63110 Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 

8 75 FR 52283, August 25, 2010. 

worthiness that may be used in 

regulations in place of credit ratings? 

4. In evaluating potential standards of 

credit-worthiness, the following criteria 

appear to be most relevant; that is, any 

alternative to credit ratings should: 

a. Provide for a reasonable and 

objective assessment of the likelihood of 

full repayment of principal and interest 

over the life of the security; 

b. Foster prudent risk management; 

c. Be transparent, replicable, and well 

defined; 

d. Allow different banking 

organizations to assign the same 

assessment of credit quality to the same 

or similar credit exposures; 

e. Allow for supervisory review; 

f. Differentiate among investments in 

the same asset class with different credit 

risk; and 

g. Provide for the timely and accurate 

measurement of negative and positive 

changes in investment quality, to the 

extent practicable. 

Are these criteria appropriate? Are 

there other relevant criteria? Are there 

standards of credit-worthiness that can 

satisfy these criteria? 

5. OTS recognizes that any measure of 

credit-worthiness likely will involve 

tradeoffs between more refined 

differentiation of credit-worthiness and 

greater implementation burden. What 

factors are most important in 

determining the appropriate balance 

between precise measurement of credit 

risk and implementation burden in 

considering alternative measures of 

credit-worthiness? 

6. Would the development of 

alternatives to the use of credit ratings, 

in most circumstances, involve cost 

considerations greater than those under 

the current regulations? Are there 

specific cost considerations that OTS 

should take into account? What 

additional burden, especially at 

community and regional savings 

associations, might arise from the 

implementation of alternative methods 

of measuring credit-worthiness? 

7. The credit rating alternatives 

discussed in this ANPR differ, in certain 

respects, to those being proposed by 

OTS and other federal banking agencies 

for regulatory capital purposes.8 OTS 

believes such distinctions are consistent 

with current differences in the 

application and evaluation of credit 

quality for evaluating loans and 

investment securities and those used for 

risk-based capital standards. Are such 

distinctions warranted? What are the 

benefits and costs of using different 

standards for different regulations? 

Alternatives for Replacing References to 

Credit Ratings in Part 560 

8. What are the advantages and 

disadvantages of the alternative 

standards described in the 

SUPPLEMENTARY INFORMATION? 

9. Should the credit-worthiness 

standard include only high quality and 

highly liquid securities? Should the 

standard include specific standards on 

probability of default? Should the 

standard vary by asset class? Are there 

other alternative credit-worthiness 

standards that should be considered? 

Should a combination of creditworthiness standards be used, and if so, 

in what instances would this be 

preferred? Would different creditworthiness standards be appropriate for 

different asset classes, probabilities of 

default, varying levels of liquidity, 

different types securities or money 

market instruments, etc? 

10. If OTS relied upon internal rating 

systems, should the credit-worthiness 

standard include any pass grade or 

should it only be mapped to higher 

grades of pass? 

11. Alternatively, should the banking 

regulators revise the current regulatory 

risk rating system to include more 

granularity in the pass grade and 

develop a credit-worthiness standard 

based upon the regulatory risk rating 

system? 

12. Should OTS adopt standards for 

marketability and liquidity separate 

from the credit-worthiness standard? If 

so, how should this differ from the 

credit-worthiness standard? 

13. Should an alternative approach 

take into account the ability of a 

security issuer to repay under stressed 

economic or market environments? If so, 

how should stress scenarios be applied? 

14. Should an assessment of creditworthiness link directly to a savings 

association’s loan rating system (for 

example, consistent with the higher 

quality credit ratings)? 

15. Should a savings association be 

permitted to consider credit assessments 

and other analytical data gathered from 

third parties that are independent of the 

seller or counterparty? What, if any, 

criteria or standards should the OTS 

impose on the use of such assessments 

and data? 

16. Should a savings association be 

permitted to rely on an investment 

quality or credit quality determination 

made by another financial institution or 

another third party that is independent 

of the seller or counterparty? What, if 

any, criteria or standards should OTS 

impose on the use of such opinions? 

17. Which alternative(s) would be 

most appropriate for smaller, 

community-oriented savings 

associations and why? 

18. Are there other alternatives that 

ought to be considered? 

