies and procedures created 

in response to the rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,533 the Commission 

preliminarily estimates that the ongoing 

activities required by the proposed rule 

would impose an annual aggregate 

burden on respondent clearing agencies 

of 49 hours.534

c. Proposed Rule 17Ad–22(e)(20) 

Registered clearing agencies are 

currently required to have written 

policies and procedures reasonably 

designed to manage risks related to links 

between the clearing agency and others 

under Rule 17Ad–22(d)(7). Proposed 

Rule 17Ad–22(e)(20) contains similar 

requirements, but also imposes 

additional requirements.535 As a result, 

a respondent clearing agency may need 

to review and update existing policies 

and procedures or establish new 

policies and procedures, as necessary, to 

satisfy the proposed requirement. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(7),536 the Commission 

preliminarily believes that respondent 

clearing agencies would incur an 

aggregate one-time burden of 

approximately 308 hours to review and 

update existing policies and 

procedures.537

Proposed Rule 17Ad–22(e)(20) would 

also impose ongoing burdens on a 

respondent clearing agency. 

Specifically, the proposed rule would 

require ongoing monitoring and 

compliance activities with respect to the 

written policies and procedures created 

in response to the rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 


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29574 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

538See Clearing Agency Standards Release, supra 

note 5, at 66260. 

539This figure was calculated as follows: 

(Compliance Attorney for 7 hours) × 7 respondent 

clearing agencies = 49 hours. 

540See 17 CFR 240.17Ad–22(d)(6). 

541See Clearing Agency Standards Release, supra 

note 5, at 66260. 

542This figure was calculated as follows: 

((Assistant General Counsel for 10 hours) + 

(Compliance Attorney for 7 hours) + (Senior 

Business Analyst for 5 hours) + (Computer 

Operations Manager for 10 hours)) = 32 hours × 7 

respondent clearing agencies = 224 hours. 

543See Clearing Agency Standards Release, supra 

note 5, at 66260. 

544This figure was calculated as follows: 

((Compliance Attorney for 5 hours) + 

(Administrative Assistant for 3 hours) + (Senior 

Business Analyst for 3 hours) = 11 hours × 7 

respondent clearing agencies = 77 hours. 

545See supra note 441. 

546This figure was calculated as follows: 

((Assistant General Counsel for 2 hours) + 

(Compliance Attorney for 6 hours) + (Computer 

Operations Manager for 7 hours) + (Senior Business 

Analyst for 2 hours) + (Chief Compliance Officer for 

5 hours) + (Senior Programmer for 2 hours)) = 24 

hours × 7 respondent clearing agencies = 168 hours. 

547See Clearing Agency Standards Release, supra 

note 5, at 66260. 

548This figure was calculated as follows: 

(Compliance Attorney for 5 hours) × 7 respondent 

clearing agencies = 35 hours. 

549See 17 CFR 240.17Ad–22(d)(9); proposed Rule 

17Ad–22(e)(23), infra Part VII; see also supra Part 

II.B.20 (discussing the requirements under the 

proposed rule). 

550See Clearing Agency Standards Release, supra 

note 5, at 66260. 

551This figure was calculated as follows: 

((Assistant General Counsel for 38 hours) + 

(Compliance Attorney for 24 hours) + (Computer 

Operations Manager for 32 hours) + (Senior 

Business Analyst for 18 hours) + (Chief Compliance 

Officer for 18 hours) + (Senior Programmer for 8 

hours)) = 138 hours × 7 respondent clearing 

agencies = 966 hours. 

552See Clearing Agency Standards Release, supra 

note 5, at 66260. 

553This figure was calculated as follows: 

(Compliance Attorney for 34 hours) × 7 respondent 

clearing agencies = 238 hours. 

burdens with respect to existing Rule 

17Ad–22,538 the Commission 

preliminarily estimates that the ongoing 

activities required by the proposed rule 

would impose an aggregate annual 

burden on respondent clearing agencies 

of 49 hours.539

8. Proposed Rules 17Ad–22(e)(21) 

Through (22): Efficiency 

a. Proposed Rule 17Ad–22(e)(21) 

Registered clearing agencies are 

currently required to have written 

policies and procedures requiring the 

clearing agency to be cost effective with 

respect to meeting the requirements of 

its participants and the markets it serves 

under Rule 17Ad–22(d)(6), and 

proposed Rule 17Ad–22(e)(21) contains 

similar requirements but also imposes 

new requirements.540 As a result, a 

respondent clearing agency would likely 

incur the burdens of reviewing and 

updating existing policies and 

procedures and may need to create new 

policies and procedures to satisfy the 

proposed rule, as necessary. 

Accordingly, based on the similar 

policies and procedures requirements 

and the corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(6),541 the Commission 

preliminarily estimates that that 

respondent clearing agencies would 

incur an aggregate one-time burden of 

approximately 224 hours to review and 

update existing policies and 

procedures.542

Proposed Rule 17Ad–22(e)(21) would 

also impose ongoing burdens on a 

respondent clearing agency. The 

proposed rule would require ongoing 

monitoring and compliance activities 

with respect to the written policies and 

procedures required under the proposed 

rule. Based on the Commission’s 

previous estimates for ongoing 

monitoring and compliance burdens 

with respect to existing Rule 17Ad– 

22,543 the Commission preliminarily 

estimates that the ongoing activities 

required by proposed Rule 17Ad– 

22(e)(21) would impose an aggregate 

annual burden on respondent clearing 

agencies of 77 hours.544

b. Proposed Rule 17Ad–22(e)(22) 

Respondent clearing agencies would 

be required to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

implement the requirements of 

proposed Rule 17Ad–22(e)(22) with 

respect to the use of relevant 

internationally accepted communication 

procedures and standards. Although 

registered clearing agencies are not 

subject to an existing similar 

requirement under Rule 17Ad–22, the 

Commission understands that covered 

clearing agencies currently use the 

relevant internationally accepted 

communication procedures and 

standards and expects a covered 

clearing agency would need to make 

only limited changes to satisfy the 

requirements under the proposed 

rule.545 Accordingly, the Commission 

preliminarily estimates that proposed 

Rule 17Ad–22(e)(22) would impose an 

aggregate one-time burden on 

respondent clearing agencies of 168 

hours to review and update existing 

policies and procedures.546

Proposed Rule 17Ad–22(e)(22) would 

also impose ongoing burdens on a 

respondent clearing agency. 

Specifically, the proposed rule would 

require ongoing monitoring and 

compliance activities with respect to the 

written policies and procedures created 

in response to the rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,547 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(22) would impose an 

aggregate annual burden on respondent 

clearing agencies of 35 hours.548

9. Proposed Rule 17Ad–22(e)(23): 

Disclosure 

Proposed Rule 17Ad–22(e)(23) 

contains similar requirements to Rule 

17Ad–22(d)(9) but also imposes 

substantial new requirements.549 As a 

result, although a respondent clearing 

agency is already required to have 

written rules, policies and procedures 

containing provisions similar to some of 

the requirements in the proposed rule, 

for some provisions of proposed Rule 

17Ad–22(e)(23), a respondent clearing 

agency would be required to establish 

policies and procedures to address the 

additional requirements. Accordingly, 

based on the similar policies and 

procedures requirements and the 

corresponding burden estimates 

previously made by the Commission for 

Rule 17Ad–22(d)(9),550 the Commission 

preliminarily estimates that respondent 

clearing agencies would incur an 

aggregate one-time burden of 966 hours 

to review and update existing policies 

and procedures and to create policies 

and procedures, as necessary.551

Proposed Rule 17Ad–22(e)(23) would 

also impose ongoing burdens on a 

respondent clearing agency. 

Specifically, the proposed rule would 

require ongoing monitoring and 

compliance activities with respect to the 

written policies and procedures created 

in response to the rule. Based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,552 the Commission 

preliminarily estimates that the ongoing 

activities required by proposed Rule 

17Ad–22(e)(23) would impose an 

aggregate annual burden on respondent 

clearing agencies of 238 hours.553

10. Total Burden for Proposed Rule 

17Ad–22(e) 

The aggregate initial burden for 

respondent clearing agencies under 

proposed Rule 17Ad–22(e) would be 

10,664 hours. The aggregate ongoing 

burden for respondent clearing agencies 

under proposed Rule 17Ad–22(e) would 

be 3,460 hours. 


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554See infra Part II.C (further discussing the 

purpose, scope, and application of proposed Rule 

17Ab2–2) and Part VII (proposed text of Rule 

17Ab2–2). 

555See Clearing Agency Standards Release, supra 

note 5, at 66260. 

556This figure was calculated as follows: 

((Assistant General Counsel for 2 hours) + (Staff 

Attorney for 4 hours) + (Outside Counsel for 6 

hours)) = 12 hours × 2 respondent clearing agencies 

= 24 hours. 

557 17 CFR 240.17a–1. 

558 17 CFR 240.17a–4(e)(7). 

559See, e.g., 5 U.S.C. 552. Exemption 4 of the 

Freedom of Information Act provides an exemption 

for trade secrets and commercial or financial 

information obtained from a person and privileged 

or confidential. See 5 U.S.C. 552(b)(4). Exemption 

8 of the Freedom of Information Act provides an 

exemption for matters that are contained in or 

related to examination, operating, or condition 

reports prepared by, on behalf of, or for the use of 

an agency responsible for the regulation or 

supervision of financial institutions. See 5 U.S.C. 

552(b)(8). 

560See id. 

561See DTCC, 2012 Annual Report, available at 

http://www.dtcc.com/about/annual-report.aspx. 

562See Intercontinental Exchange, Inc., 2012 

Annual Report, at 66, available at https://

materials.proxyvote.com/Approved/45865V/

20130319/AR_159922/. Intercontinental Exchange, 

Inc. is the parent company of ICE and ICEEU. 

ICE began clearing corporate single-name CDS in 

December 2009, and as of February 1, 2013, had 

cleared $1.9 trillion gross notional of single-name 

CDS on 153 North American corporate reference 

Continued 

E. Total Annual Reporting and 

Recordkeeping Burden for Proposed 

Rule 17Ab2–2 

Proposed Rule 17Ab2–2 would govern 

Commission determinations as to 

whether a registered clearing agency is 

a covered clearing agency and whether 

a covered clearing agency is either 

involved in activities with a more 

complex risk profile or systemically 

important in multiple jurisdictions.554

Because such determinations may be 

made upon request of a clearing agency 

or its members, the respondents would 

have the burdens of preparing such 

requests for submission to the 

Commission. The Commission 

preliminarily notes that, to the extent 

such determinations are carried out by 

the Commission on its own initiative 

pursuant to proposed Rule 17Ab2–2, the 

PRA burdens on the respondents would 

be limited. Accordingly, based on the 

Commission’s previous estimates for 

ongoing monitoring and compliance 

burdens with respect to existing Rule 

17Ad–22,555 the Commission 

preliminarily believes that respondent 

clearing agencies would incur an 

aggregate one-time burden of 

approximately 24 hours to draft and 

review a determination request to the 

Commission.556

F. Collection of Information Is 

Mandatory 

The collection of information relating 

to proposed Rules 17Ad–22(e)(1) 

through (3), 17Ad–22(e)(4)(ii) through 

(v), 17Ad–22(e)(7)(i) through (ix), and 

17Ad–22(e)(8) through (23) would be 

mandatory for all respondent clearing 

agencies. The collection of information 

requirement relating to proposed Rule 

17Ad–22(e)(4)(i) and 17Ad–22(e)(7)(x) 

would be mandatory for a respondent 

clearing agency that provides CCP 

services and that is designated by the 

Commission either as systemically 

important in multiple jurisdictions or as 

a complex risk profile clearing agency. 

The collection of information 

requirement relating to proposed Rule 

17Ad–22(e)(6) would be mandatory for 

a respondent clearing agency that 

provides CCP services. 

The collection of information 

requirement relating to proposed Rule 

17Ab2–2 is voluntary. 

G. Confidentiality 

The Commission preliminarily 

expects that the written policies and 

procedures generated pursuant to 

proposed Rule 17Ad–22(e) would be 

communicated to the members, 

subscribers, and employees (as 

applicable) of all entities covered by the 

proposed rule and the public (as 

applicable). To the extent that this 

information is made available to the 

Commission, it would not be kept 

confidential. Such policies and 

procedures would be required to be 

preserved in accordance with, and for 

periods specified in, Exchange Act 

Rules 17a–1 557 and 17a–4(e)(7).558 To 

the extent that the Commission receives 

confidential information pursuant to 

this collection of information, such 

information would be kept confidential 

subject to the provisions of applicable 

law.559

To the extent that the Commission 

receives confidential information 

pursuant to the collection of 

information under proposed Rule 

17Ab2–2, the Commission preliminarily 

expects such information would be kept 

confidential subject to the provisions of 

applicable law.560

H. Request for Comments 

The Commission invites comments on 

all of the above estimates. Pursuant to 

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

requests comment in order to (a) 

evaluate whether the collection of 

information is necessary for the proper 

performance of our functions, including 

whether the information will have 

practical utility; (b) evaluate the 

accuracy of our estimates of the burden 

of the collection of information; (c) 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; (d) 

evaluate whether there are ways to 

minimize the burden of the collection of 

information on those who respond, 

including through the use of automated 

collection techniques or other forms of 

information technology; and (e) 

determine whether there are cost 

savings associated with the collection of 

information that have not been 

identified in this proposal. 

Persons submitting comments on the 

collection of information requirements 

should direct them to the Office of 

Management and Budget, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should also 

send a copy of their comments to Kevin 

M. O’Neill, Deputy Secretary, Securities 

and Exchange Commission, 100 F Street 

NE., Washington, DC 20549–1090, with 

reference to File No. S7–03–14. 

Requests for materials submitted to 

OMB by the Commission with regard to 

this collection of information should be 

in writing, with reference to File No. 

S7–03–14, and be submitted to the 

Securities and Exchange Commission, 

Office of Investor Education and 

Advocacy, 100 F Street NE., 

Washington, DC 20549–0213. As OMB 

is required to make a decision 

concerning the collections of 

information between 30 and 60 days 

after publication, a comment to OMB is 

best assured of having its full effect if 

OMB receives it by April 25, 2014. 

IV. Economic Analysis 

A. Introduction 

The purpose of the proposed 

amendments to Rule 17Ad–22 and of 

proposed Rule 17Ab2–2 is to establish 

requirements for the operation and 

governance of registered clearing 

agencies that meet the definition of a 

‘‘covered clearing agency.’’ Registered 

clearing agencies have become an 

essential part of the infrastructure of the 

U.S. securities markets. Many securities 

transactions are centrally cleared and 

settled, and central clearing and 

settlement is becoming more prevalent 

in the security-based swap markets. For 

example, DTCC reported processing 

$1.6 quadrillion in transactions in 

2012.561 For the same period, 

Intercontinental Exchange, Inc. reported 

$10.2 trillion in gross notional CDS 

cleared and settled.562 While clearing 


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entities. See Exchange Act Release No. 34–61662 

(Mar. 5, 2010), 75 FR 11589, 11591 (Mar. 11, 2010) 

(discussing ICE’s credit default swap clearing 

activities as of March 2010); ICE, Volume of ICE 

CDS Clearing, available at https://www.theice.com/ 

clear_credit.jhtml. 

ICEEU began clearing CDS on single-name 

corporate reference entities in December 2009, and, 

as of February 1, 2013, had cleared Ö1.6 trillion in 

gross notional of single-name CDS on 121 European 

corporate reference entities. See Exchange Act 

Release No. 61973 (Apr. 23, 2010), 75 FR 22656, 

22657 (Apr. 29, 2010) (discussing ICEEU’s credit 

default swap clearing activity as of April 2010); 

ICEEU, Volume of ICE CDS Clearing, available at 

https://www.theice.com/clear_credit.jhtml. 

563See generally Darrell Duffie, Ada Li & Theo 

Lubke, Policy Perspectives on OTC Derivatives 

Market Infrastructure, at 9 (Fed. Reserve Bank N.Y. 

Staff Reps., Mar. 2010), available at http://

www.newyorkfed.org/research/staff_reports/

sr424.pdf (‘‘If a CCP is successful in clearing a large 

quantity of derivatives trades, the CCP is itself a 

systemically important financial institution. The 

failure of a CCP could suddenly expose many major 

market participants to losses. Any such failure, 

moreover, is likely to have been triggered by the 

failure of one or more large clearing members, and 

therefore to occur during a period of extreme 

market fragility.’’); Pirrong, The Inefficiency of 

Clearing Mandates, Policy Analysis, No. 655, at 11– 

14, 16–17, 24–26 (2010), available at http://

www.cato.org/pubs/pas/PA665.pdf, at 11–14, 16– 

17, 24–26 (stating, among other things, that ‘‘CCPs 

are concentrated points of potential failure that can 

create their own systemic risks,’’ that ‘‘[a]t most, 

creation of CCPs changes the topology of the 

network of connections among firms, but it does not 

eliminate these connections,’’ that clearing may 

lead speculators and hedgers to take larger 

positions, that a CCP’s failure to effectively price 

counterparty risks may lead to moral hazard and 

adverse selection problems, that the main effect of 

clearing would be to ‘‘redistribute losses 

consequent to a bankruptcy or run,’’ and that 

clearinghouses have failed or come close to failing 

in the past, including in connection with the 1987 

market break); Manmohan Singh, Making OTC 

Derivatives Safe—A Fresh Look, at 5–11 (IMF 

Working Paper, Mar. 2011), available at http://

www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf 

(addressing factors that could lead central 

counterparties to be ‘‘risk nodes’’ that may threaten 

systemic disruption). 

564See supra Part I.B.1. 

565See supra Part I.A and note 96 (describing the 

Commission’s framework for regulation of SROs 

and the SRO rule filing process); see also supra note 

53 (describing regulations adopted by the CFTC for 

DCOs). 

566See 15 U.S.C. 78q–1(b)(3)(F). 

567See Clearing Agency Standards Release, supra 

note 5, at 66263. 

568See infra Part IV.C.2.a. 569See Daron Acemoglu, Asuman Ozdaglar & 

Alireza Tahbaz-Salehi, Systemic Risk and Stability 

in Financial Networks (NBER Working Paper No. 

18727, Jan. 2013), available at http://www.nber.org/ 

papers/w18727. 

agencies generally benefit the markets 

they serve, such entities can pose 

substantial risk to the financial system 

as a whole, due in part to the fact that 

clearing agencies concentrate risk. 

Disruption to a clearing agency’s 

operations, or failure on the part of a 

clearing agency to meet its obligations, 

could serve as a potential source of 

contagion, resulting in significant costs 

not only to the clearing agency and its 

members but also the broader economy 

and market participants.563 As a result, 

proper management of the risks 

associated with central clearing and 

settlement is necessary to ensure the 

stability of U.S. securities markets. 

The mandated central clearing and 

settlement of security-based swaps 

wherever possible and appropriate, a 

core component of Title VII, reinforces 

this need.564 Where a clearing agency 

provides CCP services, clearing and 

settlement of security-based swap 

contracts replaces bilateral counterparty 

exposures with exposures against the 

clearing agency providing CCP services. 

Consequently, a move from voluntary 

central clearing and settlement of 

security-based swap contracts to 

mandatory clearing of security-based 

swap contracts, holding the volume of 

security-based swap transactions 

constant, will increase economic 

exposures against CCPs that clear 

security-based swaps. Increased 

exposures in turn raise the possibility 

that these CCPs may serve as a 

transmission mechanism for systemic 

events. 

Clearing agencies have several 

incentives to implement comprehensive 

risk management programs. First, the 

ongoing viability of a clearing agency 

depends on its reputation and the 

confidence that market participants 

have in its services. Clearing agencies 

therefore have an incentive to minimize 

the likelihood that a member default or 

operational outage would disrupt 

settlement. Second, some clearing 

agencies, including those that mutualize 

default risks, contribute a portion of 

their own capital as part of their 

contingent resources. Clearing agencies 

with such capital contributions to their 

contingent resources thus have an 

economic interest in sound risk 

management. Registered clearing 

agencies are SROs that enforce 

applicable rules and requirements under 

Commission oversight and are also in 

certain instances subject to CFTC 

oversight.565 Registered clearing 

agencies consequently also face a legal 

requirement that their rules be designed 

to protect the public interest in the 

process of clearing securities or 

derivatives.566

Nevertheless, clearing agencies’ 

incentives for sound risk management 

may be tempered by pressures to reduce 

costs and maximize profits that are 

distinct from the public interest goals 

set forth in governing statutes, such as 

financial stability, and may result in 

clearing agencies choosing tradeoffs 

between the costs and benefits of risk 

management that are not socially 

efficient. Because the current market for 

clearing services is characterized by 

high barriers to entry and limited 

competition, 567 the market power 

exercised by clearing agencies in the 

markets they serve may blunt incentives 

to invest in risk management 

systems.568 Further, even if clearing 

agencies do internalize costs that they 

impose on their clearing members, they 

may fail to internalize the consequences 

of their risk management decisions on 

other financial entities that are 

connected to them through relationships 

with clearing members.569 Such a 

failure represents a financial network 

externality imposed by clearing agencies 

on the broader financial markets and 

suggests that financial stability, as a 

public good, may be under-produced in 

equilibrium. 

As discussed in more detail below, 

the proposed amendments to Rule 

17Ad–22 represent a strengthening of 

the Commission’s regulation of 

registered clearing agencies. The 

Commission preliminarily believes that 

the more specific requirements imposed 

by the proposed amendments will 

further mitigate potential moral hazard 

associated with risk management at 

covered clearing agencies. For instance, 

in the absence of policies and 

procedures that require periodic stresstesting and validation of credit and 

liquidity risk models, clearing agencies 

could potentially choose to recalibrate 

models in periods of low volatility and 

avoid recalibration in periods of high 

volatility, causing them to 

underestimate the risks they face. 

The Commission also preliminarily 

believes that the additional specificity 

of proposed Rule 17Ad–22(e), along 

with proposed testing requirements, 

would be more effective at mitigating 

these particular manifestations of 

incentive misalignments than existing 

Rule 17Ad–22. The Commission 

preliminarily believes, as a result, that 

a general benefit of the proposed 

amendments would be reductions in the 

likelihood of CCP failure that result 

from improved safeguards. This general 

benefit would be realized to the extent 

that clearing agencies do not already 

conform to new requirements under the 

proposed amendments. Despite the 

potential incentive problems noted 

above and perhaps in anticipation of 

regulatory efforts, some registered 

clearing agencies have taken steps to 

update their policies and procedures in 

accordance with the standards 

contained in the proposed rules. The 

Commission notes that in some 

instances the proposed rules establish as 

a minimum regulatory requirement 


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570See supra note 2 and accompanying text 

(noting the requirements of Section 17A of the 

Exchange Act). 

571See supra note 13 and accompanying text 

(noting the purpose of the Dodd-Frank Act to, 

among other things, promote financial stability); 

supra note 14 and accompanying text (noting the 

purpose of the Dodd-Frank Act to, among other 

things, create a regulatory framework for the OTC 

derivatives markets). 

572See supra Part I.B.2 (describing the regulatory 

framework for FMUs set forth in the Clearing 

Supervision Act). 

573See 15 U.S.C. 78c(f). 

574See supra note 2 and accompanying text 

(noting the requirements of Section 17A). 

575See 15 U.S.C. 78w(a)(2). 

576See id. 

certain current practices at some 

registered clearing agencies. In these 

cases, the Commission preliminarily 

believes that imposing the proposed 

requirements on covered clearing 

agencies will have the effect of imposing 

consistent, higher minimum risk 

management standards across covered 

clearing agencies. 

In analyzing the economic 

consequences and effects of the rules 

proposed in this release, the 

Commission has been guided by the 

objectives of Section 17A of the 

Exchange Act to have due regard for the 

public interest, the protection of 

investors, the safeguarding of securities 

and funds, the maintenance of fair 

competition, and to otherwise further 

the purposes of the Exchange Act 

through the registration and regulation 

of clearing agencies.570 It has also been 

guided by the objectives of the DoddFrank Act to mitigate risks to the U.S. 

financial system, promote counterparty 

protection, increase market 

transparency for OTC derivatives, and 

facilitate financial stability.571 The 

Commission has also taken into account 

the importance of maintaining a wellfunctioning security-based swap market 

and the objectives of the Clearing 

Supervision Act to establish an 

enhanced supervisory and risk control 

system for systemically important 

clearing agencies and other FMUs.572 In 

addition, as directed by the Clearing 

Supervision Act, the Commission makes 

this proposal after giving careful 

consideration to the standards set forth 

in the PFMI Report as the relevant 

international standard. Proposing rules 

that maintain consistency with the 

standards set forth in the PFMI Report 

may reduce the likelihood that market 

participants, including members of 

covered clearing agencies, would 

restructure in an effort to operate in 

less-regulated markets. 

The Commission preliminarily 

believes that the proposed amendments 

to Rule 17Ad–22 and proposed Rule 

17Ab2–2 are consistent with the goals of 

Section 17A of the Exchange Act, to 

promote the prompt and accurate 

clearing and settlement of transactions 

in securities, of the Clearing 

Supervision Act, to enhance the 

supervision and oversight of clearing 

entities, and of Title VII, to create a 

robust regulatory structure for securitybased swaps. In proposing these rules, 

the Commission is also mindful of the 

benefits that would accrue through 

maintaining consistency with 

regulations adopted by the Board and 

the CFTC. 

The Commission is sensitive to the 

economic consequences and effects of 

the proposed rules, including their 

benefits and costs. In proposing these 

rules, the Commission has been mindful 

of the economic consequences of the 

decisions it makes regarding the scope 

of applying the proposed rules to 

covered clearing agencies. Moreover, the 

Commission acknowledges that, since 

many of the proposed rules require a 

covered clearing agency to adopt new 

policies and procedures, the economic 

effects and consequences of the 

proposed rules include those flowing 

from the substantive results of those 

new policies and procedures. Under 

Section 3(f) of the Exchange Act, 

whenever the Commission engages in 

rulemaking under the Exchange Act and 

is required to consider or determine 

whether an action is necessary or 

appropriate in the public interest, it 

must consider, in addition to the 

protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation.573

Further, as noted above, Section 17A of 

the Exchange Act directs the 

Commission to have due regard for the 

public interest, the protection of 

investors, the safeguarding of securities 

and funds, and maintenance of fair 

competition among brokers and dealers, 

clearing agencies, and transfer agents 

when using its authority to facilitate the 

establishment of a national system for 

clearance and settlement transactions in 

securities.574 In addition, Section 

23(a)(2) of the Exchange Act requires the 

Commission, when making rules under 

the Exchange Act, to consider the 

impact such rules would have on 

competition.575 Section 23(a)(2) also 

prohibits the Commission from adopting 

any rule that would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act.576

The Commission has attempted, 

where possible, to quantify the benefits 

and costs anticipated to flow from the 

proposed rules. In some cases, as 

indicated below, data to quantify the 

benefits and costs associated with the 

proposed rules are unavailable. For 

example, implementing policies and 

procedures that require stress testing of 

financial resources available to a 

covered clearing agency at least once 

each day may require additional 

investment in infrastructure, but the 

particular infrastructure requirements 

will depend on existing systems and a 

covered clearing agency’s choice of 

modeling techniques. In other cases, 

quantification depends heavily on 

factors outside the control of the 

Commission, particularly with regard to 

the number of potential new entrants 

affected by the proposed rules that in 

the future may be designated 

systemically important by the FSOC. 

Overall, the Commission 

preliminarily believes that the proposed 

rules represent improvements in risk 

management, be it systemic, legal, 

credit, liquidity, general business, 

custody, investment, or operational risk, 

in keeping with the requirements of 

Section 17A of the Exchange Act and 

the Dodd-Frank Act. The Commission 

preliminarily believes that the proposed 

rules will result in an increase in 

financial stability insofar as they result 

in minimum standards at covered 

clearing agencies that are higher than 

those standards implied by current 

practices at covered clearing agencies. 

In particular cases, such as new 

requirements related to management of 

liquidity risk and general business risk, 

stability may arise as a result of higher 

risk management standards at covered 

clearing agencies that effectively lower 

the probability that either covered 

clearing agencies or their members 

default. As explained in Part IV.C.2, 

reduced default probabilities for 

covered clearing agencies may, in turn, 

improve efficiency and capital 

formation. 

Request for Comments. The 

Commission requests comment on all 

aspects of the economic analysis of the 

proposed rules, including their benefits 

and costs, as well as any effect these 

proposed rules may have on 

competition, efficiency, and capital 

formation. Acknowledging the data 

limitations noted above, the 

Commission encourages commenters to 

provide data and analysis to help 

further quantify or estimate the 

potential benefits and costs of the 

proposed rules. 

B. Economic Baseline 

1. Overview 

To assess the economic effects of the 

proposed rules, including possible 


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577A brief summary of the regulatory framework 

appears in Part IV.B.2. For a more detailed 

summary of the current regulatory framework, see 

Part I. 

578See Clearing Agency Standards Release, supra 

note 5; see also supra note 25 and accompanying 

text (discussing the deemed registered provision). 

579See supra Part I.C (discussing existing 

requirements under Rule 17Ad–22). 

580See supra note 49. 

581See supra note 50 and accompanying text. 

582See, e.g., CME Group, 2012 Annual Report, at 

2, available at http://www.cmegroup.com/investorrelations/annual-review/2012/downloads/cmegroup-2012-annual-report.pdf (indicating $806 

trillion notional in trading volume); DTCC, 2012 

Annual Report, available at http://www.dtcc.com/

about/annual-report.aspx (indicating $1.6 

quadrillion in transactions cleared). 

583Membership statistics are taken from the Web 

sites of each of the listed clearing agencies and are 

current, for CME and ICE, as of October 2013; for 

FICC, including the Government Securities Division 

(‘‘GSD’’) and the Mortgage-Backed Securities 

Division (‘‘MBSD’’), as of September 2013; for OCC 

as of January 2014; and for DTC and NSCC as of 

December 6, 2013. 

584See infra Part IV.C.2 (discussing the effect of 

the proposed rules on competition, efficiency, and 

capital formation). 

585See 15 U.S.C. 78q–1. For a more detailed 

discussion of the regulatory framework for 

registered clearing agencies under Section 17A of 

the Exchange Act, see Part I.A. 

586See supra note 2 and accompanying text 

(noting the requirements of Section 17A of the 

Exchange Act). 

587See Dodd-Frank Act, 124 Stat. at 1641–1802. 

For a more detailed discussion of the regulatory 

framework for registered clearing agencies under 

Title VII, see Part I.B.1. 

effects on efficiency, competition, and 

capital formation, the Commission is 

using a baseline composed of (1) the 

current regulatory framework under 

which registered clearing agencies 

operate,577 and (2) the current practices 

of registered clearing agencies as they 

relate to the rules being proposed today. 

More specifically, the baseline 

includes existing legal requirements 

applicable to registered clearing 

agencies providing CCP or CSD services 

as they exist at the time of this proposal, 

including applicable rules adopted by 

the Commission. Rule 17Ad–22 

established a regulatory framework for 

registered clearing agencies, including 

security-based swap clearing agencies 

deemed registered pursuant to the 

Dodd-Frank Act.578 Section 17A of the 

Exchange Act generally regulates the 

national system for clearance and 

settlement, while Section 19 of the 

Exchange Act describes the registration, 

responsibilities, and oversight of SROs. 

Further, clearing agencies are subject to 

new requirements related to securitybased swaps under the Dodd-Frank Act. 

In terms of current practice, registered 

clearing agencies are required to operate 

in compliance with the requirements set 

forth in Rule 17Ad–22, though they may 

vary in the particular ways they meet 

these requirements. Some variation in 

practices across clearing agencies 

derives from the products they clear and 

the markets they serve. Additionally, 

the Commission understands that 

certain registered clearing agencies have 

already adopted practices consistent 

with several of the standards set forth in 

the PFMI Report. Accordingly, because 

proposed Rule 17Ad–22(e) and 

proposed Rule 17Ab2–2 result in 

general consistency with the standards 

set forth in the PFMI Report, the 

Commission preliminarily believes the 

resulting benefits and costs to covered 

clearing agencies would, in some cases, 

be incremental because of the 

relationship between existing 

requirements applicable to registered 

clearing agencies,579 the anticipation of 

new requirements consistent with the 

standards set forth in the PFMI 

Report,580 and the CPSS–IOSCO 

Recommendations that preceded the 

PFMI Report.581 In certain other cases, 

such as management of liquidity risk 

and general business risk, registered 

clearing agencies that are covered 

clearing agencies would be required to 

make changes to current policies and 

procedures, so the resulting costs, 

benefits and economic effects may be 

significant. 

In order to consider the broader 

implications of these proposed rules on 

market activity, including possible 

effects on efficiency, competition, and 

capital formation, the baseline also 

considers the current state of clearing 

and settlement services, including the 

number of registered clearing agencies, 

the distribution of members across these 

clearing agencies, and the volume of 

transactions these clearing agencies 

process. There are currently six 

registered clearing agencies that provide 

CCP services and one registered clearing 

agency that provides CSD services. As 

shown in Table 1, membership rates 

vary across these clearing agencies. 

Together, registered clearing agencies 

processed over $2 quadrillion in 

financial market transactions in 2012.582

TABLE 1—MEMBERSHIP STATISTICS

FOR REGISTERED CLEARING AGENCIES 583

Number 

CME Total Members .................... 72 

—Of which clear CDS ............... 14 

DTC Full Service Members .......... 272 

FICC GSD Members .................... 107 

MBSD Members ........................ 76 

ICE Clear Credit Members ........... 28 

Clear Europe Members ............. 79 

—Clear Europe Members that 

clear CDS .............................. 18 

NSCC Full Service Members ....... 175 

OCC Total Members .................... 117 

Registered clearing agencies are 

currently characterized by 

specialization and limited competition. 

Clearing and settlement services exhibit 

high barriers to entry and economies of 

scale. These features of the existing 

market, and the resulting concentration 

of clearing and settlement within a 

handful of entities, informs our 

examination of effects of the proposed 

amendments and rules on competition, 

efficiency, and capital formation.584

2. Current Regulatory Framework for 

Clearing Agencies 

The proposed amendments to Rule 

17Ad–22 and proposed Rule 17Ab2–2 

fit within the Commission’s broad 

approach to regulation of the national 

system for clearance and settlement that 

comprises the baseline for the 

Commission’s economic analysis. Key 

elements of the current regulatory 

framework for registered clearing 

agencies are Section 17A of the 

Exchange Act,585 Titles VII and VIII of 

the Dodd-Frank Act, and existing Rule 

17Ad–22. Section 17A of the Exchange 

Act directs the Commission to facilitate 

the establishment of a national system 

for the prompt and accurate clearance 

and settlement of securities 

transactions, having due regard for the 

public interest, the protection of 

investors, the safeguarding of securities 

and funds, and the maintenance of fair 

competition among brokers and dealers, 

clearing agencies, and transfer agents.586

Title VII, in response to the 2008 

financial crisis, provides the 

Commission and the CFTC with 

authority to regulate the mandatory 

exchange trading and central clearing 

and settlement of swaps that formerly 

may have been OTC derivatives.587 Title 

VII amended Section 17A of the 

Exchange Act by adding new paragraphs 

(g) through (j) requiring the registration 

of clearing agencies serving the securitybased swap market, giving the 

Commission authority to adopt rules 

governing security-based swap clearing 

agencies, and requiring compliance by 

registered clearing agencies with said 

rules. New Section 17A(i) of the 

Exchange Act provides that the 

Commission may conform standards for 

and oversight of clearing agencies to 

reflect evolving international standards. 

The Clearing Supervision Act, 

adopted in Title VIII, provides for 

enhanced regulation of FMUs, such as 

clearing agencies, and for enhanced 

coordination between the Commission, 


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588See 12 U.S.C. 5461 et seq. For a more detailed 

discussion of the regulatory framework for 

registered clearing agencies under Title VIII, see 

Part I.B.2. 

589See Clearing Agency Standards Release, supra 

note 5. For a more detailed discussion of the 

regulatory framework for registered clearing 

agencies under Rule 17Ad–22, see Part I.C. For a 

comparison of the requirements under proposed 

Rule 17Ad–22(e) and existing requirements under 

Rule 17Ad–22, see Part II.A.4. For further 

discussion of current industry practices subject to 

the requirements in Rule 17Ad–22, see Part IV.B.3. 

590See id. 

591See Clearing Agency Standards Release, supra 

note 5, at 66225, 66263–64. 

592See supra note 48 (discussing the Basel III 

capital requirements). For a more detailed 

discussion of the Basel III framework, see Part 

IV.C.1.e. 

