Document ID: SEC-2020-0773-0001
Agency: sec
Document Type: Rule
Title: Definition of Covered Clearing Agency
Posted Date: 2020-05-14T04:00Z

[Federal Register Volume 85, Number 94 (Thursday, May 14, 2020)]
[Rules and Regulations]
[Pages 28853-28867]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07905]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-88616; File No. S7-23-16]
RIN 3235-AL48

Definition of ``Covered Clearing Agency''

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to the definitions of ``covered clearing agency,'' 
``central securities depository services,'' and ``sensitivity 
analysis'' 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''), enacted in 
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 (``Dodd-Frank Act'').

DATES: Effective date: July 13, 2020.

FOR FURTHER INFORMATION CONTACT: Matthew Lee, Assistant Director, or 
Jesse Capelle, Special Counsel, 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 is amending 17 CFR 240.17Ad-
22(a)(5) (``Rule 17Ad-22(a)(5)'') to define ``covered clearing agency'' 
to mean a registered clearing agency that provides the services of a 
central counterparty (``CCP'') or central securities depository 
(``CSD''). The Commission also is amending 17 CFR 240.17Ad-22(a)(3) 
(``Rule 17Ad-22(a)(3)'') to define ``central securities depository'' to 
mean a clearing agency that is a securities depository as described in 
Section 3(a)(23)(A) of the Exchange Act.\1\ In addition, the Commission 
is amending the definition of ``sensitivity analysis'' in 17 CFR 
240.17Ad-22(a)(16) (``Rule 17Ad-22(a)(16)'') so that the policies and 
procedures of all covered clearing agencies that are CCPs provide for a 
sensitivity analysis that considers the most volatile relevant periods, 
where practical, that have been experienced by the markets served by 
the covered clearing agency. The Commission is not adopting the 
proposed definition of ``securities settlement system.''
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    \1\ 15 U.S.C. 78c(a)(23)(A).
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    In developing these rule amendments, Commission staff has consulted 
with the Financial Stability Oversight Council (``FSOC''), Commodity 
Futures Trading Commission (``CFTC''), and Board of Governors of the 
Federal Reserve System (``FRB'').\2\ The Commission has also considered 
the relevant international standards as required by Section 
805(a)(2)(A) of the Clearing Supervision Act.\3\ The relevant

[[Page 28854]]

international standards for CCPs and CSDs are the Principles for 
Financial Market Infrastructures.\4\
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    \2\ See 12 U.S.C. 5472.
    \3\ 12 U.S.C. 5464(a)(2)(A).
    \4\ See Committee on Payment and Settlement Systems and 
Technical Committee of the International Organization of Securities 
Commissions, Principles for Financial Market Infrastructures (Apr. 
16, 2012) (``PFMI''), http://www.bis.org/publ/cpss101a.pdf.
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Table of Contents

I. Background
II. Amendments to Rule 17Ad-22
    A. Rule 17Ad-22(a)(5)
    B. Rule 17Ad-22(a)(3)
    C. Rule 17Ad-22(a)(16)
    D. Proposed Definition of ``Securities Settlement System''
III. Economic Analysis
    A. Economic Background
    B. Baseline
    C. Consideration of Benefits, Costs, and the Effect on 
Competition, Efficiency, and
    Capital Formation
IV. Paperwork Reduction Act
    A. Summary of Collection of Information and Use of Information
    B. Respondent Clearing Agencies
    C. Total Annual Reporting and Recordkeeping Burdens
    D. Collection of Information Is Mandatory
    E. Confidentiality
V. Regulatory Flexibility Act Certification
    A. Registered Clearing Agencies
    B. Certification
VI. Other Matters
VII. Statutory Authority

I. Background

    In 2012, the Commission adopted 17 CFR 240.17Ad-22 (``Rule 17Ad-
22'') under the Exchange Act to strengthen the substantive regulation 
of registered clearing agencies and promote their safe and reliable 
operation.\5\ In 2016, the Commission also took an important step in 
the development of its regulatory framework for registered clearing 
agencies by adding 17 CFR 240.17Ad-22(e) (``Rule 17Ad-22(e)''),\6\ 
which strengthened the existing framework by establishing requirements 
for registered clearing agencies that meet the definition of a 
``covered clearing agency.'' Rule 17Ad-22(e) includes requirements for 
covered clearing agencies intended to address the activity and 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 both the Exchange Act and the Dodd-Frank Act. Of particular note, 
the requirements in Rule 17Ad-22(e) that address policies and 
procedures for transparency, governance, financial risk management, and 
operational risk management help ensure that covered clearing agencies 
are robust and stable.\7\
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    \5\ See 17 CFR 240.17Ad-22; Release No. 34-68080 (Oct. 22, 
2012), 77 FR 66219, 66225-26 (Nov. 2, 2012) (``Clearing Agency 
Standards adopting release'').
    \6\ Release No. 34-78961 (Sept. 28, 2016), 81 FR 70786, 70902-05 
(Oct. 13, 2016) (``CCA Standards adopting release'').
    \7\ CCA Standards adopting release, supra note 6, at 70793, 
70801-10, 70837-38.
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    As adopted in 2016, Rule 17Ad-22(e) established enhanced 
requirements for an initial group of registered clearing agencies.\8\ 
The Commission also contemporaneously proposed to amend the definition 
of ``covered clearing agency'' and certain other definitions to expand 
coverage of Rule 17Ad-22(e) to all registered clearing agencies 
providing the services of a CCP, CSD, or securities settlement 
system.\9\ The Commission received several comments in response to the 
proposed amendments.\10\ In this document, the Commission is adopting 
amendments to the definitions of ``covered clearing agency'' in Rule 
17Ad-22(a)(5), ``central securities depository services'' in Rule 17Ad-
22(a)(3), and ``sensitivity analysis'' in Rule 17Ad-22(a)(16), and the 
Commission is not adopting the proposed definition of ``securities 
settlement system.'' The effect of these amendments is to expand the 
coverage of Rule 17Ad-22(e) so that all registered clearing agencies 
providing the services of a CCP or CSD are subject to Rule 17Ad-22(e).
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    \8\ Release No. 34-71699 (Mar. 12, 2014), 79 FR 16865 (Mar. 26, 
2014), corrected at 79 FR 29507 (May 22, 2014) (``CCA Standards 
proposing release'').
    \9\ Release No. 34-78963 (Sept. 28, 2016), 81 FR 70744 (Oct. 13, 
2016) (``CCA Definition proposing release'').
    \10\ Letters from Chris Barnard, dated Dec. 9, 2016 
(``Barnard''); Keith Bishop, former California Commissioner of 
Corporations, dated Oct. 10, 2016 (``Bishop''); Ashley Burrowes, 
dated Oct. 28, 2016 (``Burrowes''); Carrie Devorah, dated Oct. 18, 
2016 (``Devorah''); Andrew Helmin, dated Dec. 9, 2016 (``Helmin''); 
Karl Muth, dated Nov. 20, 2016 (``Muth''); Suzanne Shatto, dated 
Jan. 24, 2017 (``Shatto''). The comment letters are available on the 
Commission's website at https://www.sec.gov/comments/s7-23-16/s72316.htm.
     In addition, two commenters expressed views unrelated to the 
proposed amendments. For example, one commenter expressed views on 
the regulation of clearing brokers and another expressed views on 
counterparty default, margin requirements, failed trades, and the 
use of shortselling. See Devorah (expressing views regarding J.P. 
Morgan Chase & Co.'s activity as a clearing broker) and Shatto 
(expressing views on counterparty default, margin requirements, 
failed trades, and the use of shortselling). Because these comments 
are not relevant to the rule amendments adopted in this document, 
they have not been addressed in Part II.
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II. Amendments to Rule 17Ad-22

A. Rule 17Ad-22(a)(5)

1. Proposed Amendment and Comment Received
    As discussed in the CCA Definition proposing release, the previous 
definition of ``covered clearing agency'' in Rule 17Ad-22(a)(5) stated 
that ``covered clearing agency'' means a designated clearing agency or 
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.).\11\ The Commission proposed to amend the definition of ``covered 
clearing agency'' in Rule 17Ad-22(a)(5) to mean a registered clearing 
agency that provides the services of a CCP, CSD, or securities 
settlement system.
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    \11\ See CCA Definition proposing release, supra note 9, at 
70749.
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    The Commission received one comment regarding the proposed 
amendment to the definition of ``covered clearing agency.'' \12\ The 
commenter opposed adoption of the proposed amendment, stating that, in 
contrast to existing Rule 17Ad-22, the proposal fails to meaningfully 
enhance (i) the precision with which the entities are defined, (ii) the 
public's understanding of each category, and (iii) the public's trust 
that an entity will then behave in and be regulated in expected 
ways.\13\
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    \12\ See Muth. Comments directed specifically to the 
``securities settlement system'' element of the proposed definition 
are discussed in Part II.D.
    \13\ See Muth.
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    The Commission disagrees that the amendment to the definition of 
``covered clearing agency'' fails to meaningfully enhance the precision 
with which the entities are defined. The Commission believes that the 
amended definition is more precise than the previous definition because 
it is simpler and more accessible, consolidating all of the relevant 
concepts and factors into one definition in Rule 17Ad-22 and requiring 
a less subjective analysis to determine whether a clearing agency is 
subject to the requirements in Rule 17Ad-22(e). The Commission notes 
that the previous definition of ``covered clearing agency'' included a 
number of separate factors that a reader must interpret and apply to 
determine whether a clearing agency is subject to the enhanced risk 
management requirements in Rule 17Ad-22(e). Those factors, which are 
largely but not entirely contained in the previous Rule 17Ad-22(a)(5), 
include whether a registered clearing agency has been designated as 
systemically important under Title VIII of the Dodd-Frank Act by FSOC, 
whether the Commission or the CFTC is the supervisory agency for the 
registered clearing agency, and whether the registered clearing agency 
is involved in activities with a more