19. What level of due diligence of a 

savings association should be required 

when considering the purchase of an 

investment security? How should OTS 

set minimum standards for monitoring 

the performance of an investment 

security over time so that savings 

associations effectively ensure that their 

investment securities remain 

‘‘investment quality’’ as long as they are 

held? 

Dated: October 6, 2010. 

By the Office of Thrift Supervision. 

John E. Bowman, 

Acting Director. 

[FR Doc. 2010–25845 Filed 10–13–10; 8:45 am] 

BILLING CODE P 

SMALL BUSINESS ADMINISTRATION 

13 CFR Part 107 

RIN 3245–AF56 

Small Business Investment 

Companies—Conflicts of Interest and 

Investment of Idle Funds 

AGENCY: U.S. Small Business 

Administration. 

ACTION: Proposed rule. 

SUMMARY: The U.S. Small Business 

Administration proposes to revise a rule 

which prohibits a small business 

investment company (SBIC) from 

providing financing to an Associate, as 

defined in the rules, unless it first 

obtains a conflict of interest exemption 

from SBA. The revision would eliminate 

the requirement for an exemption in the 

case of a follow-on investment in a 

small business concern by an SBIC and 

an Associate investment fund, where 

both parties invested previously on the 

same terms and conditions and where 

the follow-on investment would also be 

on the same terms and conditions as 

well as in the same proportions. In 

addition, this rule would implement 

two provisions of the Small Business 

Investment Act. First, it would bring the 

public notice requirement for conflict of 

interest transactions into conformity 

with statutory requirements. Second, it 

would expand the types of investments 

an SBIC is permitted to make with its 

‘‘idle funds’’ (cash that is not 

immediately needed for fund operations 

or investments in small business 

concerns). Finally, the rule would 

remove an outdated cross-reference and 

eliminate a section that exactly 


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Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 63111 

duplicates a provision found elsewhere 

in part 107. 

DATES: Comments on the proposed rule 

must be received on or before November 

15, 2010. 

ADDRESSES: You may submit comments, 

identified by RIN 3245–AF56, by any of 

the following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail, Hand Delivery/Courier: Harry 

E. Haskins, Deputy Associate 

Administrator for Investment, U.S. 

Small Business Administration, 409 

Third Street, SW., Washington, DC 

20416. 

SBA will post comments on http:// 

www.regulations.gov. If you wish to 

submit confidential business 

information (CBI) as defined in the User 

Notice at http://www.regulations.gov, 

please submit the information to Carol 

Fendler, Investment Division, 409 Third 

Street, SW., Washington, DC 20416. 

Highlight the information that you 

consider to be CBI and explain why you 

believe this information should be held 

confidential. SBA will review the 

information and make the final 

determination of whether it will publish 

the information or not. 

FOR FURTHER INFORMATION CONTACT: 

Carol Fendler, Investment Division, 

Office of Capital Access, (202) 205–7559 

or sbic@sba.gov. 

SUPPLEMENTARY INFORMATION: 

Section 107.730—Financings which 

constitute conflicts of interest. The 

Small Business Investment Act of 1958, 

as amended (SBI Act), authorizes SBA 

to adopt regulations to govern 

transactions that may constitute a 

conflict of interest and which may be 

detrimental to small business concerns, 

small business investment companies, 

their investors, or SBA. Accordingly, 

SBA promulgated 13 CFR 107.730, 

which generally prohibits financing 

transactions that involve a conflict of 

interest, unless the SBIC obtains a prior 

written exemption from SBA. The most 

common type of transaction requiring 

an exemption is ‘‘financing an 

Associate.’’ Associates of an SBIC, as 

defined in § 107.50, encompass a broad 

range of related parties based on 

business, economic and family ties, both 

direct and indirect. 

In addition to identifying transactions 

requiring a conflict of interest 

exemption, § 107.730 sets forth the 

circumstances under which an SBIC is 

permitted to co-invest with its 

Associates. The primary purpose of 

these provisions is to ensure that the 

terms of such co-investments are ‘‘fair 

and equitable’’ to the SBIC, i.e. that the 

SBIC is not being disadvantaged relative 

to an Associate. The co-investment rules 

include a number of ‘‘safe harbor’’ 

provisions under which the transaction 

is presumed to be fair and equitable to 

the SBIC; one of these safe harbors 

covers financings where the SBIC and 

its Associate invest at the same time and 

on the same terms and conditions. SBIC 

managers frequently seek to rely on this 

provision because they are involved in 

the management of more than one fund 

and would like to have the funds coinvest in a small business. SBA 

generally considers such co-investments 

to be beneficial because risk is spread 

across more than one entity. The small 

business may also benefit from having 

access to multiple investors. 