593Since the Basel III framework applies lower 

capital requirements only to bank exposures related 

to OTC and exchange-traded derivatives activity 

and securities financing transactions, the 

Commission currently expects that, among all 

registered clearing agencies, FICC, ICEEU, and OCC 

would be those affected by the Basel III capital 

requirements. Each would meet the proposed 

definition of ‘‘covered clearing agency.’’ 

594The Basel III framework and rules adopted by 

the Board and the Office of the Comptroller of the 

Currency consistent with that framework apply 

lower risk weights of 2% or 4% to indirect 

exposures of banks to QCCPs. See Basel III capital 

requirements, supra note 59, paras. 114–15; 

Regulatory Capital Rules, supra note 53, at 62103. 

595See BCBS, Progress Report on Implementation 

of the Basel Regulatory Framework (Oct. 2013), 

available at http://www.bis.org/bcbs/

implementation/bprl1.htm. 

596See id. 

597See Regulatory Capital Rules, supra note 53. 

598See id. 

599Although ICEEU would not be subject to 

QCCP treatment as a designated FMU, it would 

Continued 

the CFTC, and the Board by facilitating 

examinations and information 

sharing.588 It also requires the 

Commission and the CFTC to coordinate 

with the Board to develop risk 

management supervision programs for 

clearing agencies designated 

systemically important. Section 805(a) 

of the Clearing Supervision Act further 

provides that the Commission, 

considering relevant international 

standards and existing prudential 

requirements, may prescribe regulations 

that contain risk management standards 

for designated clearing agencies or the 

conduct of designated activities by a 

financial institution. 

Rule 17Ad–22 under the Exchange 

Act, adopted in 2012, requires a 

registered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures that are 

reasonably designed to meet certain 

minimum requirements for their 

operations and risk management 

practices on an ongoing basis. These 

requirements are designed to work in 

tandem with the SRO rule filing process 

and the requirement in Section 17A that 

the Commission must make certain 

determinations regarding a clearing 

agency’s rules and operations for 

purposes of initial and ongoing 

registration.589 In its economic analysis 

of the rule, the Commission noted that 

the economic characteristics of clearing 

agencies, including economies of scale, 

barriers to entry, and the particulars of 

their legal mandates, may limit 

competition and confer market power 

on such clearing agencies, which may 

lead to lower levels of service, higher 

prices, or under-investment in risk 

management systems.590 To address 

these potential market failures, Rule 

17Ad–22 was adopted to strengthen the 

substantive regulation of clearing 

agencies, promote the safe and reliable 

operation of clearing agencies, improve 

efficiency, transparency, and access to 

clearing agencies, and promote 

consistency with international 

standards.591 Part IV.B.3 discusses 

current practices at registered clearing 

agencies related to the requirements 

under Rule 17Ad–22. 

a. Basel III Capital Requirements 

In addition to requirements under the 

Exchange Act, the Dodd-Frank Act, and 

Rule 17Ad–22, other regulatory efforts 

are relevant to our analysis of the 

economic effects of proposed Rule 

17Ad–22(e). In July 2012, the BCBS 

published the Basel III capital 

requirements, which set forth interim 

rules governing the capital charges 

arising from bank exposures to CCPs 

related to OTC derivatives, exchangetraded derivatives, and securities 

financing transactions.592 Once in effect, 

the Basel III capital requirements will 

create incentives for banks to clear 

derivatives and securities financing 

transactions with CCPs licensed in a 

jurisdiction where the relevant regulator 

has adopted rules or regulations 

consistent with the standards set forth 

in the PFMI Report. Specifically, the 

Basel III capital requirements introduce 

new capital charges based on 

counterparty risk for banks conducting 

derivatives transactions or securities 

financing transactions through a CCP.593

New capital charges under the Basel 

III framework relate to a bank’s trade 

exposure and default fund exposure to 

a CCP and are a function of multiplying 

these exposures by a corresponding risk 

weight. Historically, these exposures 

have carried a risk weight of zero. As 

banking regulators adopt rules 

consistent with the Basel III capital 

requirements, however, these weights 

will increase. The risk weight assigned 

under the Basel III capital requirements 

varies depending on whether the 

counterparty is a QCCP. For example, 

risk weights for trade exposures to a 

CCP generally would vary between 20% 

and 100% depending on the CCP’s 

credit quality, while trade exposures to 

a QCCP would carry only a 2% risk 

weight.594 In addition, bank exposures 

to CCP default funds would carry a risk 

weight of 1250%. While bank exposures 

to QCCP default funds will also carry a 

1250% risk weight at low levels, under 

the Basel III framework, default fund 

exposures’ contribution to a bank’s risk 

weighed assets will be limited to at most 

18% of the bank’s trade exposures to a 

given QCCP. 

In some jurisdictions, banking 

regulators have already adopted rules 

that implement many requirements 

under the Basel III framework. For 

example, in its Capital Requirements 

Directive IV, which went into effect on 

July 17, 2013, the E.U. incorporated into 

its own legal framework the Basel III 

framework. Article 301 contains rules 

governing bank exposures to CCPs that 

are consistent with the Basel III 

framework. Similarly, the BCBS reports 

that the Basel III capital requirements, 

with the exception of capital 

conservation buffers and countercyclical 

buffers, are currently in force for 

Japanese banks.595 Canada and 

Switzerland also have risk-based capital 

rules in place.596

In the United States, on July 9, 2013, 

the Board and the Office of the 

Comptroller of the Currency jointly 

issued regulatory capital rules for U.S. 

banks consistent with the Basel III 

framework. Upon its effective date of 

January 1, 2014, the Regulatory Capital 

Rules subject bank exposures to CCPs 

and QCCPs to increased risk weights as 

specified in the Basel III framework.597

In addition to specifying risk weights, 

the rules define the term QCCP for 

banks supervised by the Board and the 

Office of the Comptroller of the 

Currency.598 According to these rules, 

QCCP status applies to any CCP that is 

a designated FMU. Further, any CCP 

that (i) requires full collateralization of 

contracts on a daily basis, and (ii), as 

demonstrated to the satisfaction of its 

supervisory regulator, is in sound 

financial condition, is subject to 

supervision by the Commission, and 

meets or exceeds the risk management 

standards established by the 

Commission under Titles VII and VIII of 

the Dodd-Frank Act, is a QCCP. Based 

on this definition, for banks regulated 

by the Board and the Office of the 

Comptroller of the Currency, all covered 

clearing agencies, with the exception of 

ICEEU,599 will be considered QCCPs for 


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nonetheless be considered a QCCP because it is 

subject to regulation by the Commission. See 

Regulatory Capital Rules, supra note 53, at 62166 

(defining ‘‘Qualifying Central Counterparty’’ at 

1.iii(B)(2)). 

600See Eur. Comm’n, Practical Implementation of 

the EMIR Framework to Non-EU Central 

Counterparties (CCPs) (May 13, 2013), available at 

http://ec.europa.eu/internal_market/financialmarkets/docs/derivatives/130513_equivalenceprocedure_en.pdf. 

601These three clearing agencies agreed to have 

their names publicly disclosed and do not 

necessarily represent the full set of registered 

clearing agencies that applied for recognition under 

EMIR. See ESMA, List of Central Counterparties 

(CCPs) Established in Non-EEA Countries Which 

Have Applied for Recognition Under Article 25 of 

Regulation (EU) No 648/2012 of the European 

Parliament and of the Council of 4 July 2012 on 

OTC Derivatives, CCPs and Trade Repositories 

(TRs) (EMIR) (Dec. 16, 2013), available at http://

www.esma.europa.eu/system/files/2013-1581_list_

of_applicants_tc-ccps_version_16_december_

2013.pdf. 

602See Regulatory Capital Rules, supra note 53, 

at 62169. 

603See id. at 62284. The Regulatory Capital Rules 

require compliance by banks no later than 2018. 

604For a more detailed discussion of the 

regulatory efforts undertaken by the Board and the 

CFTC, see note 53. 

605See id. 

606See id. 

607See id. (discussing efforts by the Board and the 

CFTC to adopt rules consistent with the standards 

set forth in the PFMI Report). 

608See Dodd-Frank Act, Sec. 712(a)(2), Public 

Law 111–203, 124 Stat. 1376, 1641–42 (2010). 

609See supra Part I.A and note 95 (describing the 

Commission’s framework for regulation of SROs 

and the SRO rule filing process). 

610See supra Part I.A, in particular notes 8–10 

(describing the requirements applicable to 

registered clearing agencies under the Exchange Act 

and the supervisory and enforcement tools available 

to the Commission to facilitate compliance with 

those requirements under the Exchange Act). 

611See 17 CFR 240.17Ad–22(d)(1); Clearing 

Agency Standards Release, supra note 5, at 66245– 

46. 

purposes of calculating risk weights for 

trade exposures and default fund 

exposures. 

In Europe, under EMIR, legal persons 

incorporated under the law of an E.U. 

member state will only be able to use 

non-E.U. CCPs if those CCPs have been 

recognized under EMIR. Further, only 

non-E.U. CCPs recognized under EMIR 

will meet the conditions necessary to be 

considered a QCCP for E.U. purposes. 

Article 25 of EMIR outlines a 

recognition procedure for non-E.U. 

CCPs and Article 89 provides a timeline 

for recognition.600 FICC, NSCC, and 

OCC applied for recognition under 

EMIR prior to a September 15, 2013 

deadline.601 As a result of applying for 

recognition, these covered clearing 

agencies will be permitted to continue 

to offer clearing services to existing E.U. 

clearing members until their 

applications are accepted or rejected. 

Additionally, the Basel III capital 

requirements, as adopted by the Board, 

the Office of the Comptroller of the 

Currency, and banking regulators in 

other jurisdictions, impose new capital 

requirements related to unconditionally 

cancellable commitments and other offbalance sheet exposures. For example, 

the Board and the Office of the 

Comptroller of the Currency will require 

banks to include 10% of the notional 

amount of unconditionally cancellable 

commitments in their calculation of 

total leverage exposure.602 The rules cap 

the ratio of tier one capital to total 

leverage exposure at 3% for banks 

subject to advanced approaches riskbased capital rules.603 To the extent that 

clearing agencies rely on financial 

resources from banks as part of their risk 

management activities, new constraints 

on off-balance sheet exposures could 

raise the cost of these activities. 

b. Other Regulatory Efforts 

Efforts by the Board and the CFTC to 

adopt rules that are consistent with the 

standards set forth in the PFMI Report 

are also relevant to the economic 

analysis of the proposed rules.604 In 

2012, the Board adopted Regulation HH 

setting forth risk management standards 

for designated FMUs, and, on January 

10, 2014, the Board proposed 

amendments to Regulation HH and its 

PSR Policy based upon the standards set 

forth in the PFMI Report.605 Similarly, 

the CFTC has published final rules 

intended to be consistent with the 

standards set forth in the PFMI 

Report.606

In proposing the amendments to Rule 

17Ad–22 and new Rule 17Ab2–2, the 

Commission is mindful of these 

regulations proposed by the Board and 

adopted by the CFTC, which seek to 

establish standards for designated FMUs 

and establish standards for certain 

DCOs, respectively.607 Section 712(a)(2) 

of Title VII requires the Commission, 

before commencing any rulemaking 

regarding, among other things, securitybased swap clearing agencies, to consult 

and coordinate to the extent possible 

with the CFTC and prudential regulators 

for the purposes of assuring regulatory 

consistency and comparability where 

possible.608 In addition, as directed by 

the Clearing Supervision Act, the 

Commission is proposing these 

amendments to Rule 17Ad–22 and Rule 

17Ab2–2 after giving careful 

consideration to the PFMI Report as the 

relevant international standard. 

3. Current Practices 

Current industry practices are a 

critical element of the economic 

baseline for registered clearing agencies. 

Registered clearing agencies are 

required to operate in compliance with 

existing Rule 17Ad–22 and, the 

Commission understands, have begun 

implementing some of the standards set 

forth in the PFMI Report. Because 

proposed Rule 17Ad–22(e) is consistent 

with those standards and furthers the 

objectives of Section 17A of the 

Exchange Act, the Clearing Supervision 

Act, and Title VII of the Dodd-Frank 

Act, the Commission preliminarily 

believes that the proposed rule 

represents, where it imposes higher 

minimum standards on covered clearing 

agencies, an additional step towards 

improved risk management. 

An overview of current practices is set 

forth below and includes discussion of 

covered clearing agency policies and 

procedures regarding general 

organization and risk management, 

including the management of legal, 

credit, liquidity, business, custody, 

investment, and operational risk. This 

discussion is based on the 

Commission’s general understanding of 

current practices as of the date of this 

proposal, reflects the Commission’s 

experience supervising registered 

clearing agencies, and is intended solely 

for the purpose of analyzing the 

economic effects of the Commission’s 

proposal. The Commission notes that in 

each case, as SROs, registered clearing 

agencies are required to submit any 

proposed rule or any proposed change 

in, addition to, or deletion from the 

rules of the clearing agency to the 

Commission for review.609 The 

Exchange Act also requires a registered 

clearing agency to enforce its rules, 

subject to Commission oversight, and 

empowers the Commission to enforce 

the rules of a registered clearing 

agency.610

a. General Organization 

i. Legal Risk 

Legal risk is the risk that a registered 

clearing agency’s rules, policies, or 

procedures may not be enforceable and 

concerns, among other things, its 

contracts, the rights of members, netting 

arrangements, discharge of obligations, 

and settlement finality. Cross-border 

activities of a registered clearing agency 

may also present elements of legal risk. 

Rule 17Ad–22(d)(1) requires a 

registered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to provide for a 

well-founded, transparent, and 

enforceable legal framework for each 

aspect of its activities in all relevant 

jurisdictions.611 Each registered clearing 

agency makes a large portion of these 


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612The rule book of each registered clearing 

agency, as well as select policies and procedures, 

are publically available on each registered clearing 

agency’s Web site. 

613See 17 CFR 240.17Ad–22(d)(8); see also 

Clearing Agency Standards Release, supra note 5, 

at 66251–52. 

614See 17 CFR 240.17Ad–22(b) and (d); see also 

Clearing Agency Standards Release, supra note 5. 

615See 17 CFR 240.17Ad–22(d)(4); see also 

Clearing Agency Standards Release, supra note 5, 

at 66248–49. 

616See 17 CFR 240.17Ad–22(d)(11). 

617See David Elliot, Central Counterparty LossAllocation Rules, at tbl. 1A (Bank of England 

Financial Stability Paper No. 20, Apr. 2013), 

available at http://www.bankofengland.co.uk/

research/Documents/fspapers/fs_paper20.pdf 

(noting the loss-allocation rules applied at the end 

of a clearing agency waterfall). 

618See, e.g., IMF, Publication of Financial Sector 

Assessment Program Documentation—Detailed 

Assessment of Observance of the National 

Securities Clearing Corporation’s Observance of the 

CPSS–IOSCO Recommendations for Central 

Counterparties, at 10 (May 2010), available at 

http://www.imf.org/external/pubs/ft/scr/2010/

cr10129.pdf (assessing NSCC’s observance of 

Recommendation 5 from the RCCP that a CCP 

should maintain sufficient financial resources to 

withstand, at a minimum, the default of a 

participant to which it has the largest exposure in 

extreme but plausible market conditions; also 

noting that NSCC began evaluating itself against 

this standard in 2009 and has backtesting results to 

support that it maintained sufficient liquidity to 

cover the failure of the largest affiliated family 

99.98% of the time during the period from January 

through April 2009); IMF, Publication of Financial 

Sector Assessment Program Documentation— 

Detailed Assessment of Observance of the Fixed 

Income Clearing Corporation—Government 

Securities Division’s Observance of the CPSS– 

IOSCO Recommendations for Central 

Counterparties, at 9–10 (2010), available at http:// 

www.imf.org/external/pubs/ft/scr/2010/cr10130.pdf 

(finding that FICC’s Government Securities Division 

observed the requirement to maintain enough 

financial resources to meet the default of its largest 

participant in extreme but plausible market 

conditions). 

policies and procedures available to 

members and participants. In addition, 

each also publishes their rule books and 

other key procedures publicly in order 

to promote the transparency of their 

legal framework.612

ii. Governance 

Rule 17Ad–22(d)(8) requires a 

registered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to have governance 

arrangements that are clear and 

transparent to fulfill the public interest 

requirements in Section 17A of the 

Exchange Act applicable to clearing 

agencies, to support the objectives of 

owners and participants, and to promote 

the effectiveness of the clearing agency’s 

risk management procedures.613

Important elements of a registered 

clearing agency’s governance 

arrangements include its ownership 

structure; its charter, bylaws, and 

charters for committees of its board and 

management committees; its rules, 

policies, and procedures; the 

composition and role of its board, 

including the structure and role of board 

committees; reporting lines between 

management and the board; and the 

processes that provide for management 

accountability with respect to the 

registered clearing agency’s 

performance. 

Each registered clearing agency has a 

board that governs its operations and 

supervises senior management. Each 

registered clearing agency also has an 

independent audit committee of the 

board and has established a board 

committee or committee of members 

tasked with overseeing the clearing 

agency’s risk management functions. 

The boards of registered clearing 

agencies that would be subject to 

proposed Rule 17Ad–22(e) as covered 

clearing agencies currently include nonmanagement members. 

iii. Framework for the Comprehensive 

Management of Risks 

Rules 17Ad–22(b) and (d) require 

registered clearing agencies to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to measure and 

mitigate credit exposures, identify 

operational risks, evaluate risks arising 

in connection with cross-border and 

domestic links for the purpose of 

clearing or settling trades, achieve DVP 

settlement, and implement risk controls 

to cover the clearing agency’s credit 

exposures to participants.614 Rule 

17Ad–22(d)(4) requires a registered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

establish business continuity plans 

setting forth procedures for the recovery 

of operations in the event of a 

disruption.615 Rule 17Ad–22(d)(11) 

further requires a registered clearing 

agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

make key aspects of the clearing 

agency’s default procedures publicly 

available and establish default 

procedures that ensure that the clearing 

agency can take timely action to contain 

losses and liquidity pressures and to 

continue meeting its obligations in the 

event of a participant default.616

In addition to meeting these 

requirements, the Commission 

understands that registered clearing 

agencies also specify actions to be taken 

when their resources are insufficient to 

cover losses faced by the registered 

clearing agency.617 These actions may 

include assessment rights on clearing 

members, forced allocation, and 

contract termination. 

b. Financial Risk Management 

Registered clearing agencies that 

provide CCP services have a variety of 

options available to mitigate the 

financial risks to which they are 

exposed. While the manner in which a 

CCP chooses to mitigate these financial 

risks depends on the precise nature of 

the CCP’s obligations, a common set of 

procedures have been implemented by 

many CCPs to manage credit and 

liquidity risks. Broadly, these 

procedures enable CCPs to manage their 

risks by reducing the likelihood of 

member defaults, limiting potential 

losses and liquidity pressure in the 

event of a member default, 

implementing mechanisms that allocate 

losses across members, and providing 

adequate resources to cover losses and 

meet payment obligations as required. 

Registered clearing agencies that 

provide CCP services must be able to 

effectively measure their credit 

exposures in order to properly manage 

those exposures. A CCP faces the risk 

that its exposure to a member can 

change as a result of a change in prices, 

positions, or both. CCPs can ascertain 

current credit exposures to each 

member by, in some cases, marking each 

member’s outstanding contracts to 

current market prices and, to the extent 

permitted by their rules and supported 

by law, by netting any gains against any 

losses. Rule 17Ad–22 includes certain 

requirements related to financial risk 

management by CCPs, including 

requirements to measure credit 

exposures to members and to use 

margin requirements to limit these 

exposures. These requirements are 

general in nature and provide registered 

clearing agencies flexibility to measure 

credit risk and set margin. Within the 

bounds of Rule 17Ad–22, CCPs may 

employ models and choose parameters 

that they conclude are appropriate to 

the markets they serve. 

The current practices of registered 

clearing agencies that provide CCP 

services generally include the following 

procedures: (1) Measuring credit 

exposures at least once a day; (2) setting 

margin coverage at a 99% confidence 

level over some set period; (3) using 

risk-based models; (4) establishing a 

fund that mutualizes losses of defaults 

by one or more participants that exceed 

margin coverage; (5) maintaining 

sufficient financial resources to 

withstand the default of at least the 

largest participant family,618 and (6), in 


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619See, e.g., CFTC–SEC Staff Roundtable on 

Clearing of Credit Default Swaps, at 123 (Oct. 2010), 

available at http://www.cftc.gov/ucm/groups/

public/@swaps/documents/dfsubmission/

dfsubmission7_102210-transcrip.pdf (Stan Ivanov 

of ICE stating, ‘‘[A]t ICE we look at two 

simultaneous defaults of the two biggest losers 

upon extreme conditions. . . .’’); see also ICE, CDS 

Client Clearing Overview, at 8 (Aug. 2013), 

available at https://www.theice.com/publicdocs/

clear_credit/ICE_Clear_Credit_Client_Clearing_

Overview.pdf (noting that the guaranty fund covers 

the simultaneous default of the two largest clearing 

members); CME Rulebook, Ch. 8H, Rule 8H07, 

available at http://www.cmegroup.com/rulebook/

CME/I/8H/8H.pdf. 

620See 17 CFR 240.17Ad–22(b)(1). 

621See 17 CFR 240.17Ad–22(b)(2). 

622See id. 

623See supra Part II.B.4.c and infra Part 

IV.C.3.a.iv(1) (discussing the related ‘‘cover one’’ 

and ‘‘cover two’’ requirements in proposed Rule 

17Ad–22(e)(4)). 

624See id. 

625See 17 CFR 240.17Ad–22(b)(2). 626See id. 

the case of security-based swap 

transactions, maintaining enough 

financial resources to be able to 

withstand the default of their two 

largest participant families.619

i. Credit Risk 

Rule 17Ad–22(b)(1) requires a 

registered clearing agency that provides 

CCP services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

measure their credit exposures at least 

once per day.620 Several CCPs have 

policies and procedures designed to 

require measuring credit exposures 

multiple times per day. 

Rule 17Ad–22(b)(3) requires a 

registered clearing agency that provides 

CCP services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

maintain sufficient financial resources 

to withstand, at a minimum, a default 

by the participant family to which it has 

the largest exposure in extreme but 

plausible market conditions.621 It 

further requires CCPs for security-based 

swaps to establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

maintain additional financial resources 

sufficient to withstand, at a minimum, 

a default by the two participant families 

to which it has the largest exposures in 

extreme but plausible market 

conditions, in its capacity as a CCP for 

security-based swaps.622 Accordingly, 

the Commission notes that Rule 17Ad– 

22(b)(3) imposes a ‘‘cover two’’ 

requirement on CCPs for security-based 

swaps in order to protect such CCPs 

from the extreme jump-to-default risk 

and nonlinear payoffs associated with 

the nature of the financial products they 

clear and the participants in the markets 

they serve. Meanwhile, CCPs that clear 

products other than security-based 

swaps are subject to a ‘‘cover one’’ 

requirement.623 Rule 17Ad–22(b)(3) also 

states that such policies and procedures 

may provide that additional financial 

resources be maintained by the CCP in 

combined or separately maintained 

funds.624

Under existing rules, CCPs collect 

contributions from their members for 

the purpose of establishing guaranty or 

clearing funds to mutualize losses under 

extreme but plausible market 

conditions. Currently, the guaranty 

funds or clearing funds consist of liquid 

assets and their sizes vary depending on 

a number of factors, including the 

products the CCP clears and the 

characteristics of CCP members. In 

particular, the guaranty funds for CCPs 

that clear security-based swaps are 

relatively larger, as measured by the size 

of the fund as a percentage of the total 

and largest exposures, than the guaranty 

or clearing funds maintained by CCPs 

for other financial instruments. CCPs 

generally take the liquidity of collateral 

into account when determining member 

obligations. Applying haircuts to assets 

posted as margin, among other things, 

mitigates the liquidity risk associated 

with selling margin assets in the event 

of a participant default. 

ii. Collateral and Margin 

Rule 17Ad–22(b)(2) requires a 

registered clearing agency that provides 

CCP services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

use margin requirements to limit their 

exposures to participants.625 This 

margin can also be used to reduce a 

CCP’s losses in the event of a participant 

default. 

Registered clearing agencies that 

provide CCP services take positions as 

substituted counterparties once their 

trade guarantee goes into effect. 

Therefore, if a counterparty whose 

obligations the registered clearing 

agency has guaranteed defaults, the 

covered clearing agency may face 

market risk, which can take one of two 

forms. First, a covered clearing agency 

is subject to the risk of movement in the 

market prices of the defaulting 

member’s open positions. Where a seller 

defaults and fails to deliver a security, 

the covered clearing agency may need to 

step into the market to buy the security 

in order to complete settlement and 

deliver the security to the buyer. 

Similarly, where a buyer defaults, the 

covered clearing agency may need to 

meet payment obligations to the seller. 

Thus, in the interval between when a 

member defaults and when the covered 

clearing agency must meet its 

obligations as a substituted counterparty 

in order to complete settlement, market 

price movements expose the covered 

clearing agency to market risk. Second, 

the covered clearing agency may need to 

liquidate non-cash margin collateral 

posted by the defaulting member. The 

covered clearing agency is therefore 

exposed to the risk that erosion in 

market prices of the collateral posted by 

the defaulting member could result in 

the covered clearing agency having 

insufficient financial resources to cover 

the losses in the defaulting member’s 

open positions. 

To manage their exposure to market 

risk resulting from fulfilling a defaulting 

member’s obligations, registered 

clearing agencies compute margin 

requirements using inputs such as 

portfolio size, volatility, and sensitivity 

to various risk factors that are likely to 

influence security prices. Moreover, 

since the size of price movements is, in 

part, a function of time, registered 

clearing agencies may limit their 

exposure to market risk by marking 

participant positions to market daily 

and, in some cases, more frequently. 

CCPs also use similar factors to 

determine haircuts applied to assets 

posted by members in satisfaction of 

margin requirements. To manage market 

risk associated with collateral 

liquidation, CCPs consider the current 

prices of assets posted as collateral and 

price volatility, asset liquidity, and the 

correlation of collateral assets and a 

member’s portfolio of open positions. 

Further, because CCPs need to value 

their margin assets in times of financial 

stress, their rulebooks may include 

features such as market-maker 

domination charges that increase 

clearing fund obligations regarding open 

positions of members in securities in 

which the member serves as a dominant 

market maker. The reasoning behind 

this charge is that, should a member 

default, liquidity in products in which 

the member makes markets may fall, 

leaving these positions more difficult to 

liquidate for non-defaulting 

participants. 

Rule 17Ab–22(b)(2) also requires a 

registered clearing agency that provides 

CCP services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide for risk-based models and 

parameters to set margin 

requirements.626 The generally 

recognized standard for such models 

and parameters is, under normal market 

conditions, price movements that 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29583 

627See 17 CFR 240.17Ad–22(a)(4). The 

Commission notes that because it is proposing to 

add new definitions to Rule 17Ad–22(a), ‘‘normal 

market conditions’’ would appear in Rule 17Ad– 

22(a)(12) in the event the proposed rules are 

adopted. The Commission is not proposing to alter 

the definition of ‘‘normal market conditions.’’ 

628See BCBS, International Convergence of 

Capital Measurement and Capital Standards: A 

Revised Framework (June 2004), available at http:// 

www.bis.org/publ/bcbs107.pdf; see also Darryll 

Hendricks & Beverly Hirtle, New Capital Rule 

Signals Supervisory Shift (Secondary Mortgage 

Mkts, Sept. 1998), available at http://www.

freddiemac.com/finance/smm/july98/pdfs/hen_

hirt.pdf. 

Prior to this standard, banks measured value-atrisk using a range of confidence intervals from 90– 

99%. See BCBS, An Internal Model-Based 

Approach to Market Risk Capital Requirements, at 

12 (Apr. 1995), available at http://www.bis.org/

publ/bcbs17.pdf. When determining the minimum 

quantitative standards for calculating risk 

measurements, the BCBS noted then the importance 

of specifying ‘‘a common and relatively 

conservative confidence level,’’ choosing the 99% 

confidence interval over other less conservative 

measures. See id. 

Since its adoption in 1998, the standard has 

become a generally recognized practice of banks to 

quantify credit risk as the worst expected loss that 

a portfolio might incur over an appropriate time 

horizon at a 99% confidence interval. See Kenji 

Nishiguchi, Hiroshi Kawai & Takanori Sazaki, 

Capital Allocation and Bank Management Based on 

the Quantification of Credit Risk, at 83 (FRBNY 

Econ. Policy Rev., Oct. 1998), available at http://

www.newyorkfed.org/research/epr/98v04n3/

9810nish.pdf; Jeff Aziz & Narat Charupat, 

Calculating Credit Exposure and Credit Loss: A 

Case Study, at 34 (Sept. 1998), available at http:// 

www.bis.org/bcbs/ca/alrequse98.pdf. 

629See 17 CFR 240.17Ad–22(b)(2). 630See 17 CFR 240.17Ad–22(b)(4). 

631See 17 CFR 240.17Ad–22(d)(5). 

632See 17 CFR 240.17Ad–22(d)(12). 

633See 17 CFR 240.17Ad–22(d)(15). 

produce changes in exposures that are 

expected to breach margin requirements 

or other risk controls only 1% of the 

time (i.e., at a 99% confidence interval) 

over a designated time horizon.627

Currently, CCPs use margin models to 

ensure coverage at a single-tailed 99% 

confidence interval. Losses beyond this 

level are typically covered by the CCP’s 

guaranty fund. This standard comports 

with existing international standards for 

bank capital requirements, which 

require banks to measure market risks at 

a 99% confidence interval when 

determining regulatory capital 

requirements.628

Rule 17Ad–22(b)(2) also requires a 

registered clearing agency that provides 

CCP services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

review such margin requirements and 

the related risk-based models and 

parameters at least monthly.629 CCPs are 

accordingly required to establish a 

model validation process that evaluates 

the adequacy of margin models, 

parameters, and assumptions. 

Additionally, CCPs are required to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to provide for an 

annual model validation consisting of 

evaluating the performance of the CCPs’ 

margin models and the related 

parameters and assumptions associated 

with such models by a qualified person 

who is free from influence from the 

persons responsible for the development 

or operation of the models being 

validated.630

iii. Liquidity Risk 

In addition to credit risk and the 

aforementioned market risk, registered 

clearing agencies also face liquidity or 

funding risk. Currently, to complete the 

settlement process, registered clearing 

agencies that employ netting rely on 

incoming payments from participants in 

net debit positions in order to make 

payments to participants in net credit 

positions. If a participant does not have 

sufficient funds or securities in the form 

required to fulfill a payment obligation 

immediately when due (even though it 

may be able to pay at some future time), 

or if a settlement bank is unable to make 

an incoming payment on behalf of a 

participant, a registered clearing agency 

may face a funding shortfall. Such 

funding shortfalls may occur due to a 

lack of financial resources necessary to 

meet delivery or payment obligations, 

however even registered clearing 

agencies that do hold sufficient 

financial resources to meet their 

obligations may not carry those in the 

form required for delivery or payments 

to participants. 

A registered clearing agency that 

provides CCP services may hold 

additional financial resources to cover 

potential funding shortfalls in the form 

of collateral. As noted above, CCPs may 

take the liquidity of collateral into 

account when determining member 

obligations. Applying haircuts to 

illiquid assets posted as margin 

mitigates the liquidity risk associated 

with selling margin assets in the event 

of participant default. Some registered 

CCPs also arrange for liquidity provision 

from other financial institutions using 

lines of credit. Additionally, some 

registered clearing agencies enter into 

prearranged funding agreements with 

their members pursuant to their rules. 

For example, members of one registered 

clearing agency are obligated to enter 

into repurchase agreements against 

securities that would have been 

delivered to a defaulting member. 

No rule under the Exchange Act 

currently requires a registered clearing 

agency through its written policies and 

procedures to address liquidity risk. 

c. Settlement 

Rule 17Ad–22(d)(5) requires a 

registered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to employ money 

settlement arrangements that eliminate 

or strictly limit the clearing agency’s 

settlement bank risks and require funds 

transfers to the clearing agency to be 

final when effected.631 Rule 17Ad– 

22(d)(12) further requires a registered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

ensure that final settlement occurs no 

later than the end of the settlement 

day.632 Accordingly, for example, 

certain registered clearing agencies 

provide for final settlement of securities 

transfers no later than the end of the day 

of the transaction. Rule 17Ad–22(d)(15) 

also requires a registered clearing 

agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

state to its participants the clearing 

agency’s obligations with respect to 

physical deliveries and identify and 

manage the risks from these 

obligations.633

d. CSDs and Exchange-of-Value 

Settlement Systems 

i. CSDs 

Rule 17Ad–22(d)(10) requires a 

registered clearing agency that provides 

CSD services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

maintain securities in an immobilized 

or dematerialized form for transfer by 

book entry to the greatest extent 

possible. Currently, some securities, 

such as mutual fund securities and 

government securities, are issued 

primarily or solely on a dematerialized 

basis. Dematerialized shares do not exist 

as physical certificates but are held in 

book entry form in the name of the 

owner (which, where the master 

security holder file is not maintained on 

paper due to the use of technology, is 

also referred to as electronic custody). 

Other types of securities may be issued 

in the form of one or more physical 

security certificates, which could be 

held by the CSD to facilitate 

immobilization. Alternatively, securities 

may be held by the beneficial owner in 

record name, in the form of book-entry 

positions, where the issuer offers the 

ability for a security holder to hold 

through the direct registration system. 


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29584 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

634See 17 CFR 240.17Ad–22(d)(13); see also 

Clearing Agency Standards Release, supra note 5, 

at 66256. 

635See supra note 293 (discussing existing rules 

applicable to registered broker-dealers that address 

customer security positions and funds in cash 

securities and listed option markets, thereby 

promoting segregation and portability at the brokerdealer level). 636See 17 CFR 240.17Ad–22(d)(3). 

Whether immobilization occurs at the 

CSD or through direct registration 

depends on what is provided for by the 

issuer. 

When a trade occurs, the depository’s 

accounting system credits one 

participant account and debits another 

participant account. Transactions 

between counterparties in 

dematerialized shares are recorded by 

the registrar responsible for maintaining 

the paper or electronic register of 

security holders, such as by a transfer 

agent, and reflected in customer 

accounts. 

Registered CSDs currently reconcile 

ownership positions in securities 

against CSD ownership positions on the 

security holders list daily, mitigating the 

risk of unauthorized creation or deletion 

of shares. 

ii. Exchange-of-Value Settlement 

Systems 

Rule 17Ad–22(d)(13) requires a 

registered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to eliminate 

principal risk by linking securities 

transfers to funds transfers in a way that 

achieves delivery versus payment,634

which serves to link obligations by 

conditioning the final settlement of one 

upon the final settlement of the other. 

One registered clearing agency, for 

example, operates a Model 2 DVP 

system that provides for gross securities 

transfers during the day followed by an 

end-of-day net funds settlement. Under 

the rules governing the clearing agency’s 

system, the delivering party in a DVP 

transaction is assured that it will be 

paid for the securities once they are 

credited to the receiving party’s 

securities account. DVP eliminates the 

risk that a buyer would lose the 

purchase price of a security purchased 

from a defaulting seller or that a seller 

would lose the sold security without 

receiving payment for a security 

acquired by a defaulting buyer. 

For example, one registered clearing 

agency has rules governing its 

continuous net settlement (‘‘CNS’’) 

system, under which it becomes the 

counterparty for settlement purposes at 

the point its trade guarantee attaches, 

thereby assuming the obligation of its 

members that are receiving securities to 

receive and pay for those securities, and 

the obligation of members that are 

delivering securities to make the 

delivery. Unless the clearing agency has 

invoked its default rules, it is not 

obligated to make those deliveries until 

it receives from members with delivery 

obligations deliveries of such securities; 

rather, deliveries that come into CNS 

ordinarily are promptly redelivered to 

parties that are entitled to receive them 

through an allocation algorithm. 