[[Page 28855]]

complex risk profile.\14\ Readers seeking to understand how to apply 
and interpret the term ``clearing agency involved in activities with a 
more complex risk profile'' must look to 17 CFR 240.17Ad-22(a)(4) and 
engage in additional analysis, including considering: (i) Whether the 
clearing agency provides central counterparty services for security-
based swaps; (ii) whether the Commission has made a determination that 
a clearing agency is involved in activities with a more complex risk 
profile at the time of its initial registration (thereby requiring a 
reader to look to Commission orders approving the registration of a 
registered clearing agency); and (iii) whether, subsequent to approving 
a clearing agency's initial registration, the Commission has made a 
determination pursuant to another rule, 17 CFR 240.17Ab2-2, that the 
clearing agency is involved in activities with a more complex risk 
profile.\15\
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    \14\ See 17 CFR 240.17Ad-22(a)(5).
    \15\ See 17 CFR 240.17Ad-22(a)(4).
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    In addition, and as first explained in the CCA Definition proposing 
release, the Commission believes that consideration of these types of 
factors could result in conflicting outcomes where certain CCPs and 
CSDs, now or in the future, are excluded from the definition of 
``covered clearing agency,'' resulting in competitive asymmetries 
between registered clearing agencies that otherwise provide similar 
clearing agency services.\16\ Similarly, the Commission also believes 
that the amended definition of ``covered clearing agency'' should 
enhance public trust that an entity will behave and be regulated in 
expected ways because the proposed definition eliminates the potential 
for different regulatory treatment, and therefore different regulatory 
behaviors and outcomes, across clearing agencies that provide the same 
clearing agency services and present similar risks to the U.S. 
securities markets.
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    \16\ See CCA Definition proposing release, supra note 9, at 
70753, 70768.
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    With respect to whether the amended definition of ``covered 
clearing agency'' enhances the public's understanding of each category 
of covered clearing agency, the Commission also disagrees with the 
commenter. In contrast to the previous definition, the amendment bases 
the definition of ``covered clearing agency'' solely on the particular 
clearing agency services provided by registered clearing agencies--
namely, CCP and CSD services--and therefore enables a clearer 
understanding and regulatory approach, based on the single and well-
understood factor of clearing agency activity, across registered 
clearing agencies that perform these critical functions.\17\ By 
amending the definition of ``covered clearing agency'' so that it 
references only clearing agency functions, the Commission believes that 
the amendment better aligns the meaning of ``covered clearing agency'' 
with the services that such a clearing agency would provide. In 
addition, these two functions implicate the concentration and 
management of risk (in particular financial risks, such as credit and 
liquidity risk) and the potential transmission of systemic risk--
activities which, by virtue of their significance to the U.S. financial 
system generally, and the national system for clearance and settlement 
in particular, warrant the application of the enhanced requirements in 
Rule 17Ad-22(e).\18\
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    \17\ See CCA Standards adopting release, supra note 6, at 70787 
(describing clearing agency functions).
    \18\ See CCA Definition proposing release, supra note 9, at 
70750.
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    Further, since the 2007-2009 financial crisis, the Commission 
understands that the terms CCP and CSD have become widespread and well-
known among market participants,\19\ and therefore the Commission 
believes that using terminology consistent with industry practice in 
the definition of ``covered clearing agency'' should help enhance the 
public's understanding of the relevant clearing agency services that 
meet the definition of a ``covered clearing agency.''
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    \19\ See, e.g., Commission, CFTC & FRB, Risk Management 
Supervision of Designated Clearing Entities, (2011) at 7, https://www.sec.gov/news/studies/2011/813study.pdf.
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2. Final Rule
    The Commission is adopting the proposed definition of ``covered 
clearing agency'' but modifying it to remove reference to ``securities 
settlement system,'' as further discussed in Part II.D.\20\ 
Accordingly, Rule 17Ad-22(a)(5) as adopted defines ``covered clearing 
agency'' to mean a registered clearing agency that provides the 
services of a CCP or CSD.
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    \20\ Comments on the proposed definition of ``securities 
settlement system'' are discussed in Part II.D.
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a. Overview of the Definitions of CCP and CSD
    In light of the amended definition, as of the effective date, all 
CCPs and CSDs registered with the Commission (that do not already meet 
the existing definition of ``covered clearing agency'') will become 
subject to examinations for compliance with Rule 17Ad-22(e) and, when 
filing proposed rule changes under 17 CFR 240.19b-4, will need to 
consider how rule changes are consistent with Rule 17Ad-22(e).\21\ In 
addition, entities seeking to register as a clearing agency that 
provide CCP or CSD services, as of the effective date, would also be 
subject to Rule 17Ad-22(e). The Commission would therefore review any 
applications on Form CA-1 submitted by such an entity for consistency 
with Rule 17Ad-22(e). The Commission previously provided guidance on 
these topics in the CCA Standards adopting release.\22\ In the CCA 
Definition proposing release, the Commission also discussed the 
important services that CCPs and CSDs provide and how those services 
support the application of the enhanced requirements in Rule 17Ad-
22(e).\23\ Below, the Commission is providing further guidance on the 
types of services that CCPs and CSDs generally provide.
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    \21\ As a result of the amended definition, as of the effective 
date, ICE Clear Credit, which provides CCP services for security-
based swap transactions, will be a covered clearing agency subject 
to Rule 17Ad-22(e). The existing CCPs that are already covered 
clearing agencies and subject to the provisions of Rule 17Ad-22(e) 
are Banque Centrale De Compensation, Fixed Income Clearing 
Corporation, ICE Clear Europe, National Securities Clearing 
Corporation, and The Options Clearing Corporation. The Depository 
Trust Company is the only CSD registered as a clearing agency in the 
United States, and it was also already a covered clearing agency 
subject to Rule 17Ad-22(e).
    \22\ See CCA Standards adopting release, supra note 6, at 70848-
49 (in the discussion of effective and compliance dates).
    \23\ See CCA Definition proposing release, supra note 9, at 
70750-52 (discussing the critical functions common among and 
specific to CCPs and CSDs).
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    As defined in 17 CFR 240.17Ad-22(a)(2) (``Rule 17Ad-22(a)(2)''), 
``central counterparty'' means a clearing agency that interposes itself 
between the counterparties to a trade, acting functionally as the buyer 
to every seller and the seller to every buyer.\24\ The definition 
includes two core concepts: (i) Interposing between the counterparties 
to a trade; and (ii) acting functionally as the buyer to every seller 
and vice versa. These concepts encompass a wide variety of practices, 
and differences in the practices of CCPs may reflect the risk 
characteristics of the instruments that the CCP clears, the 
characteristics of the participants for which the CCP clears, other 
external factors, or the design of the CCP's risk-management 
framework.\25\ For example, the Commission has previously explained 
that a CCP often assumes a central role in ensuring the performance

[[Page 28856]]

of open contracts and facilitating the clearance and settlement of 
trades through risk management tools such as: Novating and guaranteeing 
trades, netting, and collecting clearing fund contributions from 
members.\26\ In novating and guaranteeing trades, a CCP assumes the 
original parties' contractual obligations to each other and assumes 
their credit risk.\27\ In netting, a CCP reduces its overall exposure 
to its counterparties.\28\ By collecting clearing fund contributions, a 
CCP can maintain sufficient financial resources in the event a member 
defaults on its obligations to the CCP.\29\ In describing these aspects 
of CCP practices, the Commission stated its belief that a CCP, through 
its core functions and use of its risk management tools, helps reduce 
credit, market, and liquidity risk among and to its counterparties.\30\ 
Ultimately, the Commission believes that the essence of a CCP is its 
role in managing and mitigating credit exposures and liquidity risk.
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    \24\ See 17 CFR 240.17Ad-22(a)(2); Clearing Agency Standards 
adopting release, supra note 5, at 66229.
    \25\ See PFMI, supra note 4, at 155-57 (describing the variety 
in CCP structure and operations).
    \26\ Release No. 34-80295 (Mar. 22, 2017), 82 FR 15564, 15566 
(Mar. 29, 2017).
    \27\ See id.
    \28\ See id.
    \29\ See id.
    \30\ See id. at 15567.
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    Like CCPs, CSDs encompass a wide variety of practices. For example, 
a clearing agency performs CSD services when it (i) 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 (ii) otherwise permits 
or facilitates the settlement of securities transactions or the 
hypothecation or lending of securities without physical delivery of 
securities certificates.\31\ As a result, the Commission believes that 
a range of activities could meet the definition of CSD.
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    \31\ See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad-22(a)(3).
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b. Registered Clearing Agencies That Are Not Covered Clearing Agencies
    As discussed in the CCA Definition proposing release,\32\ 
registered clearing agencies that are not covered clearing agencies, 
such as registered clearing agencies that do not provide CCP or CSD 
services, will continue to be governed by other provisions of Rule 
17Ad-22, including 17 CFR 240.17Ad-22(d) (``Rule 17Ad-22(d)''), which 
contain requirements for various aspects of the payment, clearance, and 
settlement process.\33\
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    \32\ See CCA Definition proposing release, supra note 9, at 
70747 n.35.
    \33\ See 17 CFR 240.17Ad-22(d)(1)-(13).
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B. Rule 17Ad-22(a)(3)