It became apparent after adoption of 

the current § 107.730 that certain types 

of transactions could be characterized as 

both ‘‘co-investment with an Associate’’ 

and ‘‘financing an Associate.’’ As with 

all other transactions that involve the 

financing of an Associate, SBA has 

required the SBIC to obtain a prior 

written exemption even if the financing 

would fall under the safe harbor for coinvestments with Associates. 

However, SBA believes the exemption 

requirement is unnecessarily 

burdensome for one particular type of 

transaction: The SBIC and an Associate 

investment fund (most typically a fund 

under common management) make an 

initial investment in a small business 

under the same terms and conditions, 

which include the acquisition by each 

fund of at least a 10% equity interest in 

the small business. This initial round of 

financing is a ‘‘co-investment with an 

Associate’’ and does not require a 

conflict of interest exemption. However, 

when the same two parties want to 

make a follow-on investment in the 

same small business, again under the 

same terms and conditions, the second 

and subsequent round(s) of financing 

are considered to be ‘‘financing an 

Associate’’ and do require a prior 

written exemption. This is because the 

Associate fund’s 10% or greater equity 

interest causes the small business itself 

to be defined as an Associate of the 

SBIC under paragraph (8)(ii) of the 

definition in § 107.50. While SBA 

would approve a conflict of interest 

exemption for a follow-on financing 

transaction on the same terms and 

conditions by an SBIC and its Associate 

fund, the Agency is concerned that the 

exemption requirement may cause 

unnecessary delays in making financing 

available to the small business, and 

imposes a significant administrative 

burden on both the SBIC and SBA. 

To address this concern, this 

proposed rule adds an exception to 13 

CFR 107.730(a)(1). Currently, this 

paragraph prohibits the financing of an 

Associate without a prior written 

conflict of interest exemption. Under 

the new exception, a prior written 

exemption would not be required for an 

Associate financing that satisfies all of 

the following conditions: 

1. The small business that will receive 

the financing is an Associate of the 

SBIC, pursuant to paragraph (8)(ii) of 

the Associate definition, only because 

an Associate investment fund already 

holds a 10% or greater equity interest in 

the small business. 

2. The SBIC and the Associate fund 

previously invested in the small 

business at the same time and on the 

same terms and conditions. 

3. The SBIC and the Associate fund 

will provide follow-on financing to the 

small business at the same time and on 

the same terms and conditions. 

4. The SBIC and the Associate fund 

will provide follow-on financing to the 

small business in the same 

proportionate dollar amounts as their 

respective investments in the previous 

round of financing (e.g., if the SBIC 

invested $2 million and the Associate 

invested $1 million in the previous 

round, their follow-on investments 

would be in the same 2:1 ratio). 

The revision will allow transactions 

meeting these specific conditions to be 

governed only by the co-investment 

provisions of § 107.730(d) rather than by 

the ‘‘Associate financing’’ provisions of 

the current § 107.730(a), thereby 

returning to SBA’s original intent when 

it promulgated the co-investment rules. 

SBA expects that this change will help 

to eliminate delays in making follow-on 

financing available to small businesses 

while providing appropriate protection 

for small business concerns, investors in 

SBICs and the Federal government. 