Members are obligated to take and pay 

for securities allocated to them in the 

CNS process. These rules also provide 

mechanisms to allow receiving members 

a right to receive high priority in the 

allocation of deliveries, and also permit 

a member to buy-in long positions that 

have not been delivered to it by the 

close of business on the scheduled 

settlement date. 

e. Default Management 

i. Participant-Default Rules and 

Procedures 

Rule 17Ad–22(d)(11) requires a 

registered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to make key 

aspects of its default procedures 

publicly available and establish default 

procedures that ensure it can take 

timely action to contain losses and 

liquidity pressures and to continue 

meeting its obligations in the event of a 

participant default. The rules of 

registered clearing agencies typically 

state what constitutes a default, identify 

whether the board or a committee of the 

board may make that determination, and 

describe what steps the clearing agency 

may take to protect itself and its 

members. In this regard, registered 

clearing agencies typically attempt, 

among other things, to hedge and 

liquidate a defaulting member’s 

positions. Rules of registered clearing 

agencies also include information about 

the allocation of losses across available 

financial resources. 

ii. Segregation and Portability 

No rule under the Exchange Act 

currently requires a registered clearing 

agency through its written policies and 

procedures to enable the portability of 

positions of a member’s customers and 

the collateral provided in connection 

therewith. Additionally, no rule under 

the Exchange Act currently requires a 

registered clearing agency through its 

written policies and procedures to 

protect the positions of a member’s 

customers from the default or 

insolvency of the member.635

f. General Business and Operational 

Risk Management 

i. General Business Risk 

Business risk refers to the risks and 

potential losses arising from a registered 

clearing agency’s administration and 

operation as a business enterprise that 

are neither related to member default 

nor separately covered by financial 

resources designated to mitigate credit 

or liquidity risk. While Rule 17Ad–22 

sets forth requirements for registered 

clearing agencies to identify, monitor, 

and mitigate or eliminate a broad array 

of risks through written policies and 

procedures, no rule under the Exchange 

Act expressly requires a registered 

clearing agency through its written 

policies and procedures to identify, 

monitor, and manage general business 

risk or to meet a capital requirement. 

Nonetheless, registered clearing 

agencies currently have certain internal 

controls in place to mitigate business 

risk. Some clearing agencies, for 

instance, have policies and procedures 

that identify an auditor who is 

responsible for examining accounts, 

records, and transactions, as well as 

other duties prescribed in the audit 

program. Other registered clearing 

agencies allow members to collectively 

audit the books of the clearing agency 

on an annual basis, at their own 

expense. 

ii. Custody and Investment Risks 

Registered clearing agencies face 

default risk from commercial banks that 

they use to effect money transfers 

among participants, to hold overnight 

deposits, and to safeguard collateral. 

Rule 17Ad–22(d)(3) requires a registered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

(i) hold assets in a manner that 

minimizes risk of loss or delay in its 

access to them; and (ii) invest assets in 

instruments with minimal credit, 

market, and liquidity risks.636

Registered clearing agencies currently 

seek to minimize the risk of loss or 

delay in access by holding assets that 

are highly liquid (e.g., cash, U.S. 

Treasury securities, or securities issued 

by a U.S. government agency) and by 

engaging banks to custody the assets 

and facilitate settlement. Typically, 

registered clearing agencies take steps to 

ensure that assets held in custody are 

protected from claims from the 

custodian’s creditors using trust 

accounts or equivalent arrangements. 

Additionally, designated clearing 

agencies may gain access to account 


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637See supra Part II.B.4.f.iii (discussing the 

requirement under proposed Rule 17Ad– 

22(e)(7)(iii) for a covered clearing agency to have 

policies and procedures reasonably designed to 

ensure it has access to account services at a Federal 

Reserve Bank or other relevant central bank). 

638See 17 CFR 240.17Ad–22(d)(4). 

639See id. 

640Many of these practices had been previously 

developed pursuant to prior Commission 

guidelines. See ARP I and II, supra note 324; see 

also supra note 326 (discussing related 

requirements under proposed Regulation SCI). 

641See, e.g., NSCC, Assessment of Compliance 

with the CPSS/IOSCO Recommendations for 

Central Counterparties (Nov. 2011), available at 

http://www.dtcc.com/legal/policy-andcompliance.aspx. 

642See 17 CFR 240.17Ad–22(b)(5). 

643See 17 CFR 240.17Ad–22(b)(6). 

644See 17 CFR 240.17Ad–22(b)(7). 

645See 17 CFR 240.17Ad–22(d)(2). 646See supra Part IV.B.1. 

services at a Federal Reserve Bank, to 

the extent such services are not already 

available as the result of other laws and 

regulations.637

iii. Operational Risk 

Operational risk refers to a broad 

category of potential losses arising from 

deficiencies in internal processes, 

personnel, and information technology. 

Registered clearing agencies face 

operational risk from both internal and 

external sources, including human 

error, system failures, security breaches, 

and natural or man-made disasters. Rule 

17Ad–22(d)(4) requires a registered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

identify sources of operational risk and 

to minimize those risks through the 

development of appropriate systems, 

controls and procedures.638 It also 

requires a registered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to (i) implement 

systems that are reliable and secure, and 

have adequate, scalable capacity; and 

(ii) have business continuity plans that 

allow for timely recovery of operations 

and fulfillment of a clearing agency’s 

obligations.639

As a result, registered clearing 

agencies have developed and currently 

maintain plans to assure the 

safeguarding of securities and funds, the 

integrity of automated data processing 

systems, and the recovery of securities, 

funds, or data under a variety of loss or 

destruction scenarios.640 These plans 

may include turning operations over to 

a secondary site that is located a 

sufficient distance from the primary 

location to ensure a distinct geographic 

risk profile. In addition, registered 

clearing agencies generally maintain an 

internal audit department to review the 

adequacy of their internal controls, 

procedures, and records with respect to 

operational risks. Some registered 

clearing agencies also engage 

independent accountants to perform an 

annual study and evaluation of the 

internal controls relating to their 

operations.641

g. Access 

i. Access and Participation 

Requirements 

Rule 17Ad–22(b)(5) requires a 

registered clearing agency that provides 

CCP services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide the opportunity for a person 

that does not perform any dealer or 

security-based swap dealer services to 

obtain membership on fair and 

reasonable terms at the clearing agency 

to clear securities for itself or on behalf 

of other persons.642 Rule 17Ad–22(b)(6) 

requires a registered clearing agency 

that provides CCP services to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to have 

membership standards that do not 

require participants to maintain a 

portfolio of any minimum size or a 

minimum transaction volume.643 Rule 

17Ad–22(b)(7) requires a registered 

clearing agency that provides CCP 

services to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide a person that maintains net 

capital equal or greater than $50 million 

with the ability to obtain membership at 

the clearing agency, provided such 

persons are able to comply with 

reasonable membership standards, with 

higher net capital requirements 

permissible subject to Commission 

approval.644

In addition, Rule 17Ad–22(d)(2) 

requires a registered clearing agency to 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to require 

participants to have sufficient financial 

resources and robust operational 

capacity to meet obligations arising from 

participation in the clearing agency, 

have procedures in place to monitor that 

participation requirements are met on 

an ongoing basis, and have participation 

requirements that are objective and 

publicly disclosed, and permit fair and 

open access.645 Typically, a registered 

clearing agency’s rulebook requires 

applicants for membership to provide 

certain financial and operational 

information prior to being admitted as a 

member and on an ongoing basis as a 

condition of continuing membership. 

Registered clearing agencies review this 

information to ensure that the applicant 

has the operational capability to meet 

the other demands of interfacing with 

the clearing agency. In particular, 

registered clearing agencies typically 

require that an applicant demonstrate 

that it has adequate personnel capable 

of handling transactions with the 

clearing agency and adequate physical 

facilities, books and records, and 

procedures to fulfill its anticipated 

commitments to, and to meet the 

operational requirements of, the clearing 

agency and other members with 

necessary promptness and accuracy. As 

a result, an applicant needs to 

demonstrate that it has adequate 

personnel capable of handling 

transactions with the clearing agency 

and adequate physical facilities, books 

and records, and procedures to conform 

to conditions or requirements in these 

areas that the clearing agency 

reasonably may deem necessary for its 

protection. Registered clearing agencies 

have published these requirements on 

their Web sites. 

Registered clearing agencies use an 

ongoing monitoring process to help 

them understand relevant changes in 

the financial condition of their members 

and to mitigate credit risk exposure of 

the clearing agency to its members. The 

risk management staff analyzes financial 

statements filed with regulators, as well 

as information obtained from other 

SROs and gathered from various 

financial publications, so that the 

clearing agency may evaluate, for 

instance, whether members maintain 

sufficient financial resources and robust 

operational capacity to meet their 

obligations as participants in the 

clearing agency pursuant to existing 

Rule 17Ad–22(d)(2)(i). 

Table 1 contains membership 

statistics for registered clearing 

agencies.646 Current membership 

generally reflects features of cleared 

markets. The decision to become a 

clearing member depends on the 

products being cleared, the structure of 

these asset markets as well as the 

current state of regulation for cleared 

markets. For example, the structure of 

security-based swap markets and the 

payoffs to security-based swap contracts 

differs markedly from that of equity 

markets and common stock, which may 

explain some of the differences between 

the concentrated membership of certain 

clearing agencies and the relatively 

broader membership of others. 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29586 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

647See 17 CFR 240.17Ad–22(d)(7). 

648See Exchange Act Release No. 52784 (Nov. 16, 

2005), 71 FR 70902 (Nov. 23, 2005); Exchange Act 

Release No. 55239 (Feb. 5, 2007), 72 FR 6797 (Feb. 

13, 2007). 649See 17 CFR 240.17Ad–22(d)(6). 

650See 17 CFR 240.17Ad–22(d)(9). 

651See supra Part I.A and note 95 (describing the 

Commission’s framework for regulation of SROs 

and the SRO rule filing process). 

652See supra note 362 (discussing requirements 

under Rule 19b–4(i)). 

653See proposed Rule 17Ab2–2, infra Part VII. 

ii. Tiered Participation Arrangements 

Tiered participation arrangements 

occur when clearing members (direct 

participants) provide access to clearing 

services to third parties (indirect 

participants). No rule under the 

Exchange Act currently requires a 

registered clearing agency through its 

written policies and procedures to 

identify, monitor, and manage material 

risks arising from tiered participation 

arrangements. The Commission 

understands, however, that certain 

registered clearing agencies have 

policies and procedures currently in 

place in order to identify, monitor, or 

manage such arrangements. Specifically, 

such clearing agencies rely on 

information gathered from, and 

distributed by, direct participants in 

order to manage these tiered 

participation arrangements. For 

example, under some covered clearing 

agencies’ rules, direct participants 

generally have the responsibility to 

indicate to the clearing agency whether 

a transaction submitted for clearing 

represents a proprietary or customer 

position. Such rules further require 

direct participants to calculate, and 

notify the clearing agency of the value 

of, each customer’s collateral. Direct 

participants also communicate with 

indirect participants regarding the 

clearing agency’s margin and other 

requirements. 

iii. Links 

Rule 17Ad–22(d)(7) requires a 

registered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to evaluate the 

potential sources of risks that can arise 

when the clearing agency establishes 

links either cross-border or domestically 

to clear or settle trades, and ensure that 

the risks are managed prudently on an 

ongoing basis.647

Each registered clearing agency is 

linked to other clearing organizations, 

trading platforms, and service providers. 

For instance, a link between U.S. and 

Canadian clearing agencies allows U.S. 

members to clear and settle valued 

securities transactions with participants 

of a Canadian securities depository. The 

link is designed to facilitate cross-border 

transactions by allowing members to use 

a single depository interface for U.S. 

and Canadian dollar transactions and 

eliminate the need for split 

inventories.648 Registered clearing 

agencies that provide CCP services 

currently establish links to allow 

members to realize collateral and other 

operational efficiencies. 

h. Efficiency 

i. Efficiency and Effectiveness 

Rule 17Ad–22(d)(6) requires a 

registered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to require the 

clearing agency to be cost-effective in 

meeting the requirements of participants 

while maintaining safe and secure 

operations.649 Registered clearing 

agencies have procedures to control 

costs and to regularly review pricing 

levels against operating costs. These 

clearing agencies may use a formal 

budgeting process to control 

expenditures, and may review pricing 

levels against their costs of operation 

during the annual budget process. 

Registered clearing agencies also 

analyze workflows in order to make 

recommendations to improve their 

operating efficiency. 

ii. Communication Procedures and 

Standards 

Although no rule under the Exchange 

Act expressly requires a registered 

clearing agency through its written 

policies and procedures to use or 

accommodate relevant internationally 

accepted communication procedures 

and standards, the Commission believes 

that registered clearing agencies already 

use these standards. Registered clearing 

agencies typically rely on electronic 

communication with market 

participants, including members. For 

example, some registered clearing 

agencies have rules in place stating that 

clearing members must retrieve 

instructions, notices, reports, data, and 

other items and information from the 

clearing agency through electronic data 

retrieval systems. Some registered 

clearing agencies have the ability to rely 

on signatures transmitted, recorded, or 

stored through electronic, optical, or 

similar means. Other clearing agencies 

have policies and procedures that 

provide for certain emergency meetings 

using telephonic or other electronic 

notice. 

i. Transparency 

Transparency requirements and 

disclosures by registered clearing 

agencies serve to limit the size of 

potential information asymmetries 

between registered clearing agencies, 

their members, and market participants. 

Rule 17Ad–22(d)(9) requires a registered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

provide market participants with 

sufficient information for them to 

identify and evaluate risks and costs 

associated with using the clearing 

agency’s services.650 Information 

regarding the operations and services of 

each registered clearing agency can be 

viewed publicly either on the clearing 

agency’s Web site or a Web site 

maintained by an affiliate of the clearing 

agency. Because registered clearing 

agencies are SROs,651 changes to their 

rules are published by the Commission 

and are available for public viewing on 

each clearing agency’s Web site.652

Besides providing market participants 

with information on the risks and costs 

associated with their services, registered 

clearing agencies regularly provide 

information to their members to assist 

them in managing their risk exposures 

and potential funding obligations. Some 

of these disclosures may be common to 

all members—such as information about 

the composition of clearing fund 

assets—while other disclosures that 

concern particular positions or 

obligations may only be made to 

individual members. 

4. Determinations by the Commission 

Currently, although Rule 17Ad–22(d) 

applies to registered clearing agencies, 

no mechanism exists for the 

Commission to make determinations 

with regard to covered clearing agencies 

of the type that would occur under 

proposed Rule 17Ab2–2.653

C. Consideration of Benefits, Costs, and 

the Effect on Competition, Efficiency, 

and Capital Formation 

The discussion below sets forth the 

potential economic effects stemming 

from the proposed rules. The section 

begins by framing more general 

economic issues related to the proposed 

amendments to Rule 17Ad–22 and 

proposed Rule 17Ab2–2. The discussion 

that follows considers the effects of the 

proposed rules on efficiency, 

competition, and capital formation. The 

section ends with a discussion of the 

benefits and costs flowing from specific 

provisions of the proposed amendments 

to Rule 17Ad–22 and proposed Rule 

17Ab2–2. 


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654Cf. PFMI Report, supra note 1, at 9. 

655See e.g., Itzhak Gilboa & David Schmeidler, 

Maxmin Expected Utility with Non-Unique Prior, 

18 J. Mathematical Econ. 141 (1989) (proposing an 

axiomatic foundation of a decision rule based on 

maximizing expected minimum payoff of a 

strategy). 

656Specifically, by performing key roles in the 

transaction process, clearing agencies serve to 

maintain higher minimum payoffs in poor states of 

the world, by, for example, immobilizing securities 

or adopting DVP systems. 

657See e.g., David Easley & Maureen O’Hara, 

Microstructure and Ambiguity, 65 J. Fin. 1817 

(2010) (using a theoretical model of trade on venues 

that differ in rules, the authors show how rules that 

reduce market-related ambiguity may induce a 

participatory equilibrium). 

658The Commission preliminarily notes that the 

Commission’s proposal provides a greater level 

detail than the proposed PSR Policy and is tailored 

to take into account considerations particular to 

covered clearing agencies, consistent with the 

Commission’s role as the supervisory agency under 

the Clearing Supervision Act. The Commission 

further notes that, in contrast to the Board’s PSR 

Policy, proposed Rule 17Ad–22(e) would constitute 

an enforceable federal regulation if adopted. See 

proposed PSR Policy, supra note 53, at 2841 

(distinguishing the legal effect of proposed Reg. HH 

from the proposed PSR Policy). 

1. General Economic Considerations 

The proposed amendments to Rule 

17Ad–22, taken as a whole, would 

likely produce economic effects that are 

either conditioned on multiple 

provisions of proposed Rule 17Ad–22(e) 

being implemented as a set or are 

simply common to multiple provisions 

of the proposal. Since these economic 

effects are attributable in some way to 

each of the individual subsections of 

proposed Rule 17Ad–22(e), this section 

considers potential impacts of the 

proposed amendments, as a whole, 

through their effects on systemic risk, 

the discretion with which covered 

clearing agencies operate, market 

integrity, concentration in the market 

for clearing services and among clearing 

members, and QCCP status. 

a. Systemic Risk 

A large portion of financial activity in 

the United States ultimately flows 

through one or more registered clearing 

agencies that would become covered 

clearing agencies under the proposed 

rules. These clearing agencies have 

direct links to members and indirect 

links to the customers of members. They 

are also linked to each other through 

common members, operational 

processes, and in some cases crossmargining and cross-guaranty 

agreements. These linkages allow 

covered clearing agencies to provide 

opportunities for risk-sharing but also 

allow them to serve as potential 

conduits for risk transmission. Covered 

clearing agencies play an important role 

in fostering the proper functioning of 

financial markets. If they are not 

effectively managed, however, they may 

transmit financial shocks, particularly 

on days of market stress. 

The centralization of clearance and 

settlement activities at covered clearing 

agencies allows market participants to 

reduce costs, increase operational 

efficiency, and manage risks more 

effectively.654 While providing benefits 

to market participants, the 

concentration of these activities at a 

covered clearing agency implicitly 

exposes market participants to the risks 

faced by covered clearing agencies 

themselves, making risk management at 

covered clearing agencies a key element 

of systemic risk mitigation. 

b. Discretion 

The Commission recognizes that the 

degree of discretion permitted by the 

proposed rules partially determines 

their economic effect. Even where 

current practices at covered clearing 

agencies would not need to change 

significantly to comply with the 

proposed rules, covered clearing 

agencies could still potentially face 

costs associated with the limitations on 

discretion that will result from the 

proposed rules, including costs related 

to limiting a clearing agency’s flexibility 

to respond to changing economic 

environments. For example, to the 

extent that covered clearing agencies 

currently in compliance with the 

proposed rules value the ability to 

periodically allow net liquid assets to 

drop below the minimum level 

specified by the proposed rules, they 

may incur additional costs because 

under the proposed rules they lose the 

option to do so. 

Although there may be costs to 

limiting the degree of discretion covered 

clearing agencies have over risk 

management policies and procedures, 

the Commission preliminarily believes 

there are also potential benefits. As 

discussed above, clearing agencies may 

not fully internalize the social costs of 

poor internal controls and thus, given 

additional discretion, may not craft 

appropriate risk management policies 

and procedures. For example, even if 

existing regulation provides clearing 

agencies with the incentives necessary 

to manage risks appropriately in a static 

sense, they may not provide clearing 

agencies with incentives to update their 

risk management programs in response 

to dynamic market conditions. 

Additionally, efforts at cost reduction or 

profit maximization could encourage 

clearing agencies to reduce the quality 

of risk management by, for example, 

choosing to update parameters and 

assumptions rapidly in periods of low 

volatility while maintaining stale 

parameters and assumptions in periods 

of high volatility. By reducing covered 

clearing agencies’ discretion over their 

policies and procedures, the proposed 

amendments to Rule 17Ad–22 may 

reduce the likelihood that risk 

management practices lag behind 

changing market conditions by requiring 

periodic analysis of model performance 

while paying particular attention to 

periods of high volatility or low 

liquidity. 

Subjecting covered clearing agencies 

to more specific requirements may have 

other benefits for cleared markets as 

well. Recent academic research has 

explored the ways in which regulation 

affects liquidity in financial markets 

when participants are ‘‘ambiguity 

averse,’’ where ambiguity is defined as 

uncertainty over the set of payoff 

distributions for an asset.655 Such 

investors may heavily weigh worst-case 

scenarios when they decide whether to 

hold the asset. The Commission 

preliminarily believes that regulation 

aimed at enhancing standards for 

covered clearing agencies while 

reducing their discretion may reduce 

the ambiguity associated with holding 

cleared assets in the presence of credit 

risk and settlement risk 656 and thus 

may allow investors to rule out worstcase states of the world. In this regard, 

more specific rules may encourage 

participation in cleared markets by 

investors that benefit from resulting 

risk-sharing opportunities.657

c. Market Integrity 

The Commission preliminarily 

believes that the proposed amendments 

to Rule 17Ad–22 could provide the 

benefit of reduced potential for market 

fragmentation that may arise from 

different requirements across regulatory 

regimes. These benefits would flow to 

markets that are also supervised by the 

Board and the CFTC, and 

internationally, since cleared markets 

are global in nature and linked to one 

another through common participants. 

Based on its consultation and 

coordination with other regulators, the 

Commission preliminarily believes its 

proposal is consistent and comparable, 

where possible and appropriate, with 

the rules and policy statement proposed 

by the Board and the rules adopted by 

the CFTC. The Board’s proposed 

revisions to its PSR Policy incorporate 

only the headline principles contained 

in the PFMI Report and are consistent 

with the Commission’s approach in 

proposed Rule 17Ad–22(e).658

With respect to the rules proposed by 

the Board and adopted by the CFTC, in 


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659For example, the Commission preliminarily 

believes that proposed Rule 17Ad–22(e)(23), 

requiring disclosure of rules, key procedures, and 

market data, contains the same substantive 

requirements as rules proposed by the Board and 

adopted by the CFTC. See proposed Reg. HH, supra 

note 53, at 3686–88, 3693 (the Board proposing Sec. 

234.3(a)(23)); DCO Int’l Standards Release, supra 

note 53, at 72493–94, 72521 (CFTC adopting Sec. 

39.37). 

In this case, the Commission notes that regulators 

have taken slightly different approaches to 

achieving disclosure of rules, key procedures, and 

market data. The CFTC requires disclosure through 

the CPSS–IOSCO Disclosure Framework. See DCO 

Int’l Standards Release, supra note 53, at 72493–94, 

72521 (CFTC adopting Sec. 39.37(a)); see also 

CPSS–IOSCO, Disclosure Framework for Financial 

Market Infrastructures (Apr. 2012), available at 

http://www.bis.org/publ/cpss101c.pdf. The 

Commission and the Board have proposed to 

require disclosure through a comprehensive public 

disclosure set forth in their proposed rules. The 

Commission preliminarily believes, however, that 

the three disclosure regimes impose the same 

substantive requirements. 

660See proposed Reg. HH, supra note 53, at 3677– 

78, 3691 (the Board proposing Sec. 234.3(a)(7)); 

DCO Int’l Standards Release, supra note 53, at 

72487–91, 72518 (CFTC adopting Sec. 39.33(c)). 

661See 17 CFR 39.16; proposed Reg. HH, supra 

note 53, at 3680–81, 3692 (the Board proposing Sec. 

234.3(a)(13)); see also DCO Principles Release, 

supra note 53, at 69395–97, 69442 (CFTC adopting 

Sec. 39.16). 

many instances the rules proposed by 

the Commission are consistent with 

these regulatory provisions, as each of 

the three rule sets are intended to be 

consistent with the headline principles 

contained in the PFMI Report,659 but the 

Commission’s proposals differ from 

those requirements proposed by the 

Board and adopted by the CFTC in 

terms of the specific portions of the key 

considerations and explanatory text 

contained in the PFMI Report that are, 

or are not, referenced or emphasized. In 

some cases, the Commission is 

proposing more specific requirements 

than those proposed by the Board or 

adopted the CFTC, and, in others, it is 

proposing rules with fewer additional 

specific requirements. 

The following discussion provides 

examples of proposed rule provisions 

that are representative of the differences 

between the Commission’s proposal and 

the Board’s proposal and the CFTC’s 

final rules, where the Commission is 

proposing more detailed requirements 

than those proposed by the Board or 

adopted by the CFTC: 

• In proposing Rule 17Ad–22(e)(4), 

the Commission would explicitly permit 

a covered clearing agency’s policies and 

procedures to be reasonably designed to 

maintain financial resources either in 

combined or separately maintained 

clearing or default funds. Rules 

proposed by the Board and adopted by 

the CFTC do not include a comparable 

provision. The Commission 

preliminarily believes this requirement 

is appropriate because permitting a 

covered clearing agency to maintain a 

separate default fund for purposes of 

complying with proposed Rules 17Ad– 

22(e)(4)(ii) and (iii) increases the range 

of options available to covered clearing 

agencies when complying with this 

requirement and, when used 

appropriately, will allow a covered 

clearing agency to distribute the costs 

and responsibilities of clearing 

membership more equitably among 

clearing members. 

• In proposing Rule 17Ad–22(e)(7), 

the Commission would permit a covered 

clearing agency’s policies and 

procedures to include as qualifying 

liquid resources (i) assets that are 

readily available and convertible into 

cash through prearranged funding 

arrangements determined to be highly 

reliable even in extreme but plausible 

market conditions by the board of 

directors of the covered clearing agency, 

following a review conducted for this 

purpose not less than annually, and (ii) 

other assets that are readily available 

and eligible for pledging to a relevant 

central bank, if the covered clearing 

agency has access to routine credit at 

such central bank that permits said 

pledges or other transactions by the 

covered clearing agency. Rules proposed 

by the Board do not include a provision 

comparable to either of these two 

proposed requirements, and rules 

adopted by the CFTC do not include a 

provision including as qualifying liquid 

resources assets readily available and 

eligible for pledging to a central bank.660

The Commission preliminarily 

believes this requirement is appropriate 

given the specific circumstances of the 

U.S. securities markets. U.S. securities 

markets are among the largest and most 

liquid in the world, and CCPs operating 

in the United States are also among the 

largest in the world. The resulting peak 

liquidity demands of CCPs are therefore 

proportionately large on both an 

individual and an aggregate basis, and 

the ability of CCPs to satisfy a 

requirement limiting qualifying liquid 

resources to committed facilities could 

be constrained by the capacity of 

traditional liquidity sources in the U.S. 

banking sector in certain circumstances. 

The Commission preliminarily believes 

that limiting the funding arrangements 

that are included within the definition 

of qualifying liquid resources to 

committed funding arrangements is not 

appropriate in the case of the U.S. 

securities markets and expanding the 

concept of qualifying liquid resources to 

include other highly reliable funding 

arrangements is necessary and 

appropriate to ensure the proper 

functioning of covered clearing agencies 

under the Exchange Act. For similar 

reasons, the Commission preliminarily 

believes it is appropriate to include in 

the definition of qualifying liquid 

resources assets that a central bank 

would permit a covered clearing agency 

to use as collateral, to the extent such 

covered clearing agency has access to 

routine credit at such central bank. 

• In proposing Rule 17Ad–22(e)(13), 

the Commission would explicitly 

require a covered clearing agency’s 

policies and procedures to be 

reasonably designed to ensure that the 

covered clearing agency has the 

authority and operational capacity to 

contain losses and liquidity demands in 

a timely manner and to continue to meet 

its obligations by, among other things, 

addressing the allocation of credit losses 

the covered clearing agency may face. 

Rules proposed by the Board and 

adopted by the CFTC do not include a 

comparable provision to address the 

allocation of credit losses.661 The 

Commission preliminarily believes this 

requirement is appropriate to help 

ensure that credit losses a covered 

clearing agency may reasonably be 

expected to experience are capable of 

allocation through pre-established 

practices of the covered clearing agency. 

The proposed rule would also facilitate 

the orderly handling of member defaults 

and provide certainty and transparency 

by enabling members to understand 

their obligations to the covered clearing 

agency in extreme circumstances ex 

ante. 

• In proposing Rule 17Ad–22(e)(18), 

the Commission would explicitly 

require a covered clearing agency’s 

policies and procedures to be 

reasonably designed to require 

monitoring of compliance with access 

and participation requirements. Rules 

proposed by the Board and adopted by 

the CFTC do not include a comparable 

provision. The Commission 

preliminarily believes this requirement 

is consistent with Exchange Act 

provisions requiring registered clearing 

agencies to have rules designed to not 

permit unfair discrimination in the 

admission of participants because it 

helps ensure that a covered clearing 

agency complies with its own 

membership requirements. 

• In proposing Rule 17Ad–22(e)(19), 

the Commission would explicitly 

require a covered clearing agency’s 

policies and procedures to be 

reasonably designed to require regular 

review of its tiered participation 

arrangements. Rules proposed by the 

Board and adopted by the CFTC do not 

include a comparable provision. The 


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662See DCO Int’l Standards Release, supra note 

53, at 72480–81, 72515 (CFTC adopting Sec. 39.30). 

663See 15 U.S.C. 78c(a)(27). 

664See supra note 111 (discussing rules for 

governance arrangements proposed by the 

Commission to, among other things, mitigate 

conflicts of interest at registered clearing agencies 

that provide CCP services for security-based swaps). 

665See DCO Int’l Standards Release, supra note 

53, at 72492–93, 72520 (CFTC adopting Sec. 

39.36(c)). 

666See 17 CFR 39.11, 39.13; see also DCO 

Principles Release, supra note 53 (CFTC adopting 

Secs. 39.11 and 39.13). 667See 17 CFR 39.13(g)(2); see also DCO 

Principles Release, supra note 53, at 69364–79, 

69438 (CFTC adopting Sec. 39.13(g)(2)). 

668See supra Part I.A and note 96 (describing the 

Commission’s framework for regulation of SROs 

and the SRO rule filing process). 

669For example, the Commission is proposing 

Rules 17Ad–22(e)(11) and (12) to establish 

requirements for covered clearing agencies that 

provide CSD services and for exchange-of-value 

settlement systems. See supra Parts II.B.8–9 and 

infra Part VII (discussing the proposed rules and 

providing rule text, respectively). The CFTC has not 

proposed comparable rules because CSDs and 

securities settlement systems do not fall within the 

scope of its regulatory authority. 

Commission preliminarily believes this 

requirement is consistent with Exchange 

Act provisions requiring registered 

clearing agencies to have rules designed 

to not permit unfair discrimination in 

the admission of participants because it 

helps ensure that a covered clearing 

agency periodically reconsiders whether 

in practice its membership requirements 

may result in either an inappropriately 

broad or narrow membership. 

The following discussion provides 

examples of proposed rule provisions 

that are representative of the differences 

between the Commission’s proposal and 

the Board’s proposal and the CFTC’s 

final rules, where the Commission is 

proposing requirements that are more 

general than those proposed by the 

Board or adopted by the CFTC: 

• In proposing Rule 17Ad–22(e)(2), 

the Commission would not require a 

covered clearing agency’s policies and 

procedures to be reasonably designed to 

include requirements for disclosure of 

board decisions, review of the 

performance of the board of directors 

and individual directors, documentation 

and disclosure of governance 

arrangements, procedures for managing 

conflicts of interests involving board 

members, and oversight of the risk 

function. Rules adopted by the CFTC 

include such requirements.662 The 

Commission preliminarily believes that 

such requirements would in part be 

duplicative of existing Exchange Act 

requirements applicable to covered 

clearing agencies grounded in the broad 

definition of the term ‘‘rules of a 

clearing agency’’ in Section 3(a)(27) of 

the Exchange Act,663 and otherwise 

have been contemplated by the 

Commission’s proposed Regulation 

MC.664 Accordingly any further 

requirements in this respect would be 

considered by the Commission 

separately. 

• In proposing Rules 17Ad–22(e)(4) 

and (e)(7), the Commission would not 

require a covered clearing agency’s 

policies and procedures for stress 

testing its financial resources and liquid 

resources, respectively, to cover specific 

stress scenarios, as rules adopted by the 

CFTC do.665 The Commission 

preliminarily believes it is appropriate 

to provide discretion to the covered 

clearing agencies to identify the stress 

scenarios most appropriate for their 

needs given their status as SROs subject 

to the Commission’s oversight, and to 

rely upon other tools available to the 

Commission through its supervisory and 

examination programs to ensure the 

responsibilities of covered clearing 

agencies in this regard are fulfilled. 

• In proposing Rule 17Ad–22(e)(5), 

the Commission would not specifically 

require, as the CFTC does in its rules, 

a covered clearing agency’s policies and 

procedures to be reasonably designed to 

(i) establish prudent valuation practices 

and develop haircuts that are tested 

regularly and take into account stressed 

market conditions (including to reduce 

the need for procyclical adjustments); 

(ii) avoid concentrated holdings of 

certain assets where it could 

significantly impair the ability to 

liquidate such assets quickly without 

significant adverse price effects; and (iii) 

use a collateral management system that 

is well designed and operationally 

flexible, such that it, among other 

things, accommodates changes in the 

ongoing monitoring and management of 

collateral; and (iv) allow for the timely 

valuation of collateral and execution of 

any collateral or margin calls.666 While 

the Commission preliminarily agrees 

that these requirements may facilitate 

prudent practices, the Commission 

preliminarily observes that 

consideration of these practices would 

fall within the general responsibilities of 

a covered clearing agency and its board 

of directors. The Commission therefore 

preliminarily believes that proposed 

Rule 17Ad–22(e)(5) strikes the 

appropriate balance in establishing 

policies and procedures requirements 

with respect to collateral management. 

• In proposing Rule 17Ad–22(e)(6), 

the Commission also would not require 

a covered clearing agency’s policies and 

procedures to be reasonably designed to 

determine the appropriate historic time 

period for the margin methodology 

based on the characteristics of each 

product, spread, account, or portfolio or 

to require specifying minimum 

liquidation periods for different types of 

derivatives. Rules adopted by the CFTC 

include such requirements.667 While the 

Commission preliminarily agrees that 

these requirements may facilitate 

prudent practices, the Commission 

preliminarily observes that 

consideration of these practices would 

fall within the general responsibilities of 

a covered clearing agency and its board 

of directors. The Commission therefore 

preliminarily believes that proposed 

Rule 17Ad–22(e)(6) strikes the 

appropriate balance in establishing 

policies and procedures requirements 

with respect to risk management. 

These differences between the 

Commission’s proposal and the Board’s 

proposed rules and the CFTC’s final 

rules are provided here as examples of 

the differences observed between the 

respective rule sets and do not 

constitute an exhaustive list. In 

preliminarily formulating the specific 

requirements of the proposed rules in 

furtherance of Section 17A of the 

Exchange Act, the Commission was 

guided by its experience in supervising 

registered clearing agencies, including 

through the SRO rule filing process 

under Section 19(b) of the Exchange Act 

and Rule 19b–4, periodic inspections 

and examinations, and other monitoring 

of the activities of registered clearing 

agencies.668 The Commission also took 

into account the particular 

circumstances of the U.S. securities 

markets, including but not limited to 

business models of and current 

practices at covered clearing agencies, 

characteristics of the products cleared, 

the nature of the covered clearing 

agencies’ participant base, and other 

factors. The Commission preliminarily 

believes the differences between its 

proposal and the Board’s proposed rules 

and the CFTC’s final rules are 

appropriate for the reasons noted above. 

The Commission further preliminarily 

notes that some of the differences 

between the Commission’s proposal and 

the CFTC’s final rules is attributable to 

differences between the scope of the 

Commission’s and the CFTC’s 

regulatory authority.669

Further, CPSS–IOSCO members are 

also in various stages of implementing 

the standards set forth in the PFMI 

Report into their own regulatory 

regimes, and the Commission 

preliminarily believes that proposing a 

set of requirements generally consistent 

with the relevant international 

standards would result in diminished 

likelihood that participants in cleared 

markets would restructure and operate 


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670See supra note 53 (citing the Board’s proposal 

and the CFTC’s final rules). 671See supra note 48 and infra Part IV.C.1.e 

(discussing the Basel III capital requirements and 

the economic effect of QCCP status under the Basel 

III capital requirements, respectively). 672See, e.g., Arnoud W.A. Boot, Silva Dezo ̃elan, 

& Todd T. Milbourn, Regulatory Distortions in a 

Competitive Financial Services Industry, 16 J. Fin. 

Serv. Res. 249 (2000) (showing that, in a simple 

industrial organization model of bank lending, a 

change in the cost of capital resulting from 

regulation results in a greater loss of profits when 

regulated banks face competition from nonregulated banks than when regulations apply 

equally to all competitors); Victor Fleischer, 

Regulatory Arbitrage, 89 Tex. L. Rev. 227 (2010) 

(discussing how, when certain firms are able to 

choose their regulatory structure, regulatory costs 

are shifted onto those entities that cannot engage in 

regulatory arbitrage). 

673See Basel III capital requirements, supra note 

48. 

674See supra note 49 (defining ‘‘financial market 

infrastructure’’). 

675Cf. PFMI Report, supra note 1, at 11. 

676 Kenneth J. Arrow, Economic Welfare and the 

Allocation of Resources for Invention 609–626, in 

The Rate and Direction of Inventive Activity: 

Economic and Social Factors (NBER, 1962), 

available at http://www.nber.org/chapters/

c2144.pdf. 