    The Commission proposed to amend the defined term ``central 
securities depository services'' in Rule 17Ad-22(a)(3) by deleting the 
word ``services'' so that the rule would instead define the term 
``central securities depository'' to mean a clearing agency that is a 
securities depository as described in Section 3(a)(23)(A) of the 
Exchange Act. While the Commission proposed to amend the defined term, 
it did not propose to amend the meaning of the term as set forth in 
Rule 17Ad-22(a)(3). The purpose of this proposed amendment was to 
ensure consistency with the use of the defined term ``central 
counterparty'' in Rule 17Ad-22(a)(2) in the proposed definition of 
``covered clearing agency.''
    The Commission received one comment regarding the amendment to the 
definition of ``central securities depository services.'' \34\ This 
commenter stated that the proposed definition is ``unnecessary 
surplusage'' because Rule 17Ad-22(a)(3) already defines ``central 
securities depository services.'' \35\ The Commission notes that the 
purpose of the proposed modification was to conform the defined term 
``central securities depository'' with the defined term ``central 
counterparty'' in Rule 17Ad-22(a)(2) by removing the reference to 
``services'' in the term. As previously discussed, the term ``central 
securities depository,'' like the term ``central counterparty,'' is 
widely known and used among market participants, as CSDs and CCPs are 
critical financial market utilities.\36\ Further, the Commission 
continues to believe that the amendment improves consistency with the 
use of ``central counterparty'' throughout Rule 17Ad-22 and helps make 
the amended definition of ``covered clearing agency'' clear. Finally, 
and for the reasons just given above, the amendment removes a term in 
Rule 17Ad-22(a)(3) that the Commission believes to be in excess of what 
is necessary to ensure consistency in expressing a well understood 
concept both across the Commission's rules as well as market 
participants' application of such terms. For these reasons, the 
Commission believes that the amendment is appropriate.
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    \34\ See Bishop.
    \35\ See id.
    \36\ See supra note 19 and accompanying text.
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    For the reasons discussed above, the Commission is adopting the 
amended definition of ``central securities depository'' in Rule 17Ad-
22(a)(3) as proposed.

C. Rule 17Ad-22(a)(16)

    As discussed in the CCA Definition proposing release, a covered 
clearing agency that provides CCP services must establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to regularly review, test, and verify its risk-based margin 
system by conducting a sensitivity analysis of its margin model, among 
other things.\37\ The Commission proposed two amendments to the 
definition of ``sensitivity analysis'' in Rule 17Ad-22(a)(16). First, 
in conjunction with the proposed definition of ``covered clearing 
agency,'' the Commission proposed to amend the definition of 
``sensitivity analysis'' to remove the reference to ``a covered 
clearing agency involved in activities with a more complex risk 
profile'' from paragraph (a)(16)(ii). Second, in order to improve 
consistency among the elements within the definition of sensitivity 
analysis, the Commission proposed to separate the two elements in 
paragraph (a)(16)(i) into two separate paragraphs and renumber the 
existing paragraphs accordingly.
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    \37\ See CCA Definition proposing release, supra note 9, at 
70754-55.
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    Thus, taking these two proposed amendments together, the proposed 
definition of ``sensitivity analysis'' would apply to covered clearing 
agencies that provide CCP services and would mean an analysis that 
involves analyzing the sensitivity of a model to its assumptions, 
parameters, and inputs 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 conditions; (ii) uses actual portfolios and, where 
applicable, hypothetical portfolios that reflect the characteristics of 
proprietary positions and customer positions; (iii) considers the most 
volatile relevant periods, where practical, that have been experienced 
by the markets served by the clearing agency; and (iv) 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.
    In response to the proposal, one commenter suggested that the 
Commission specifically refer to reverse stress testing in the 
amendments to the

[[Page 28857]]

rule.\38\ The Commission previously addressed this issue in the CCA 
Standards adopting release. As explained there, Rule 17Ad-22(e) does 
not preclude a covered clearing agency from performing reverse stress 
testing as part of its financial risk management; indeed, the 
Commission indicated that a covered clearing agency generally should 
consider using reverse stress testing to evaluate the adequacy of 
financial resources.\39\ However, the Commission continues to believe 
that each covered clearing agency should retain flexibility, subject to 
its obligations and responsibilities as an SRO under the Exchange Act, 
to develop its stress testing framework in light of the ever-evolving 
challenges and risks inherent in the securities markets. Further, the 
Commission notes that reverse stress testing, which can be a useful 
tool to evaluate the adequacy of financial resources held by a covered 
clearing agency, is a distinct concept from sensitivity analysis, which 
in the context of Rule 17Ad-22(a)(16) concerns how assumptions, 
parameters, and inputs into a covered clearing agency's margin model 
react to potential changes in market conditions.
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    \38\ Barnard.
    \39\ See CCA Standards adopting release, supra note 6, at 70815.
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    For the reasons discussed above, the Commission is adopting the 
amended definition of ``sensitivity analysis'' in Rule 17Ad-22(a)(16) 
as proposed.

D. Proposed Definition of ``Securities Settlement System''

    In the CCA Definition proposing release, the Commission proposed to 
define ``securities settlement system'' to mean a clearing agency that 
enables securities to be transferred and settled by book entry 
according to a set of predetermined multilateral rules.\40\
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    \40\ See CCA Definition proposing release, supra note 9, at 
70754.
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    Several commenters raised concerns regarding the proposed 
definition, stating that it was unclear,\41\ ambiguous,\42\ and 
superfluous.\43\ Commenters raised these concerns because the term 
``securities settlement system'' does not appear in the Exchange 
Act,\44\ and one commenter did not understand the meaning of 
``multilateral rules'' as used in the definition.\45\
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    \41\ See Bishop.
    \42\ See Burrowes.
    \43\ See id.
    \44\ See Bishop; Burrowes.
    \45\ See Helmin.
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    In consideration of these comments, the Commission is not adopting 
the proposed definition of ``securities settlement system.'' At this 
time, no registered clearing agency currently provides only the 
services of a securities settlement system. Rather, as explained in the 
CCA Definition proposing release, clearing agencies provide differing 
clusters of services for their participants, and the Commission has 
registered several clearing agencies over the years that provide the 
services of a securities settlement system along with other 
services.\46\ For example, in the past, the Commission has included 
book-entry transfers among the services provided by either a CSD or a 
securities settlement system.\47\ As another example, one registered 
clearing agency currently provides both CSD services and the services 
of a securities settlement system for the U.S. securities markets.\48\ 
Because the services of a securities settlement system have not been 
offered as standalone services historically and are not currently,\49\ 
the Commission believes that the amended definition of ``covered 
clearing agency,'' as adopted and discussed in Part II.A, covers 
substantially the same scope of clearing agency activity as the 
proposed definition.
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    \46\ See CCA Definition proposing release, supra note 9, at 
70752 & nn.83-88.
    \47\ See id. at 70748, 70752.
    \48\ See id.
    \49\ As described in the CCA Definition proposing release, over 
the years the Commission has registered a number of entities as 
clearing agencies that provide a variety of services, including 
securities settlement services for transactions executed by 
specialists on an exchange, for mortgage-backed securities 
transactions, and for cross-border transactions. See id. at 70752.
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    Thus, in response to the concerns identified by commenters and to 
eliminate ambiguity, the Commission is not adopting the proposed 
definition of ``securities settlement system.'' \50\
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    \50\ Because the Commission is not adopting the definition of 
``securities settlement system,'' the numbering for the definition 
of ``sensitivity analysis'' will be different than proposed, and the 
definitions of ``stress testing,'' ``systemically important in 
multiple jurisdictions,'' and ``transparent'' will retain their 
original numbering, rather than be renumbered as proposed.
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III. Economic Analysis

    The Commission is sensitive to the economic consequences and 
effects of the adopted amendments, including their benefits and costs. 
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.\51\ Further, as noted above, Section 17A of the Exchange Act 
directs the Commission, when using its authority to facilitate the 
establishment of a national system for clearance and settlement of 
securities transactions, 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.\52\ Section 23(a)(2) of the Exchange Act 
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.\53\
---------------------------------------------------------------------------

    \51\ See 15 U.S.C. 78c(f).
    \52\ See CCA Definition proposing release, supra note 9, at 
70745-46.
    \53\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission is amending the definition of ``covered clearing 
agency'' in Rule 17Ad-22(a)(5) by focusing directly on clearing agency 
functions. Thus the amended definition of ``covered clearing agency'' 
covers all clearing agencies that provide the services of a CCP or CSD. 
The Commission is also adopting a conforming amendment to the 
definition of ``central securities depository services'' in Rule 17Ad-
22(a)(3), and the Commission is amending the definition of 
``sensitivity analysis'' in Rule 17Ad-22(a)(16). As discussed in Part 
II, these amendments expand the scope of registered clearing agencies 
subject to Rule 17Ad-22(e) and encompass one additional registered 
clearing agency that now meets the definition of a ``covered clearing 
agency'' and is subject to the requirements of Rule 17Ad-22(e).