SBA is also proposing a change to 

§ 107.730(g), which requires public 

notice of all requests by SBICs for 

conflict of interest exemptions. The 

current language requires public notice 

by both SBA (via publication in the 

Federal Register) and the requesting 

SBIC (via publication in a newspaper in 

the locality most directly affected by the 

transaction). These disclosure 

requirements are more extensive than 

those required by section 312 of the SBI 

Act, from which the local publication 

requirement was removed by section 3 

of Public Law 107–100 (December 21, 

2001). This rule would bring the 

regulation into conformity with the 

statute by eliminating the requirement 

for public notice in the affected locality; 

the requirement for public notice in the 

Federal Register would not be affected. 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
63112 Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 

Section 107.530—Restrictions on 

investments of idle funds by leveraged 

Licensees. An SBIC holding idle funds 

may invest those funds only as 

permitted by § 107.530(b). The 

permitted investments are all relatively 

short term and bear minimal or no risk 

of loss, such as direct obligations of the 

United States that mature within 15 

months of the date of investment. The 

current regulation largely follows 

section 308(b) of the SBI Act (15 U.S.C. 

687(b)), but does not reflect an 

amendment made by Public Law 108– 

447, Division K, section 202 (December 

8, 2004) that allows an SBIC to invest 

‘‘in mutual funds, securities, or other 

instruments that consist of, or represent 

pooled assets of’’ the various direct 

investment vehicles permitted by 

section 308(b). 15 U.S.C. 687(b)(3). For 

example, this provision allows an SBIC 

to invest idle funds in a money market 

account, as long as the money market 

fund invests exclusively in permitted 

instruments. This proposed rule would 

bring the regulation into conformity 

with the statute. 

Section 107.855—Interest rate ceiling 

and limitations on fees charged to Small 

Businesses (‘‘Cost of Money’’). The 

proposed rule would correct an error by 

removing § 107.855(g)(10). This 

paragraph provides an exclusion from 

the Cost of Money calculation in the 

form of a cross-reference to the nonexistent § 107.855(i). 

Section 107.505—Facsimile 

requirement. The proposed rule would 

eliminate duplication by removing 

§ 107.505, which requires an SBIC to 

have the capability to receive fax 

messages. This section repeats language 

already found in § 107.504(b). 

Compliance with Executive Orders 

12866, 12988 and 13132, the Paperwork 

Reduction Act (44 U.S.C. Ch. 35) and 

the Regulatory Flexibility Act (5 U.S.C. 

601–612) 

Executive Order 12866 

The Office of Management and Budget 

has determined that this rule is not a 

‘‘significant’’ regulatory action under 

Executive Order 12866. 

Executive Order 12988 

This action meets applicable 

standards set forth in section 3(a) and 

3(b)(2) of Executive Order 12988, Civil 

Justice Reform, to minimize litigation, 

eliminate ambiguity, and reduce 

burden. The action does not have 

retroactive or presumptive effect. 

Executive Order 13132 

The proposed rule would not have 

substantial direct effects on the States, 

or the distribution of power and 

responsibilities among the various 

levels of government. Therefore, for the 

purposes of Executive Order 13132, 

Federalism, SBA determines that this 

proposed rule has no federalism 

implications warranting the preparation 

of a federalism assessment. 

Paperwork Reduction Act, 44 U.S.C. Ch. 

35 

For purposes of the Paperwork 

Reduction Act, (PRA) 44 U.S.C. Ch. 35, 

SBA has determined that this rule 

would not impose any new reporting or 

recordkeeping requirements. The 

requirement for SBICs to submit 

requests for conflict of interest 

exemptions is not an information 

collection as that term is defined by the 

PRA because the requests do not involve 

any standardized or identical reporting, 

recordkeeping or disclosure 

requirements. Rather, each request for 

exemption is unique to the 

circumstances of the particular SBIC. In 

any event, to the extent that SBICs are 

currently required to submit conflict of 

interest exemptions under the 

circumstances described in this 

proposed rule, that requirement would 

no longer exist. 

Compliance With the Regulatory 

Flexibility Act, 5 U.S.C. 601–612 

The Regulatory Flexibility Act (RFA), 

5 U.S.C. 601, requires administrative 

agencies to consider the effect of their 

actions on small entities, small nonprofit businesses, and small local 

governments. Pursuant to the RFA, 

when an agency issues a rule, the 

agency must prepare an Initial 

Regulatory Flexibility Act (IRFA) 

analysis which describes whether the 

impact of the rule will have a significant 

economic impact on a substantial 

number of small entities. However, 

§ 605 of the RFA allows an agency to 

certify a rule, in lieu of preparing an 

IRFA, if the rulemaking is not expected 

to have a significant economic impact 

on a substantial number of small 

entities. This proposed rule would affect 

all SBICs, of which there are currently 

309. SBA estimates that approximately 

75% of these SBICs are small entities. 