677See CPSS, Market Structure Development in 

the Clearing Industry: Implications for Financial 

Stability, at sec. 5 (Nov. 2010), available at 

http://www.bis.org/publ/cpss92.pdf; see also Siyi 

Zhu, Is There a ‘Race to the Bottom’ in Central 

Counterparties Competition?—Evidence from 

LCH.Clearnet SA, EMCF and EuroCCP, DNB 

Occasional Studies, Vol. 9, No. 6 (2011); John Kiff 

et al., Credit Derivatives: Systemic Risks and Policy 

Options (IMF Working Paper No. 254, Nov. 2009), 

available at http://www.imf.org/external/pubs/ft/

wp/2009/wp09254.pdf. 

678See generally Nadia Linciano, Giovanni 

Siciliano & Gianfranco Trovatore, The Clearing and 

Settlement Industry: Structure Competition and 

Regulatory Issues (Italian Secs. & Exch. Comm’n 

Research Paper 58, May 2005), available at 

http://www.ssrn.com/abstract=777508 (concluding 

in part that the core services offered by the 

clearance and settlement industry tend toward 

natural monopolies because the industry can be 

characterized as a network industry, where 

consumers buy systems rather than single goods, 

consumption externalities exist, costs lock-in 

consumers once they choose a system, and 

production improves with economies of scale); 

Heiko Schmiedel, Markku Malkama ̈ki & Juha 

Tarkka, Economies of Scale and Technological 

Development in Securities Depository and 

Settlement Systems, at 10 (Bank of Fin. Discussion 

Paper 26, Oct. 2002), available at http://

www.suomenpankki.fi/en/julkaisut/tutkimukset/

keskustelualoitteet/Documents/0226.pdf. (‘‘The 

overall results of this study reveal the existence of 

substantial economies of scale among depository 

and settlement institutions. On average, the 

centralized U.S. system is found to be the most cost 

effective settlement system and may act as the cost 

saving benchmark.’’). 

679See, e.g., Roe, supra note 172 (arguing that 

counterparty risk concentrated within CCPs may be 

transferred to the broader financial system through 

links between clearing members and their clients). 

in less-regulated markets.670

Additionally, international standards 

such as the Basel III framework could 

create complications for U.S. clearing 

agencies not subject to regulations based 

on the standards set in the PFMI Report 

as a result of the Basel III framework’s 

treatment of QCCPs. In particular, if 

U.S. clearing agencies do not obtain 

QCCP status from foreign banking 

regulators who have adopted rules 

conforming to the Basel III framework 

because, for instance, the regulatory 

framework is not consistent with the 

standards set forth in the PFMI Report, 

foreign bank members of U.S. clearing 

agencies may have incentives to move 

their clearing business to clearing 

agencies in jurisdictions where they 

might obtain lower capital requirements 

under the Basel III framework.671

Failure to maintain consistency with 

other regulators may disrupt cleared 

markets in a number of ways. 

Significant differences across regulatory 

regimes may encourage participants to 

restructure their operations in order to 

avoid a particular regulatory regime.672

Such differences may reduce the 

liquidity of cleared products in certain 

markets if they result in an undersupply 

of clearing services. Further, 

inconsistency in regulation across 

jurisdictions may increase the 

likelihood that restructuring by market 

participants in response such 

inconsistency results in concentrating 

clearing activity in regimes with a 

weaker commitment to policies and 

procedures for sound risk management. 

In the case of clearing agency 

standards, there are additional 

motivations for consistency with other 

regulatory requirements. The 

Commission preliminarily believes that 

such consistency would prevent the 

application of inconsistent regulatory 

burdens and thereby reduce the 

likelihood that participants in cleared 

markets would restructure and operate 

in less-regulated markets. Additionally, 

such consistency would allow foreign 

bank clearing members and foreign bank 

customers of clearing members of 

covered clearing agencies to be subject 

to lower capital requirements under the 

Basel III framework.673

d. Concentration 

The economic effects associated with 

the proposed rules may also be partially 

determined by the economic 

characteristics of clearing agencies. 

Generally, the economic characteristics 

of FMIs, including clearing agencies, 

include specialization, economies of 

scale, barriers to entry, and a limited 

number of competitors.674 Such 

characteristics, coupled with the 

particulars of an FMI’s legal mandate, 

could result in market power, leading to 

lower levels of service, higher prices, 

and under-investment in risk 

management systems.675

The centralization of clearing 

activities in a relatively small number of 

clearing agencies somewhat insulated 

from market forces may result in a 

reduction in their incentives to innovate 

and to invest in the development of 

appropriate risk management practices 

on an ongoing basis, particularly when 

combined with the cost reduction 

pressures noted above in Part IV.A.676

However, the Commission notes that the 

inverse may not necessarily hold. In 

other words, additional competition in 

the market for clearing services may not 

necessarily result in improved risk 

management. For instance, aggressive 

price-cutting in a ‘‘race to the bottom’’ 

may result in clearing agencies 

accepting lower-quality collateral, 

requiring lower margin and default fund 

contributions, lowering access 

requirements, or holding lower reserves, 

potentially undermining their risk 

management efforts.677

Market power may raise particular 

issues with respect to the allocation of 

benefits and costs flowing from these 

proposed rules and precipitate changes 

in the structure of the financial 

networks that are served by covered 

clearing agencies. For example, as a 

result of limited competition,678 existing 

covered clearing agencies may easily 

pass the incremental costs associated 

with enhanced standards on to their 

members, who may share these costs 

with their customers, potentially 

resulting in increased transaction costs 

in cleared securities. 

If incremental increases in costs lead 

clearing agencies to charge higher prices 

for their services, then certain clearing 

members may choose to terminate 

membership and cease to clear 

transactions for their customers. Should 

this occur the result may be further 

concentration among clearing members, 

where each remaining member clears a 

higher volume of transactions. In this 

case, clearing agencies and the financial 

markets they serve would be more 

exposed to these larger clearing 

members. These remaining clearing 

members may, however, each 

internalize more of the costs their 

activity in cleared markets imposes on 

the financial system. 

The increased importance of a small 

set of clearing members, in turn, may 

result in firms not previously 

systemically important increasing in 

systemic importance. This is 

particularly true for clearing members 

that participate in multiple markets, 

both cleared and not cleared.679

However, adequate regulation of capital 

levels and margin amounts at surviving 

clearing members could mean that, 

though shocks to these members may be 


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680See supra note 48 (discussing the Basel III 

capital requirements). 

681See infra Part IV.C.1.e. 

682The Commission notes that benefits to banks 

that may arise as a result of the proposed rules may 

be contingent upon regulators in other jurisdictions 

taking action to recognize the QCCP status of 

covered clearing agencies. 

683For a discussion of the effects of QCCP status 

on competition between bank and non-bank 

clearing members, see Part IV.C.2.a. 

684See supra note 593 (noting that the 

Commission currently expects the lower capital 

treatment under the Basel III framework to affect 

registered clearing agencies FICC, ICEEU, and OCC, 

each of which would meet the definition of a 

‘‘covered clearing agency’’ under the proposed 

rules). 

685As discussed above, the Board and Office of 

Comptroller of the Currency have adopted rules 

implementing capital requirements under Basel III 

that make capital treatment for exposures to CCPs 

independent of the proposed rules for U.S. banks 

regulated by these two agencies, and therefore the 

Commission preliminarily believes no benefits 

would accrue to U.S. bank clearing members of 

FICC and OCC. 

686Under the Basel III framework ICCEU and 

FICC’s repurchase agreement segment would also 

be eligible for QCCP status. However, FICC does not 

report counterparties to repo agreements, and 

ICEEU does not separately report exposures related 

to security-based swap clearing, so we are currently 

unable to quantify potential benefits related to 

QCCP status for these entities. 

687The Commission used the set of entities it 

identified as banks on OCC’s member list, available 

at http://www.optionsclearing.com/membership/

member-information/. For U.S. bank holding 

companies, 2012 total assets, risk weighted assets, 

net income, and tier 1 capital ratios were collected 

from Y–9C reports available at the National 

Information Center, http://www.ffiec.gov/

nicpubweb/nicweb/nichome.aspx. For non-U.S. 

bank holding companies, Commission staff 

obtained corresponding data from financial 

statements and supplementary financial materials 

posted to bank Web sites. Where necessary, values 

were converted back to U.S. dollars at appropriate 

exchange rates obtained from Thomson Reuters 

Datastream and the Federal Reserve, http://

www.federalreserve.gov/releases/h10/hist/. 

688For example, one bank in the sample, with 

6.25% of total risk-weighted assets, was assigned 

6.25% of the total trade and default fund exposures 

while another bank in the sample, with 3.43% of 

total risk weighted assets, was assigned 3.43% of 

these exposures. Because trade exposures of OCC 

members against OCC are nonpublic, the 

Commission used the balance of OCC margin 

deposits and deposits in lieu of margin held at OCC, 

$57.48 billion, as a proxy for trade exposures. 

OCC’s 2012 clearing fund deposits were valued at 

$2.66 billion. See OCC, 2012 Annual Report, 

available at http://www.optionsclearing.com/

components/docs/about/annual-reports/occ_2012_

annual_report.pdf. 

larger, the propagation of shocks may be 

limited to a smaller set of entities and 

their equity holders. 

e. Qualifying CCP Status and 

Externalities on Clearing Members 

An effect of the proposed 

amendments to Rule 17Ad–22 is that 

covered clearing agencies required to 

comply with the proposed rules may be 

more likely to qualify as QCCPs in nonU.S. jurisdictions that have adopted the 

Basel III framework’s QCCP definition. 

Under the Basel III framework, a QCCP 

is defined as an entity operating as a 

CCP that is prudentially supervised in a 

jurisdiction where the relevant regulator 

has established, and publicly indicated 

that it applies to the CCP on an ongoing 

basis, domestic rules and regulations 

that are consistent with the standards 

set forth in the PFMI Report.680 Because 

the proposed amendments to Rule 

17Ad–22 are intended to be in line with 

the standards set forth in the PFMI 

Report, the Commission preliminarily 

believes that foreign bank clearing 

members of certain covered clearing 

agencies and foreign banks clearing 

indirectly through clearing members of 

covered clearing agencies may benefit 

from covered clearing agencies 

obtaining QCCP status. In particular, 

bank clearing members and bank 

indirect participants of covered clearing 

agencies that could attain QCCP status 

would face lower capital requirements 

with respect to cleared derivatives and 

repurchase agreement transactions 

because, under the Basel III framework, 

capital requirements for bank exposures 

to QCCPs are lower than capital 

requirements for bank exposures to nonqualifying CCPs for these products. 

Although the Board and the Office of 

the Comptroller of the Currency have 

already adopted rules implementing the 

Basel III capital requirements that 

would identify all covered clearing 

agencies (with the exception of ICEEU) 

as QCCPs for the purposes of applying 

risk weights to assets at U.S. banks,681

the proposed amendments to Rule 

17Ad–22 may result in non-U.S. bank 

clearing members experiencing lower 

capital requirements related to 

exposures against covered clearing 

agencies relative to a baseline scenario 

in which foreign banking regulators do 

not determine that a covered clearing 

agency is a QCCP.682

The Basel III framework affects capital 

requirements for bank exposures to 

central counterparties in two important 

ways. The first relates to trade 

exposures, defined under the Basel III 

capital requirements as the current and 

potential future exposure of a clearing 

member or indirect participant in a CCP 

arising from OTC derivatives, exchangetraded derivatives transactions, and 

securities financing transactions. If 

these exposures are held against a 

QCCP, they will be assigned a risk 

weight of 2%. In contrast, exposures 

against non-qualifying CCPs do not 

receive lower capital requirements 

relative to bilateral exposures and are 

assigned risk weights between 20% and 

100%, depending on counterparty credit 

risk. Second, the Basel III capital 

requirements impose a cap on risk 

weights applied to default fund 

contributions, limiting risk-weighted 

assets (subject to a 1250% risk weight) 

to a cap of 20% of a clearing member’s 

trade exposures against a QCCP. This is 

in contrast to treatment of exposures 

against non-qualifying CCPs, which are 

uncapped and subject to a 1250% risk 

weight. Because QCCP status generally 

impacts capital treatment, any benefits 

of attaining QCCP status will likely 

accrue, at least in part, to foreign 

clearing members or foreign indirect 

participants subject to the Basel III 

capital requirements.683 As a result of 

lower risk weights applied to exposures 

and a cap on capital requirements 

against default fund obligations, 

clearing members of QCCPs subject to 

Basel III capital requirements may 

experience an improved capital position 

relative to bank members of non-QCCPs. 

This may lower the costs of debt capital 

for bank members of QCCPs.684

Non-U.S. banks that are constrained 

by Basel III tier one capital requirements 

would face a shock to risk-weighted 

assets once capital rules come into 

force.685 The size of the shock depends 

on regulators’ determinations with 

regard to QCCP status. Regardless of the 

size of the shock and in order to come 

into compliance with capital rules, 

however, affected banks will have to 

raise capital or reduce leverage. In the 

absence of perfect markets, these banks 

may incur ongoing costs as a result. 

In quantifying the benefits of 

achieving QCCP status, the Commission 

based its estimate on publicly available 

information with regard to OCC.686 To 

estimate the upper bound for the 

potential benefits accruing to bank 

clearing members at OCC as a result of 

QCCP status, the Commission identified 

a sample of 20 bank clearing members 

at OCC and, for each bank, collected 

information about total assets, risk 

weighted assets, net income and tier one 

capital ratio at the holding company 

level for 2012.687 The Commission then 

allocated trade exposures and default 

fund exposures across the sample of 

bank clearing members based on the 

level of risk-weighted assets.688 The 

Commission measured the impact on 

risk-weighted assets for non-U.S. bank 

clearing members under two different 

capital treatment regimes. The first 

regime is in the absence of QCCP status, 

assuming a 100% risk weight applied to 

trade exposures and 1250% risk weight 

applied to default fund exposures for 

non-U.S. members. In the second 

regime, OCC obtains QCCP status, and 

banks are allowed to apply a 2% risk 


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29592 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

689The Basel III framework allows banks to 

compute default fund exposures in two ways. 

Method 1 involves computing capital requirements 

for each member proportional to its share of an 

aggregate capital requirement for all clearing 

members in a scenario where to average clearing 

members default. The Commission currently lacks 

data necessary to compute default fund exposures 

under this approach, instead we use Method 2, 

which caps overall exposure to a QCCP at 20% of 

trade exposures. See Basel III framework, supra 

note 48, Annex 4, paras. 121–25 (outlining two 

methods for computing default fund exposures). 

690The Commission notes that, at present, no 

bank in its sample of bank clearing members of OCC 

is bound by capital requirements under the Basel 

III framework. Bank holding company risk-weighted 

assets, adjusted total assets, and capital ratio data 

have been taken from http://www2.fdic.gov/SDI/. 

The Commission used data from 2009–2012 for its 

sample of bank clearing members and assumed no 

bank-specific countercyclical capital buffers for 

these banks. This suggests a minimum tier 1 capital 

ratio of 9.6%, exceeding the Basel III minimum by 

1.1%. The same analysis suggests a minimum total 

capital ratio of 12.3%, exceeding the Basel III 

minimum by 1.8%. 

691This data has been taken from Compustat. Due 

to data limitations, for certain banks a shorter 

window was used for this calculation. The 

minimum sample window was nine years. 

692See supra note 599 and accompanying text 

(noting that banks supervised by the Board and the 

Office of the Comptroller of the Currency would 

treat covered clearing agencies as QCCPs for the 

purposes of calculating regulatory capital ratios). 

weight applied to trade exposures and a 

1250% risk weight to default fund 

exposures up to a total exposure cap of 

20% of trade exposures.689 If OCC is 

determined to be a QCCP, then the 

increase in risk weighted assets will be 

smaller in magnitude, implying a 

smaller adjustment at lower cost. The 

Commission preliminarily estimates 

that benefits associated with OCC 

obtaining QCCP status stemming from 

lower capital requirements against trade 

exposures to QCCPs as a result of the 

proposed rules to have an upper bound 

of $600 million per year, or 

approximately 0.60% of the total 2012 

net income reported by bank clearing 

members at OCC. 

The Commission’s analysis is limited 

in several respects and relies on several 

assumptions. First, a limitation of our 

proxy for trade exposures and our use 

of OCC’s clearing fund is that the 

account balances include deposits by 

bank clearing members, who would 

experience lower capital requirements 

under the Basel III framework, and nonbank clearing members who would not. 

The Commission preliminarily assumes, 

for the purposes of establishing an 

upper bound for the benefits to market 

participants that are associated with 

QCCP status for OCC under the 

proposed rules, that the balance of both 

OCC’s margin account and OCC’s 

default fund are attributable only to 

bank clearing members. Additionally, 

we assume an extreme case where, in 

the absence of QCCP status, trade 

exposures against a CCP would be 

assigned a 100% risk weight, causing 

the largest possible shock to riskweighted assets for affected banks. 

Concluding that lower capital 

requirements on trade exposures to OCC 

would produce effects in the real 

economy also requires that certain 

conditions exist. Agency problems, 

taxes, or other capital market 

imperfections could result in banks 

targeting a particular capital structure. 

Further, capital constraints on bank 

clearing members subject to the Basel III 

framework should bind so that higher 

capital requirements on bank clearing 

members subject to the Basel III 

framework in the absence of QCCP 

status would cause these banks to 

exceed capital constraints if they chose 

to redistribute capital to shareholders or 

invest capital in projects with returns 

that exceed their cost of capital. Using 

publically available data, however, it is 

not currently possible to determine 

whether capital constraints will bind for 

bank clearing members when rules 

applying Basel III capital requirements 

come into force, so to estimate an upper 

bound for the effects of QCCP status on 

bank clearing members we assume that 

tier one capital constraints for all bank 

clearing members of OCC would bind in 

an environment with zero weight placed 

on bank exposures to CCPs.690

For the purposes of quantifying 

potential benefits from QCCP status, the 

Commission has also assumed that 

banks choose to adjust to new capital 

requirements by deleveraging. In 

particular, the Commission assumed 

that banks would respond by reducing 

risk-weighted assets equally across all 

risk classes until they reach the 

minimum tier one capital ratio under 

the Basel framework of 8.5%. We 

measure the ongoing costs to each nonU.S. bank by multiplying the implied 

change in total assets by each bank’s 

return on assets, estimated using up to 

12 years of annual financial statement 

data.691

The Basel III capital requirements for 

exposures to CCPs yield additional 

benefits for QCCPs that the Commission 

is currently unable to quantify due to 

lack of data concerning client clearing 

arrangements by banks. For client 

exposures to clearing members, the 

Basel III capital requirements allow 

participants to reflect the shorter closeout period of cleared transactions in 

their capitalized exposures. The Basel 

III framework’s treatment of exposures 

to CCPs also applies to client exposures 

to CCPs through clearing members. This 

may increase the likelihood that bank 

clients of bank clearing members that 

are subject to the Basel III capital 

requirements share some of the benefits 

of QCCP status. 

Furthermore, the fact that the Basel III 

capital requirements apply to bank 

clearing members may have important 

implications for competition and 

concentration. While the proposed rules 

may extend lower capital requirements 

against exposures to CCPs to non-U.S. 

bank clearing members of covered 

clearing agencies,692 the benefits of 

QCCP status will still be limited to bank 

clearing members. However, the costs 

associated with compliance with the 

proposed rules may be borne by all 

clearing members, regardless of whether 

or not they are supervised as banks. A 

potential consequence of this allocation 

of costs and benefits may be ‘‘crowding 

out’’ of members of QCCPs that are not 

banks and will not experience benefits 

with respect to the Basel III framework. 

This may result in an unintended 

consequence of increased concentration 

of clearing activity among bank clearing 

members. As noted in Part IV.C.1.d, this 

increased concentration could mean 

that each remaining clearing member 

becomes more important from the 

standpoint of systemic risk 

transmission. 

In addition to benefits for bank 

clearing members, certain benefits 

resulting from QCCP status may also 

accrue to covered clearing agencies. If 

banks value lower capital requirements 

attributable to QCCP status, bank 

clearing members may prefer 

membership at QCCPs to membership at 

CCPs that are not QCCPs. A flight of 

clearing members from covered clearing 

agencies in the absence of QCCP status 

would result in default-related losses 

being mutualized across a narrower 

member base. If the flight from covered 

clearing agencies results in lower 

transactional volume at these clearing 

agencies, then economies of scale may 

be lost, resulting in higher clearing fees 

and higher transaction costs in cleared 

products. 

2. Effect on Competition, Efficiency, and 

Capital Formation 

The proposed amendments to Rule 

17Ad–22 and proposed Rule 17Ab2–2 

have the potential to affect competition, 

efficiency, and capital formation. As 

with the rest of the benefits and costs 

associated with the proposed 

amendments to Rule 17Ad–22, the 

Commission preliminarily believes that 

several of the effects described below 

only occur to the extent that covered 

clearing agencies do not already have 

operations and governance mechanisms 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29593 

693See, e.g., Clearing Agency Standards Release, 

supra note 5, at 66263. 

694See, e.g., Clearing Agency Standards Release, 

supra note 5, at 66263 n.481. 

695See supra Part IV.C.1.d (discussing 

concentration both in the market for clearing 

services and among clearing members). 

that conform to the requirements in 

proposed Rule 17Ad–22(e). 

Additionally, the Commission 

preliminarily believes that consistency 

with international regulatory 

frameworks, as embodied by the 

standards set forth in the PFMI Report, 

which may promote the integrity of 

cleared markets, could have substantial 

effects on competition, efficiency, and 

capital formation. 

a. Competition 

Two important characteristics of the 

market for clearance and settlement 

services are high fixed costs and 

economies of scale. Large investments 

in risk management and information 

technology infrastructure costs, such as 

financial data database and network 

maintenance expenses, are components 

of high fixed costs for clearing agencies. 

Consequently, the clearance and 

settlement industry exhibits economies 

of scale in that the average total cost per 

transaction, which includes fixed costs, 

diminishes with the increase in 

transaction volume as high fixed costs 

are spread over a larger number of 

transactions. 

Furthermore, high fixed costs 

translate into barriers to entry that 

preclude competition. Lower 

competition is an important source of 

market power for clearing agencies. As 

a result, clearing agencies possess the 

ability to exert market power and 

influence the fees charged for clearance 

and settlement services in the markets 

they serve.693 Any costs resulting from 

the proposed amendments may have the 

effect of raising already high barriers to 

entry. As the potential entry of new 

clearing agencies becomes more remote, 

existing clearing agencies may be able to 

reduce service quality, restrict the 

supply of services, or increase fees 

above marginal cost in an effort to earn 

economic rents from participants in 

cleared markets.694

Even if they could not take advantage 

of a marginal increase in market power, 

clearing agencies may use their market 

power to pass any increases in costs that 

flow from the proposed amendments to 

their members. This may be especially 

true in the cases of member-owned 

clearing agencies, such as DTC, FICC, 

NSCC, and OCC, where members lack 

the opportunity to pass costs through to 

outside equity holders. Allowing 

clearing members to serve on the board 

of directors of a covered clearing agency 

may align a covered clearing agency’s 

incentives with its membership. Certain 

complications may also arise, however, 

when clearing members sit on boards of 

covered clearing agencies as members of 

the board and may choose to allocate 

the costs of enhanced risk management 

inefficiently across potential 

competitors, in an effort to reduce their 

own share of these costs. 

Members who are forced to 

internalize the costs of additional 

requirements under the proposed rules 

may seek to terminate their 

membership. Additionally, prospective 

clearing members may find it difficult to 

join clearing agencies, given the 

additional costs they must 

internalize.695 Remaining clearing 

members may gain market power as a 

result, enabling them to extract 

economic rents from their customers. 

Rent extraction could take the form of 

higher transaction costs in cleared 

markets, thereby reducing efficiency, as 

discussed below. 

The Commission also acknowledges 

that proposed Rule 17Ad–22(e)(19) may 

affect competition among firms that 

choose to become clearing members, 

and those who provide clearing services 

indirectly, through a clearing member. 

Monitoring and managing the risks 

associated with indirect participation in 

clearing may be costly. If monitoring 

and managing the risks associated with 

indirect participation in clearing proves 

costly for clearing agencies and if 

clearing agencies are able to pass the 

additional costs related to monitoring 

and managing risks to clearing 

members, it may cause marginal 

clearing members unable to absorb these 

additional costs to exit. While these 

exits may be socially efficient, since 

they reflect the internalization of costs 

otherwise imposed upon other 

participants in cleared markets through 

increased probability of clearing agency 

default, they may nevertheless result in 

lower competition among clearing 

members for market share, potentially 

providing additional market power to 

the clearing members that remain. 

The Commission preliminarily 

believes, however, that management of 

risks from indirect participation is 

important in mitigating the risks that 

clearing agencies pose to financial 

stability. The tiered participation risk 

exposures, including credit, liquidity, 

and operational risks inherent in 

indirect participation arrangements, 

may present risks to clearing agencies, 

their members, and to the broader 

financial markets. For instance, if the 

size of an indirect participant’s 

positions is large relative to a clearing 

member’s capacity to absorb risks, this 

may increase the clearing member’s 

default risk. Consequently, a clearing 

agency with indirect participation 

arrangements may be exposed to the 

credit risk of an indirect participant 

through its clearing members. Similarly, 

a margin call on, or a default by, an 

indirect participant could constrain 

liquidity of its associated clearing 

members, making it more difficult for 

these members to manage their 

positions at the clearing agency. 

The consistency across regulatory 

frameworks contemplated by the 

proposed rules may also affect 

competition. Financial markets in 

cleared products are global, 

encompassing many countries and 

regulatory jurisdictions. Consistency 

with international regulatory 

frameworks may facilitate entry of 

clearing agencies into new markets. By 

contrast, conflicting or duplicative 

regulation across jurisdictions, or even 

within jurisdictions, may cause 

competitive friction that inhibits entry 

and helps clearing agencies behave like 

local monopolists. Consistency in 

regulation can facilitate competition 

among clearing agencies so long as 

regulation is not so costly as to 

discourage participation in any market. 

Additionally, the Commission 

preliminarily believes that proposed 

Rule 17Ad–22(e)(23) may facilitate 

competition among clearing agencies 

across jurisdictions by requiring public 

disclosures that enable market 

participants to compare clearing 

agencies more easily. 

The consistency across regulatory 

requirements contemplated by the 

proposed rules may affect competition 

among banks in particular. Clearing 

derivative and repurchase agreement 

transactions through QCCPs will result 

in lower capital requirements for banks 

under the Basel III capital requirements. 

Therefore, consistency with the 

standards set forth in the PFMI Report 

may allow banks that clear these 

products through covered clearing 

agencies to compete on equal terms with 

banks that clear through other clearing 

agencies accorded QCCP status. This 

effect potentially countervails higher 

barriers to entry that enhanced risk 

management standards may impose on 

clearing members by lowering the 

marginal cost of clearing these 

transactions. Furthermore, covered 

clearing agencies potentially compete 

with one another for volume from 

clearing members. Since clearing 

members receive better treatment for 

exposures against QCCPs, clearing 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29594 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

696See supra note 593 (noting that the 

Commission currently expects the lower capital 

treatment under the Basel III framework to affect 

registered clearing agencies FICC, ICEEU, and OCC, 

each of which would meet the definition of a 

‘‘covered clearing agency’’ under the proposed 

rules). 

697See e.g., Navneet Arora, Priyank Gandhi & 

Francis Longstaff, Counterparty Credit Risk and the 

Credit Default Swap Market, 103 J. Fin. Econ. 280 

(2012). Using transaction prices and quotes by 14 

different CDS dealers, the authors identified how 

dealers’ credit risk affects transaction prices. They 

observed a relationship between spreads and credit 

risk implying that a 645-basis-point increase in a 

dealer’s credit spread would produce a one-basispoint increase in transaction prices. They explain 

the magnitude of this relationship by noting that 

their sample included transactions that were mostly 

collateralized, which would diminish the 

sensitivity of transaction prices to counterparty 

credit risk. 

698 If investors who might benefit from risksharing in cleared markets are ambiguity-averse, 

then regulation that addresses payoffs in times of 

financial strain may induce their participation. See 

supra note 655 and accompanying text. 

members will find it less costly to deal 

with QCCPs. Failure to establish 

requirements consistent with the 

standards set forth in the PFMI Report 

may place U.S. covered clearing 

agencies at a competitive disadvantage 

globally. 

The ability of covered clearing 

agencies to obtain QCCP status may also 

affect competition among clearing 

agencies. Under the Basel III framework, 

QCCP status would have practical 

relevance only for covered clearing 

agencies providing CCP services for 

derivatives, security-based swaps, and 

securities financing transactions. To the 

extent that the proposed rules increase 

the likelihood that banking regulators 

that have implemented the Basel III 

framework in their jurisdiction 

recognize covered clearing agencies as 

QCCPs, banks that clear at covered 

clearing agencies will experience lower 

capital requirements. Since clearing 

agencies may compete for volume from 

clearing members that are also banks, 

the proposed rules may remove a 

competitive friction between covered 

clearing agencies and other clearing 

agencies that enjoy recognition as 

QCCPs by banking regulators. As a 

corollary, the proposed rules could 

potentially disadvantage any registered 

clearing agencies that are not covered 

clearing agencies.696 The Commission 

also preliminarily notes that the ability 

of registered clearing agencies to 

voluntarily apply for covered clearing 

agency status under proposed Rule 

17Ab2–2(a) may potentially allow 

entrants to achieve QCCP status if the 

Commission determines they should 

receive covered clearing agency status 

and they otherwise meet the 

requirements of the Basel III framework. 

Further competitive effects may flow 

from the proposal as a result of the 

determinations under proposed Rule 

17Ab2–2 for clearing agencies engaged 

in activities with a more complex risk 

profile and clearing agencies that are 

systemically important in multiple 

jurisdictions. These entities will be 

responsible for maintaining additional 

financial resources sufficient to cover 

the default of the two participant 

families that would potentially cause 

the largest aggregate credit exposures in 

extreme but plausible market conditions 

as well as undertake an annual 

feasibility analysis for extending 

liquidity risk management from ‘‘cover 

one’’ to ‘‘cover two.’’ These clearing 

agencies will have to collect these 

resources from participants, either 

through higher margin requirements or 

guaranty fund contributions, or 

indirectly through third-party borrowing 

arrangements secured by member 

resources. Regardless of how clearing 

agencies obtain these additional 

resources, the requirement to do so 

potentially raises the costs to use 

services provided by covered clearing 

agencies which could, at the margin, 

shift transactional volume to clearing 

agencies that fall outside the scope 

determined by proposed Rule 17Ab2–2, 

where competing clearing agencies 

exist, or opt out of clearing altogether. 

b. Efficiency 

The proposed amendments to Rule 

17Ad–22 may affect efficiency in a 

number of ways, though as discussed 

previously, most of these effects will 

only flow to the extent that covered 

clearing agencies do not already comply 

with the proposed amendments. First, 

because the proposed amendments 

result in general consistency with the 

standards set forth in the PFMI Report 

and requirements proposed by the 

Board and adopted by the CFTC, 

consistency likely fosters efficiency by 

reducing the risk that covered clearing 

agencies will be faced with conflicting 

or duplicative regulation when clearing 

financial products across multiple 

regulatory jurisdictions. 

Consistency across regulatory regimes 

in multiple markets may also result in 

efficiency improvements. Fully 

integrated markets would allow clearing 

agencies to more easily exploit 

economies of scale because clearing 

agencies tend to have low marginal 

costs and, thus, could provide clearance 

and settlement services over a larger 

volume of transactions at a lower 

average cost. Differences in regulation, 

on the other hand, may result in market 

fragmentation, allowing clearing 

agencies to operate as local monopolists. 

The resulting potential for segmentation 

of clearing and settlement businesses 

along jurisdictional lines may lead to 

overinvestment in the provision of 

clearing services and reductions in 

efficiency as clearing agencies open and 

operate solely within jurisdictional 

boundaries. If market segmentation 

precludes covered clearing agencies 

from clearing transactions for customers 

located in another jurisdiction with a 

market too small to support a local 

clearing agency, fragmentation may 

result in under-provisioning of clearing 

and settlement services in these areas, 

in turn reducing the efficiency with 

which market participants share risk. 

The proposed amendments may also 

affect efficiency directly if they mitigate 

covered clearing agencies’ incentives to 

underinvest in risk management and 

recovery and wind-down procedures. 

CCP default and liquidation is likely a 

costly event, so to the extent that the 

proposed rules mitigate the risk of CCP 

default and prescribe rules for orderly 

recovery and wind-down, they will 

produce efficiency benefits. Another 

direct effect on efficiency may come if 

registered clearing agencies attempt to 

restructure their operations in ways that 

would allow them to fall outside of the 

scope of proposed Rule 17Ad–22(e). 

Finally, price efficiency and the 

efficiency of risk sharing among market 

participants may be affected by the 

proposed amendments. On one hand, 

the cost of a transaction includes costs 

related to counterparty default that are 

typically unrelated to fundamental asset 

payoffs. Academic research using credit 

default swap transaction data has 

revealed a statistically significant, 

though economically small, relationship 

between the credit risk of a counterparty 

and the spreads implicit in transaction 

prices.697 Enhanced risk management by 

clearing agencies may reduce this 

component of transaction costs. By 

reducing deviations of prices from 

fundamental value, the proposed 

amendments may increase price 

efficiency. If lower transaction costs or 

reduced ambiguity facilitates 

participation in cleared markets by 

investors who would benefit from 

opportunities for risk-sharing in these 

markets,698 then this transmission 

channel may result in more efficient 

allocation of risk. On the other hand, the 

proposed amendments may have 

adverse implications for price efficiency 

in cleared markets if they drive up 

transaction costs as higher costs of risk 

management enter asset prices. An 

increase in transaction costs could cause 

certain market participants to avoid 

trading altogether, reducing liquidity in 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29595 

699See supra Part IV.C.1 (discussing the 

economic effects of the proposed rules on the 

market for clearing services generally). 

700See supra Part IV.C.1.a (discussing the general 

economic effects of the proposed rules on systemic 

risk). 

701See supra note 697. 

702The Commission notes that under proposed 

Rule 17Ab2–2(a), a registered clearing agency that 

is not involved in activities with a more complex 

risk profile and is not a designated clearing agency 

may apply for covered clearing agency status, 

which would subject them to the requirements of 

Rule 17Ad–22(e). The Commission preliminarily 

believes that this may occur if the registered 

clearing agency believes such status may credibly 

signal the quality of the services it provides or if 

it is seeking to obtain QCCP status under the Basel 

III framework. 

703See supra note 107; supra Part II.B.1 

(discussing the full set of requirements under 

proposed Rule 17Ad–22(e)(1)); supra Part IV.B.3.a.i 

(discussing current practices among registered 

clearing agencies regarding legal risk); see also 17 

CFR 240.17Ad–22(d)(1). 

cleared products and opportunities for 

risk sharing among investors in these 

markets. 

c. Capital Formation 

The implications for capital formation 

that flow from these proposed rules 

stem mainly from incremental costs that 

result from compliance with more 

specific standards and benefits in the 

form of more efficient risk sharing. 

In cases where current practice falls 

short of the proposed amendments, 

covered clearing agencies may have to 

invest in infrastructure or make other 

expenditures to come into compliance, 

which may divert capital from other 

uses. In line with our previous 

discussion of cost allocation in the 

market for clearing services, these 

resources may come from clearing 

members and their customers.699

At the same time, the Commission 

preliminarily believes that the standards 

contemplated under the proposed rules 

may foster capital formation. As 

mentioned earlier, clearing agencies that 

are less prone to failure may help 

reduce transaction costs in the markets 

they clear.700 Conceptually, the 

component of transaction costs that 

reflects counterparty credit risk insures 

one counterparty against the default of 

another.701 Reductions in counterparty 

default risk allow the corresponding 

portion of transaction costs to be 

allocated to more productive uses by 

market participants who otherwise 

would bear these costs. 

If, on balance, the proposed 

amendments cause transaction costs to 

decrease in cleared markets, then the 

expected value of trade may increase. 

Counterparties that are better able to 

diversify risk through participation in 

cleared markets may be more willing to 

invest in the real economy rather than 

choosing to engage in precautionary 

savings. 

3. Effect of Proposed Amendments to 

Rule 17Ad–22 and Proposed Rule 

17Ab2–2 

The discussion below outlines the 

costs and benefits preliminarily 

considered by the Commission as they 

relate to the rules being proposed today. 