A. Economic Background

    As the Commission has noted before, registered clearing agencies 
have become an essential part of the infrastructure of the U.S. 
securities markets.\54\ While central clearing generally benefits the 
markets in which it is available, clearing agencies can pose 
substantial risk to the financial system as a whole, due in part to the 
fact that central clearing concentrates risk in the clearing 
agency.\55\ Disruption to a

[[Page 28858]]

clearing agency's operations, or failure on the part of a clearing 
agency to meet its obligations, could therefore serve as a potential 
source of contagion, resulting in significant costs not only to the 
clearing agency itself or its members but also to other market 
participants or the broader U.S. financial system.\56\ As a result, 
proper management of the risks associated with central clearing is 
necessary to ensure the stability of the U.S. securities markets and 
the broader U.S. financial system. When a clearing agency provides CCP 
services, central clearing replaces bilateral counterparty exposures 
with exposures against the clearing agency. Consequently, a move to 
central clearing of security-based swaps, holding the volume of 
security-based swap transactions constant, increases economic exposures 
against clearing agencies that centrally clear security-based swaps. 
Increased exposures in turn raise the possibility that these clearing 
agencies may serve as a transmission mechanism for systemic events.
---------------------------------------------------------------------------

    \54\ See CCA Definition proposing release, supra note 9, at 
70756; see also CCA Standards adopting release, supra note 6, at 
70849.
    \55\ For example, the default and liquidation of a clearing 
agency would be costly and disruptive to financial markets. See, 
e.g., CCA Standards adopting release, supra note 6, at 70866; see 
also Robert Cox & Robert Steigerwald, A CCP is a CCP is a CCP, (Fed. 
Reserve Bank of Chi. Policy Discussion Paper 2017-01, Apr. 2017), at 
13-14, https://www.chicagofed.org/publications/policy-discussion-papers/2017/pdp-1. Further, clearing members face risks if losses 
borne by clearing agencies, including the default of one member, are 
mutualized across non-defaulting members. See, e.g., CCA Standards 
adopting release, supra note 6, at 70854-59 (describing the risks 
clearing agencies face, including, among others, counterparty credit 
risk, liquidity risk, and operational risk).
    \56\ See generally Dietrich Domanski, Leonardo Gambacorta, & 
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS 
Q. Rev., Dec. 2015, at 59, https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf (describing links between CCP financial risk 
management and systemic risk); Darrell Duffie, Ada Li, & Theo Lubke, 
Policy Perspectives on OTC Derivatives Market Infrastructure, (Fed. 
Reserve Bank of N.Y. Staff Report No. 424, Jan. 2010), at 9, 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.''); Craig Pirrong, The Inefficiency of Clearing Mandates 
(CATO Inst. Policy Analysis No. 655, July 21, 2010), at 11-14, 16-
17, 24-26, http://www.cato.org/pubs/pas/PA665.pdf (stating, among 
other things, that ``CCPs are concentrated points of potential 
failure that can create their own systemic risks,'' that ``[a]t 
most, creation of CCPs changes the topology of the network of 
connections among firms, but it does not eliminate these 
connections,'' that clearing may lead speculators and hedgers to 
take larger positions, that a CCP's failure to effectively price 
counterparty risks may lead to moral hazard and adverse selection 
problems, that the main effect of clearing would be to 
``redistribute losses consequent to a bankruptcy or run,'' and that 
clearing entities have failed or come close to failing in the past, 
including in connection with the 1987 market break); Froukelien 
Wendt, Central Counterparties: Addressing Their Too Important to 
Fail Nature (IMF Working Paper No. 15/21, Jan. 2015), https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Central-Counterparties-Addressing-their-Too-Important-to-Fail-Nature-42637 
(assessing the potential channels for contagion arising from CCP 
interconnectedness); Manmohan Singh, Making OTC Derivatives Safe--A 
Fresh Look (IMF Working Paper No. 11/66, Mar. 2011), at 5-11, 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). See also Ben Bernanke, Clearing and 
Settlement during the Crash, 3 Rev. Fin. Stud. 133 (1990) for a 
discussion of the risks affecting clearing and settlement during the 
October 1987 stock market crash.
---------------------------------------------------------------------------

    As the Commission discussed in the CCA Definition proposing 
release, clearing agencies have incentives to implement a risk 
management framework that can effectively manage the risks posed by 
central clearing, but these incentives can also be tempered by 
pressures to reduce costs and maximize profits that are distinct from 
goals set forth in governing statutes.\57\ In addition, regulatory 
reforms, including efforts to mandate central clearing for OTC 
derivatives, can alter incentives to manage risks for both CCPs and 
clearing members. These factors may cause CCPs to choose risk 
management policies that do not fully reflect the costs and benefits 
that accrue to other financial market participants as a result of their 
decisions, and these choices may have implications for financial 
stability.
---------------------------------------------------------------------------

    \57\ See id.
---------------------------------------------------------------------------

B. Baseline

    In order to assess the economic effects of the amendments to Rule 
17Ad-22, the Commission uses an economic baseline that considers the 
current market for clearance and settlement services. As discussed in 
the CCA Definition proposing release,\58\ the Commission believes that 
the amendment to the definition of ``covered clearing agency'' will 
likely result in one additional registered clearing agency, ICE Clear 
Credit (``ICC''), becoming subject to the requirements in Rule 17Ad-
22(e), and may also affect ICE Clear Europe (``ICEU'') because ICEU is 
a potential substitute provider of CCP services for security-based 
swaps to ICC's clearing members, even though the amendment to the 
definition of ``covered clearing agency'' does not affect ICEU's 
current status as a covered clearing agency.\59\ Since publication of 
the CCA Definition proposing release, the Commission has registered 
Banque Central de Compensation, which conducts business under the name 
LCH SA (``LCH SA''), as a clearing agency to provide CCP services for 
U.S. persons for security-based swaps, including single-name credit 
default swaps, through its CDSClear business unit. Similar to ICEU, the 
Commission believes that ICC becoming subject to the requirements in 
Rule 17Ad-22(e) may also affect CDSClear because LCH SA is also a 
potential substitute provider of CCP services for security-based swaps 
to ICC's clearing members, even though the amendment to the definition 
of ``covered clearing agency'' does not affect LCH SA's current status 
as a covered clearing agency.\60\ The Commission's baseline therefore 
includes these three entities in the market for clearance and 
settlement services, the current market practices at these entities, as 
well as the regulatory framework for these entities, including rules 
adopted by other regulators to the extent that these rules affect the 
cost structure, business, and market practices of the above-mentioned 
entities. Accordingly, Table 1 below provides membership statistics for 
ICC, ICEU, and LCH SA's CDSClear as of February 2020.
---------------------------------------------------------------------------

    \58\ See id. at 70757.
    \59\ See infra Part III.C.1.c. Because ICC, ICEU, and LCH SA's 
CDSClear overlap in the products they clear, the amendments could 
potentially cause business to shift among these three clearing 
agencies.
    \60\ See supra note 59 and accompanying text.
    \61\ Membership statistics are taken from the websites of each 
of the listed clearing agencies as of February 2020: ICE Clear 
Credit Participants, https://www.theice.com/clear-credit/participants; ICE Clear Europe Membership, https://www.theice.com/clear-europe/membership; LCH SA Member Search, https://www.lch.com/membership/member-search.

 Table 1--Membership Statistics for ICE Clear Credit, ICE Clear Europe,
                       and LCH SA's CDSClear \61\
------------------------------------------------------------------------
                                                                 Number
------------------------------------------------------------------------
ICE
  Clear Credit Members.......................................         29
  Clear Europe Members.......................................         89
  --*Clear Europe Members that clear CDS.....................         30
LCH
  SA Members.................................................        119
  --CDSClear Members.........................................         26
------------------------------------------------------------------------

With respect to the regulatory framework and current practices, the 
Commission discussed each at length in the CCA Definition proposing 
release.\62\ The regulatory framework, which includes Section 17A of 
the Exchange Act, Section 19 of the Exchange Act, Titles VII and VIII 
of the Dodd-Frank Act, Rule 17Ad-22 under the Exchange Act, and certain 
regulations adopted by the CFTC, remains substantially unchanged. The 
current practices of ICC and ICEU also remain substantially unchanged, 
except that the Commission has approved the following proposed rule 
changes at ICC and ICEU since

[[Page 28859]]

publication of the CCA Definition proposing release:
---------------------------------------------------------------------------

    \62\ See CCA Definition proposing release, supra note 9, at 
70757-64.
---------------------------------------------------------------------------

     With respect to risk management, ICC has expanded the 
scope of credit default swap contracts for which it provides clearing 
services,\63\ revised its risk management framework,\64\ revised its 
liquidity risk management and stress testing frameworks,\65\ revised 
policies and procedures regarding liquidity thresholds,\66\ amended 
policies and procedures for end-of-day price discovery,\67\ revised and 
formalized its model validation framework,\68\ revised and formalized 
its back-testing framework,\69\ revised and formalized its new 
initiatives approval policy and procedural framework,\70\ and revised 
and formalized its risk parameter setting and review policy; \71\
---------------------------------------------------------------------------

    \63\ See, e.g., Release Nos. 34-87297 (Oct. 15, 2019), 84 FR 
56270 (Oct. 21, 2019); 34-84130 (Sept. 18, 2018), 83 FR 47665 (Sept. 
20, 2018); 34-82853 (Mar. 12, 2018), 83 FR 11570 (Mar. 15, 2018); 
34-81646 (Sept. 18, 2017), 82 FR 44477 (Sept. 22, 2017); 34-79892 
(Jan. 27, 2017), 82 FR 9086 (Feb. 2, 2017); 34-79197 (Oct. 31, 
2016), 81 FR 76987 (Nov. 4, 2016).
    \64\ See, e.g., Release Nos. 34-87297 (Oct. 15, 2019), 84 FR 
56270 (Oct. 21, 2019); 34-84457 (Oct. 19, 2018), 83 FR 53917 (Oct. 
25, 2018); 34-83832 (Aug. 13, 2018), 83 FR 41118 (Aug. 17, 2018); 
34-82853 (Mar. 12, 2018), 83 FR 11570 (Mar. 15, 2018); 34-79220 
(Nov. 2, 2016), 81 FR 78677 (Nov. 8, 2016).
    \65\ See, e.g., Release Nos. 34-86838 (Aug. 30, 2019), 84 FR 
47019 (Sept. 9, 2019); 34-86378 (July 15, 2019), 84 FR 34990 (July 
19, 2019); 34-82853 (Mar. 12, 2018), 83 FR 11570 (Mar. 15, 2018); 
34-81797 (Oct. 2, 2017), 82 FR 46844 (Oct. 6, 2017); 34-81347 (Aug. 
8, 2017), 82 FR 37917 (Aug. 14, 2017).
    \66\ Release No. 34-80324 (Mar. 28, 2017), 82 FR 16244 (Apr. 3, 
2017).
    \67\ See, e.g., Release Nos. 34-87297 (Oct. 15, 2019), 84 FR 
56270 (Oct. 21, 2019); 34-82960 (Mar. 28, 2018), 83 FR 14300 (Apr. 
3, 2018); 34-81186 (July 21, 2017), 82 FR 34997 (July 27, 2017); 34-
80858 (June 5, 2017), 82 FR 26824 (June 9, 2017).
    \68\ See, e.g., Release No. 34-86039 (June 5, 2019), 84 FR 27167 
(June 11, 2019); 34-83690 (July 24, 2018), 83 FR 36655 (July 30, 
2018).
    \69\ Release No. 34-85357 (Mar. 19, 2019), 84 FR 11146 (Mar. 25, 
2019).
    \70\ Release No. 34-85105 (Feb. 11, 2019), 84 FR 4570 (Feb. 15, 
2019).
    \71\ Release No. 34-85495 (Apr. 3, 2019), 84 FR 14158 (Apr. 9, 
2019).
---------------------------------------------------------------------------