Therefore, SBA has determined that this 

proposed rule would have an impact on 

a substantial number of small entities. 

However, SBA has determined that the 

impact on entities affected by the rule 

would not be significant. The conflict of 

interest provision would eliminate the 

current requirement for SBICs to obtain 

a conflict of interest exemption for a 

particular type of transaction. This 

change is expected to reduce the 

regulatory burden on SBICs and allow 

them to close such financing 

transactions with less delay. 

SBA asserts that the economic impact 

of the rule, if any, would be minimal 

and entirely beneficial to small SBICs. 

Accordingly, the Administrator of the 

SBA hereby certifies that this rule 

would not have a significant impact on 

a substantial number of small entities. 

List of Subjects in 13 CFR Part 107 

Investment companies, Loan 

programs—business, Reporting and 

recordkeeping requirements, Small 

businesses. 

For the reasons stated in the 

preamble, the Small Business 

Administration proposes to amend part 

107 of title 13 of the Code of Federal 

Regulations as follows: 

PART 107—SMALL BUSINESS 

INVESTMENT COMPANIES 

1. The authority citation for part 107 

continues to read as follows: 

Authority: 15 U.S.C. 681 et seq., 683, 

687(c), 687b, 687d, 687g, 687m, Pub. L. 106– 

554, 114 Stat. 2763; and Pub. L. 111–5, 123 

Stat. 115. 

§ 107.505 [Removed] 

2. Remove § 107.505. 

3. Amend § 107.530 by redesignating 

paragraphs (b)(3) through (b)(6) as (b)(4) 

through (b)(7) and adding a new 

paragraph (b)(3) to read as follows: 

§ 107.530 Restrictions on investments of 

idle funds by leveraged Licensees. 

* * * * * 

(b) Permitted investments of idle 

funds. * * * 

(3) Mutual funds, securities, or other 

instruments that exclusively consist of, 

or represent pooled assets of, 

investments described in paragraphs 

(b)(1) or (b)(2) of this section; or 

* * * * * 

4. Amend § 107.730 by revising 

paragraphs (a)(1) and (g) to read as 

follows: 

§ 107.730 Financings which constitute 

conflicts of interest. 

(a) * * * 

(1) Provide Financing to any of your 

Associates, except for a Financing to an 

Associate that meets all of the following 

conditions: 

(i) The Small Business that receives 

the Financing is your Associate, 

pursuant to paragraph (8)(ii) of the 

Associate definition in § 107.50, only 

because an investment fund that is your 

Associate holds a 10% or greater equity 

interest in the Small Business. 

(ii) You and the Associate investment 

fund previously invested in the Small 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 198 / Thursday, October 14, 2010 / Proposed Rules 63113 

1Commission regulations referred to herein are 

found at 17 CFR Ch. 1. 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov./ 

LawRegulation/OTCDERIVATIVES/index.htm. 

3Pursuant to Section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

4 7 U.S.C. 1 et seq. 

5See Commodity Futures Modernization Act of 

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

6See Appendix A to Part 39, 17 CFR Part 39. The 

Commission notes that it intends to propose 

removal of Appendix A, in its entirety, as part of 

a future proposed rulemaking. 

7Section 8a(5) of the CEA authorizes the 

Commission to promulgate such regulations as, in 

the judgment of the Commission, are reasonably 

necessary to effectuate any of the provisions or to 

accomplish any of the purposes of the CEA. 

8The term ‘‘clearing members’’ refers to entities 

that have a direct financial relationship to a DCO, 

regardless of the DCO’s organizational structure, 

Continued 

Business at the same time and on the 

same terms and conditions. 

(iii) You and the Associate investment 

fund are providing follow-on financing 

to the Small Business at the same time, 

on the same terms and conditions, and 

in the same proportionate dollar 

amounts as your respective investments 

in the previous round(s) of financing 

(for example, if you invested $2 million 

and your Associate invested $1 million 

in the previous round, your respective 

follow-on investments would be in the 

same 2:1 ratio). 

* * * * * 

(g) Public notice. Before granting an 

exemption under this § 107.730, SBA 

will publish notice of the transaction in 

the Federal Register. 