These specific costs and benefits are in 

addition to the more general costs and 

benefits anticipated under the 

Commission’s proposal discussed in 

Part IV.C.1 and include, in particular, 

the costs and benefits stemming from 

the availability of QCCP status under 

the Basel III capital requirements. Many 

of the costs and benefits discussed 

below are difficult to quantify. This is 

particularly true where clearing agency 

practices are anticipated to evolve and 

adapt to changes in technology and 

other market developments. The 

difficulty in quantifying costs and 

benefits of the proposed rules is further 

exacerbated by the fact that in some 

cases the Commission lacks information 

regarding the specific practices of 

clearing agencies that could assist in 

quantifying certain costs. For example, 

as noted in Part IV.C.3.a.iv(4), without 

detailed information about the 

composition of illiquid assets held by 

clearing agencies and their members, 

the Commission cannot provide 

reasonable estimates of costs associated 

with satisfying substantive requirements 

under proposed Rules 17Ad–22(e)(7)(i) 

and (ii). Another example, discussed in 

Part IV.C.3.a.iv(5), is testing and 

validation of financial risk models, 

where the Commission is only able to 

estimate that costs will fall within a 

range. In this case, the costs associated 

with substantive requirements under the 

proposed rules may depend on the types 

of risk models employed by clearing 

agencies, which are, in turn, dictated by 

the markets they serve. As a result, 

much of the discussion is qualitative in 

nature, though where possible, the costs 

and benefits have been quantified. 

a. Proposed Rule 17Ad–22(e) 

The Commission recognizes that the 

scope of the proposed rules is an 

important determinant of their 

economic effect. Having considered the 

anticipated costs associated with the 

proposed rules, the Commission 

preliminarily believes that it is 

appropriate to limit the application of 

proposed Rule 17Ad–22(e) to covered 

clearing agencies, as these are the 

registered clearing agencies for which 

the benefits of the proposed rules are 

the greatest. In particular, as discussed 

below, the Commission preliminarily 

believes that an important benefit 

resulting from the enhanced risk 

management requirements in the 

proposed rules is a reduction in the risk 

of a failure of a covered clearing agency. 

For example, for designated clearing 

agencies these benefits may be 

significant due to their size, exposure to, 

and interconnectedness with market 

participants, and the effect their failure 

may have on markets, market 

participants, and the broader financial 

system. For complex risk profile 

clearing agencies, significant benefits 

may flow as a result of their higher 

baseline default risk. 

As an alternative, the Commission 

could have proposed to extend the 

scope of proposed Rule 17Ad–22(e) to 

cover all registered clearing agencies. 

The Commission preliminarily 

acknowledges, however, that costs of 

compliance with the proposed rules 

may represent barriers to entry for 

clearing agencies. By continuing to 

apply Rule 17Ad–22(d) to registered 

clearing agencies that are not covered 

clearing agencies, the Commission 

preliminary believes that the proposed 

scope Rule 17Ad–22(e) appropriately 

preserves the potential for innovation in 

the establishment and operation of 

registered clearing agencies.702

Moreover, including CME and ICE in 

the set of covered clearing agencies 

would potentially subject them to 

requirements that would be duplicative 

of CFTC requirements. 

i. Proposed Rule 17Ad–22(e)(1): Legal 

Risk 

Because, as noted above, proposed 

Rule 17Ad–22(e)(1) would require 

substantially the same set of policies 

and procedures as Rule 17Ad– 

22(d)(1),703 the Commission 

preliminarily believes that proposed 

Rule 17Ad–22(e)(1) would likely impose 

limited material additional costs on 

covered clearing agencies and produce 

limited benefits, in line with the general 

economic considerations discussed in 

Part IV.C.1. 

ii. Proposed Rule 17Ad–22(e)(2): 

Governance 

Each covered clearing agency has a 

board of directors that governs its 

operations and oversees its senior 

management. Proposed Rule 17Ad– 

22(e)(2) would establish more detailed 

requirements for governance 

arrangements at covered clearing 

agencies relative to those imposed on 


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29596 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

704See supra Part II.B.2 (discussing the full set of 

requirements under proposed Rule 17Ad–22(e)(2) 

and its relationship to Rule 17Ad–22(d)(8)); see also 

supra note 119 (discussing how the proposed rule 

would complement other proposed requirements 

concerning governance at clearing agencies that 

may apply separately). 

705The Commission estimated a cost per director 

of $68,000 in proposing Regulation MC. See 

Exchange Act Release No. 34–63107 (Oct. 14, 2010), 

75 FR 65881, 65921 & n.215 (Oct. 26, 2010). The 

$73,000 estimate reflects this amount in 2013 

dollars, using consumer price inflation data 

provided by the Bureau of Labor Statistics. 

706See supra Part II.B.3 (discussing the full set of 

requirements under proposed Rule 17Ad–22(e)(3)). 

707See supra Part II.B.3.b (discussing the 

requirements for recovery and orderly wind-down 

plans under proposed Rule 17Ad–22(e)(3)(ii)). 

registered clearing agencies under Rule 

17Ad–22(d)(8).704

The Commission understands that 

any covered clearing agency subject to 

the proposed rule has policies and 

procedures in place that clearly 

prioritize the risk management and 

efficiency of the clearing agency. 

However, the Commission preliminarily 

believes that covered clearing agencies 

do not already have in place policies 

and procedures with respect to other 

requirements under proposed Rule 

17Ad–22(e)(2). Based on its supervisory 

experience, the Commission 

preliminarily believes that some 

covered clearing agencies may need to 

update their policies and procedures to 

comply with proposed Rule 17Ad– 

22(e)(2)(iv). These updates will entail 

certain basic compliance costs, and 

covered clearing agencies may also 

incur assessment costs related to 

analyzing current governance 

arrangements in order to determine the 

extent to determine which they do not 

meet the requirements of the proposed 

amendments. The estimated costs in 

terms of paperwork are discussed in 

Part III.D.1. If, as a result of new policies 

and procedures, a covered clearing 

agency is required to recruit new 

directors, the Commission preliminarily 

estimates a cost per director of 

$73,000.705

While there are potential costs 

associated with compliance, the 

Commission preliminarily believes that 

benefits would potentially accrue from 

these requirements. Specifically, the 

Commission preliminarily believes that 

enhanced governance arrangements 

would further promote safety and 

efficiency at the clearing agency— 

motives that may not be part of a 

clearing agency’s governance 

arrangements in the absence of 

regulation. Policies and procedures 

required under the proposed rules 

would also reinforce governance 

arrangements at covered clearing 

agencies by requiring board members 

and senior management to have 

appropriate experience and skills to 

discharge their duties and 

responsibilities. 

Compliance with these proposed 

requirements could reduce the risk that 

insufficient internal controls within a 

covered clearing agency endanger 

broader financial stability. While the 

benefits of compliance are difficult to 

quantify, the Commission preliminarily 

believes that they flow predominantly 

from a reduced probability of covered 

clearing agency default. 

iii. Proposed Rule 17Ad–22(e)(3): 

Comprehensive Framework for the 

Management of Risks 

The Commission preliminarily 

believes that proposed Rule 17Ad– 

22(e)(3) would aid covered clearing 

agencies in implementing a systematic 

process to examine risks and assess the 

probability and impact of those risks.706

Proposed Rule 17Ad–22(e)(3)(i) 

specifies that a risk management 

framework include policies and 

procedures reasonably designed to 

identify, measure, monitor, and manage 

the range of risks that arise in or are 

borne by the covered clearing agency. 

Critically, these policies and procedures 

would be subject to review on a 

specified basis and approval by the 

board of directors annually. A sound 

framework for comprehensive risk 

management under regular review 

would have the benefits of providing 

covered clearing agencies with a better 

awareness of the totality of risks they 

face in the dynamic markets they serve. 

In addition, the requirement to have 

policies and procedures that provide for 

an independent audit committee of the 

board and that provide internal audit 

and risk management functions with 

sufficient resources, authority, and 

independence from management, as 

well as access to risk and audit 

committees of the board, would 

reinforce governance arrangements 

directly related to risk management at 

covered clearing agencies. A holistic 

approach to risk management could 

help ensure that policies and 

procedures that covered clearing 

agencies adopt pursuant to the proposed 

rules work in tandem with one another. 

For example, such an approach could 

result in risk-based membership 

standards under proposed Rule 17Ad– 

22(e)(18) that are consistent with 

policies and procedures related to the 

allocation of credit losses under 

proposed Rule 17Ad–22(e)(13)(i). The 

Commission preliminarily believes 

ensuring that a covered clearing 

agency’s risk management activities fit 

within a unified framework could 

mitigate the risk of financial losses to 

covered clearing agencies’ members and 

participants in the markets they serve. 

Additionally, the proposed rule 

extends requirements under Rules 

17Ad–22(d)(4) and 17Ad–22(d)(11) by 

requiring plans for recovery and winddown.707 To the extent that covered 

clearing agencies do not already have 

such plans in place, they may incur 

additional incremental costs. Plans for 

recovery and wind-down benefit both 

clearing members and, more generally, 

participants in markets where products 

are cleared. Many of the costs and 

benefits of such plans depend critically 

on the specific recovery and wind-down 

tools that covered clearing agencies 

choose to include in their rules. The 

presence of such plans could reduce 

uncertainty over the allocation of 

financial losses to clearing members in 

the event that a covered clearing agency 

faces losses due to member default or 

for other reasons that exceed its 

prefunded default resources. Further, 

recovery and wind-down plans that 

detail the circumstances under which 

clearing services may be suspended or 

terminated may mitigate the risk of 

market disruption in periods of 

financial stress. Market participants 

who face the possibility that the assets 

they trade may no longer be cleared and 

settled by a CCP may be unwilling to 

trade such assets at times when risk 

sharing is most valuable. While the 

effects are difficult to quantify, the 

Commission preliminarily believes that 

recovery and wind-down plans may 

support liquidity in times of financial 

stress. 

Based on its supervisory experience, 

the Commission preliminarily believes 

that all covered clearing agencies have 

an independent audit committee of the 

board and most covered clearing 

agencies already have some rules 

governing recovery and wind-down of 

clearing operations but have plans that 

vary in their degree of formality. As a 

result, the benefits and costs associated 

with these requirements will likely be 

limited to incremental changes 

associated with covered clearing 

agencies’ review of their policies and 

procedures for recovery and wind-down 

and to registered clearing agencies that 

move into the set of covered clearing 

agencies. 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29597 

708See supra Part II.B.4.c (discussing the full set 

of requirements under proposed Rule 17Ad– 

22(e)(4)). 

709The Commission also notes that no covered 

clearing agency would be systemically important in 

multiple jurisdictions unless and until the 

Commission made such a determination pursuant 

to proposed Rule 17Ab2–2. See supra Part II.C and 

infra Part VII (discussing the determinations 

process under proposed Rule 17Ab2–2 and 

providing proposed rule text, respectively). 

710See supra Part IV.B.3.b.i (discussing current 

practices regarding credit risk management at 

registered clearing agencies). 

711Cf. PFMI Report, supra note 1, at 43 

(discussing Principle 4, Explanatory Note 3.4.19). 

712Rule 17Ad–22(b)(4) requires a registered 

clearing agency’s policies and procedures be 

reasonably designed to provide for an annual 

validation of its margin models and the related 

parameters and assumptions. See 17 CFR 

240.17Ad–22(b)(4). 

713See supra Part II.B.4.d (discussing the full set 

of requirements under proposed Rule 17Ad– 

22(e)(5)). 

iv. Proposed Rules 17Ad–22(e)(4) 

Through (7): Financial Risk 

Management 

(1) Proposed Rule 17Ad–22(e)(4): Credit 

Risk 

Proposed Rule 17Ad–22(e)(4) would 

establish requirements for credit risk 

management by covered clearing 

agencies.708 Based on its supervisory 

experience, the Commission 

preliminarily believes that all entities 

that would be covered clearing agencies 

are already in compliance with 

proposed Rules 17Ad–22(e)(4)(i) 

through (iv). Pursuant to Rule 17Ad– 

22(b)(3), registered clearing agencies 

that provide CCP services currently 

maintain additional financial resources 

to meet the ‘‘cover one’’ requirement, 

and registered clearing agencies that 

would be complex risk profile clearing 

agencies under the proposed rules 

currently maintain financial resources 

to meet the ‘‘cover two’’ requirement.709

All covered clearing agencies exclude 

resources that are not prefunded when 

calculating this coverage.710 As a result, 

the Commission preliminarily believes 

little or no additional direct costs or 

benefits will result from these 

requirements unless registered clearing 

agencies were to become covered 

clearing agencies and include resources 

that are not prefunded towards their 

resource requirements. The requirement 

to include only prefunded resources 

when calculating the financial resources 

available to meet the standards under 

proposed Rules 17Ad–22(e)(4)(i) 

through (iii) potentially reduces the risk 

that covered clearing agencies request 

financial resources from their members 

in times of financial stress, when 

members are least able to provide these 

resources. 

While requiring ‘‘cover two’’ for 

complex risk profile clearing agencies 

and for covered clearing agencies 

designated systemically important in 

multiple jurisdictions would place 

additional burdens on the affected 

clearing agencies, the Commission 

preliminarily believes that the 

requirement is appropriate because 

disruption to these entities due to 

member default carries relatively higher 

expected costs than for other covered 

clearing agencies. These relatively 

higher expected costs arise from the fact 

that covered clearing agencies 

designated systemically important in 

multiple jurisdictions are exposed to 

foreign financial markets and may serve 

as a conduit for the transmission of risk; 

for complex risk profile clearing 

agencies, high expected costs may arise 

from discrete jump-to-default price 

changes in the products they clear and 

higher correlations in the default risk of 

members.711

Proposed Rule 17Ad–22(e)(4)(vi) and 

(vii) would also impose additional costs 

by requiring additional measures to be 

taken with respect to the testing of a 

covered clearing agency’s financial 

resources and model validation of a 

covered clearing agency’s credit risk 

models. These requirements do not 

currently exist as part of the standards 

applied to registered clearing 

agencies.712 Covered clearing agencies 

may incur additional costs under 

expanded and more frequent testing of 

total financial resources if the formal 

requirement that results of monthly 

testing be reported to appropriate 

decision makers is a practice not 

currently used by covered clearing 

agencies. A range of costs for these new 

requirements is discussed in Part 

IV.C.3.a.iv(5). 

Frequent monitoring and stress testing 

of total financial resources, conforming 

model validations, and reporting of 

results of the monitoring and testing to 

appropriate personnel within the 

clearing agency could help rapidly 

identify any gaps in resources required 

to ensure stability, even in scenarios not 

anticipated on the basis of historical 

data. Moreover, the requirement to test 

and, when necessary, update the 

assumptions and parameters supporting 

models of credit risk will support the 

adjustment of covered clearing agency 

financial resources to changing financial 

conditions, and mitigate the risk that 

covered clearing agencies will 

strategically manage updates to their 

risk models in support of cost reduction 

or profit maximization. 

(2) Proposed Rule 17Ad–22(e)(5): 

Collateral 

Proposed Rule 17Ad–22(e)(5) would 

require a covered clearing agency to 

have policies and procedures reasonably 

designed to limit the assets it accepts as 

collateral to those with low credit, 

liquidity, and market risks, and to set 

and enforce appropriately conservative 

haircuts and concentration limits. 

Collateral haircut and concentration 

limit models would be subject to a notless-than-annual review of their 

sufficiency.713 Rule 17Ad–22(d)(3) 

currently requires registered clearing 

agencies to have policies and 

procedures reasonably designed to hold 

assets in a manner that minimizes risk 

of loss or risk of delay in access to them 

and invest assets in instruments with 

minimal credit, market, and liquidity 

risk. 

By focusing on the nature of assets 

and not on accounts, the Commission 

preliminarily believes the proposed rule 

may allow covered clearing agencies the 

ability to manage collateral more 

efficiently. In particular, under the 

proposed rule, a covered clearing 

agency would have the option of 

accepting collateral that is riskier than 

cash and holding this collateral at 

commercial banks, potentially 

increasing default risk exposure. On the 

other hand, the requirement to regularly 

review concentration limits and haircuts 

mitigates the risk that a covered clearing 

agency’s collateral policies fail to 

respond to changing economic 

conditions. Based on its supervisory 

experience, the Commission 

understands that all registered clearing 

agencies that would meet the definition 

of a covered clearing agency already 

conform to the requirements under the 

proposed rule related to the nature of 

assets they may accept as collateral and 

the haircuts and concentration limits 

they apply to collateral assets, so the 

associated costs and benefits that would 

result from these requirements would 

apply only if registered clearing 

agencies not already in compliance were 

to become covered clearing agencies. 

As a result of the proposed rule, these 

covered clearing agencies and registered 

clearing agencies that become covered 

clearing agencies may experience 

additional costs as a result of the 

proposed annual review requirements 

for the sufficiency of collateral haircut 

and concentration limit models. Based 

on its supervisory experience, the 

Commission preliminarily believes that 

many clearing agencies that require 

collateral would need to develop 

policies and procedures to review 

haircuts and concentration limits 

annually. Enforcement of the proposed 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29598 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

714See supra Part II.B.4.e (discussing the full set 

of requirements under proposed Rule 17Ad– 

22(e)(6)). 

715See e.g., Philipp Haene & Andy Sturm, 

Optimal Central Counterparty Risk Management 

(Swiss Nat’l Bank Working Paper, June 2009) 

(addressing the tradeoff between margin and default 

fund, considering collateral costs, clearing member 

default probability, and the extent to which margin 

requirements are associated with risk mitigating 

incentives). 

716See supra Part II.B.4.f (discussing the full set 

of requirements under proposed Rule 17Ad– 

22(e)(7)). 

haircut requirement would also require 

additional resources. A range of costs 

for these new requirements is discussed 

in Part IV.C.3.a.iv(5). Adherence to the 

new requirements by these entrants 

could extend the benefits of prompt loss 

coverage, incentive alignment, and 

systemic risk mitigation to a larger 

volume of cleared transactions. 

(3) Proposed Rule 17Ad–22(e)(6): 

Margin 

Proposed Rule 17Ad–22(e)(6) would 

require a covered clearing agency that 

provides CCP services to have policies 

and procedures reasonably designed to 

require it to cover credit exposures 

using a risk-based margin system and to 

establish minimum standards for such a 

system. It would require these policies 

and procedures to cover daily collection 

of variation margin. The proposed rule 

also requires a set of policies and 

procedures generally designed to 

support a reliable margin system. 

Among these are policies and 

procedures to ensure the use of reliable 

price data sources and appropriate 

methods for measuring credit exposure, 

which could improve margin system 

accuracy. Finally, covered clearing 

agencies would be required to have 

policies and procedures related to the 

testing and verification of margin 

models.714 Proposed Rules 17Ad– 

22(a)(6) and (14) support these 

requirements by addressing the means 

of verification for margin models and 

the level of coverage required of a 

margin system against potential future 

exposures, respectively. Based on its 

supervisory experience, however, the 

Commission understands that all 

current covered clearing agencies have 

policies and procedures that conform to 

the requirements under proposed Rules 

17Ad–22(e)(6)(i) through (v) and (vii), 

and some will have to update their 

policies and procedures to comply with 

proposed Rule 17Ad–22(e)(6)(vi). 

Similar to proposed Rules 17Ad– 

22(e)(4) and (7), covered clearing 

agencies that do not already engage in 

backtesting of margin resources at least 

once each day or engage in a monthly 

analysis of assumptions and parameters, 

as well as registered clearing agencies 

that enter into the set of covered 

clearing agencies in the future, may 

incur incremental compliance costs as a 

result of the proposed rule. Since 

margin plays a key role in clearing 

agency risk management, however, 

requiring that margin be periodically 

verified and modified as a result of 

changing market conditions may 

mitigate the risks posed by covered 

clearing agencies to financial markets in 

periods of financial stress. Further, 

periodic review of model specification 

and parameters reduces the likelihood 

that covered clearing agencies 

opportunistically update margin models 

in times of low volatility and fail to 

update margin models in times of high 

volatility. A range of costs for 

verification and modification of margin 

models is discussed in Part 

IV.C.3.a.iv(5). Further, since risk-based 

initial margin requirements may cause 

market participants to internalize some 

of the costs borne by the CCP as a result 

of large or risky positions,715 ensuring 

that margin models are well-specified 

and correctly calibrated with respect to 

economic conditions will help ensure 

that they continue to align the 

incentives of clearing members with the 

goal of financial stability. 

(4) Proposed Rule 17Ad–22(e)(7): 

Liquidity Risk 

Proposed Rule 17Ad–22(e)(7) would 

require a covered clearing agency to 

have policies and procedures reasonably 

designed to effectively monitor, 

measure, and manage liquidity risk.716

Parties to securities and derivatives 

transactions rely on clearing agencies 

for prompt clearance and settlement of 

transactions. Market participants in 

centrally cleared and settled markets are 

often linked to one another through 

intermediation chains in which one 

party may rely on proceeds from sales 

of cleared products to meet payment 

obligations to another party. If 

insufficient liquidity causes a clearing 

agency to fail to meet settlement or 

payment obligations to its members, 

consequences could include the default 

of a clearing member who may be 

depending on these funds to make a 

payment to another market participant, 

with losses then transmitted to others 

that carry exposure to this market 

participant if the market participant is 

depending on payments from the 

clearing members to make said 

payments to others. Therefore, the 

benefits related to liquidity risk 

management generally flow from the 

reduced risk of systemic risk 

transmission by covered clearing 

agencies as a result of liquidity 

shortfalls, either in the normal course of 

operation or as a result of member 

default. 

Enhanced liquidity risk management 

may produce additional benefits. 

Clearing members would face less 

uncertainty over whether a covered 

clearing agency has the liquidity 

resources necessary to make prompt 

payments which would reduce any need 

to hedge the risk of nonpayment. 

Potential benefits from enhanced 

liquidity risk management may also 

extend beyond members of covered 

clearing agencies or markets for 

centrally cleared and settled securities. 

Clearing members are often members of 

larger financial networks, and the ability 

of a covered clearing agency to meet 

payment obligations to its members can 

directly affect its members’ ability to 

meet payment obligations outside of the 

cleared market. Thus, management of 

liquidity risk may mitigate the risk of 

contagion between asset markets. 

Based on its supervisory experience, 

the Commission preliminarily believes 

that some covered clearing agencies 

would need to create new policies and 

procedures, or update existing policies 

and procedures, to meet requirements 

under the various subsections of 

proposed Rule 17Ad–22(e)(7). These 

actions would entail compliance costs, 

as noted in Part III.B.2. Further, the 

Commission preliminarily believes that 

for some covered clearing agencies the 

proposed requirements would require 

them to establish new practices. The 

cost of adherence to the proposed rule 

would likely be passed on to market 

participants in cleared markets, as 

discussed in more detail below. 

Under proposed Rule 17Ad– 

22(e)(7)(i), a covered clearing agency 

would be required to have policies and 

procedures reasonably designed to 

require maintaining sufficient resources 

to achieve ‘‘cover one’’ for liquidity risk. 

This requirement mirrors the ‘‘cover 

one’’ requirement for credit risk in 

proposed Rule 17Ad–22(e)(4)(iii). Based 

on its supervisory experience, the 

Commission preliminarily believes that 

many covered clearing agencies do not 

currently meet a ‘‘cover one’’ 

requirement for liquidity and thus will 

likely incur costs to comply with this 

proposed rule. As discussed earlier, 

whether covered clearing agencies 

choose to gather liquidity directly from 

members or instead choose to rely on 

third-party arrangements, the costs of 

liquidity may be passed on to other 

market participants, eventually 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29599 

717See supra Part IV.C.1.d (discussing the effect 

of the proposed rules on concentration in the 

market for clearing services and among clearing 

members). 718See proposed Rule 17Ad–22(a)(15), infra Part 

VII (defining ‘‘qualifying liquid resources’’). 

719See Letter from Kim Taylor, President, CME 

Clearing, to Melissa Jurgens, Office of the 

Secretariat, CFTC, Sept. 16, 2013, at 13 & n.48 

(noting CME’s assumption that the cost of 

committed liquidity or committed repurchase 

facilities is approximately $3 million for every $1 

billion of required committed facilities, including 

upfront fees, commitment fees, legal fees, and 

collateral agent fees). 

720See id. at 11. 

721See Letter from Robert C. Pickel, CEO, ISDA 

to Secretary, CFTC, Sept. 16, 2013, at 4 (discussing 

collateral and liquidity requirements); see also 

Craig Pirrong, Clearing and Collateral Mandates: A 

New Liquidity Trap?, 24 J. Applied Corp. Fin. 67 

(2012). 

722See Bloomberg, Global Syndicated Loans, 1st 

Half 2013 League Tables (July 1, 2013), available at 

http://www.bloomberg.com/professional/files/2012/

08/Global-Syndicated-Loans-2012.pdf. 

increasing transaction costs.717 The 

requirement may, however, reduce the 

procyclicality of covered clearing 

agencies’ liquidity demands, which may 

reduce costs to market participants in 

certain situations. For instance, the 

requirement would reduce the 

likelihood that a covered clearing 

agency would have to call on its 

members to contribute additional 

liquidity in periods of financial stress, 

when liquidity may be most costly. 

Under proposed Rule 17Ad– 

22(e)(7)(ii), a covered clearing agency 

would be required to have policies and 

procedures reasonably designed to 

ensure that it meets the minimum 

liquidity resource requirement in 

proposed Rule 17Ad–22(e)(7)(i) with 

qualifying liquid resources.718

Qualifying liquid resources would 

include cash held at the central bank or 

at a creditworthy commercial bank, 

assets that are readily converted into 

cash pursuant to committed lines of 

credit, committed foreign exchange 

swaps, committed repurchase 

agreements or other highly reliable 

prearranged funding agreements, or 

assets that may be pledged to a central 

bank in exchange for cash (if the 

covered clearing agency has access to 

routine credit at a central bank). The 

Commission notes that the proposed 

rules allow covered clearing agencies 

some measure of flexibility in managing 

qualifying liquid resources and that 

covered clearing agencies would be able 

to use creditworthy commercial bank 

services where appropriate. 

Based on its supervisory experience, 

the Commission preliminarily believes 

that some covered clearing agencies 

currently do not meet the proposed 

liquidity requirements with qualifying 

liquid resources. As an alternative to the 

proposed rules, the Commission could 

have restricted the definition of 

qualifying liquid resources to assets 

held by covered clearing agencies. 

These covered clearing agencies and the 

markets they serve would benefit from 

the proposed minimum requirements 

for liquidity resources in terms of the 

reduced risk of liquidity shortfalls and 

associated contagion risks described 

above. However, qualifying liquid 

resources may be costly for covered 

clearing agencies to maintain on their 

own balance sheets. Such resources 

carry an opportunity cost. Assets held as 

cash are, by definition, not available for 

investment in less liquid assets that may 

be more productive uses of capital. This 

cost may ultimately be borne by clearing 

members who contribute liquid 

resources to covered clearing agencies to 

meet minimum requirements under 

proposed Rule 17Ad–22(e)(7)(ii) and 

their customers. 

The Commission notes that, under the 

proposed rules, covered clearing 

agencies have flexibility to meet their 

qualifying liquid resource requirements 

in a number of ways. In perfect capital 

markets, maintaining on-balance-sheet 

liquidity resources should be no more 

costly than entering into committed 

lines of credit or prearranged funding 

agreements backed by less-liquid assets 

that would allow these assets to be 

converted into cash. However, market 

frictions, such as search frictions, may 

enable banks to obtain liquidity at lower 

cost than other firms. In the presence of 

such frictions, obtaining liquidity using 

committed and uncommitted funding 

arrangements provided by banks may 

prove a less costly option for some 

covered clearing agencies than holding 

additional liquid resources on their 

balance sheets. In particular, the 

Commission preliminarily believes that 

requiring covered clearing agencies to 

enter into committed or uncommitted 

funding arrangements would decrease 

the costs that would be experienced by 

them in the event they sought to 

liquidate securities holdings during 

periods of market disruptions and 

increase the likelihood that they meet 

funding obligations to market 

participants by reducing the risk of 

delay in converting non-cash assets into 

cash. 

The Commission notes that 

committed or uncommitted funding 

arrangements would only count towards 

minimum requirements to the extent 

that covered clearing agencies had 

securities available to post as collateral, 

so use of these facilities may require 

covered clearing agencies to require 

their members to contribute more 

securities. If these securities are costly 

for clearing members to supply, then 

additional required contributions to 

meet minimum requirements under 

proposed Rule 17Ad–22(e)(7)(ii) may 

impose burdens on clearing members 

and their customers. Similarly, 

prearranged funding arrangements may 

entail implicit costs to clearing 

members. Prearranged funding 

arrangements could impose costs on 

clearing members if they are obligated to 

contribute securities towards a collateral 

pool that the covered clearing agency 

would use to back borrowing. 

Alternatively, clearing members may be 

obligated under a covered clearing 

agency’s rules to act as counterparties to 

repurchase agreements. Under the latter 

scenario, clearing members would bear 

costs associated with accepting 

securities in lieu of cash. Additionally, 

the Commission notes certain explicit 

costs specifically associated with these 

arrangements outlined below. 

Counterparties to committed 

arrangements allowable under proposed 

Rule 17Ad–22(a)(15) charge covered 

clearing agencies a premium to provide 

firm liquidity commitments and 

additional out-of-pocket expenses will 

be incurred establishing and 

maintaining committed liquidity 

arrangements. The Commission 

preliminarily estimates that the total 

cost of committed funding arrangements 

will be approximately 30 basis points 

per year, including upfront fees, legal 

fees, commitment fees, and collateral 

agent fees.719 Furthermore, the 

Commission is aware of other potential 

consequences of these arrangements. In 

some instances, they may cause entities 

outside of a covered clearing agency to 

bear risks ordinarily concentrated 

within the covered clearing agency, 

while, in others, these arrangements 

may result in increased exposure of 

covered clearing agencies to certain 

members.720 Financial intermediaries 

that participate in committed credit 

facilities may be those least able to 

provide liquidity in times of financial 

stress, so these commitments may 

represent a route for risk 

transmission.721 Finally, the 

Commission notes that covered clearing 

agencies may face constraints in the size 

of credit facilities available to them. 

Recent market statistics have estimated 

the total size of the committed credit 

facility market in the U.S. at $1.2 trillion 

with only 12 of 1800 facilities exceeding 

$10 billion in size.722 Given the volume 

of activity at covered clearing agencies, 

it is possible that they may only be able 

to use committed credit facilities to 

meet a portion of their liquidity 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29600 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

723Subtracting the lower bound of commitment 

fees (5 basis points) from the estimated total cost 

of a committed facility (30 basis points) yields an 

estimate of the upper bound of the fees associated 

with an uncommitted facility (30 ¥ 5 = 25 basis 

points). We estimate the lower bound of fees 

associated with an uncommitted facility 

analogously (30 ¥ 15 = 15 basis points). 

724Covered clearing agencies may choose to 

allocate liquidity burdens based on a number of 

factors related to the markets they serve and their 

membership. See, e.g., Exchange Act Release No. 

34–70999 (Dec. 5, 2013), 78 FR 75400 (Dec. 11, 

2013) (Commission order approving NSCC rule 

change to institute supplemental liquidity deposits 

to its clearing fund designed to increase liquidity 

resources to meet its liquidity needs). 

725To produce this range, the Commission used 

a combination of publicly available information 

from SRO rule filings, comment letters, and 2012 

annual financial statements, and non-public 

information gathered as a result of its regulatory 

role. For each covered clearing agency, the 

Commission assumed that the covered clearing 

agency’s guaranty fund represents the sole source 

of liquidity used to satisfy its minimum liquidity 

requirements under the proposed rules. To compute 

the level of qualifying liquid resources currently 

held by each covered clearing agency, the 

Commission assumed that cash in the covered 

clearing agency’s guaranty fund remains fixed at 

current levels and added to this any amount from 

credit facilities that could be backed by the value 

of securities held in the covered clearing agency’s 

guaranty funds. 

Taking the sum of these current qualifying liquid 

resources over all covered clearing agencies and 

subtracting this from the sum of the ‘‘cover one’’ 

guaranty fund requirement over all covered clearing 

agencies results in the total shortfall relative to 

minimum requirements under proposed Rules 

17Ad–22(e)(7)(i) and (ii). The Commission further 

assumed that covered clearing agencies would 

cover this shortfall using prearranged funding 

agreements backed by additional securities posted 

to guaranty funds by clearing members. Finally, the 

Commission multiplied the total prearranged 

funding amount by between 0.15% and 0.25% to 

arrive at a range of ongoing costs. 

726See Alessandro Beber, Michael W. Brandt & 

Kenneth A. Kavajecz, Flight-to-Quality or Flight-toLiquidity? Evidence from the Euro-Area Bond 

Market, 22 Rev. Fin. Stud. 925 (2009) (decomposing 

sovereign yield spreads into credit and liquidity 

components and showing that credit quality matters 

for bond valuation but that, in times of market 

stress, investors chase liquidity, not quality); 

Markus K. Brunnermeier & Lasse Heje Pedersen, 

Market Liquidity and Funding Liquidity, 22 Rev. 

Fin. Stud. 2201 (2009) (showing, in a theoretical 

model, how with low wealth shocks, demand for 

illiquid assets falls off more sharply than demand 

for liquid assets); Francis A. Longstaff, The Flightto-Liquidity Premium in U.S. Treasury Bond Prices, 

77 J. Bus 511 (2004) (estimating the liquidity 

premium associated with U.S. Treasuries relative to 

close substitutes); Dimitri Vayanos Flight to 

Quality, Flight to Liquidity, and the Pricing of Risk 

(NBER Working Paper No. 10327, Feb. 2004) 

(showing, in a theoretical model, that during 

volatile times, assets’ liquidity premia increase), 

available at http://www.nber.org/papers/

w10327.pdf. 

requirements under proposed Rule 

17Ad–22(e)(7)(ii). 

A covered clearing agency may 

alternatively use a prearranged funding 

arrangement determined to be highly 

reliable in extreme but plausible market 

conditions to raise liquid resources 

backed by non-cash assets but that does 

not require firm commitments from 

liquidity providers. This strategy would 

avoid certain of the explicit fees 

associated with firm commitments, 

while incurring costs related to the 

annual review and maintenance of such 

arrangements. Based on its supervisory 

experience and discussions with market 

participants, the Commission 

preliminarily believes the cost 

associated with commitment fees to be 

between 5 and 15 basis points per year. 

Given the 30 basis point cost associated 

with committed funding arrangements, 

mentioned above, uncommitted 

facilities could entail costs of between 

15 and 25 basis points.723 Prearranged 

funding arrangements may ultimately 

prove less costly than holding cash and 

may be more widely available than 

committed arrangements, while still 

reducing the likelihood of delay faced 

by covered clearing agencies that 

attempt to market less-liquid assets. As 

mentioned above in the context of 

committed credit facilities, the 

Commission acknowledges that 

financial institutions who offer to 

provide liquidity to covered clearing 

agencies on an uncommitted basis may 

be least able to do so in times of 

financial stress, when access to liquidity 

is most needed by the covered clearing 

agency. Without a commitment in place, 

counterparties retain the option to fail to 

provide liquidity during stressed 

conditions, when liquidity is most 

valuable to clearing agencies and the 

markets they serve. To the extent 

covered clearing agencies may establish 

requirements for clearing members to 

provide liquidity to ensure compliance 

with the Commission’s proposed rules, 

the costs experienced by members 

indirectly may exceed those associated 

with committed credit facilities. 

Finally, covered clearing agencies that 

have access to routine credit at a central 

bank could meet the qualifying liquid 

resources requirement with assets that 

are pledgeable to a central bank. The 

Commission notes that this may 

represent the lowest cost option for 

covered clearing agencies, but 

understands that this latter provision 

would represent an advantage only if 

and when a covered clearing agency 

receives the benefit of access to routine 

central bank borrowing. The 

Commission anticipates that at such 

future time access to routine credit at a 

central bank would provide covered 

clearing agencies with additional 

flexibility with respect to resources used 

to comply with the liquidity risk 

management requirements of proposed 

Rules 17Ad–22(e)(7)(i) and (ii). 

The total cost of maintaining 

qualifying liquid resources pursuant to 

proposed Rules 17Ad–22(e)(7)(i) and (ii) 

is composed of the cost of each liquidity 

source including assets held by covered 

clearing agencies, committed credit 

facilities and prearranged funding 

agreements, multiplied by the quantity 

of each of these liquidity sources held 

by covered clearing agencies. The 

Commission is unable to quantify the 

cost of cash held by clearing agencies 

and securities required to back credit 

facilities since such estimates would 

require detailed information about 

additional required contributions of 

clearing members under the proposed 

rules, as well as clearing members’ best 

alternative to holding cash and 

securities.724 As mentioned above, 

however, the Commission has limited 

information about the costs associated 

with committed and uncommitted 

credit facilities. Based on this 

information, we are able to quantify the 

costs associated with committed credit 

facilities that will result from the 

requirement to maintain qualifying 

liquid resources. The Commission 

preliminarily estimates that the cost of 

compliance with the proposed rules will 

be between $133 million and $225 

million per year as a result of the 

requirement to enter into prearranged 

funding agreements for non-cash assets 

used to meet liquidity requirements 

under proposed Rules 17Ad–22(e)(7)(i) 

and (ii). This analysis assumes that 

covered clearing agencies will enter into 

such agreements at arm’s length on an 

uncommitted basis. Based on staff 

discussions with market participants, 

the Commission understands that 

alternative arrangements between 

covered clearing agencies and their 

members may be obtained at lower cost, 

though these arrangements may come 

with increased wrong-way risk.725

U.S. Treasury securities would not 

fall under the proposed definition of 

qualifying liquid resources. The 

Commission understands that U.S. 