     With respect to risk management, ICEU has modified rules 
relating to its own contribution to CDS default resources,\72\ allowed 
new transaction types,\73\ revised policies and procedures concerning 
end-of-day price discovery,\74\ amended its loss-given default 
framework,\75\ amended its collateral and haircut policy,\76\ modified 
its procyclicality framework,\77\ amended its stress testing 
policy,\78\ amended its liquidity plan,\79\ amended its finance 
procedures,\80\ amended its single name CDS liquidity charge 
methodology,\81\ modified rules relating to its model risk governance 
framework,\82\ revised its back-testing policy,\83\ revised its risk 
policy,\84\ and revised its policies relating to liquidity management; 
\85\
---------------------------------------------------------------------------

    \72\ Release No. 34-81076 (July 5, 2017), 82 FR 32037 (July 11, 
2017).
    \73\ Release No. 34-82890 (Mar. 16, 2018), 83 FR 12630 (Mar. 22, 
2018).
    \74\ See, e.g., Release Nos. 34-84033 (Sept. 5, 2018), 83 FR 
46005 (Sept. 11, 2018); 34-83389 (June 6, 2018), 83 FR 27356 (June 
12, 2018); 34-81031 (June 27, 2017), 82 FR 30918 (July 3, 2017); 34-
80978 (June 20, 2017), 82 FR 28919 (June 26, 2017).
    \75\ See supra note 73.
    \76\ Release No. 34-82659 (Feb. 8, 2018), 83 FR 6660 (Feb. 14, 
2018).
    \77\ Release No. 34-82313 (Dec. 13, 2017), 82 FR 60254 (Dec. 19, 
2017).
    \78\ Release Nos. 34-85236 (Mar. 1, 2019), 84 FR 8348 (Mar. 7, 
2019); 34-83243 (May 15, 2018), 83 FR 23506 (May 21, 2018).
    \79\ Release No. 34-84754 (Dec. 7, 2018), 83 FR 64171 (Dec. 13, 
2018).
    \80\ Release No. 34-84375 (Oct. 5, 2018), 83 FR 51715 (Oct. 12, 
2018).
    \81\ Release No. 34-85776 (May 3, 2019), 84 FR 20454 (May 9, 
2019).
    \82\ See, e.g., Release No. 34-85128 (Feb. 13, 2019), 84 FR 5137 
(Feb. 20, 2019).
    \83\ See, e.g., Release Nos. 34-87360 (Oct. 18, 2019), 84 FR 
57100 (Oct. 24, 2019); 34-85236 (Mar. 1, 2019), 84 FR 8348 (Mar. 7, 
2019).
    \84\ See, e.g., Release Nos. 34-85236 (Mar. 1, 2019), 84 FR 8348 
(Mar. 7, 2019); 34-81680 (Sept. 22, 2017), 82 FR 45339 (Sept. 28, 
2017).
    \85\ Release No. 34-86891 (Sept. 6, 2019), 84 FR 48191 (Sept. 
12, 2019).
---------------------------------------------------------------------------

     With respect to client clearing, ICEU modified its rules 
to permit indirect client clearing arrangements; \86\
---------------------------------------------------------------------------

    \86\ Release No. 34-82422 (Dec. 29, 2017), 83 FR 546 (Jan. 4, 
2018).
---------------------------------------------------------------------------

     With respect to recovery and wind-down plans, both ICC and 
ICEU amended their clearing rules relating to default management, 
recovery, and wind-down; \87\
---------------------------------------------------------------------------

    \87\ See, e.g., Release Nos. 34-86783 (Aug 28, 2019), 84 FR 
46575 (Sept. 4, 2019); 34-86364 (July 12, 2019), 84 FR 34455 (July 
18, 2019); 34-86259 (July 1, 2019), 84 FR 32483 (July 8, 2019); 34-
83651 (July 17, 2018), 83 FR 34891 (July 23, 2018); 34-79750 (Jan. 
6, 2017), 82 FR 3831 (Jan. 12, 2017).
---------------------------------------------------------------------------

     With respect to policies and procedures for default 
management, both ICC and ICEU revised their rules relating to the 
application of default provisions \88\ and revised their auction 
procedures for a defaulting clearing participant's open CDS positions; 
\89\
---------------------------------------------------------------------------

    \88\ See, e.g., Release Nos. 34-86838 (Aug. 30, 2019), 84 FR 
47019 (Sept. 9, 2019); 34-80304 (Mar. 24, 2017), 82 FR 15733 (Mar. 
30, 2017).
    \89\ Release No. 34-87804 (Dec. 19, 2019), 84 FR 71501 (Dec. 27, 
2019).
---------------------------------------------------------------------------

     With respect to recognizing credit events, both ICC and 
ICEU modified their clearing rules to reflect ISDA's Narrowly Tailored 
Credit Event supplement; \90\
---------------------------------------------------------------------------

    \90\ See, e.g., Release Nos. 34-87971 (Jan. 15, 2020), 85 FR 
3724 (Jan. 22, 2020); 34-88013 (Jan. 22, 2020), 85 FR 5058 (Jan. 28, 
2020).
---------------------------------------------------------------------------

     With respect to treasury operations, ICC amended its 
treasury operations policies and procedures; \91\
---------------------------------------------------------------------------

    \91\ See, e.g., Release Nos. 34-87859 (Dec. 26, 2019), 85 FR 157 
(Jan. 2, 2020); 34-84312 (Sept. 28, 2018), 83 FR 50124 (Oct. 4, 
2018); 34-81386 (Aug. 14, 2017), 82 FR 39484 (Aug. 18, 2017).
---------------------------------------------------------------------------

     With respect to clearing membership policy, ICEU 
formalized and added requirements for applications for CDS clearing 
membership; \92\ and
---------------------------------------------------------------------------

    \92\ Release No. 34-86359 (July 11, 2019), 84 FR 34241 (July 17, 
2019).
---------------------------------------------------------------------------

     With respect to operational risk, both ICC and ICEU 
amended their operational risk management frameworks.\93\
---------------------------------------------------------------------------

    \93\ See, e.g., Release Nos. 34-86184 (June 24, 2019), 84 FR 
31132 (June 28, 2019); 34-83071 (Apr. 19, 2018), 83 FR 18108 (Apr. 
25, 2018).

    In addition, the Commission approved LCH SA's registration as a 
clearing agency after publication of the CCA Definition proposing 
release, and since then the Commission has also approved rule changes 
by LCH SA concerning its policies and procedures for risk management, 
including with respect to liquidity risk, margin, and default fund 
management.\94\
---------------------------------------------------------------------------

    \94\ See, e.g., Release Nos. 34-88039 (Jan. 24, 2020), 85 FR 
5489 (Jan. 30, 2020); 34-87881 (Jan. 2, 2020), 85 FR 947 (Jan. 8, 
2020); 34-86376 (July 15, 2019), 84 FR 34955 (July 19, 2019); 34-
83691 (July 24, 2018), 83 FR 36635 (July 30, 2018); 34-82345 (Dec. 
18, 2017), 82 FR 60781 (Dec. 22, 2017); 34-81056 (June 30, 2017), 82 
FR 31364 (July 6, 2017); 34-80849 (June 2, 2017), 82 FR 26721 (June 
8, 2017); 34-80848 (June 2, 2017), 82 FR 26728 (June 8, 2017).
---------------------------------------------------------------------------

    The Commission believes that ICEU's rule changes, LCH SA's 
registration, and LCH SA's subsequent rule changes would not 
substantially affect the preliminary assessment of most of the economic 
effects set forth in the CCA Definition proposing release, except to 
the extent that uniform regulatory requirements among ICEU, LCH SA, and 
ICC may enable clearing members to shift their business from ICEU or 
LCH SA to ICC.\95\ The Commission also believes that the ICC rule 
changes may affect the Commission's preliminary assessment of benefits, 
costs, and the effect on competition, efficiency, and capital formation 
in two ways, as follows. First, to the extent that changes to ICC's 
risk management framework result in changes to ICC's clearing fund 
deposits, margin deposits, and deposits collected in lieu of margin, 
the updated calculations in Part III.C.1.a below include the effects of 
such rule changes in estimating the anticipated benefits for clearing 
members. Second, to the extent that these rule changes improve 
compliance with any aspect of Rule 17Ad-22(e) or the CFTC's comparable 
rules, ICC may have lower costs of complying with the amendments to 
Rule 17Ad-22 than first estimated in 2016.
---------------------------------------------------------------------------

    \95\ See infra Part III.C.1.c.