§ 107.855 [Amended] 

5. Amend § 107.855 by removing 

paragraph (g)(10) and redesignating 

current paragraphs (g)(11) through 

(g)(13) as (g)(10) through (g)(12). 

Dated: October 6, 2010. 

Karen G. Mills, 

Administrator. 

[FR Doc. 2010–25729 Filed 10–13–10; 8:45 am] 

BILLING CODE 8025–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 39 and 140 

RIN 3038–AC98, 3038–AD02 

Financial Resources Requirements for 

Derivatives Clearing Organizations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing rules to implement 

new statutory provisions enacted by 

Title VII and Title VIII of the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). The 

proposed regulations establish financial 

resources requirements for derivatives 

clearing organizations (DCOs) for the 

purpose of ensuring that they maintain 

sufficient financial resources to enable 

them to perform their functions in 

compliance with the Commodity 

Exchange Act and the Dodd-Frank Act. 

DATES: Submit comments on or before 

December 13, 2010. 

ADDRESSES: You may submit comments, 

identified by RIN number, by any of the 

following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Agency Web Site: http:// 

www.cftc.gov. Follow the instructions 

for submitting comments on the Web 

site. 

• E-mail: DCOSIDCOfinres@cftc.gov. 

Include the RIN number in the subject 

line of the message. 

• Fax: 202–418–5521. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the established 

procedures in CFTC Regulation 145.9.1

FOR FURTHER INFORMATION CONTACT: John 

C. Lawton, Deputy Director and Chief 

Counsel, 202–418–5480, 

jlawton@cftc.gov, Phyllis P. Dietz, 

Associate Director, 202–418–5449, 

pdietz@cftc.gov, or Eileen A. Donovan, 

Special Counsel, 202–418–5096, 

edonovan@cftc.gov, Division of Clearing 

and Intermediary Oversight, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21 Street, NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Title VII 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.2 Title VII of 

the Dodd-Frank Act 3 amended the 

Commodity Exchange Act (CEA) 4 to 

establish a comprehensive regulatory 

framework to reduce risk, increase 

transparency, and promote market 

integrity within the financial system by, 

among other things: (1) Providing for the 

registration and comprehensive 

regulation of swap dealers and major 

swap participants; (2) imposing clearing 

and trade execution requirements on 

standardized derivative products; 

(3) creating rigorous recordkeeping and 

real-time reporting regimes; and 

(4) enhancing the Commission’s 

rulemaking and enforcement authorities 

with respect to all registered entities 

and intermediaries subject to the 

Commission’s oversight. 

Section 725(c) of the Dodd-Frank Act 

amends Section 5b(c)(2) of the CEA, 

which sets forth core principles with 

which a DCO must comply to be 

registered and to maintain registration 

as a DCO. 

The core principles were added to the 

CEA by the Commodity Futures 

Modernization Act of 2000 (CFMA).5

Consistent with the CFMA’s principlesbased approach to regulation, the 

Commission did not adopt 

implementing rules and regulations, but 

instead promulgated guidance for DCOs 

on compliance with the core 

principles.6 However under Section 

5b(c)(2), as amended by the Dodd-Frank 

Act, Congress expressly confirmed that 

the Commission may adopt 

implementing rules and regulations 

pursuant to its rulemaking authority 

under Section 8a(5) of the CEA.7

The Commission continues to believe 

that, where possible, each DCO should 

be afforded an appropriate level of 

discretion in determining how to 

operate its business within the statutory 

framework. At the same time, the 

Commission recognizes that specific 

bright-line regulations may be necessary 

in order to facilitate DCO compliance 

with a given core principle, and 

ultimately, to protect the integrity of the 

U.S. clearing system. Accordingly, in 

developing the proposed regulation, the 

Commission has endeavored to strike an 

appropriate balance between 

establishing general prudential 

standards and prescriptive 

requirements. 

Core Principle B, as amended by the 

Dodd-Frank Act, requires a DCO to 

possess financial resources that, at a 

minimum, exceed the total amount that 

would enable the DCO to meet its 

financial obligations to its clearing 

members 8 notwithstanding a default by 


jlentini on DSKJ8SOYB1PROD with PROPOSALS