Treasury markets represent some of the 

largest and most liquid markets in the 

world, see Part IV.B.3.f.ii, and that, in 

‘‘flights to quality’’ and ‘‘flights to 

liquidity’’ in times of financial stress, 

U.S. Treasuries trade at a premium to 

other assets.726 If, as an alternative to 

the proposed rules, the Commission 

included U.S. government securities in 

the definition of qualifying liquid 

resources, the Commission 

preliminarily estimates the cost of 

complying with requirements under 

proposed Rule 17Ad–22(e)(7)(i) and (ii) 

would be reduced by between $9 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29601 

727The Commission re-estimated the level of 

prearranged funding agreements required to meet 

requirements under proposed Rules 17Ad– 

22(e)(7)(i) and (ii) using the data and methodology 

described in note 725, except in this case the 

Commission assumed that all non-defaulting 

member resources applied to funding obligations 

were a mix of cash and U.S. Treasuries for a lower 

bound, and assumed that all resources applied to 

funding obligations were a mix of cash and U.S. 

Treasuries for an upper bound. 

Taking the sum of these current qualifying liquid 

resources over all covered clearing agencies and 

subtracting this from the sum of cover one guaranty 

fund requirement over all covered clearing agencies 

results in the total shortfall relative to minimum 

requirements under proposed Rules 17Ad– 

22(e)(7)(i) and (ii) if U.S. government and agency 

securities were considered qualifying liquid 

resources. As above, the Commission further 

assumed that covered clearing agencies would 

cover this shortfall using prearranged funding 

agreements backed by additional securities posted 

to guaranty funds by clearing members and 

multiplied this amount by between 0.15% and 

0.25% to arrive at a range of ongoing costs. 

728Brian Begalle et al., The Risk of Fire Sales in 

the Tri-Party Repo Market, at 19 & n.37 (FRBNY 

Staff Report No. 616, May 2013), available at 

http://www.newyorkfed.org/research/staff_reports/

sr616.pdf. 

729See proposed Rule 17Ad–22(e)(7)(iii), infra 

Part VII. 

730See supra Part IV.C.2.b. 

731See proposed Rule 17Ad–22(e)(7)(ix), infra 

Part VII. 

million and $225 million per year.727

The Commission preliminarily believes, 

however, that there are benefits to 

including government securities only if 

prearranged funding agreements exist. 

In particular, given the quantity of these 

securities financed by the largest 

individual dealers, fire-sale conditions 

could materialize if collateral is 

liquidated in a disorderly manner, 

which could prevent covered clearing 

agencies from meeting payment 

obligations.728

Proposed Rule 17Ad–22(e)(7)(iii) 

concerns access to accounts and 

services at a central bank, when 

available and where practical.729 The 

Commission preliminarily believes that 

it may be beneficial for covered clearing 

agencies to use central bank account 

services because doing so would reduce 

exposure to commercial bank default 

risk. Moreover, for some covered 

clearing agencies, central bank services 

may represent the lowest-cost 

admissible funding arrangement under 

the proposed rule. The Commission 

understands, however, that central bank 

services are only currently available to 

a subset of covered clearing agencies, 

and the proposed rule only requires 

policies and procedures to ensure use of 

central bank accounts and services 

when practical and available. 

Proposed Rules 17Ad–22(e)(7)(iv) and 

(v) address relations between covered 

clearing agencies and their liquidity 

providers. The Commission 

preliminarily believes that a key benefit 

of these proposed rules would be an 

increased level of assurance that 

liquidity providers would be able to 

supply liquidity to covered clearing 

agencies on demand. Such assurance is 

especially important because of the 

possibility that covered clearing 

agencies may rely on outside liquidity 

providers to convert non-cash assets 

into cash using prearranged funding 

arrangements or committed facilities, 

pursuant to proposed Rule 17Ad– 

22(e)(7)(ii) and the definition of 

qualifying liquid resources in proposed 

Rule 17Ad–22(a)(15). The required 

policies and procedures would ensure 

the covered clearing agency undertakes 

due diligence to confirm that it has a 

reasonable basis to believe each of its 

liquidity providers understand the 

liquidity risk borne by the liquidity 

provider, and that the liquidity provider 

would have the capacity to provide 

liquidity under commitments to the 

covered clearing agency. Finally, 

covered clearing agencies would be 

required, under the proposed rule, to 

maintain and test the covered clearing 

agency’s procedures and operational 

capacity for accessing liquidity under 

their agreements. The Commission 

preliminarily believes that, besides the 

costs associated with new or updated 

policies and procedures discussed in 

Part III.B.2, covered clearing agencies 

and liquidity providers may experience 

costs associated with the proposed rules 

as a result of the requirement to test 

liquidity resources, such as, for 

example, fees associated with 

conducting test draws on a covered 

clearing agency’s credit lines. Costs 

associated with ongoing monitoring and 

compliance related to testing are 

included in the Commission’s estimate 

of quantifiable costs presented in Part 

IV.C.3.d. 

Proposed Rules 17Ad–22(e)(7)(vi) and 

(vii) may impose costs on covered 

clearing agencies as a result of 

requirements for testing the sufficiency 

of liquidity resources and validating 

models used to measure liquidity risk. 

The testing and model validation 

requirements of these proposed rules are 

similar to requirements for testing and 

model validation for credit risk in 

proposed Rules 17Ad–22(e)(4)(vi) and 

(vii), and the Commission preliminarily 

believes that these proposed rules 

would yield similar benefits. Frequent 

monitoring and testing liquidity 

resources could help rapidly identify 

any gaps in resources required to meet 

payment obligations. Moreover, the 

requirement to test and, when 

necessary, update the assumptions and 

parameters supporting models of 

liquidity risk will support the 

adjustment of covered clearing agency 

liquidity resources to changing financial 

conditions and mitigate the risk that 

covered clearing agencies will 

strategically manage updates to their 

liquidity risk models in support of costreduction or profit-maximization. 

Proposed Rule 17Ad–22(e)(7)(viii) 

addresses liquidity shortfalls at a 

covered clearing agency, and the 

Commission preliminarily believes the 

proposed rule would reduce ambiguity 

related to settlement delays in the event 

of liquidity shocks. Among other things, 

by requiring procedures that seek to 

avoid delay of settlement payments, this 

proposed rule would require covered 

clearing agencies to address liquidity 

concerns in advance rather than relying 

on strategies of delaying accounts 

payable in the event of liquidity shocks. 

As discussed previously, effective 

liquidity risk management by covered 

clearing agencies that serves to 

eliminate uncertainty on the part of 

clearing members that payments by the 

covered clearing agency will be made on 

time may allow these clearing members 

to allocate their liquidity resources to 

more efficient uses than holding 

precautionary reserves.730 The 

Commission preliminarily believes the 

proposed rule may reduce some of the 

flexibility covered clearing agencies 

have in the absence of the proposed 

rule, which could impose additional 

burdens on these clearing agencies as 

discussed in Part IV.C.1.b. 

Proposed Rule 17Ad–22(e)(7)(ix) 

would require a covered clearing agency 

to have policies and procedures 

reasonably designed to describe its 

process for replenishing any liquid 

resources that it may employ during a 

stress event.731 The ability to replenish 

liquidity resources is critical to ensure 

that covered clearing agencies are able 

to continue operations after a stress 

event. Beyond the general benefits 

associated with liquidity risk 

management noted earlier, this 

proposed rule would yield particular 

benefits insofar as it would reduce 

uncertainty about covered clearing 

agency liquidity resources at precisely 

those times when information about 

liquidity may be most important to 

market participants. 

Finally, proposed Rule 17Ad– 

22(e)(7)(x) would require a covered 

clearing agency that provides CCP 

services and is either systemically 

important in multiple jurisdictions or is 

a clearing agency involved in activities 

with a more complex risk profile to 

conduct a feasibility analysis for ‘‘cover 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29602 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

732See proposed Rule 17Ad–22(e)(7)(x), infra Part 

VII. 

733The Commission notes that while the stress 

testing provisions in proposed Rules 17Ad–22(e)(4) 

through (7) include new requirements for covered 

clearing agencies, Rule 17Ad–22(b)(4) requires 

registered clearing agencies that provide CCP 

services for security-based swaps to have policies 

and procedures for a general margin model 

validation requirement. See supra note 712. 

734This figure was calculated as follows: 2 

Consultants for 40 hours per week at $653 per hour 

= $52,240 × 12 weeks = $626,880 per clearing 

agency × 7 covered clearing agencies = $4,388,160. 

The $653 per hour figure for a consultant was 

calculated using www.payscale.com, modified by 

Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits, and overhead. 

The Commission previously estimated that 

ongoing costs associated with hiring external 

consultants to fulfill the requirements of Rule 

17Ad–22(b)(4) would be approximately $3.9 million 

per year. See Clearing Agency Standards Release, 

supra note 5, at 66261. 

two.’’ 732 The primary cost associated 

with this rule will be an annual analysis 

by the affected covered clearing 

agencies. Costs associated with a 

feasibility study would likely include 

the cost of staffing and consulting, 

which will depend on the scope of 

products cleared and the particular 

approach taken by each covered clearing 

agencies. The costs associated with this 

requirement are included in Part 

IV.C.3.d. 

(5) Testing and Validation of Risk 

Models 

Proposed Rules 17Ad–22(e)(4) 

through (7) include requirements for 

covered clearing agencies to have 

policies and procedures reasonably 

designed to test and validate models 

related to financial risks. Covered 

clearing agencies may incur additional 

costs under expanded and more 

frequent testing of financial resources if 

the proposed requirements for testing 

and validation do not conform to 

practices currently used by covered 

clearing agencies.733 These costs are 

composed of two portions. The first 

encompasses startup costs related to 

collection and storage of data elements 

necessary to implement testing and 

validation, along with investments in 

software tools and human capital to 

support these functions. The second 

portion of costs includes the ongoing, 

annual costs of conducting testing and 

validation under the proposed rules. 

Based on its supervisory experience 

and discussions with industry 

participants, the Commission 

preliminarily believes that startup costs 

to support testing and validation of 

credit risk, margin, and liquidity risk 

models at covered clearing agencies 

could fall in the range of $5 million to 

$25 million for each covered clearing 

agency. This range primarily reflects 

investments in information technology 

to process data already available to 

covered clearing agencies for stress 

testing and validation purposes. The 

range’s width reflects differences in 

markets served by, as well as the scope 

of operations of, each covered clearing 

agency. Based on its supervisory 

experience and discussions with 

industry participants, the Commission 

estimates a lower bound of $1 million 

per year for ongoing costs related to 

testing of risk models. 

Should each covered clearing agency 

choose to hire external consultants for 

the purposes of performing model 

validation required under proposed 

Rules 17Ad–22(e)(4) and 17Ad–22(e)(7) 

through written policies and 

procedures, the Commission 

preliminarily estimates the ongoing cost 

associated with hiring such consultants 

would be approximately $4,388,160 in 

the aggregate.734

The Commission acknowledges that it 

could have, as an alternative, proposed 

rules that would require testing and 

validation of financial risk models at 

covered clearing agencies at different 

frequencies. For example, the 

Commission could have required 

backtesting of margin resources less 

frequently than daily. Such a policy 

could imply less frequent adjustments 

in margin levels that may result in overor under-margining. The Commission 

preliminarily believes that the 

frequencies of testing and validation of 

financial risk models that it has 

proposed are appropriate given the risks 

faced by covered clearing agencies and 

current market practices related to 

frequency of meetings of risk 

management committees and boards of 

directors at covered clearing agencies. 

v. Proposed Rules 17Ad–22(e)(8) 

Through (10): Settlement and Physical 

Delivery 

Proposed Rules 17Ad–22(e)(8) 

through (10) require covered clearing 

agencies to have policies and 

procedures reasonably designed to 

address settlement risk. Many of the 

issues raised by settlement are similar to 

those raised by liquidity. Uncertainty in 

settlement may make it difficult for 

clearing members to fulfill their 

obligations to other market participants 

within their respective financial 

networks if they hold back 

precautionary reserves, as discussed 

above. Based on its supervisory 

experience, the Commission 

preliminarily believes that the benefits 

and costs for the majority of covered 

clearing agencies will likely be limited. 

Registered clearing agencies that enter 

into the set of covered clearing agencies 

in the future, by contrast, may bear more 

significant costs as a result of the 

enhanced standards. 

Settlement finality is important to 

market participants for a number of 

reasons. Reversal of transactions can be 

costly to participants. For example, if 

transactions are reversed, buyers and 

sellers of securities may be exposed to 

additional market risk as they attempt to 

reestablish desired positions in cleared 

products. Similarly, reversal of 

transactions may render participants 

expecting to receive payment from the 

covered clearing agency unable to fulfill 

payment obligations to their 

counterparties, exposing these 

additional parties to the transmitted 

credit risk. Finally, settlement finality 

can help facilitate default management 

procedures by covered clearing agencies 

since they improve transparency of 

members’ positions. Unless settlement 

finality is established by covered 

clearing agencies, market participants 

may attempt to hedge reversal risk for 

themselves. This could come at the cost 

of efficiency if it means that, on the 

margin, participants are less likely to 

use cleared products as collateral in 

other financial transactions. 

In addition, settlement in central bank 

money, where available and determined 

to be practical by the board of directors 

of the covered clearing agency, as the 

proposed rules would require, greatly 

reduces settlement risk related to 

payment agents. Using central bank 

accounts to effect settlement rather than 

settlement banks removes a link from 

the intermediation chain associated 

with clearance and settlement. As a 

result, a covered clearing agency would 

be less exposed to the default risk of its 

settlement banks. In cases where 

settlement banks maintain links to other 

covered clearing agencies, for example 

as liquidity providers or as members, 

reducing exposure to settlement bank 

default risk may be particularly 

valuable. 

As in the case of proposed Rule 

17Ad–22(e)(7)(iii), the Commission 

acknowledges there may be 

circumstances in which covered 

clearing agencies either do not have 

access to central bank account services 

or the use of such services is 

impractical. Accordingly, the 

Commission preliminarily believes it is 

appropriate to allow covered clearing 

agencies the flexibility to also use 

commercial bank account services to 

effect settlement, subject to a 

requirement that covered clearing 

agencies monitor and manage the risks 

associated with such arrangements. 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29603 

735See Neal L. Wolkoff & Jason B. Werner, The 

History of Regulation of Clearing in the Securities 

and Futures Markets, and Its Impact on 

Competition, 30 Rev. Banking & Fin. L. 313, 323 

(2010). 

736See Commission, Study of Unsafe and 

Unsound Practices of Brokers and Dealers, H.R. 

Doc. No. 231, 92nd Cong., 1st Sess. 13, at 168 (1971) 

(suggesting that the delivery and transfer process for 

paper certificates were a principal cause of failures 

to deliver and receive during the ‘‘paperwork 

crisis’’ of the late 1960s). 

737See supra note 274; supra Part II.B.9 

(discussing the full set of requirements under 

proposed Rule 17Ad–22(e)(13)); supra Part 

IV.B.3.d.ii (discussing current practices among 

registered clearing agencies regarding exchange-ofvalue settlement systems); see also 17 CFR 

240.17Ad–22(d)(13). 

738See, e.g., Elliot, supra note 617 (discussing 

various loss-allocation rules and CCP recovery and 

wind-down). 

vi. Proposed Rule 17Ad–22(e)(11): CSDs 

CSDs play a key role in modern 

financial markets. For many issuers, 

many transactions in their securities 

involve no transfer of physical 

certificates. 

Paperless trade generally improves 

transactional efficiency. Book-entry 

transfer of securities may facilitate 

conditional settlement systems required 

by proposed Rule 17Ad–22(e)(12). For 

example, book-entry transfer in a 

delivery versus payment system allows 

securities to be credited to an account 

immediately upon debiting the account 

for the payment amount. Institutions 

and individuals may elect to no longer 

hold and exchange certificates that 

represent their ownership of securities. 

An early study showed that the creation 

of DTC resulted in a 30–35% reduction 

in the physical movement of 

certificates.735 Among other benefits, to 

the extent that delays in exchanging 

paper certificates result in settlement 

failures, immobilization and 

dematerialization of shares reduces the 

frequency of these failures.736

For markets to realize the 

transactional benefits of paperless trade, 

however, requires confidence that CSDs 

can correctly account for the number of 

securities in their custody and for the 

book entries that allocate these 

securities across participant accounts. In 

order to realize these benefits, the 

proposed rules also require covered 

CSDs to establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to 

ensure the integrity of securities issues, 

minimize the risks associated with 

transfer of securities, and protect assets 

against custody risk. Based on its 

supervisory experience, the Commission 

preliminarily believes that registered 

CSDs already have infrastructure in 

place to meet these requirements. 

However, CSDs may face incremental 

compliance costs in instances where 

they must modify their rules in order to 

implement appropriate controls. 

Compliance costs may be higher for 

potential new CSDs that are determined 

to be covered clearing agencies in the 

future. 

vii. Proposed Rule 17Ad–22(e)(12): 

Exchange-of-Value Settlement Systems 

Clearance and settlement of 

transactions between two parties to a 

trade involves an exchange of one 

obligation for another. Regarding 

transactions in securities, these claims 

can be securities or payments for 

securities. A particular risk associated 

with transactions is principal risk, 

which is the risk that only one 

obligation is successfully transferred 

between counterparties. For example, in 

a purchase of common stock, a party 

faces principal risk if, despite 

successfully paying the counterparty for 

the purchase, the counterparty may fail 

to deliver the shares. 

The proposed requirements under 

Rule 17Ad–22(e)(12) are substantially 

the same as those in Rule 17Ad– 

22(d)(13).737 As a result, covered 

clearing agencies that have been in 

compliance with Rule 17Ad–22(d)(13) 

face no substantially new requirements 

under Proposed Rule 17Ad–22(e)(12). 

The Commission preliminary expects 

the proposed rule would likely impose 

limited material additional costs on 

covered clearing agencies. It would also 

produce benefits in line with the general 

economic considerations discussed in 

Part IV.C.1. The economic effects may 

differ for registered clearing agencies 

that enter into the set of covered 

clearing agencies in the future. 

viii. Proposed Rule 17Ad–22(e)(13): 

Participant-Default Rules and 

Procedures 

Proposed Rule 17Ad–22(e)(13) would 

require covered clearing agencies to 

have policies and procedures for 

participant default with additional 

specificity relative to current 

requirements for registered clearing 

agencies under Rule 17Ad–22(d)(11). In 

particular, proposed Rule 17Ad– 

22(e)(13) requires policies and 

procedures that address the allocation of 

credit losses that exceed default 

resources, repayment of liquidity 

providers, replenishment of financial 

resources, and testing and review of 

default procedures. 

Based on its supervisory experience, 

the Commission preliminarily believes 

all covered clearing agencies currently 

test and review default procedures at 

least annually, so the costs of this 

requirement would apply only to 

registered clearing agencies that may 

enter into the set of covered clearing 

agencies in the future. Most covered 

clearing agencies, however, will be 

required to update their policies and 

procedures as a result of proposed Rules 

17Ad–22(e)(13)(i) and (ii). Clearing 

members may experience benefits from 

proposed Rule 17Ad–22(e)(13)(i), which 

requires covered clearing agencies to 

provide disclosure to members 

regarding the allocation of default losses 

when these losses exceed the level of 

financial resource it has available. As a 

result of this additional transparency, 

clearing members may experience an 

improved ability to manage their 

expectations of potential obligations 

against the covered clearing agency, 

which may increase the likelihood of 

orderly wind-downs in the event of 

member default. Crafting such 

allocation plans by covered clearing 

agencies may entail certain compliance 

costs, as previously discussed in Part 

III.D.5.a and as discussed further in Part 

IV.C.3.d. Further, covered clearing 

agencies may allocate default losses in 

a number of ways that may themselves 

have implications for participation, 

competition, and systemic risk.738 For 

example, if, as a part of a default 

resolution plan, selective tear-up is 

contemplated after a failed position 

auction, then clearing members who 

expect low loss exposure in the tear-up 

may not have adequate incentives to 

participate in the position auction, even 

if they are better able to absorb losses 

than clearing members who expect high 

exposure in the tear-up plan. This 

would increase the chances of a failed 

auction and the chances of a protracted 

and more disruptive wind-down. Thus, 

the total costs of any loss allocation plan 

may depend largely on the particular 

choices embedded in covered clearing 

agencies’ plans. 

As an alternative to the proposed 

rules, the Commission could have 

proposed more prescriptive 

requirements for default procedures at 

covered clearing agencies. The 

Commission preliminarily believes that 

differences in cleared assets and in the 

characteristics of clearing members 

supports allowing each covered clearing 

agency flexibility in choosing its own 

default procedures pursuant to 

proposed Rule 17Ad–22(e)(13). 

In addition to loss allocation plans, 

proposed Rule 17Ad–22(e)(13) contains 

new provisions related to the 

replenishment of financial resources 

and testing and review of default 

procedures that do not appear in Rule 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29604 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

739See, e.g., Paul Klemperer, Competition When 

Consumers Have Switching Costs: An Overview 

with Applications to Industrial Organization, 

Macroeconomics, and International Trade, 62 Rev. 

Econ. Stud. 515 (1995) (presenting an overview of 

switching costs and their effects on competition). 

740Additional equity capital may be raised 

through share issuance or by retaining earnings. 

17Ad–22(d)(11). The Commission 

preliminarily believes that proposed 

rules related to replenishment of 

financial resources may reduce the 

potential for systemic risk and 

contagion in cleared markets, as they 

facilitate covered clearing agencies’ 

prompt access to these resources in 

times of financial stress. The 

Commission also preliminarily believes 

that broad-based participation in the 

testing of default procedures could 

reduce disruption to cleared markets in 

the event of default. However, to the 

extent that testing of these procedures 

requires participation by members of 

covered clearing agencies, members’ 

customers, and other stakeholders, these 

parties may bear costs under the 

proposed rules. The Commission is 

unable to quantify the economic effects 

of participation in these tests at this 

time. 

ix. Proposed Rule 17Ad–22(e)(14): 

Segregation and Portability 

Segregation and portability of 

customer positions serves a number of 

useful purposes in cleared markets. In 

the normal course of business, the 

ability to efficiently identify and move 

an individual customer’s positions and 

collateral between clearing members 

enables customers to easily terminate a 

relationship with one clearing member 

and initiate a relationship with another. 

This may facilitate competition between 

clearing members by ensuring 

customers are free to move their 

accounts from one clearing member to 

another based on their preferences, 

without being unduly limited by 

operational barriers.739

Segregation and portability may be 

especially important in the event of 

participant default. By requiring that 

customer collateral and positions 

remain segregated, covered clearing 

agencies can facilitate, in the event of a 

clearing member’s insolvency, the 

recovery of customer collateral and the 

movement of customer positions to one 

or more other clearing members. 

Further, portability of customer 

positions may facilitate the orderly 

wind down of a defaulting member if 

customer positions may be moved to a 

non-defaulting member. Porting of 

positions in a default scenario may yield 

benefits for customers if the alternative 

is closing-out positions at one clearing 

member and reestablishing them at 

another clearing member. The latter 

strategy would cause customers to bear 

transactions costs, which might be 

especially high in times of financial 

stress. 

The Commission notes that, in its 

preliminary view, these proposed rules 

are flexible in their approach to 

implementing segregation and 

portability requirements. The most 

efficient means of implementing these 

requirements may depend on the 

products that a covered clearing agency 

clears as well as other business practices 

at a covered clearing agency. For 

example, a clearing agency’s decision 

whether or not to collect margin on a 

gross or net basis may bear on its 

decision to port customer positions and 

collateral on an individual or omnibus 

basis, and while an individual account 

structure may provide a higher degree of 

protection from a default by another 

customer, it may be operationally and 

resource intensive for a covered clearing 

to implement and may reduce the 

efficiency of its operations. 

As a result, the costs and benefits of 

proposed Rule 17Ad–22(e)(14) will 

depend on specific rules implemented 

by covered clearing agencies as well as 

how much these rules differ from 

current practice. Based on its 

supervisory experience, the Commission 

preliminarily believes that the current 

practices at covered clearing agencies to 

which the proposed rule would apply 

already meets segregation requirements 

under the proposed rule, so any costs 

and benefits for covered clearing 

agencies would flow from implementing 

portability requirements, though it 

potentially raises a barrier to entry for 

security-based swap clearing agencies or 

clearing agencies involved in activities 

with a more complex risk profile that 

seek to become covered clearing 

agencies. 

x. Proposed Rule 17Ad–22(e)(15): 

General Business Risk 

While proposed Rules 17Ad–22(e)(4) 

and 17Ad–22(e)(7) require that covered 

clearing agencies have policies and 

procedures reasonably designed to 

address credit risk and liquidity risk, 

proposed Rule 17Ad–22(e)(15) requires 

that covered clearing agencies have 

policies and procedures reasonably 

designed to address general business 

risk. The Commission preliminarily 

believes that general business losses 

experienced by covered clearing 

agencies represent a distinct risk to 

cleared markets, given limited 

competition and specialization of 

clearing agencies. In this regard, the loss 

of clearing services due to general 

business losses would likely result in 

major market disruption. The proposed 

rule requires a covered clearing agency 

to have policies and procedures 

reasonably designed to mitigate the risk 

that business losses result in the 

disruption of clearing services. Under 

these policies and procedures covered 

clearing agencies would hold sufficient 

liquid resources funded by equity to 

cover potential general business losses, 

which at a minimum would constitute 

six months of operating expenses. The 

Commission preliminarily believes that 

the benefits of such policies and 

procedures would flow primarily from 

covered clearing agencies that would be 

required to increase their holdings of 

liquid net assets funded by equity, 

enabling them to sustain their 

operations for sufficient time and 

achieve orderly wind-down if such 

action is eventually necessary. 

The Commission could have proposed 

a higher or lower minimum level of 

resources, for example, corresponding to 

one quarter of operating expenses or one 

year of operating expenses. The 

Commission preliminarily believes, 

however, that the rules, as proposed, 

afford covered clearing agencies 

sufficient flexibility in determining the 

level of resources to hold while 

maintaining a minimum standard that 

supports continued operations in the 

event of general business losses. As 

another alternative, the Commission 

could have allowed covered clearing 

agencies additional flexibility in 

determine the nature of the financial 

resources held to mitigate the effects of 

general business risk or the means by 

which these resources are funded. The 

Commission preliminarily believes, 

however, that by specifying that these 

resources be liquid in nature, the 

proposed rule would limit any delays by 

covered clearing agencies that suffer 

business losses from paying expenses 

required for continued operations. 

Additionally, by specifically requiring 

that a covered clearing agency draw 

liquid net resources from members as 

equity capital, the proposed rules may 

also encourage members to more closely 

monitor the business operations of a 

covered clearing agency, which may 

reduce the likelihood of losses. 

Based on its supervisory experience 

Commission preliminarily believes that 

certain covered clearing agencies would 

be required to establish and maintain 

policies and procedures providing for 

specified levels of equity capital and 

higher levels of liquid net assets than 

they would in the absence of proposed 

Rule 17Ad–22(e)(15).740 Table 2 

contains summary information from five 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29605 

741 In the case of DTCC, to obtain an estimate of 

annual operating expense, the Commission made 

minor adjustments to the total expense by 

excluding expenses not related to DTCC’s core 

operations, since its annual income statement does 

not explicitly show the operating expense. 742The Commission notes that these two cases are 

provided as estimates of cash and cash equivalents 

funded by equity for existing covered clearing 

agencies for limited purposes of the economic 

analysis but are not methods the Commission 

would necessarily accept if used by a covered 

clearing agency to comply with proposed Rule 

17Ad–22(e)(15). Nor should the two cases presented 

be viewed as interpretive guidance regarding 

proposed Rule 17Ad–22(e)(15). 

743For example, in Case 2, for DTC we arrive at 

a pro-rata allocation of cash by computing the ratio 

of Average Equity to the sum of Average Equity and 

Average Liabilities (282/3646 = 7.73%,) and 

applying this to Average Cash and Cash Equivalents 

(7.73% × 3151 = 243.71) to arrive at a proxy of the 

level of liquid net assets funded by equity. 

744The figures in Table 2 are based on financial 

data taken from the 2008–2012 annual reports of 

DTC, FICC, ICEEU, NSCC, and OCC. The 

Commission notes that these figures are presented 

for the limited purposes of conducting this 

economic analysis and do not represent methods 

the Commission would necessarily accept if used 

by a covered clearing agency to comply with 

proposed Rule 17Ad–22(e)(15). 745See Franco Modigliani & Merton H. Miller, 

The Cost of Capital, Corporation Finance and the 

Theory of Investment, 48 Am. Econ. Rev. 261 (1958) 

(showing the irrelevance of capital structure in 

perfect markets). 746See Eugene F. Fama & Kenneth R. French, The 

Cross-Section of Expected Stock Returns, 47 J. Fin. 

427 (1992). For CME, the Commission used 

monthly return data from January 2003 to December 

2012, and for ICE, from December 2005 to December 

2012. 

The Commission calculated this data using Daily/ 

Monthly U.S. Stock Files© 2012 Center for Research 

in Security Prices (CRSP), The University of 

Chicago Booth School of Business, and Thomson 

Reuters Datastream. 

747The Commission based this estimate on the 

2012 financial statements for DTC, CME, FICC, ICE, 

NSCC, and OCC. To ensure comparability, the 

Commission estimated leverage ratios for each of 

these clearing agencies by adjusting assets for 

clearing and guaranty funds and dividing by 

shareholders’ equity. While DTC, NSCC, FICC, ICE, 

and CME all have estimated leverage ratios of 

between 1 and 2, the Commission computed a 

higher leverage ratio of 5 for OCC. As a result, the 

Commission computed OCC’s cost of capital by first 

‘‘unlevering’’ CME’s estimated beta of 1.14 using 

2012 financial statement information to arrive at an 

unlevered beta of 0.87 and levering this using 

OCC’s 2012 financial statement information to 

arrive at a levered beta of 3.36. Finally, the 

Commission applied the current Fama-French 

monthly risk premium at a 10-year horizon, 

annualized, and added the current 10 year risk-free 

rate to arrive at a levered cost of equity of 

approximately 26% for OCC. 

748See e.g., Anat R. Admati, Peter M. DeMarzo, 

Martin F. Hellwig & Paul Pfleiderer, Fallacies, 

Irrelevant Facts, and Myths in the Discussion of 

Capital Regulation: Why Bank Equity is Not 

Expensive (Working Paper, Mar. 23, 2011), 

available at http://www.coll.mpg.de/pdf_dat/2010_

42online.pdf (addressing the statement that 

‘‘[i]ncreased bank equity requirements increase the 

funding costs for banks because they must use more 

equity, which has a higher required return’’). 

registered clearing agencies and 

estimates, solely for purposes of 

evaluating the costs and benefits of 

proposed Rule 17Ad–22(e)(15), the 

amount of additional capital these 

entities would be required to establish 

and maintain to comply with the 

proposed rule. As the Commission has 

not previously had such a capital 

requirement, the estimate is based on 

one half of the average annual operating 

expenses for each covered clearing 

agency as reflected in their annual 

financial statements over the five-year 

period ending December 31, 2012.741

Table 2 identifies cash and cash 

equivalents as liquid assets and averages 

this over the same five-year period. A 

key shortcoming of using publicly 

available financial data is the difficulty 

in determining how much of a firm’s 

cash and cash equivalents are funded by 

either equity or liabilities, or both. To 

this end, the Commission considered 

two different cases.742 In Case 1, the 

Commission assumed that cash on each 

clearing agency’s balance sheet was 

funded by liabilities first, with the 

residual funded by equity. In Case 2, the 

Commission assumed that cash on each 

clearing agency’s balance sheet was 

funded pro-rata by equity and 

liabilities.743 This procedure likely 

yields an upper bound for estimates of 

additional equity necessary to meet the 

minimum reserve requirements. 

Table 2. Hypothetical Additional 

Equity Necessary to Meet Requirements 

Under Proposed Rule 17Ad–22(e)(15), 

in Millions of Dollars, Based on Years 

2008–2012.744

DTC FICC ICEEU NSCC OCC 

Average Six Months Operating Expense .................................................................... 166 62 41 94 68 

Average Cash and Cash Equivalents .......................................................................... 3,151 8,259 129 3,838 64 

Average Liabilities ........................................................................................................ 3,364 8,471 84 3,833 155 

Cash Funded by Equity ............................................................................................... 0 0 45 5 0 

Average Total Equity ................................................................................................... 282 97 192 125 15 

Average Net Income ............................................................................................. 21 16 119 26 2 

Case 1, Additional Equity Needed ............................................................................... 166 62 0 89 68 

Case 2, Additional Equity Needed ............................................................................... 0 0 0 0 63 

Absent market frictions, a change in 

capital structure should have no effect 

on the value of a covered clearing 

agency.745 The Commission 

acknowledges that market imperfections 

such as asymmetric information, moral 

hazard, and regulation may imply that 

covered clearing agencies that would 

need to raise additional equity capital 

incur opportunity costs for holding this 

additional capital rather than investing 

it in projects or distributing it back to 

equity holders who might, in turn, 

invest in projects. 

To estimate these costs, the 

Commission applied the capital asset 

pricing model to observed returns for 

CME and ICE, two clearing agencies that 

have publicly-traded equity 

outstanding.746 This methodology 

yielded an estimate of the cost of equity 

for these two clearing agencies of 

approximately 10%. Applying estimated 

cost of equity to the lower bound of 

additional equity required under the 

proposed rule suggests an annual cost of 

$16 million, while applying this cost to 

the upper bound of additional equity 

needed suggests an annual cost of $50 

million.747 These estimates are subject 

to a number of caveats. In particular, 

this exercise does not take into account 

the possibility that equity finance may 

reduce the cost of equity due to the 

resulting decrease in leverage, 748 or that 

clearing agencies might simultaneously 

raise equity while reducing liabilities. 

Both of these possibilities would likely 

reduce the cost to covered clearing 

agencies of increased equity capital. 

Finally, this analysis presumes that 

covered clearing agencies will choose to 

comply with the requirements in 

proposed Rule 17Ad–22(e)(15)(iii) at the 

lower bound of six months’ operating 

expenses. 

Clearing agencies that issue equity in 

order to satisfy the new requirements 

would additionally face costs related to 

issuance. The Commission preliminarily 

recognizes that the cost of maintaining 

additional equity resembles an 

insurance premium against the losses 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
29606 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

749See supra Part II.B.14 (discussing the full set 

of requirements under proposed Rule 17Ad– 

22(e)(17)); see also 17 CFR 240.17Ad–22(d)(4). 

associated by market disruption in the 

absence of clearing services. 

xi. Proposed Rule 17Ad–22(e)(16): 

Custody and Investment Risks 

Proposed Rule 17Ad–22(e)(16) 

requires a covered clearing agency to 

have policies and procedures reasonably 

designed to safeguard both their own 

assets as well as the assets of 

participants, broadening the 

requirement applicable to registered 

clearing agencies in Rule 17Ad–22(d)(3) 

to the protection of participants’ assets. 

The Commission preliminarily 

believes that this may have benefits in 

terms of protecting against systemic 

risk, to the extent that covered clearing 

agencies to this point have treated their 

own assets differently by applying 

greater safeguards to those assets than 

with respect to assets of their members 

and members’ clients. Protection of 

member assets is important to cleared 

markets because, for example, the assets 

of a member in default serve as margin 

and represent liquidity supplies that a 

covered clearing agency may access to 

cover losses. If covered clearing 

agencies can quickly access these 

liquidity sources, they may be able to 

limit losses to non-defaulting members. 

Participants may benefit from 

proposed Rule 17Ad–22(e)(16) in other 

ways. Requiring a covered clearing 

agency’s policies and procedures to 

safeguard its assets and participant 

assets and to invest in assets with 

minimal credit, liquidity, and market 

risk may reduce uncertainty in the value 

of participant assets and participants’ 

exposure to mutualized losses. This may 

allow participants to deploy their own 

capital more efficiently. Furthermore, 

easy access to their own capital enables 

members to more freely terminate their 

participation in covered clearing 

agencies. 