---------------------------------------------------------------------------

[[Page 28860]]

C. Consideration of Benefits, Costs, and the Effect on Competition, 
Efficiency, and Capital Formation

    As discussed in the CCA Definition proposing release, the aggregate 
economic effects of the amendments to Rule 17Ad-22 arise from two 
sources: (i) The amendments' likely effects on existing registered 
clearing agencies, and (ii) the amendments' likely effects on clearing 
agencies that may register with the Commission in the future. Thus, the 
below discussion considers the benefits, costs, and likely effects on 
efficiency, competition, and capital formation that may arise from 
these two sources separately.\96\ Further, when viewed in isolation, 
the economic effects related to existing registered clearing agencies 
are likely to be low in magnitude but, when taken together with the 
economic effects related to future registrants, could be substantial. 
This is particularly true because the rules subject future registrants 
that are CCPs or CSDs to the enhanced requirements in Rule 17Ad-22(e), 
and these clearing agencies are likely to play critical roles in the 
U.S. clearance and settlement system.
---------------------------------------------------------------------------

    \96\ CCA Definition proposing release, supra note 9, at 70764.
---------------------------------------------------------------------------

1. Economic Effects Related to Registered Clearing Agencies
    The Commission continues to believe that the addition of ICC as a 
covered clearing agency will incrementally extend the systemic benefits 
of risk management first discussed in the CCA Standards adopting 
release and previously explained in the CCA Definition proposing 
release. These benefits consist of improved financial stability,\97\ a 
reduction in the ambiguity associated with holding cleared assets in 
the presence of credit and settlement risk, and a reduction in market 
fragmentation arising from different requirements across regulatory 
regimes.\98\ The Commission also continues to believe that the 
extension of these benefits will likely be incremental and will only 
appear to the extent that the amendments would result in changes to ICC 
policies and procedures because, as explained in the CCA Definition 
proposing release, ICC is regulated as a systemically important 
derivatives clearing organization (``SIDCO'') by the CFTC, and Rule 
17Ad-22(e) is consistent with comparable regulatory provisions adopted 
by the CFTC.\99\ The following sections attempt to estimate particular 
benefits that could accrue to ICC and its members as a result of ICC 
being more likely to qualify as a Qualified CCP (``QCCP'') under the 
amended definitions,\100\ and then they discuss the costs and the 
effect on efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \97\ See id. at 70765; see also CCA Standards adopting release, 
supra note 6, at 70867-80.
    \98\ See CCA Definition proposing release, supra note 9, at 
70765; see also CCA Standards adopting release, supra note 6, at 
70861-62.
    \99\ See CCA Definition proposing release, supra note 9, at 
70765.
    \100\ The BCBS capital framework, as well as the rules adopted 
by the FRB and Office of the Comptroller of the Currency consistent 
with that framework, applies lower risk weights to indirect 
exposures of banks to QCCPs. See BCBS, Capital Requirements for Bank 
Exposures to Central Counterparties (Dec. 2019), https://www.bis.org/basel_framework/chapter/CRE/54.htm?inforce=20191215&export=pdf (``BCBS capital framework''); see 
also Regulatory Capital Rules: Regulatory Capital, Implementation of 
Basel III, Capital Adequacy, Transition Provisions, Prompt 
Corrective Action, Standardized Approach for Risk-Weighted Assets, 
Market Discipline and Disclosure Requirements, Advanced Approaches 
Risk-Based Capital Rule, and Market Risk Capital Rule, 76 FR 62017, 
62099 (Oct. 11, 2013), at 62103.
---------------------------------------------------------------------------

a. Benefits
    As explained in the CCA Definition proposing release, the 
amendments to Rule 17Ad-22 make it more likely that ICC will qualify as 
a QCCP for security-based swap transactions in foreign jurisdictions 
that have adopted the BCBS capital framework's QCCP definition.\101\ In 
particular, ICC's qualification as a QCCP would result in its foreign 
bank clearing members and foreign bank indirect participants facing 
lower capital requirements with respect to cleared security-based swap 
transactions relative to the baseline in which foreign banking 
regulators do not determine ICC to be a QCCP.\102\
---------------------------------------------------------------------------

    \101\ See CCA Definition proposing release, supra note 9, at 
70765.
    \102\ The benefits to bank clearing members are contingent upon 
regulators in other jurisdictions taking action to recognize ICC's 
QCCP status following adoption of the amended definition of 
``covered clearing agency.''
---------------------------------------------------------------------------

    As explained in the CCA Definition proposing release, the BCBS 
capital framework affects capital requirements for bank exposures to 
CCPs in two important ways: (i) Generally, trade exposures held against 
a QCCP are assigned a risk weight of two percent rather than risk 
weights ranging from 20 to 100 percent depending on counterparty credit 
risk; and (ii) the risk weight applied to default fund contributions to 
a QCCP are generally lower than those applied to default fund 
contributions to a non-QCCP.\103\ In the proposing release, the 
Commission used a method permitted under the interim BCBS capital 
requirements to estimate an upper bound for the benefits to clearing 
members of lower capital requirements for exposures to QCCPs.\104\ 
Since the CCA Definition proposing release, the BCBS capital framework 
updated the capital requirements for bank exposures to CCPs. In 
contrast to the interim approach that was in force until January 1, 
2017, the current requirements permit only one method for computing 
capital requirements for default fund contributions to QCCPs.\105\ 
Under the current requirements, a bank clearing member's default fund 
contribution has a capital requirement that is the greater of either 
(i) the hypothetical capital requirement of the CCP reflecting all of 
its counterparty credit risk exposures multiplied by the proportion of 
the bank clearing member's contribution to the CCP's default fund or 
(ii) eight percent multiplied by two percent multiplied by the clearing 
member bank's default fund contribution.\106\ Although the change in 
capital requirements affects the magnitude of benefits that bank 
clearing members might experience as a result of QCCP status, the 
Commission continues to expect that bank clearing members subject to 
the BCBS capital framework may benefit from an improved capital 
position and lowering funding costs relative to the bank clearing 
members of non-qualifying CCPs.
---------------------------------------------------------------------------

    \103\ See CCA Definition proposing release, supra note 9, at 
70765.
    \104\ See BCBS, Capital Requirements for Bank Exposures to 
Central Counterparties (July 2012), https://www.bis.org/publ/bcbs227.pdf.
    \105\ See CCA Definition proposing release, supra note 9, at 
70765, for a discussion of the 2014 methods for calculating capital 
requirements for bank exposures to CCPs; see also supra note 104 and 
accompanying text.
    \106\ See BCBS capital framework, supra note 100; see also supra 
note 101.
---------------------------------------------------------------------------

    As set forth in the CCA Definition proposing release, the 
Commission has attempted to quantify the benefits of achieving QCCP 
status using publicly available information with regard to ICC.\107\ To 
estimate the upper bound for the potential benefits accruing to bank 
clearing members at ICC as a result of its QCCP status, the Commission 
identified the sample of 15 bank holding companies and foreign 
equivalents of bank holding companies that own clearing members and, 
for each, collected information about total assets, risk-weighted 
assets, net income, and tier-one capital ratio at the holding company 
level for 2019.\108\ The

[[Page 28861]]

Commission then allocated trade exposures and default fund exposures 
across the sample of bank clearing members based on the level of risk-
weighted assets.\109\ The Commission measured the impact on risk-
weighted assets for foreign bank clearing members under two different 
capital treatment regimes. In the first regime, ICC does not obtain 
QCCP status, and bank clearing members are subject to a 100 percent 
risk weight for trade exposures and a 1250 percent risk weight for 
default fund exposures. In the second regime, ICC obtains QCCP status, 
and bank clearing members can apply a two percent risk weight to trade 
exposures and the greater of either (i) ICC's hypothetical capital 
requirement multiplied by the proportion of the bank clearing member's 
contribution to the CCP's default fund, or (ii) 0.16 percent of the 
bank clearing member's default fund contribution.\110\ If ICC 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. 
Using data through December 2019, the Commission now estimates that the 
benefits of lower capital requirements against exposures to QCCPs as a 
result of the amendments to Rule 17Ad-22 have an upper bound of $17.8 
million per year (up from the estimate of $12.9 million provided in the 
CCA Definition proposing release, which was based on data through 
August 2016), or approximately 0.01 percent of the total net income 
reported by the bank holding companies and foreign equivalent of bank 
holding companies that own ICC clearing members in 2019.\111\
---------------------------------------------------------------------------

    \107\ See CCA Definition proposing release, supra note 9, at 
70765-66.
    \108\ The Commission used the set of entities it identified as 
banks on ICC's member list available at https://www.theice.com/clear-credit/participants. For U.S. bank holding companies, 2019 
total assets, risk weighted assets, net income, and tier-one capital 
ratios were collected from Y-9C reports from the National 
Information Center, available at https://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx. For the foreign equivalent of bank holding 
companies, Commission staff obtained corresponding data from 
financial statements and supplementary financial materials posted to 
company websites. Where necessary, values were converted back to 
U.S. dollars at September 30, 2019 or December 31, 2019 (depending 
on the most recently reported quarterly financial results) exchange 
rates obtained from the Federal Reserve at http://www.federalreserve.gov/releases/h10/hist/.
    \109\ For example, one bank in the sample, with 8.52 percent of 
total risk-weighted assets, was assigned 8.52 percent of the total 
trade and default fund exposures while another bank in the sample, 
with 3.01 percent of total risk weighted assets, was assigned 3.01 
percent of these exposures. Because trade exposures of ICC members 
against ICC are nonpublic, the Commission used the balance of ICC 
margin deposits in house accounts held by ICC, $11.1 billion, as a 
proxy for trade exposures. ICC's clearing participant guaranty fund 
deposits as of September 30, 2019 were valued at $2.28 billion. See 
ICC 2019 Q3 Quantitative Disclosure, https://www.theice.com/clear-credit/regulation#quantitative-disclosures.
    \110\ See BCBS capital framework, supra note 100. ICC's 
hypothetical capital requirement (``KCCP'') as of September 30, 2019 
was $126.38 million. See supra note 109 and accompanying text 
(discussing ICC's guaranty fund deposits).
    \111\ The Commission quantified the benefits related to ICC's 
attaining QCCP status for ICC's bank clearing members and indirect 
participants with respect to all reported exposures. Over the period 
of March 2009 through December 2019, the gross notional value of 
security-based swap transactions cleared by ICE Clear Credit 
comprised 9.6 percent of the total value of all CDS transactions 
cleared (see https://www.theice.com/clear-credit). Based on this 
information, the Commission arrived at the benefits to ICC's bank 
clearing members and bank indirect participants from ICC's attaining 
QCCP status with respect to security-based swap transactions by 
multiplying the total benefits by 0.096.
---------------------------------------------------------------------------