Based on its supervisory experience, 

the Commission preliminarily believes 

that current practices at covered 

clearing agencies meet the requirements 

under proposed Rule 17Ad–22(e)(16) in 

most cases, so the additional costs and 

benefits flowing from these 

requirements would be generally 

limited to registered clearing agencies 

that may enter the set of covered 

clearing agencies in the future. 

xii. Proposed Rule 17Ad–22(e)(17): 

Operational Risk Management 

Because, as noted above, proposed 

Rule 17Ad–22(e)(17) would require 

substantially the same set of policies 

and procedures as Rule 17Ad– 

22(d)(4),749 the Commission 

preliminarily believes that proposed 

Rule 17Ad–22(e)(17) would likely 

impose limited material additional costs 

on covered clearing agencies and 

produce limited benefits, in line with 

the general economic considerations 

discussed in Part IV.C.1. 

xiii. Proposed Rules 17Ad–22(e)(18) 

Through (20): Membership 

Requirements, Tiered Participation, and 

Linkages 

As discussed earlier, covered clearing 

agencies play an important role in the 

markets they serve. They often enjoy a 

central place in financial networks that 

enables risk sharing, but may also 

enable them to serve as conduits for the 

transmission of risk throughout the 

financial system. Proposed Rules (18) 

through (20) require covered clearing 

agencies to have policies and 

procedures reasonably designed to 

explicitly consider and manage the risks 

associated with the particular 

characteristics of their network of direct 

members, the broader community of 

customers, and other parties that rely on 

the services provided by the covered 

clearing agencies or other partners that 

the covered clearing agency is 

connected to through relevant linkages. 

The Commission preliminarily believes 

that these efforts carry benefits insofar 

as they reduce the extent to which 

covered clearing agencies may impose 

negative externalities on financial 

markets. 

As economies of scale contribute to 

the business dynamics of clearing and 

settlement, there is often only one 

clearing agency or a small number of 

clearing agencies for a particular class of 

security. Consequently, membership in 

a clearing agency may influence 

competitive dynamics between 

members and indirect participants, such 

as intermediaries, in cleared markets. 

Members and indirect participants may 

compete for the same set of customers, 

but indirect participants must have 

relationships with members to access 

clearing services. Members, therefore, 

may have incentives in place to extract 

economic rents from indirect 

participants by imposing higher fees or 

restricting access to clearing services. 

Permitting fair and open access to 

clearing agencies and their services may 

promote competition among market 

participants and may result in lower 

costs and efficient clearing and 

settlement services. Open access to 

clearing agencies may reduce the 

likelihood that credit and liquidity risk 

become concentrated among a small 

number of clearing members, each of 

which retain a large number of indirect 

participants through tiered 

arrangements. Further, links between 

clearing agencies may facilitate risk 

management across multiple security 

classes and improve the efficiency of 

collateral arrangements. 

(1) Proposed Rule 17Ad–22(e)(18): 

Member Requirements 

While fair and open access to clearing 

agencies may promote competition and 

enhance the efficiency of clearing and 

settlement services, these improvements 

should not come at the expense of 

prudent risk management. The 

soundness of clearing members 

contributes directly to the soundness of 

a clearing agency and mutualization of 

losses within clearing agencies expose 

each clearing member to the default risk 

of every other clearing member. 

Accordingly, it is important for clearing 

agencies to control and effectively 

manage the risks to which they are 

exposed by their direct and indirect 

participants by establishing risk-related 

requirements for participation. 

Based on its supervisory experience, 

the Commission preliminarily believes 

that current practices among most 

covered clearing agencies involve a mix 

of objective financial and business 

requirements stipulated in publiclyavailable rulebooks and discretion 

exercised by the covered clearing 

agency. As a result and based on its 

supervisory experience, the Commission 

preliminarily believes that some 

changes to policies and procedures at 

covered clearing agencies may be 

required under the proposed rule. 

(2) Proposed Rule 17Ad–22(e)(19): 

Tiered Participation Arrangements 

The Commission preliminarily 

believes that proposed Rule 17Ad– 

22(e)(19) may improve covered clearing 

agencies’ ability to manage its exposure 

to market participants that are not 

clearing members, but access payment, 

clearing, or settlement facilities through 

their relationships with clearing 

members. A covered clearing agency 

that is able to effectively manage its 

exposure to its members but fails to 

identify, monitor, and manage its 

exposures to non-member firms may 

overlook dependencies that are critical 

to the stability of cleared markets. This 

is particularly true if indirect 

participants in the covered clearing 

agency are large and might potentially 

precipitate the default of one or more 

direct members. 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29607 

750See supra Parts II.B.19 and VII (discussing the 

requirements for communication procedures and 

standards under Rule 17Ad–22(e)(22) and providing 

the rule text, respectively). 

The data necessary to compute 

summary statistics that would be 

helpful in quantifying the costs and 

benefits of the proposed rule, including 

those that would indicate the size of 

indirect participants and the volume of 

transactions in which they are involved, 

are not available. Nevertheless, the 

Commission is sensitive to the fact that 

costs associated with the proposed rules 

may result in concentration of clearing 

services among fewer clearing members. 

Part of this process of consolidation may 

mean an increase in the volume of 

trading activity that involves indirect 

members, making identification of risks 

associated with indirect members even 

more critical. Based on its supervisory 

experience, however, the Commission 

preliminarily believes that certain 

covered clearing agencies already have 

policies and procedures in place that 

would satisfy the requirements of the 

proposed rule even in the absence of 

such explicit requirements under 

existing rules. Costs and benefits from 

the proposed rule would come from 

those other registered clearing agencies 

that require updates to their policies 

and procedures to come into 

compliance with the proposed rule. 

The Commission is sensitive to the 

fact that indirect participants play a key 

role in maintaining competition in 

markets for intermediation of trading in 

securities insofar as they offer investors 

a broader choice of intermediaries to 

deal with in centrally cleared and 

settled securities markets. If elements of 

policies and procedures under this rule 

make indirect participation marginally 

more costly, then transactions costs for 

investors may increase. 

(3) Proposed Rule 17Ad–22(e)(20): Links 

Links between clearing agencies and 

their members are only one way that 

clearing agencies interface with the 

financial system. A clearing agency may 

also establish links with other clearing 

agencies and FMUs through a set of 

contractual and operational 

arrangements. For a clearing agency, the 

primary purpose of establishing a link 

would be to expand its clearing and 

settlement services to additional 

financial instruments, markets, and 

institutions. Established links among 

clearing agencies and FMUs may enable 

direct and indirect market participants 

to have access to a broader spectrum of 

clearing and settlement services. 

Sound linkages between clearing 

agencies that provide CCP services may 

also provide their customers with more 

efficient collateral arrangements and 

cross-margining benefits. Crossmargining potentially relaxes liquidity 

constraints in the financial system by 

reducing total required margin 

collateral. Resources that would 

otherwise be posted as margin may be 

allocated to more productive investment 

opportunities. 

A clearing agency that establishes a 

link or multiple links may also impose 

costs on participants in markets it clears 

by indirectly exposing them to systemic 

risk from linked entities. The 

Commission acknowledges that clearing 

agencies that form linkages may be 

exposed to additional risks, including 

credit and liquidity risks, as a 

consequence of these links. Links may, 

however, produce benefits for members 

to the extent that diversification and 

hedging across their combined portfolio 

reduces their margin requirements. At 

the same time, because such an 

agreement requires the linked clearing 

agencies to each guarantee crossmargining participants’ obligations to 

the other clearing agency, crossmargining potentially exposes members 

of one clearing agency to default risk 

from members of the other. 

By requiring that covered clearing 

agencies have policies and procedures 

reasonably designed to identify, 

monitor, and manage risks related to 

any link, proposed Rule 17Ad–22(e)(20), 

like Rule 17Ad–22(d)(7), reduces the 

likelihood that such links serve as 

channels for systemic risk transmission. 

Because proposed Rule 17Ad–22(e)(20) 

differs only marginally from Rule 17Ad– 

22(d)(7), the Commission preliminarily 

believes that the costs and benefits 

flowing from the proposed rule will be 

incremental, to the extent that the 

additional specificity in proposed Rule 

17Ad–22(e)(20) causes covered clearing 

agencies to modify current practices. 

The Commission has aggregated these 

costs below. 

xiv. Proposed Rule 17Ad–22(e)(21): 

Efficiency and Effectiveness 

Proposed Rule 17Ad–22(e)(21) would 

impose on covered clearing agencies 

requirements in addition to those 

currently applied to registered clearing 

agencies under Rule 17Ad–22(d)(6) by 

also requiring covered clearing agencies 

to have policies and procedures that 

ensure that a covered clearing agency’s 

management review efficiency and 

effectiveness in four key areas: 

• Efficiency and effectiveness in 

clearing and settlement arrangements 

may reduce participants’ transaction 

costs and enhance liquidity by reducing 

the amount of collateral that customers 

must provide for transactions and the 

opportunity cost associated with 

providing such collateral. Where 

appropriate, net settlement 

arrangements can reduce collateral 

requirements. Similarly, clearing 

arrangements that include a broad scope 

of products enable clearing members to 

take advantage of netting efficiencies 

across positions. 

• Efficient and effective operating 

structures, including risk management 

policies, procedures, and systems, may 

reduce the likelihood of failures that 

may lead to impairment of a clearing 

agency’s capacity to complete 

settlement and interfering with its 

ability to monitor and manage credit 

exposures. 

• An efficient scope of products that 

a clearing agency clears, settles, or 

records may provide its participants and 

customers with more efficient collateral 

arrangements and cross-margining 

benefits that ultimately reduce 

transaction costs and improve liquidity 

in cleared markets. 

• Efficient and effective use of 

technology and communication 

procedures facilitates effective payment, 

clearing and settlement, and 

recordkeeping. 

The Commission preliminarily 

believes that requirements related to 

efficient operation of covered clearing 

agencies are appropriate given the 

market power enjoyed by these entities, 

as discussed in Part IV.C.1.d. Limited 

competition in the market for clearing 

services may blunt incentives for 

covered clearing agencies to cost 

effectively provide high quality services 

to market participants in the absence of 

regulation. 

Based on its supervisory experience, 

the Commission preliminarily believes 

that some covered clearing agencies 

would be required to make updates to 

their policies and procedures as a result 

of the proposed rule. As a result, the 

Commission expects incremental costs 

and benefits to flow from the proposed 

rule only to the extent that this 

additional specificity causes covered 

clearing agencies to modify current 

practices. 

xv. Proposed Rule 17Ad–22(e)(22): 

Communication Procedures and 

Standards 

Based on its supervisory experience, 

the Commission preliminarily believes 

that some changes to policies and 

procedures would be necessary to meet 

requirements under proposed Rule 

17Ad–22(e)(22).750 These costs are 

included as a part of implementation 

costs, as discussed below. However, the 

Commission understands that covered 


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29608 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

751See supra Part IV.C.3.a (discussing the 

appropriateness of the proposed scope of Rule 

17Ad–22(e)). 

clearing agencies already accommodate 

internationally accepted communication 

procedures and standards and 

preliminarily anticipates only 

incremental costs resulting from the 

proposed rule, in addition to the above 

discussed benefits. Registered clearing 

agencies that may enter into the set of 

covered clearing agencies in the future 

may need to conform their practices to 

internationally accepted communication 

procedures and standards, as well as 

adopt new policies and procedures as a 

result of the proposed rule, resulting in 

more substantial costs. 

xvi. Proposed Rule 17Ad–22(e)(23): 

Disclosure of Rules, Key Procedures, 

and Market Data 

Enhanced disclosure may also 

improve the efficiency of transactions in 

cleared products and improve financial 

stability more generally by improving 

the ability of members of covered 

clearing agencies to manage risks and 

assess costs. Additional information 

would reduce the potential for 

uncertainty on the part of clearing 

members regarding their obligations to 

covered clearing agencies. Proposed 

Rule 17Ad–22(e)(23) requires a covered 

clearing agency to establish, implement, 

maintain, and enforce written policies 

and procedures reasonably designed to 

require specific disclosures. As in Rules 

17Ad–22(d)(9) and (11), covered 

clearing agencies would be required 

under proposed Rule 17Ad–22(e)(23) to 

disclose default procedures to the 

public and disclose sufficient 

information to participants to allow 

them to manage the risks, fees, and 

other material costs associated with 

membership. 

Under proposed Rule 17Ad–22(e)(23), 

a covered clearing agency must 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to update, on a 

biannual basis, public disclosures that 

describe the covered clearing agency’s 

market and activities, along with 

information about the agency’s legal, 

governance, risk management, and 

operating frameworks, including 

specifically covering material changes 

since the last disclosure, a general 

background on the covered clearing 

agency, a rule-by-rule summary of 

compliance with proposed Rules 17Ad– 

22(e)(1) through (22), and an executive 

summary. The proposed rule adds a 

new requirement, relative to existing 

requirements for registered clearing 

agencies under Rule 17Ad–22(d)(9), to 

update the disclosure biannually and to 

include, among other things, specific 

data elements, including details about 

system design and operations, 

transaction values and volumes, average 

intraday exposure to participants, and 

statistics on operational reliability. 

Additional transparency may have 

benefits for participants and cleared 

markets more generally. For example, if 

information about the systems that 

support a covered clearing agency is 

public, investors may be more certain 

that the market served by this agency is 

less prone to disruption and more 

accommodating of trade. Furthermore, 

public disclosure of detailed operating 

data may facilitate evaluation of each 

covered clearing agency’s operating 

record by market participants. Further, 

under proposed Rule 17Ad– 

22(e)(23)(iv), these disclosures would be 

made about specific categories that 

potentially facilitate comparisons 

between covered clearing agencies. 

Additional availability of information 

on operations may increase the 

likelihood that clearing agencies 

compete to win market share from 

participants that value operational 

stability. This additional market 

discipline may provide additional 

incentives for covered clearing agencies 

to maintain reliability. Finally, updating 

the public disclosure every two years or 

more frequently following certain 

changes as required pursuant to 

proposed Rule 17Ad–22(e)(23)(v) would 

support the benefits of enhanced public 

disclosures by ensuring that information 

provided to the public remains up-todate. The Commission preliminarily 

believes this would reduce the 

likelihood that market participants are 

forced to evaluate covered clearing 

agencies on the basis of stale data. 

Clearing members, in particular, may 

benefit from additional disclosure of 

risk management and governance 

arrangements. These details potentially 

have significant bearing on clearing 

members’ risk management because 

they may remove uncertainty 

surrounding members’ potential 

obligations to a covered clearing agency. 

In certain circumstances, additional 

disclosures may reveal to members that 

the expected costs of membership 

exceed the expected benefits of 

membership, and that exit from the 

clearing agency may be privately 

optimal. In addition to the costs of 

concentration among members 

discussed in earlier sections, the 

Commission also recognizes the 

potential for systemic benefits from 

termination. Member exit on the basis of 

more precise information may reduce 

the risk posed to other financial market 

participants by members who, given 

additional information, might prefer to 

terminate their membership, due to an 

inability to manage the risks to which a 

covered clearing agency exposes them. 

While exit from clearing agencies may 

have consequences for competition 

among clearing members, the 

Commission preliminarily believes that 

encouraging the participation of firms 

that are not able to bear the risks of 

membership is not an appropriate 

means of mitigating the effects of market 

power on participants in cleared 

markets. 

Based on its supervisory experience, 

the Commission preliminarily believes 

that some covered clearing agencies will 

require changes to policies and 

procedures as a result of the proposed 

rules. Compliance costs associated with 

changes to policies and procedures, 

biannual review and disclosure of 

additional data are included in 

implementation costs, below. 

b. Proposed Rule 17Ab2–2 

Proposed Rule 17Ad–22(e) would 

subject covered clearing agencies to 

requirements that are in many instances 

more specific than requirements under 

Rule 17Ad–22(d) and in some cases 

produce new obligations to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to test, report, and 

disclose key elements of a covered 

clearing agency’s performance, risk 

management, and operations. 

Proposed Rule 17Ab2–2 provides 

procedures for the Commission to 

determine on its own initiative, or upon 

voluntary application by a registered 

clearing agency, whether a registered 

clearing agency is a covered clearing 

agency and therefore is subject to 

proposed Rule 17Ad–22(e). It also 

provides procedures for the Commission 

to determine whether a covered clearing 

agency is systemically important in 

multiple jurisdictions or has a complex 

risk profile and therefore should be 

subject to stricter risk management 

standards under proposed Rule 17Ad– 

22(e). 

Proposed Rule 17Ab2–2(a) provides 

procedures for the Commission to 

determine whether a registered clearing 

agency that is otherwise not a 

designated clearing agency or a complex 

risk profile clearing agency is a covered 

clearing agency on the basis of the 

products it clears or other 

characteristics the Commission may 

deem appropriate under the 

circumstances. While the Commission 

preliminarily believes the current scope 

of proposed Rule 17Ad–22(e) is 

appropriate,751 proposed Rule 17Ab2– 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29609 

752See Exchange Act Release No. 34–63107 (Oct. 

14, 2010), 75 FR 65881, 65919 & n.206 (Oct. 26, 

2010). 

753See, e.g., Darrell Duffie & Haoxiang Zhu, Does 

a Central Clearing Counterparty Reduce 

Counterparty Risk?, 1 Rev. Asset Pricing Stud. 74 

(2011) (addressing potential inefficiencies resulting 

from fragmented clearing along product lines). 

754See supra note 705. 

755See supra Part IV.C.3.a.iv(5), in particular note 

734. 

756To monetize the cost of board review, the 

Commission used a recent report by Bloomberg 

stating that the average director works 250 hours 

and earns $251,000, resulting in an estimated $1000 

per hour for board review. As a proxy for the cost 

of management review, the Commission is 

estimating $457 per hour, based upon the Director 

of Compliance cost data from the SIFMA table, see 

infra note 778. The Commission estimates the total 

cost of review for each clearing agency as follows: 

((Board Review for 32 hours at $1000 per hour) + 

(Management Review for 16 hours at $457 per 

hour)) = $39,312. The Commission requests 

comment on this estimate. 

757To monetize the internal costs the 

Commission staff used data from the SIFMA 

publications, Management and Professional 

Earnings in the Security Industry—2012, and Office 

Salaries in the Securities Industry—2012, modified 

by the Commission staff to account for an 1800 hour 

work-year and multiplied by 5.35 (professionals) or 

2.93 (office) to account for bonuses, firm size, 

employee benefits and overhead. Commission staff 

also estimated an hourly rate for a Chief Financial 

Officer. The Web site www.salary.com reports that 

median CFO annual salaries in 2012 were $307,554. 

A Grant Thornton LLP survey estimated that in 

2012 public company CFOs received an average 

annual salary of $286,500. Using an approximate 

midpoint of these two estimates of $300,000 per 

year, and dividing by an 1800-hour work year and 

Continued 

2(a) would provide the Commission 

with latitude in adjusting the scope of 

proposed Rule 17Ad–22(e) in response 

to financial innovation and changing 

economic circumstances. Proposed Rule 

17Ab2–2(a) contemplates voluntary 

application of registered clearing 

agencies to become covered clearing 

agencies. 

Proposed Rule 17Ab2–2(b) includes 

criteria the Commission may consider in 

determining whether a covered clearing 

agency is systemically important in 

multiple jurisdictions. Two of these 

criteria are based on input from a set of 

other bodies comprised of FSOC and 

regulators in other jurisdictions. As a 

result, it is possible that the flow of 

costs and benefits from proposed Rule 

17Ad–22(e) may be partially determined 

by the decisions of other regulatory 

bodies. 

Proposed Rule 17Ab2–2(c), by 

contrast, suggests characteristics of the 

financial products that a clearing agency 

clears as a basis upon which the 

Commission may determine that a 

clearing agency’s activity has a complex 

risk profile. 

The impact of proposed rules that 

determine the application of enhanced 

requirements could have direct costs on 

registered clearing agencies in the form 

of legal or consulting costs incurred as 

a result of seeking a determination from 

the Commission. In instances where 

these clearing agencies choose to apply 

to the Commission for status as a 

covered clearing agency under proposed 

Rule 17Ab2–2(a), the Commission 

preliminarily believes that a registered 

clearing agency’s voluntary application 

would suggest that the applicant’s 

private benefits from regulation under 

proposed Rule 17Ad–22(e) justify its 

costs. 

Quantifiable costs related to 

determinations under proposed Rule 

a17Ab2–2 are noted in Part IV.C.3.d. 

Indirect effects of the determination 

process may have important economic 

effects on the ultimate volume of 

clearing activity, beyond the economic 

effects of the proposed requirements 

themselves. An important feature of 

proposed Rule 17Ab2–2 is providing 

transparency for the determinations 

process. On one hand, transparency may 

allow clearing agencies to plan for new 

obligations under proposed Rule 17Ad– 

22(e); on the other, transparency may 

allow clearing agencies to restructure 

their business to avoid falling within the 

scope of proposed Rule 17Ad–22(e). 

To the extent that proposed Rule 

17Ad–22(e), if adopted as proposed, 

may increase costs relative to their peers 

for covered clearing agencies, clearing 

agencies whose activities have a more 

complex risk profile, and clearing 

agencies systemically important in 

multiple jurisdictions, clearing agencies 

may have incentives to restructure their 

businesses strategically to avoid these 

Commission determinations or 

otherwise exit any services made 

prohibitively expensive by such 

determinations. Such potential 

consequential effects would be among 

the considerations for the Commission 

to review in connection with any 

specific decision under proposed Rule 

17Ab2–2. Restructuring may involve 

spinning off business lines into separate 

entities, limiting the scope of clearing 

activities to certain markets, or limiting 

the scale of clearing activities within a 

single market.752

Any one of these responses could 

result in inefficiencies. As suggested in 

Part IV.C.2.b, registered clearing 

agencies may incur costs as a result of 

attempts to restructure. Clearing 

agencies that break up along product 

lines or fail to consolidate when 

consolidation is efficient may fail to 

take advantage of economies of scope 

and result in inefficient use of 

collateral.753 Similarly, clearing 

agencies that limit their scale may 

provide lower levels of clearing services 

to the markets that they serve. 

c. Proposed Rule 17Ad–22(f) 

Proposed Rule 17Ad–22(f) includes a 

provision that specifies Commission 

authority over designated clearing 

agencies for which it is the supervisory 

agency. Since this provision codifies 

existing statutory authority, the 

Commission does not anticipate any 

economic effects from this proposed 

rule. 

d. Quantifiable Costs and Benefits 

As discussed above, the proposed 

amendments to Rule 17Ad–22 and 

proposed Rule 17Ab2–2 would impose 

certain costs on covered clearing 

agencies. As discussed in Part 

IV.C.3.a.ii, if a covered clearing agency 

is required to recruit new directors, the 

Commission preliminarily estimates a 

cost per director of $73,000.754 As 

discussed in Part IV.C.3.a.iv(4), the 

Commission preliminarily estimates 

costs associated with liquidity resources 

under proposed Rules 17Ad–22(e)(7) 

and (a)(15) would likely fall between 

$133 million and $225 million per year 

across all covered clearing agencies. As 

discussed in Part IV.C.3.a.iv(5), the 

Commission preliminarily believes that 

startup costs related to financial risk 

management systems for existing 

covered clearing agencies, related to 

new testing and model validation 

requirements to be between $5 million 

to $25 million. The Commission also 

estimates a lower bound on ongoing 

costs related to these requirements of $1 

million per year. If covered clearing 

agencies were to hire external 

consultants for the purposes of 

performing model validation required 

under proposed Rules 17Ad–22(e)(4) 

and (7) through policies and procedures, 

the Commission preliminarily estimates 

the ongoing cost associated with hiring 

such consultants would be about 

$4,388,160 in the aggregate.755 As 

discussed in Part IV.C.3.a.x, the 

Commission expects quantifiable 

economic costs as a result of proposed 

Rule 17Ad–22(e)(15) to be between $16 

million and $50 million per year across 

covered clearing agencies. 

In addition, proposed Rules 17Ad– 

22(e)(3), (4), (6), (7), (15) and (21) all 

include elements of review by either a 

covered clearing agency’s board or its 

management on an ongoing basis. The 

Commission preliminarily estimates the 

cost of ongoing review for these 

proposed rules at approximately 

$39,312 per year.756 The proposed rules 

would also impose certain 

implementation burdens and related 

costs on covered clearing agencies.757


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29610 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

multiplying by the 5.35 factor which normally is 

used to include benefits but here is used as an 

approximation to offset the fact that New York 

salaries are typically higher than the rest of the 

country, the result is $892 per hour. The 

Commission requests comment on this estimate. 

758The total initial cost for an entrant that is not 

a CSD and does engage in activities with a more 

complex risk profile was calculated as follows: 

((Assistant General Counsel for 428 hours at $467 

per hour) + (Compliance Attorney for 365 hours at 

$310 per hour) + (Administrative Assistant for 2 

hours at $72 per hour) + (Computer Operations 

Department Manager for 300 hours at $361 per 

hour) + (Senior Business Analyst for 85 hours at 

$245 per hour) + (Senior Risk Management 

Specialist for 114 hours at $249 per hour) + (Chief 

Compliance Office for 102 hours at $441 per hour) 

+ (Senior Programmer for 53 hours at $282 per 

hour) + (Chief Financial Officer for 50 hours at $892 

per hour) + (Financial Analyst for 70 hours at $245 

per hour)) = $592,215. 

759The total cost associated with determinations 

under proposed Rule 17Ab2–2 was calculated as 

follows: ((Assistant General Counsel for 2 hours at 

$467 per hour) + (Compliance Attorney for 4 hours 

at $310 per hour) + (Outside Counsel for 6 hours 

at $400 per hour)) x 2 registered clearing agencies 

= $9,148. 

760The total initial cost was calculated as follows: 

((Assistant General Counsel for 2,906 hours at $467 

per hour) + (Compliance Attorney for 2,475 hours 

at $310 per hour) + (Administrative Assistant for 14 

hours at $72 per hour) + (Computer Operations 

Department Manager for 2,030 hours at $361 per 

hour) + (Senior Business Analyst for 565 hours at 

$245 per hour) + (Senior Risk Management 

Specialist for 773 hours at $249 per hour) + (Chief 

Compliance Office for 699 hours at $441 per hour) 

+ (Senior Programmer for 361 hours at $282 per 

hour) + (Chief Financial Officer for 350 hours at 

$892 per hour) + (Financial Analyst for 490 hours 

at $245 per hour) + (Intermediate Accountant for 15 

hours at $155 per hour)) = $4,032,720. 

761The total ongoing cost was calculated as 

follows: ((Compliance Attorney for 1,851 hours at 

$310 per hour) + (Administrative Assistant for 137 

hours at $72 per hour) + (Senior Business Analyst 

for 151 hours at $245 per hour) + (Senior Risk 

Management Specialist for 70 hours at $249 per 

hour) + (Risk Management Specialist for 1,251 

hours at $131 per hour)) = $801,980. 

762See supra note 686 and accompanying text. 

763See Duffie, Li & Lubke, supra note 563 (noting 

that the failure of a CCP could suddenly expose 

many major market participants to losses); see also 

Cecchetti, Gyntelberg & Hollanders, supra note 19 

(‘‘[A] CCP concentrates counterparty and 

operational risks and the responsibilities for risk 

management. Therefore it is critical that CCPs have 

both effective risk control and adequate financial 

resources.’’); supra note 278 and accompanying text 

(asserting that delays and breakdowns in the 

payments and clearance process and the perception 

that the clearing system might not be able to meet 

obligations may have contributed to price declines 

during the October 20, 1987 market crash). 

These costs generally include 

assessment costs to determine 

compliance with the proposed rules and 

costs related to new policies and 

procedures and updates to existing 

policies and procedures required by the 

proposed rules. In Part III, the 

Commission estimated the burdens of 

these implementation requirements for 

covered clearing agencies. 

For a new entrant into the set of 

covered clearing agencies from the set of 

registered clearing agencies, the 

Commission preliminarily estimates the 

startup compliance costs associated 

with policies and procedures to be 

$592,215,758 and compliance costs 

associated with the determinations 

process under proposed Rule 17Ab2–2 

to be $9,148.759 Based on its supervisory 

experience, the Commission 

preliminarily believes that in many 

cases registered clearing agencies are 

already in compliance with many of the 

requirements included in the proposed 

rules, so this cost represents an upper 

bound on upfront costs. Conditioned on 

its current understanding of current 

market practice at covered clearing 

agencies, the Commission preliminarily 

estimates that the total costs across all 

existing covered clearing agencies will 

be $4,032,720.760 The Commission 

preliminarily estimates that in the 

aggregate existing covered clearing 

agencies would be subject to ongoing 

costs associated with the proposed rule 

in the amount of approximately 

$801,980 per year.761

A benefit of the proposed rules that 

the Commission is able to quantify is 

the impact of QCCP status of OCC to 

non-U.S. bank clearing members at 

OCC. This benefit comes as a result of 

lower capital requirements against 

exposures to QCCPs relative to nonqualifying CCPs. In Part IV.C.1.e, the 

Commission provided an estimate of the 

upper bound of this benefit, $600 

million per year, or 0.60% of the 

aggregate 2012 net income reported by 

bank clearing members at OCC. The 

Commission preliminarily believes that 

the actual benefits flowing from QCCP 

status would likely be higher due to 

benefits for foreign bank members of 

FICC and ICEEU, in addition to the 

benefits with respect to OCC discussed 

above.762

The Commission preliminarily 

believes that the proposed rules will 

result in an increase in financial 

stability insofar as they result in 

minimum standards at covered clearing 

agencies that are higher than those 

standards implied by current practices 

at covered clearing agencies. Some of 

this increased stability may come as a 

result of lower activity as the proposed 

rules cause participants to internalize a 

greater proportion of the costs that their 

activity imposes on the financial 

system, reducing the costs of default, 

conditional on a default event 

occurring. Increased stability may also 

come as a result of higher risk 

management standards at covered 

clearing agencies that effectively lower 

the probability that either covered 

clearing agencies or their members 

default. 

The Commission preliminarily 

believes that clearance and settlement of 

securities and security-based swaps is 

fundamental to the stability of financial 

markets. As discussed above, clearing 

agencies may not fully consider the 

costs they could impose on financial 

market participants.763 As a result of the 

potential negative externalities 

associated with their activities, 

enhanced risk management standards 

are particularly important for those 

clearing agencies that pose the greatest 

risk to financial markets and the U.S. 

financial system. 

D. Request for Comments 

The Commission generally requests 

comment about its preliminary analysis 

of the economic effects of the proposed 

rules and any qualitative and 

quantitative data that would facilitate an 

evaluation and assessment of the 

economic effects of this proposal. In 

addition, the Commission requests 

comment on the following specific 

issues: 

• Has the Commission appropriately 

identified the relevant costs and benefits 

associated with each requirement under 

proposed Rule 17Ad–22(e)? Why or why 

not? 

• Are there any provisions of 

proposed Rule 17Ad–22(e) for which 

the costs of enhanced risk management 

standards appear inappropriate relative 

to the benefits of such standards, 

particularly given existing requirements 

under Rule 17Ad–22(d)? Please explain. 

• Would particular provisions of 

proposed Rule 17Ad–22(e) improve or 

diminish competition between covered 

clearing agencies? Which provisions are 

likely to have such effects and through 

what transmission channels? 

• Would the scope of proposed Rule 

17Ad–22(e) have implications for 

competition between covered clearing 

agencies and registered clearing 

agencies that are not covered clearing 

agencies? 

• Would particular provisions of 

proposed Rule 17Ad–22(e) improve or 

diminish competition between members 

of covered clearing agencies? Are there 

any provisions that would allow a 

subset of members to compete on better 

terms than other members? 

• How would the effects of QCCP 

status will be allocated across members? 

Can market participants provide any 

qualitative or quantitative data to help 

the Commission evaluate the effects of 

QCCP status on clearing members and 

any heterogeneity in trade exposures 

and default fund exposures to covered 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29611 

764See 5 U.S.C. 601 et seq. 

765 5 U.S.C. 603(a). 

766Section 601(b) of the RFA permits agencies to 

formulate their own definitions of ‘‘small entities.’’ 

See 5 U.S.C. 601(b). The Commission has adopted 

definitions for the term ‘‘small entity’’ for the 

purposes of rulemaking in accordance with the 

RFA. These definitions, as relevant to this proposed 

rulemaking, are set forth in Rule 0–10, 17 CFR 

240.0–10. 

767See 5 U.S.C. 605(b). 

768See 17 CFR 240.0–10(d). 

769 In 2012, DTCC processed $1.6 quadrillion in 

financial transactions, subsidiary DTC settled 

$110.3 trillion of securities and held securities 

valued at $37.2 trillion, subsidiary NSCC processed 

an average daily value of $742.7 billion in equity 

securities, subsidiary FICC cleared $1.116 

quadrillion in government securities, and FICC’s 

Mortgage-Backed Securities Division cleared $104 

trillion of transactions in agency mortgage-backed 

securities. See DTCC, 2012 Annual Report, 

available at http://www.dtcc.com/about/annualreport.aspx and http://www.dtcc.com/annuals/

2012/br-settlement-and-asset-services.html; FSOC, 

2013 Annual Report, supra note 39, at 99. 

In addition, OCC cleared more than 4 billion 

contracts and held margin of $78.8 billion at the 

end of 2012. See OCC, 2012 Annual Report, 

available at http://www.optionsclearing.com/

components/docs/about/annual-reports/occ_2012_

annual_report.pdf. CME Group had total contract 

volume of 2.89 billion contracts (in round turn 

trades) with a total notional value of $806 trillion. 

See CME Group, 2012 Annual Report, available at 

http://files.shareholder.com/downloads/CME/

2635449816x0x653543/02DB7C7F-ACF0-4D73- 

9AD7-1ACCEF68559A/CME_Group_2012_Annual_

Report.pdf. ICE and ICEEU together cleared CDS 

with a total notional value of $10.24 trillion. See 

Intercontinental Exchange, Inc., 2012 Annual 

Report, available at http://files.shareholder.com/

downloads/ICE/2623237906x0x649669/DFB49A9C152C-4287-848C-7CCDDA42D61E/ICE_2012_

Annual_Report_FINAL.pdf. 

770See 17 CFR 240.0–10(d). The Commission 

based this determination on its review of public 

sources of financial information about registered 

clearing agencies and lifecycle event service 

providers for OTC derivatives. 

771Public Law 104–121, 110 Stat. 857 (1996) 

(codified in various sections of 5 U.S.C., 15 U.S.C. 

and as a note to 5 U.S.C. 601). 

clearing agencies across bank and nonbank clearing members? 

• Would bank clearing members to be 

constrained by the Basel III capital 

requirements? Do bank clearing 

members typically target tier one or total 

capital ratios as a business practice? 

• In areas where existing 

requirements under Rule 17Ad–22(d) 

could be viewed as being consistent 

with the PFMI, and so could potentially 

earn QCCP status for covered clearing 

agencies, do the costs of additional 

requirements under proposed Rule 

17Ad–22(e) appear appropriate relative 

to benefits of these requirements, aside 

from QCCP status? Please explain. 

• Does the Commission’s proposed 

definition of qualifying liquid resources 

adequately reflect the ability with which 

covered clearing agency assets may be 

used to meet funding obligations? Has 

the Commission adequately assessed the 

costs and benefits of requiring funding 

arrangements before considering noncash resources ‘‘qualifying’’? 

• What would be the potential costs 

and benefits of requiring covered 

clearing agencies to hold liquid net 

assets in accordance with proposed Rule 

17Ad–22(e)(15)? Can you provide 

qualitative and quantitative data to aid 

the Commission in evaluating these 

potential costs and benefits? 

• Has the Commission adequately 

assessed the risks posed by indirect 

participation at covered clearing 

agencies? Can you provide qualitative 

and quantitative data to aid the 

Commission in evaluating the level of 

indirect participation in cleared 

markets, the heterogeneity of indirect 

participation across clearing members 

and the implications for networks of 

exposures in cleared markets? 

V. Regulatory Flexibility Act 

Certification 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires the Commission, in 

promulgating rules, to consider the 

impact of those rules on small 

entities.764 Section 603(a) of the 

Administrative Procedure Act,765 as 

amended by the RFA, generally requires 

the Commission to undertake a 

regulatory flexibility analysis of all 

proposed rules to determine the impact 

of such rulemaking on ‘‘small 

entities.’’ 766 Section 605(b) of the RFA 

states that this requirement shall not 

apply to any proposed rule which, if 

adopted, would not have a significant 

economic impact on a substantial 

number of small entities.767

A. Registered Clearing Agencies 

The proposed amendments to Rule 

17Ad–22 and proposed Rule 17Ab2–2 

would apply to covered clearing 

agencies, which would include 

registered clearing agencies that are 

designated clearing agencies, complex 

risk profile clearing agencies, or clearing 

agencies that otherwise have been 

determined to be covered clearing 

agencies by the Commission. For the 

purposes of Commission rulemaking 

and as applicable to the proposed 

amendments to Rule 17Ad–22 and 

proposed Rule 17Ab2–2, a small entity 

includes, when used with reference to a 

clearing agency, a clearing agency that 

(i) compared, cleared, and settled less 

than $500 million in securities 

transactions during the preceding fiscal 

year, (ii) had less than $200 million of 

funds and securities in its custody or 

control at all times during the preceding 

fiscal year (or at any time that it has 

been in business, if shorter), and (iii) is 

not affiliated with any person (other 

than a natural person) that is not a small 

business or small organization.768

Based on the Commission’s existing 

information about the clearing agencies 

currently registered with the 

Commission,769 the Commission 

preliminarily believes that such entities 

exceed the thresholds defining ‘‘small 

entities’’ set out above. While other 

clearing agencies may emerge and seek 

to register as clearing agencies, the 

Commission preliminarily does not 

believe that any such entities would be 

‘‘small entities’’ as defined in Exchange 

Act Rule 0–10.770 In any case, clearing 

agencies can only become subject to the 

new requirements under proposed Rule 

17Ad–22(e) should they meet the 

definition of a covered clearing agency, 

as described above. Accordingly, the 

Commission preliminarily believes that 

any such registered clearing agencies 

will exceed the thresholds for ‘‘small 

entities’’ set forth in Exchange Act Rule 

0–10. 

B. Certification 

For the reasons described above, the 

Commission certifies that the proposed 

amendments to Rule 17Ad–22 and 

proposed Rule 17Ab2–2 would not have 

a significant economic impact on a 

substantial number of small entities for 

purposes of the RFA. The Commission 

requests comment regarding this 

certification. The Commission requests 

that commenters describe the nature of 

any impact on small entities, including 

clearing agencies and counterparties to 

security and security-based swap 

transactions, and provide empirical data 

to support the extent of the impact. 

VI. Small Business Regulatory 

Enforcement Fairness Act 

Under the Small Business Regulatory 

Enforcement Fairness Act of 1996,771 a 

rule is considered ‘‘major’’ where, if 

adopted, it results or is likely to result 

in (i) an annual effect on the economy 

of $100 million or more (either in the 

form of an increase or a decrease); (ii) 

a major increase in costs or prices for 

consumers or individual industries; or 

(iii) significant adverse effect on 

competition, investment, or innovation. 

The Commission requests comment on 

the potential impact of the proposed 

amendments to Rule 17Ad–22 and 

proposed Rule 17Ab2–2 on the economy 

on an annual basis, any potential 

increase in costs or prices for consumers 

or individual industries, and any 

potential effect on competition, 

investment, or innovation. Commenters 

are requested to provide empirical data 


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and other factual support for their views 

to the extent possible. 

VII. Statutory Authority and Text of 

Amended Rule 17Ad–22 and Proposed 

Rule 17Ab2–2 

Pursuant to the Exchange Act, 

particularly Section 17A thereof, 15 

U.S.C. 78q–1, and Section 805 of the 

Clearing Supervision Act, 12 U.S.C. 

5464, the Commission proposes to 

amend Rule 17Ad–22 and proposes new 

Rule 17Ab2–2. 

List of Subjects in 17 CFR Part 240 

Reporting and recordkeeping 

requirements, Securities. 

Text of Amendment 

In accordance with the foregoing, 

Title 17, Chapter II of the Code of 

Federal Regulations is proposed to be 

amended as follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE 

■ 1. The general authority citation for 

Part 240 continues to read, and the 

sectional authority for § 240.17Ad–22 is 

revised to read, as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78d, 78e, 78f, 78g, 78i, 78j, 78j– 

1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 

78o–4, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 

78x, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 

80a–37, 80b–3, 80b–4, 80b–11, and 7201 et. 

seq.; 18 U.S.C. 1350; and 12 U.S.C. 

5221(e)(3), unless otherwise noted. 

* * * * * 

Section 240.17Ad–22 is also issued under 

12 U.S.C. 5461 et seq. 

* * * * * 

■ 2. Section 240.17Ab2–2 is added to 

read as follows: 

§ 240.17Ab2–2 Determinations affecting 

covered clearing agencies. 

(a) The Commission may, if it deems 

appropriate, upon application by any 

clearing agency or member of a clearing 

agency, or on its own initiative, 

determine whether a registered clearing 

agency should be considered a covered 

clearing agency. In determining whether 

a clearing agency should be considered 

a covered clearing agency, the 

Commission may consider: 

(1) Characteristics such as the clearing 

of financial instruments that are 

characterized by discrete jump-todefault price changes or that are highly 

correlated with potential participant 

defaults; or 

(2) Such other characteristics as it 

deems appropriate in the circumstances. 

(b) The Commission may, if it deems 

appropriate, upon application by any 

clearing agency or member of a clearing 

agency, or on its own initiative, 

determine whether a covered clearing 

agency is systemically important in 

multiple jurisdictions. In determining 

whether a covered clearing agency is 

systemically important in multiple 

jurisdictions, the Commission may 

consider: 

(1) Whether the covered clearing 

agency is a designated clearing agency; 

(2) Whether the clearing agency has 

been determined to be systemically 

important by one or more jurisdictions 

other than the United States through a 

process that includes consideration of 

whether the foreseeable effects of a 

failure or disruption of the designated 

clearing agency could threaten the 

stability of each relevant jurisdiction’s 

financial system; or 

(3) Such other factors as it may deem 

appropriate in the circumstances. 

(c) The Commission may, if it deems 

appropriate, determine whether any of 

the activities of a clearing agency 

providing central counterparty services, 

in addition to clearing agencies 

registered with the Commission for the 

purpose of clearing security-based 

swaps, have a more complex risk 

profile. In determining whether a 

clearing agency’s activity has a more 

complex risk profile, the Commission 

may consider: 

(1) Characteristics such as the clearing 

of financial instruments that are 

characterized by discrete jump-todefault price changes or that are highly 

correlated with potential participant 

defaults; or 

(2) Such other characteristics as it 

deems appropriate in the circumstances, 

as factors supporting a finding of a more 

complex risk profile. 

(d) The Commission shall publish 

notice of its intention to consider 

making a determination under 

paragraph (a), (b), or (c) of this section, 

together with a brief statement of the 

grounds under consideration therefor, 

and provide at least a 30-day public 

comment period prior to any such 

determination, giving all interested 

persons an opportunity to submit 

written data, views, and arguments 

concerning such proposed 

determination. The Commission may 

provide the clearing agency subject to 

the proposed determination opportunity 

for hearing regarding the proposed 

determination. 

(e) Notice of determinations under 

paragraph (a), (b), or (c) of this section 

shall be given by prompt publication 

thereof, together with a statement of 

written reasons therefor. 

(f) For purposes of this rule, the terms 

central counterparty, covered clearing 

agency, designated clearing agency, and 

systemically important in multiple 

jurisdictions shall have the meanings set 

forth in § 240.17Ad–22(a). 

■ 3. Amend § 240.17Ad–22 by: 

■ a. Revising paragraph (a) and the 

introductory text of paragraph (d); and 

■ b. Adding paragraphs (e) and (f). 

The revisions and additions read as 

follows: 

§ 240.17Ad–22 Standards for clearing 

agencies. 

(a) Definitions. For purposes of this 

section: 

(1) Backtesting means an ex-post 

comparison of actual outcomes with 

expected outcomes derived from the use 

of margin models. 

(2) Central counterparty means a 

clearing agency that interposes itself 

between the counterparties to securities 

transactions, acting functionally as the 

buyer to every seller and the seller to 

every buyer. 

(3) Central securities depository 

services means services of a clearing 

agency that is a securities depository as 

described in Section 3(a)(23)(A) of the 

Exchange Act (15 U.S.C. 78c(a)(23)(A)). 

(4) Clearing agency involved in 

activities with a more complex risk 

profile means a clearing agency 

registered with the Commission under 

Section 17A of the Exchange Act (15 

U.S.C. 78q–1) and that: 

(i) Provides central counterparty 

services for security-based swaps; 

(ii) Has been determined by the 

Commission to be involved in activities 

with a more complex risk profile at the 

time of its initial registration; or 

(iii) Is subsequently determined by 

the Commission to be involved in 

activities with a more complex risk 

profile pursuant to § 240.17Ab2–2(c). 

(5) Conforming model validation 

means an evaluation of the performance 

of each material risk management model 

used by a covered clearing agency (and 

the related parameters and assumptions 

associated with such models), including 

initial margin models, liquidity risk 

models, and models used to generate 

clearing or guaranty fund requirements, 

performed by a qualified person who is 

free from influence from the persons 

responsible for the development or 

operation of the models or policies 

being validated. 

(6) Conforming sensitivity analysis 

means a sensitivity analysis that: 

(i) Considers the impact on the model 

of both moderate and extreme changes 

in a wide range of inputs, parameters, 

and assumptions, including correlations 

of price movements or returns if 

relevant, which reflect a variety of 

historical and hypothetical market 


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conditions. Sensitivity analysis must 

use actual and hypothetical portfolios 

that reflect the characteristics of 

proprietary positions and, where 

applicable, customer positions; 

(ii) When performed by or on behalf 

of a covered clearing agency involved in 

activities with a more complex risk 

profile, considers the most volatile 

relevant periods, where practical, that 

have been experienced by the markets 

served by the clearing agency; and 

(iii) Tests the sensitivity of the model 

to stressed market conditions, including 

the market conditions that may ensue 

after the default of a member and other 

extreme but plausible conditions as 

defined in a covered clearing agency’s 

risk policies. 

(7) Covered clearing agency means a 

designated clearing agency, a clearing 

agency involved in activities with a 

more complex risk profile for which the 

Commodity Futures Trading 

Commission is not the Supervisory 

Agency as defined in Section 803(8) of 

the Payment, Clearing, and Settlement 

Supervision Act of 2010 (12 U.S.C. 5461 

et seq.), or any clearing agency 

determined to be a covered clearing 

agency by the Commission pursuant to 

§ 240.17Ab2–2. 

(8) Designated clearing agency means 

a clearing agency registered with the 

Commission under Section 17A of the 

Exchange Act (15 U.S.C. 78q–1) that is 

designated systemically important by 

the Financial Stability Oversight 

Council pursuant to the Payment, 

Clearing, and Settlement Supervision 

Act of 2010 (12 U.S.C. 5461 et seq.) and 

for which the Commission is the 

supervisory agency as defined in 

Section 803(8) of the Payment, Clearing, 

and Settlement Supervision Act of 2010 

(12 U.S.C. 5461 et seq.). 

(9) Financial market utility has the 

same meaning as defined in Section 

803(6) of the Payment, Clearing, and 

Settlement Supervision Act of 2010 (12 

U.S.C. 5462(6)). 

(10) Link means, for purposes of 

paragraph (e)(20) of this section, a set of 

contractual and operational 

arrangements between two or more 

clearing agencies, financial market 

utilities, or trading venues that connect 

them directly or indirectly for the 

purposes of participating in settlement, 

cross margining, expanding their 

services to additional instruments or 

participants, or for any other purposes 

material to their business. 

(11) Net capital as used in paragraph 

(b)(7) of this section means net capital 

as defined in § 240.15c3–1 for brokerdealers or any similar risk adjusted 

capital calculation for all other 

prospective clearing members. 

(12) Normal market conditions as 

used in paragraphs (b)(1) and (2) of this 

section means conditions in which the 

expected movement of the price of 

cleared securities would produce 

changes in a clearing agency’s exposures 

to its participants that would be 

expected to breach margin requirements 

or other risk control mechanisms only 

one percent of the time. 

(13) Participant family means that if 

a participant directly, or indirectly 

through one or more intermediaries, 

controls, is controlled by, or is under 

common control with, another 

participant then the affiliated 

participants shall be collectively 

deemed to be a single participant family 

for purposes of paragraphs (b)(3), 

(d)(14), (e)(4), and (e)(7) of this section. 

(14) Potential future exposure means 

the maximum exposure estimated to 

occur at a future point in time with an 

established single-tailed confidence 

level of at least 99% with respect to the 

estimated distribution of future 

exposure. 

(15) Qualifying liquid resources 

means, for any covered clearing agency, 

the following, in each relevant currency: 

(i) Cash held either at the central bank 

of issue or at creditworthy commercial 

banks; 

(ii) Assets that are readily available 

and convertible into cash through 

prearranged funding arrangements 

without material adverse change 

provisions, such as: 

(A) Committed arrangements, 

including: 

(1) Lines of credit, 

(2) Foreign exchange swaps, and 

(3) Repurchase agreements; or 

(B) Other prearranged funding 

arrangements determined to be highly 

reliable even in extreme but plausible 

market conditions by the board of 

directors of the covered clearing agency 

following a review conducted for this 

purpose not less than annually; and 

(iii) Other assets that are readily 

available and eligible for pledging to (or 

conducting other appropriate forms of 

transactions with) a relevant central 

bank, if the covered clearing agency has 

access to routine credit at such central 

bank that permits said pledges or other 

transactions by the covered clearing 

agency. 

(16) Security-based swap means a 

security-based swap as defined in 

Section 3(a)(68) of the Exchange Act (15 

U.S.C. 78c(a)(68)). 

(17) Sensitivity analysis means an 

analysis that involves analyzing the 

sensitivity of a model to its 

assumptions, parameters, and inputs. 

(18) Stress testing means the 

estimation of credit or liquidity 

exposures that would result from the 

realization of extreme but plausible 

price changes or changes in other 

valuation inputs and assumptions. 

(19) Systemically important in 

multiple jurisdictions means, with 

respect to a covered clearing agency, a 

covered clearing agency that has been 

determined by the Commission to be 

systemically important in more than one 

jurisdiction pursuant to § 240.17Ab2–2. 

(20) Transparent means, for the 

purposes of paragraphs (e)(1), (2), and 

(10) of this section, to the extent 

consistent with other statutory and 

Commission requirements on 

confidentiality and disclosure, that 

relevant documentation is disclosed, as 

appropriate, to the Commission and to 

other relevant authorities, to clearing 

members and to customers of clearing 

members, to the owners of the covered 

clearing agency, and to the public. 

* * * * * 

(d) Each registered clearing agency 

that is not a covered clearing agency 

shall establish, implement, maintain 

and enforce written policies and 

procedures reasonably designed to, as 

applicable: 

* * * * * 

(e) Each covered clearing agency shall 

establish, implement, maintain and 

enforce written policies and procedures 

reasonably designed to, as applicable: 

(1) Provide for a well-founded, clear, 

transparent, and enforceable legal basis 

for each aspect of its activities in all 

relevant jurisdictions. 

(2) Provide for governance 

arrangements that: 

(i) Are clear and transparent; 

(ii) Clearly prioritize the safety and 

efficiency of the covered clearing 

agency; 

(iii) Support the public interest 

requirements in Section 17A of the 

Exchange Act (15 U.S.C. 78q–1) 

applicable to clearing agencies, and the 

objectives of owners and participants; 

and 

(iv) Establish that the board of 

directors and senior management have 

appropriate experience and skills to 

discharge their duties and 

responsibilities. 

(3) Maintain a sound risk management 

framework for comprehensively 

managing legal, credit, liquidity, 

operational, general business, 

investment, custody, and other risks 

that arise in or are borne by the covered 

clearing agency, which: 

(i) Includes risk management policies, 

procedures, and systems designed to 

identify, measure, monitor, and manage 

the range of risks that arise in or are 

borne by the covered clearing agency, 


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29614 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

that are subject to review on a specified 

periodic basis and approved by the 

board of directors annually; 

(ii) Includes plans for the recovery 

and orderly wind-down of the covered 

clearing agency necessitated by credit 

losses, liquidity shortfalls, losses from 

general business risk, or any other 

losses; 

(iii) Provides risk management and 

internal audit personnel with sufficient 

authority, resources, independence from 

management, and access to the board of 

directors; 

(iv) Provides risk management and 

internal audit personnel with a direct 

reporting line to, and oversight by, a risk 

management committee and an audit 

committee of the board of directors, 

respectively; and 

(v) Provides for an independent audit 

committee. 

(4) Effectively identify, measure, 

monitor, and manage its credit 

exposures to participants and those 

arising from its payment, clearing, and 

settlement processes, including by: 

(i) Maintaining sufficient financial 

resources to cover its credit exposure to 

each participant fully with a high degree 

of confidence; 

(ii) To the extent not already 

maintained pursuant to paragraph 

(e)(4)(i) of this section, for a covered 

clearing agency providing central 

counterparty services that is either 

systemically important in multiple 

jurisdictions or a clearing agency 

involved in activities with a more 

complex risk profile, maintaining 

additional financial resources at the 

minimum to enable it to cover a wide 

range of foreseeable stress scenarios that 

include, but are not limited to, the 

default of the two participant families 

that would potentially cause the largest 

aggregate credit exposure for the 

covered clearing agency in extreme but 

plausible market conditions; 

(iii) To the extent not already 

maintained pursuant to paragraph 

(e)(4)(i) of this section, for a covered 

clearing agency not subject to paragraph 

(e)(4)(ii) of this section, maintaining 

additional financial resources at the 

minimum to enable it to cover a wide 

range of foreseeable stress scenarios that 

include, but are not limited to, the 

default of the participant family that 

would potentially cause the largest 

aggregate credit exposure for the 

covered clearing agency in extreme but 

plausible market conditions; 

(iv) Including prefunded financial 

resources, excluding assessments for 

additional guaranty fund contributions 

or other resources that are not 

prefunded, when calculating the 

financial resources available to meet the 

standards under paragraphs (e)(4)(i) 

through (iii) of this section, as 

applicable; 

(v) Maintaining the financial 

resources required under paragraphs 

(e)(4)(i) through (iii) of this section, as 

applicable, in combined or separately 

maintained clearing or guaranty funds; 

(vi) Testing the sufficiency of its total 

financial resources available to meet the 

minimum financial resource 

requirements under paragraphs (e)(4)(i) 

through (iii) of this section, as 

applicable, by: 

(A) Conducting a stress test of its total 

financial resources once each day using 

standard predetermined parameters and 

assumptions; 

(B) Conducting a comprehensive 

analysis on at least a monthly basis of 

the existing stress testing scenarios, 

models, and underlying parameters and 

assumptions, and considering 

modifications to ensure they are 

appropriate for determining the covered 

clearing agency’s required level of 

default protection in light of current and 

evolving market conditions; 

(C) Conducting a comprehensive 

analysis of stress testing scenarios, 

models, and underlying parameters and 

assumptions more frequently than 

monthly when the products cleared or 

markets served display high volatility or 

become less liquid, and when the size 

or concentration of positions held by the 

covered clearing agency’s participants 

increases significantly; and 

(D) Reporting the results of its 

analyses under paragraphs (e)(4)(iv)(B) 

and (C) of this section to appropriate 

decision makers at the covered clearing 

agency, including but not limited to, its 

risk management committee or board of 

directors, and using these results to 

evaluate the adequacy of and adjust its 

margin methodology, model parameters, 

models used to generate clearing or 

guaranty fund requirements, and any 

other relevant aspects of its credit risk 

management framework, in supporting 

compliance with the minimum financial 

resources requirements set forth in 

paragraphs (e)(4)(i) through (iii) of this 

section; and 

(vii) Performing a conforming model 

validation for its credit risk models to be 

performed not less than annually or 

more frequently as may be contemplated 

by the covered clearing agency’s risk 

management framework established 

pursuant to paragraph (e)(3) of this 

section. 

(5) Limit the assets it accepts as 

collateral to those with low credit, 

liquidity, and market risks, and set and 

enforce appropriately conservative 

haircuts and concentration limits if the 

covered clearing agency requires 

collateral to manage its or its 

participants’ credit exposure; and 

require a review of the sufficiency of its 

collateral haircuts and concentration 

limits to be performed not less than 

annually. 

(6) Cover, if the covered clearing 

agency provides central counterparty 

services, its credit exposures to its 

participants by establishing a risk-based 

margin system that, at a minimum: 

(i) Considers, and produces margin 

levels commensurate with, the risks and 

particular attributes of each relevant 

product, portfolio, and market; 

(ii) Marks participant positions to 

market and collects margin, including 

variation margin or equivalent charges if 

relevant, at least daily and includes the 

authority and operational capacity to 

make intraday margin calls in defined 

circumstances; 

(iii) Calculates margin sufficient to 

cover its potential future exposure to 

participants in the interval between the 

last margin collection and the close out 

of positions following a participant 

default; 

(iv) Uses reliable sources of timely 

price data and procedures and sound 

valuation models for addressing 

circumstances in which pricing data are 

not readily available or reliable; 

(v) Uses an appropriate method for 

measuring credit exposure that accounts 

for relevant product risk factors and 

portfolio effects across products; 

(vi) Is monitored by management on 

an ongoing basis and regularly 

reviewed, tested, and verified by: 

(A) Conducting backtests of its margin 

resources at least once each day using 

standard predetermined parameters and 

assumptions; 

(B) Conducting a conforming 

sensitivity analysis of its margin 

resources and its parameters and 

assumptions for backtesting on at least 

a monthly basis, and considering 

modifications to ensure the backtesting 

practices are appropriate for 

determining the adequacy of the 

covered clearing agency’s margin 

resources; 

(C) Conducting a conforming 

sensitivity analysis of its margin 

resources and its parameters and 

assumptions for backtesting more 

frequently than monthly during periods 

of time when the products cleared or 

markets served display high volatility or 

become less liquid, and when the size 

or concentration of positions held by the 

covered clearing agency’s participants 

increases or decreases significantly; and 

(D) Reporting the results of its 

analyses under paragraphs (e)(6)(vi)(B) 

and (C) of this section to appropriate 

decision makers at the covered clearing 


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agency, including but not limited to, its 

risk management committee or board of 

directors, and using these results to 

evaluate the adequacy of and adjust its 

margin methodology, model parameters, 

and any other relevant aspects of its 

credit risk management framework; and 

(vii) Requires a conforming model 

validation for the covered clearing 

agency’s margin system and related 

models to be performed not less than 

annually, or more frequently as may be 

contemplated by the covered clearing 

agency’s risk management framework 

established pursuant to paragraph (e)(3) 

of this section. 

(7) Effectively measure, monitor, and 

manage the liquidity risk that arises in 

or is borne by the covered clearing 

agency, including measuring, 

monitoring, and managing its settlement 

and funding flows on an ongoing and 

timely basis, and its use of intraday 

liquidity by, at a minimum, doing the 

following: 

(i) Maintaining sufficient liquid 

resources at the minimum in all relevant 

currencies to effect same-day and, 

where appropriate, intraday and 

multiday settlement of payment 

obligations with a high degree of 

confidence under a wide range of 

foreseeable stress scenarios that 

includes, but is not limited to, the 

default of the participant family that 

would generate the largest aggregate 

payment obligation for the covered 

clearing agency in extreme but plausible 

market conditions; 

(ii) Holding qualifying liquid 

resources sufficient to meet the 

minimum liquidity resource 

requirement under paragraph (e)(7)(i) of 

this section in each relevant currency 

for which the covered clearing agency 

has payment obligations owed to 

clearing members; 

(iii) Using the access to accounts and 

services at a Federal Reserve Bank, 

pursuant to Section 806(a) of the 

Payment, Clearing, and Settlement 

Supervision Act of 2010 (12 U.S.C. 

5465(a)), or other relevant central bank, 

when available and where determined 

to be practical by the board of directors 

of the covered clearing agency, to 

enhance its management of liquidity 

risk; 

(iv) Undertaking due diligence to 

confirm that it has a reasonable basis to 

believe each of its liquidity providers, 

whether or not such liquidity provider 

is a clearing member, has: 

(A) Sufficient information to 

understand and manage the liquidity 

provider’s liquidity risks; and 

(B) The capacity to perform as 

required under its commitments to 

provide liquidity to the covered clearing 

agency; 

(v) Maintaining and testing with each 

liquidity provider, to the extent 

practicable, the covered clearing 

agency’s procedures and operational 

capacity for accessing each type of 

relevant liquidity resource under 

paragraph (e)(7)(i) of this section at least 

annually; 

(vi) Determining the amount and 

regularly testing the sufficiency of the 

liquid resources held for purposes of 

meeting the minimum liquid resource 

requirement under paragraph (e)(7)(i) of 

this section by, at a minimum: 

(A) Conducting a stress test of its 

liquidity resources at least once each 

day using standard and predetermined 

parameters and assumptions; 

(B) Conducting a comprehensive 

analysis on at least a monthly basis of 

the existing stress testing scenarios, 

models, and underlying parameters and 

assumptions used in evaluating 

liquidity needs and resources, and 

considering modifications to ensure 

they are appropriate for determining the 

clearing agency’s identified liquidity 

needs and resources in light of current 

and evolving market conditions; 

(C) Conducting a comprehensive 

analysis of the scenarios, models, and 

underlying parameters and assumptions 

used in evaluating liquidity needs and 

resources more frequently than monthly 

when the products cleared or markets 

served display high volatility, become 

less liquid, when the size or 

concentration of positions held by the 

clearing agency’s participants increases 

significantly and in other appropriate 

circumstances described in such 

policies and procedures; and 

(D) Reporting the results of its 

analyses under paragraphs (e)(6)(vii)(B) 

and (C) of this section to appropriate 

decision makers at the covered clearing 

agency, including but not limited to, its 

risk management committee or board of 

directors, and using these results to 

evaluate the adequacy of and adjust its 

liquidity risk management methodology, 

model parameters, and any other 

relevant aspects of its credit risk 

management framework; 

(vii) Performing a conforming model 

validation of its liquidity risk models 

not less than annually or more 

frequently as may be contemplated by 

the covered clearing agency’s risk 

management framework established 

pursuant to paragraph (e)(3) of this 

section; 

(viii) Addressing foreseeable liquidity 

shortfalls that would not be covered by 

the covered clearing agency’s liquid 

resources and seek to avoid unwinding, 

revoking, or delaying the same-day 

settlement of payment obligations; 

(ix) Describing the covered clearing 

agency’s process to replenish any liquid 

resources that the clearing agency may 

employ during a stress event; and 

(x) Undertaking an analysis at least 

once a year that evaluates the feasibility 

of maintaining sufficient liquid 

resources at a minimum in all relevant 

currencies to effect same-day and, 

where appropriate, intraday and 

multiday settlement of payment 

obligations with a high degree of 

confidence under a wide range of 

foreseeable stress scenarios that 

includes, but is not limited to, the 

default of the two participant families 

that would potentially cause the largest 

aggregate payment obligation for the 

covered clearing agency in extreme but 

plausible market conditions if the 

covered clearing agency provides 

central counterparty services and is 

either systemically important in 

multiple jurisdictions or a clearing 

agency involved in activities with a 

more complex risk profile. 

(8) Define the point at which 

settlement is final no later than the end 

of the day on which the payment or 

obligation is due and, where necessary 

or appropriate, intraday or in real time. 

(9) Conduct its money settlements in 

central bank money, where available 

and determined to be practical by the 

board of directors of the covered 

clearing agency, and minimize and 

manage credit and liquidity risk arising 

from conducting its money settlements 

in commercial bank money if central 

bank money is not used by the covered 

clearing agency. 

(10) Establish and maintain 

transparent written standards that state 

its obligations with respect to the 

delivery of physical instruments, and 

establish and maintain operational 

practices that identify, monitor, and 

manage the risks associated with such 

physical deliveries. 

(11) When the covered clearing 

agency provides central securities 

depository services: 

(i) Maintain securities in an 

immobilized or dematerialized form for 

their transfer by book entry, ensure the 

integrity of securities issues, and 

minimize and manage the risks 

associated with the safekeeping and 

transfer of securities; 

(ii) Implement internal auditing and 

other controls to safeguard the rights of 

securities issuers and holders and 

prevent the unauthorized creation or 

deletion of securities, and conduct 

periodic and at least daily reconciliation 

of securities issues it maintains; and 


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29616 Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 

(iii) Protect assets against custody risk 

through appropriate rules and 

procedures consistent with relevant 

laws, rules, and regulations in 

jurisdictions where it operates. 

(12) Eliminate principal risk by 

conditioning the final settlement of one 

obligation upon the final settlement of 

the other, regardless of whether the 

covered clearing agency settles on a 

gross or net basis and when finality 

occurs if the covered clearing agency 

settles transactions that involve the 

settlement of two linked obligations. 

(13) Ensure the covered clearing 

agency has the authority and 

operational capacity to take timely 

action to contain losses and liquidity 

demands and continue to meet its 

obligations by, at a minimum, doing the 

following: 

(i) Addressing allocation of credit 

losses the covered clearing agency may 

face if its collateral and other resources 

are insufficient to fully cover its credit 

exposures, including the repayment of 

any funds the covered clearing agency 

may borrow from liquidity providers; 

(ii) Describing the covered clearing 

agency’s process to replenish any 

financial resources it may use following 

a default or other event in which use of 

such resources is contemplated; and 

(iii) Requiring the covered clearing 

agency’s participants and, when 

practicable, other stakeholders to 

participate in the testing and review of 

its default procedures, including any 

close-out procedures, at least annually 

and following material changes thereto. 

(14) Enable, when the covered 

clearing agency provides central 

counterparty services for security-based 

swaps or engages in activities that the 

Commission has determined to have a 

more complex risk profile, the 

segregation and portability of positions 

of a participant’s customers and the 

collateral provided to the covered 

clearing agency with respect to those 

positions and effectively protect such 

positions and related collateral from the 

default or insolvency of that participant. 

(15) Identify, monitor, and manage the 

covered clearing agency’s general 

business risk and hold sufficient liquid 

net assets funded by equity to cover 

potential general business losses so that 

the covered clearing agency can 

continue operations and services as a 

going concern if those losses 

materialize, including by: 

(i) Determining the amount of liquid 

net assets funded by equity based upon 

its general business risk profile and the 

length of time required to achieve a 

recovery or orderly wind-down, as 

appropriate, of its critical operations 

and services if such action is taken; 

(ii) Holding liquid net assets funded 

by equity equal to the greater of either 

(x) six months of the covered clearing 

agency’s current operating expenses, or 

(y) the amount determined by the board 

of directors to be sufficient to ensure a 

recovery or orderly wind-down of 

critical operations and services of the 

covered clearing agency, as 

contemplated by the plans established 

under paragraph (e)(3)(ii) of this section, 

and which: 

(A) Shall be in addition to resources 

held to cover participant defaults or 

other risks covered under the credit risk 

standard in paragraph (b)(3) or 

paragraphs (e)(4)(i) through (iii) of this 

section, as applicable, and the liquidity 

risk standard in paragraphs (e)(7)(i) and 

(ii) of this section; and 

(B) Shall be of high quality and 

sufficiently liquid to allow the covered 

clearing agency to meet its current and 

projected operating expenses under a 

range of scenarios, including in adverse 

market conditions; and 

(iii) Maintaining a viable plan, 

approved by the board of directors and 

updated at least annually, for raising 

additional equity should its equity fall 

close to or below the amount required 

under paragraph (e)(15)(ii) of this 

section. 

(16) Safeguard the covered clearing 

agency’s own and its participants’ 

assets, minimize the risk of loss and 

delay in access to these assets, and 

invest such assets in instruments with 

minimal credit, market, and liquidity 

risks. 

(17) Manage the covered clearing 

agency’s operational risks by: 

(i) Identifying the plausible sources of 

operational risk, both internal and 

external, and mitigating their impact 

through the use of appropriate systems, 

policies, procedures, and controls; 

(ii) Establishing and maintaining 

policies and procedures reasonably 

designed to ensure that systems have a 

high degree of security, resiliency, 

operational reliability, and adequate, 

scalable capacity; and 

(iii) Establishing and maintaining a 

business continuity plan that addresses 

events posing a significant risk of 

disrupting operations. 

(18) Establish objective, risk-based, 

and publicly disclosed criteria for 

participation, which permit fair and 

open access by direct and, where 

relevant, indirect participants and other 

financial market utilities, require 

participants to have sufficient financial 

resources and robust operational 

capacity to meet obligations arising from 

participation in the clearing agency, and 

monitor compliance with such 

participation requirements on an 

ongoing basis. 

(19) Identify, monitor, and manage the 

material risks to the covered clearing 

agency arising from arrangements in 

which firms that are indirect 

participants in the covered clearing 

agency rely on the services provided by 

direct participants to access the covered 

clearing agency’s payment, clearing, or 

settlement facilities. 

(20) Identify, monitor, and manage 

risks related to any link the covered 

clearing agency establishes with one or 

more other clearing agencies, financial 

market utilities, or trading markets. 

(21) Be efficient and effective in 

meeting the requirements of its 

participants and the markets it serves, 

and have the covered clearing agency’s 

management regularly review the 

efficiency and effectiveness of its: 

(i) Clearing and settlement 

arrangements; 

(ii) Operating structure, including risk 

management policies, procedures, and 

systems; 

(iii) Scope of products cleared, 

settled, or recorded; and 

(iv) Use of technology and 

communication procedures. 

(22) Use, or at a minimum 

accommodate, relevant internationally 

accepted communication procedures 

and standards in order to facilitate 

efficient payment, clearing, and 

settlement. 

(23) Maintain clear and 

comprehensive rules and procedures 

that provide for the following: 

(i) Publicly disclosing all relevant 

rules and material procedures, 

including key aspects of its default rules 

and procedures; 

(ii) Providing sufficient information to 

enable participants to identify and 

evaluate the risks, fees, and other 

material costs they incur by 

participating in the covered clearing 

agency; 

(iii) Publicly disclosing relevant basic 

data on transaction volume and values; 

(iv) Providing a comprehensive public 

disclosure of its material rules, policies, 

and procedures regarding governance 

arrangements and legal, financial, and 

operational risk management, accurate 

in all material respects at the time of 

publication, that includes: 

(A) Executive summary. An executive 

summary of the key points from 

paragraphs (e)(23)(iv)(B), (C), and (D) of 

this section; 

(B) Summary of material changes 

since the last update of the disclosure. 

A summary of the material changes 

since the last update of paragraph 

(e)(23)(iv)(C) or (D) of this section; 


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Federal Register / Vol. 79, No. 99 / Thursday, May 22, 2014 / Proposed Rules 29617 

(C) General background on the 

covered clearing agency. A description 

of: 

(1) The covered clearing agency’s 

function and the markets it serves, 

(2) Basic data and performance 

statistics on the covered clearing 

agency’s services and operations, such 

as basic volume and value statistics by 

product type, average aggregate intraday 

exposures to its participants, and 

statistics on the covered clearing 

agency’s operational reliability, and 

(3) The covered clearing agency’s 

general organization, legal and 

regulatory framework, and system 

design and operations; and 

(D) Standard-by-standard summary 

narrative. A comprehensive narrative 

disclosure for each applicable standard 

set forth in paragraphs (e)(1) through 

(22) of this section with sufficient detail 

and context to enable a reader to 

understand the covered clearing 

agency’s approach to controlling the 

risks and addressing the requirements in 

each standard; and 

(v) Updating the public disclosure 

under paragraph (e)(23)(iv) of this 

section every two years, or more 

frequently following changes to its 

system or the environment in which it 

operates to the extent necessary to 

ensure statements previously provided 

under paragraph (e)(23)(iv) of this 

section remain accurate in all material 

respects. 

(f) For purposes of enforcing the 

Payment, Clearing, and Settlement 

Supervision Act of 2010 (12 U.S.C. 5461 

et seq.), a designated clearing agency for 

which the Commission acts as 

supervisory agency shall be subject to, 

and the Commission shall have the 

authority under, the provisions of 

paragraphs (b) through (n) of Section 8 

of the Federal Deposit Insurance Act (12 

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

the same extent as if such designated 

clearing agency were an insured 

depository institution and the 

Commission were the appropriate 

Federal banking agency for such insured 

depository institution. 

By the Commission. 

Dated: March 12, 2014. 

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–05806 Filed 3–25–14; 8:45 

a.m.] 

Editorial Note: Proposed rule document 

2014–05806 was originally published on 

pages 16865 through 16975 in the issue of 

Wednesday, March 26, 2014. In that 

publication the footnotes contained 

erroneous entries. The corrected document is 

republished in its entirety. 

[FR Doc. R1–2014–05806 Filed 5–21–14; 8:45 am] 

BILLING CODE 1505–01–D 


TKELLEY on DSK3SPTVN1PROD with PROPOSALS2