    As previously explained in the CCA Definition proposing release, 
the Commission's analysis here is limited in several respects and 
relies on several assumptions about the nature of trade exposures to 
ICC,\112\ as discussed further below. First, the Commission is using 
the balance of ICC's margin account and default fund as proxies for 
trade exposures and guaranty fund deposits, respectively. These likely 
include deposits both by bank clearing members, who would directly 
experience lower capital requirements under the BCBS capital framework, 
and non-bank subsidiaries of bank holding companies and foreign 
equivalents of bank holding companies, who would experience effects 
through the lower capital requirements of their parent bank holding 
companies. Furthermore, the guaranty fund deposits may include deposits 
by non-bank client clearing participants. For the purposes of this 
analysis, the Commission continues to assume, to establish an upper 
bound for the benefits to market participants that are associated with 
QCCP status for ICC under the adopted rules, that ICC's guaranty fund 
accounts are attributable only to bank clearing members. Additionally, 
the Commission continues to assume an extreme case where, in the 
absence of QCCP status, trade exposures against a CCP would be assigned 
a 100 percent risk weight, causing the largest possible shock to risk-
weighted assets for affected banks.
---------------------------------------------------------------------------

    \112\ See CCA Definition proposing release, supra note 9, at 
70766-77.
---------------------------------------------------------------------------

    Second, lower capital requirements on exposures to ICC would 
produce effects in the real economy only under certain conditions. For 
example, agency problems, taxes, or other capital market imperfections 
could result in banks targeting a particular capital structure. 
Additionally, the BCBS capital framework must constrain bank clearing 
members such that these banks cannot either use capital to invest in 
assets whose returns exceed the banks' cost of capital or return 
capital to shareholders because these actions would decrease their 
capital ratios below regulatory minimums. Using publicly available 
data, however, it remains unfeasible to determine to what extent the 
finalized BCBS capital requirements will constrain bank clearing 
members. Instead, the Commission continues to assume that all bank 
clearing members of ICC act as if they are at their minimum allowed 
tier-one capital ratios before accounting for exposures to CCPs.\113\
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    \113\ The Commission notes that, at present, no bank in its 
sample of bank clearing members of ICC has only the minimum amount 
of capital required by the BCBS capital framework. For U.S. bank 
holding companies, tier-one capital ratios were collected from Y-9C 
reports from the National Information Center, available at https://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx. For the foreign 
equivalent of bank holding companies, Commission staff obtained 
corresponding data from financial statements and supplementary 
financial materials posted to company websites. The Commission used 
data from 2019 for its sample of clearing members. This sample's 
minimum tier-one capital ratio is 12.2 percent, and the minimum 
amount by which a clearing member exceeds its tier-one capital 
requirement is two percent.
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    Third, the Commission continues to assume that banks choose to 
adjust to new capital requirements by deleveraging. In particular, the 
Commission has 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 BCBS capital framework.\114\ 
The Commission continues to measure the ongoing costs to each foreign 
bank clearing member by multiplying the implied change in total assets 
by each bank's return on assets, using up to 12 years of annual 
financial statement data.\115\
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    \114\ Each bank, bank holding company, and foreign equivalent of 
a bank holding company faces the same six percent base tier-one 
capital ratio requirement and 2.5 percent capital conservation 
buffer. Additionally, each bank holding company has a buffer for 
being a globally or domestically systemically important bank, 
ranging from one percent to 3.5 percent. Lastly, some jurisdictions 
have instituted countercyclical capital buffers.
    \115\ This 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.
---------------------------------------------------------------------------

    Fourth, the BCBS capital framework yields additional benefits for 
QCCPs that the Commission remains unable to quantify due to a lack of 
data concerning client clearing arrangements by banks. For client 
exposures to clearing members, the BCBS capital framework allows 
participants to reflect the shorter close-out period of cleared 
transactions in their capitalized exposures. The BCBS capital 
framework's treatment of exposures to CCPs also applies to client 
exposures to CCPs through clearing members. This may increase the 
likelihood that bank

[[Page 28862]]

clients of bank clearing members subject to the BCBS capital framework 
share some of the benefits of QCCP status.
    Fifth, the BCBS capital framework may impact competition and 
concentration. For example, while the amendments to Rule 17Ad-22 may 
extend lower capital requirements to certain bank clearing members, the 
costs of overall compliance with Rule 17Ad-22 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 a ``crowding out'' of non-bank members of QCCPs, including any 
such subsidiaries of bank holding companies, who may not experience any 
or all of the benefits with respect to the BCBS capital framework. This 
may result in an unintended consequence of an increased concentration 
of clearing activity among ICC's bank clearing members. This increased 
concentration could mean that each of the remaining clearing members 
becomes more important from the standpoint of systemic risk 
transmission since, for example, clearing agencies would have fewer 
non-defaulting members to take on a defaulting member's portfolio, and 
clearing agencies that rely on clearing members to participate in 
default auctions would hold auctions with fewer participants.
    Sixth, the Commission continues to believe that the benefits of ICC 
attaining QCCP status may depend on whether foreign bank clearing 
members of ICC are currently able to shift their clearing business from 
ICC to alternative clearing agencies that serve similar markets. In 
this regard, the Commission notes that ICC has several overlapping 
members with ICEU and LCH SA's CDSClear. ICEU and CDSClear also clear 
many of the same contracts that ICC does.\116\ ICEU clears all of the 
European corporate single name CDS and Western European sovereign 
single name CDS. Additionally, compared to ICC's 250 North American 
corporate single name reference entities, LCH SA clears contracts on 
153 North American entities, with significant overlap. Thus, in a 
situation where ICEU and LCH SA are QCCPs and ICC is not, common 
foreign bank clearing members of the three agencies may obtain many of 
the same benefits of ICC having QCCP status by moving their clearing 
business to either ICEU or LCH SA's CDSClear. However, under such a 
scenario, the full range of benefits stemming from ICC having QCCP 
status would not be fully realized because: (i) Some clearing members 
of ICC are not clearing members of either ICEU or LCH SA's CDSClear; 
(ii) some participants that have a client clearing agreement with ICC 
may not have a client clearing agreement with ICEU; and (iii) ICC 
clears contracts that neither ICEU or LCH SA's CDSClear does. Thus, 
even common bank members may not be able to move their entire clearing 
business to another CCP.
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    \116\ ICEU clears all of the European corporate security-based 
swaps and Western European sovereign security-based swaps that ICC 
does. CDSClear only clears corporate security-based swaps that 
reference constituents of the index products it accepts. The 153 
unique North American reference entities have a substantial overlap 
with the North American corporate security-based swaps that ICC 
clears. The Commission used the description of ICEU cleared 
contracts available at https://www.theice.com/clear-europe/cds and 
CDSClear cleared contracts available at https://www.lch.com/services/cdsclear/what-we-clear.
---------------------------------------------------------------------------

b. Costs
    As previously discussed, ICC is a SIDCO regulated by the CFTC under 
a regime that is consistent and comparable with Rule 17Ad-22(e). In 
light of the similarity among the two regulatory frameworks, the 
Commission continues to believe that the economic costs ICC will bear 
as a result of the amendments to Rule 17Ad-22 will be related to the 
establishment, implementation, and maintenance of certain policies and 
procedures under Rule 17Ad-22(e). The Commission now estimates that 
these costs will at most include one-time costs of approximately 
$752,673 \117\ and annual costs of approximately $158,594.\118\ As 
noted above in Part III.B, to the extent that rule changes implemented 
by ICC since 2016 facilitate compliance with Rule 17Ad-22(e), the 
actual cost to ICC may be lower.
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    \117\ Calculated as ((Assistant General Counsel for 440 hours at 
$478 per hour) + (Chief Compliance Officer for 146 hours at $544 per 
hour) + (Chief Financial Officer for 50 hours at $1,111 per hour) + 
(Compliance Attorney for 377 hours at $374 per hour) + (Computer 
Operations Department Manager for 344 hours at $452 per hour) + 
(Financial Analyst for 70 hours at $281 per hour) + (Senior Business 
Analyst for 85 hours at $281 per hour) + (Senior Programmer for 75 
hours at $340 dollars per hour) + (Senior Risk Management Specialist 
for 114 hours at $367 per hour)) = $752,673. These dollar amounts 
have been updated since the CCA Definition proposing release to 
account for inflation since 2016.
    To monetize these costs and those set forth below, Commission 
staff used data from two SIFMA publications, Management and 
Professional Earnings in the Security Industry--2013, and Office 
Salaries in the Securities Industry--2013, modified to account for 
an 1,800-hour work year and multiplied by 5.35 (professionals) or 
2.93 (office) to account for bonuses, firm size, employee benefits 
and overhead. Inflation adjustments use data published by the Bureau 
of Labor Statistics.
    Commission staff separately estimated an hourly rate for a chief 
financial officer, using the website www.salary.com, which reports 
median salaries of $378,564, and a Grant Thornton LLP 2019 survey, 
which estimates that Russell 2000 financial services chief financial 
officers receive a median annual salary of $368,815. Using an 
approximate midpoint of these two estimates of $373,690 per year, 
and dividing by an 1,800-hour work year and 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 $1,111 
per hour.
    \118\ Calculated as ((Administrative Assistant for 20 hours at 
$82 per hour) + (Compliance Attorney for 279 hours at $374 per hour) 
+ (Computer Operations Department Manager for 12 hours at $452 per 
hour) + (Risk Management Specialist for 183 hours at $204 per hour) 
+ (Senior Business Analyst for 22 hours at $281 per hour) + (Senior 
Risk Management Specialist for 10 hours at $367 per hour)) = 
$158,594 per year.
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c. Effects on Efficiency, Competition, and Capital Formation
    As previously discussed, the amendments to Rule 17Ad-22 do not 
alter the status of existing covered clearing agencies.\119\ The 
Commission continues to believe that the amendments will not change the 
behavior of market participants associated with these entities and will 
therefore not generate any economic benefits or costs for these 
entities. Further, even though the amendments do not alter the status 
of ICEU or LCH SA, the Commission continues to believe that the 
amendments are likely to generate economic effects for these entities 
because ICC clears many of the same security-based swap transactions 
that are cleared by ICEU and LCH SA. Because the amendments are likely 
to result in uniform regulatory requirements for similar risks at these 
clearing agencies, they could potentially cause business to shift from 
ICEU or LCH SA to ICC. This could translate into a loss of economies of 
scale for ICEU or LCH SA which, in turn, would result in higher 
clearing fees and higher transaction costs in cleared products. 
Furthermore, it may reduce the benefits of netting and portfolio 
margining, which could result in higher margins and consequently 
transaction costs for clearing participants.
---------------------------------------------------------------------------

    \119\ See supra note 21 (discussing the six CCPs and one CSD 
that, prior to the amendments, were already covered clearing 
agencies subject to Rule 17Ad-22(e)).
---------------------------------------------------------------------------

2. Economic Effects Related to Future Registrants
    In addition to the effects imposed on the existing set of 
registered clearing agencies, the amendments to Rule 17Ad-22 will 
affect the regulation of clearing agencies that register with the 
Commission in the future. As previously discussed in the CCA Definition 
proposing release, any clearing agency

[[Page 28863]]

that provides the services of a CCP or CSD will now be a covered 
clearing agency.\120\ This means that covered clearing agencies will no 
longer be limited to those that have been designated by FSOC or that 
are involved in activities with a complex risk profile. Nor will 
clearing agencies be excluded when the CFTC is the supervisory agency 
under the Clearing Supervision Act.
---------------------------------------------------------------------------

    \120\ See CCA Definition proposing release, supra note 9, at 
70767-68.
---------------------------------------------------------------------------

    Because the Commission continues to be unable to predict the number 
of clearing agencies likely to register in the future, much less the 
number that are likely to be CCPs or CSDs, it continues to be unable to 
quantify the aggregate economic effects that could flow to future 
registrants from the amendments to Rule 17Ad-22.\121\ The Commission 
continues to believe that the amendments would generally increase the 
likelihood that Rule 17Ad-22(e) would apply to a new registrant; in 
recent years, however, the Commission has received, on average, fewer 
than one application for registration as a clearing agency per 
year.\122\ Where possible, the Commission has attempted to estimate the 
benefits and costs it would expect the amendments to Rule 17Ad-22 to 
have on a single new registrant.
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    \121\ The comments received did not provide any additional 
information regarding the likelihood of new registrant clearing 
agencies.
    \122\ The Commission notes that, for new registrants seeking to 
provide CCP or CSD services, the amendments ensure that Rule 17Ad-
22(e) would apply to such registrants, but clearing agencies can 
perform other functions as well.
---------------------------------------------------------------------------

a. Benefits
    As discussed in the CCA Definition proposing release, the 
Commission continues to believe that the amendments to Rule 17Ad-22 may 
reduce the costs that potential new providers of clearance and 
settlement services expect to incur in determining whether they would 
need to meet the enhanced requirements of covered clearing 
agencies.\123\ Under the amendments, any registered clearing agency 
that expects to provide the services of a CCP or CSD would also expect 
to be subject to Rule 17Ad-22(e) without requiring additional 
information about FSOC designation or a Commission determination that 
its activities have a more complex risk profile. To the extent that 
this reduces the need for potential entrants that engage in those 
services to assess whether they are likely to be regulated as covered 
clearing agencies, the amendments could reduce the costs associated 
with registration. The Commission continues to believe that a 
reasonable estimate of cost reduction a single registrant is likely to 
experience is $4,208, attributable to reduced legal expenses associated 
with determining whether or not the registrant will also be regulated 
as a covered clearing agency.\124\
---------------------------------------------------------------------------

    \123\ See CCA Definition proposing release, supra note 9, at 
70768.
    \124\ The Commission calculated this reduction in costs as 
((Assistant General Counsel for 2 hours at $478 per hour) + 
(Compliance Attorney for 3 hours at $374 per hour) + (Outside 
Counsel for 5 hours at $426 per hour = $4,208. These dollar amounts 
have been updated since the CCA Definition proposing release to 
account for inflation since 2016.
---------------------------------------------------------------------------

    In the absence of the amendments to Rule 17Ad-22, and without 
designation by FSOC or engagement in activities with a more complex 
risk profile, a registered clearing agency would instead be subject to 
Rule 17Ad-22(d). The amendments therefore increase the likelihood that 
new entrants into the market for clearance and settlement services 
would be subject to Rule 17Ad-22(e). Generally, to the extent that Rule 
17Ad-22(e) imposes higher risk management standards on potential 
entrant CCPs and CSDs, the Commission believes the amendments to Rule 
17Ad-22 may improve financial stability. As previously discussed, some 
of this increased stability may come as a result of lower activity, as 
Rule 17Ad-22(e) causes participants of these new entrants to 
internalize a greater proportion of the costs that their activity 
imposes on the financial system, reducing the costs of default when a 
default event occurs. Increased stability may also come as a result of 
the higher risk management standards at potential entrants, effectively 
lowering the probability that either the entrant clearing agencies or 
their members default.\125\
---------------------------------------------------------------------------

    \125\ See CCA Definition proposing release, supra note 9, at 
70768; CCA Standards adopting release, supra note 6, at 70881.
---------------------------------------------------------------------------

b. Costs
    As previously discussed, in the absence of these amendments to Rule 
17Ad-22, a registered clearing agency that has not been designated by 
FSOC or subject to a Commission determination would be subject to Rule 
17Ad-22(d) rather than Rule 17Ad-22(e). To the extent that the 
requirements under Rule 17Ad-22(e) impose additional costs on potential 
entrants who would otherwise have been regulated under Rule 17Ad-22(d), 
the Commission continues to believe that the amendments may impose 
additional costs on such potential entrants.
    In the CCA Definition proposing release and the CCA Standards 
adopting release,\126\ the Commission estimated specific costs that 
registered clearing agencies would bear related to holding sufficient 
qualifying liquid resources under 17 CFR 240.17Ad-22(e)(7) (``Rule 
17Ad-22(e)(7)''). Because the organizational and governance structures 
of covered clearing agencies vary, as do the composition of their 
members and the products they clear, the Commission remains unable to 
provide precise estimates of the costs associated with these 
requirements that potential entrants may bear as a result of the 
amendments to Rule 17Ad-22. However if a potential entrant resembles 
the average covered clearing agency, the Commission continues to expect 
that compliance with Rule 17Ad-22(e)(7) would cost the entrant between 
$24 million and $40 million per year.\127\ In addition, the Commission 
continues to estimate the startup compliance costs associated with 
policies and procedures for a potential entrant that is not a CSD to be 
substantially similar to the costs estimated in the CCA Standards 
adopting release: $691,309, after adjusting for inflation.\128\ 
Furthermore, 17 CFR 240.17Ad-22(e)(3), (4), (6), (7), (15), and (21) 
each include elements of review by either a covered clearing agency's 
board or its management on an ongoing basis. The Commission continues 
to estimate the cost of ongoing review for these rules at approximately 
$40,000 per year for a

[[Page 28864]]

potential entrant, as estimated in the CCA Standards adopting 
release.\129\
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    \126\ See CCA Definition proposing release, supra note 9, at 
70768; CCA Standards adopting release, supra note 6, at 70870-73.
    \127\ To arrive at this range, the Commission divided the 
maximum and minimum costs associated with compliance estimated in 
the CCA Standards adopting release by five covered clearing 
agencies. See CCA Definition proposing release, supra note 9, at 
70768.
    \128\ CCA Standards adopting release, supra note 6, at 70881 & 
n.757. The 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 
$478 per hour) + (Compliance Attorney for 365 hours at $374 per 
hour) + (Administrative Assistant for 2 hours at $82 per hour) + 
(Computer Operations Department Manager for 300 hours at $452 per 
hour) + (Senior Business Analyst for 85 hours at $281 per hour) + 
(Senior Risk Management Specialist for 114 hours at $367 per hour) + 
(Chief Compliance Office for 102 hours at $544 per hour) + (Senior 
Programmer for 53 hours at $340 per hour) + (Chief Financial Officer 
for 50 hours at $1,111 per hour) + (Financial Analyst for 70 hours 
at $281 per hour)) = $691,309. These dollar amounts have been 
updated since the CCA Definition proposing release to account for 
inflation since 2016. Because only 17 CFR 240.17Ad-22(e)(11) applies 
solely to CSDs and many of the other parts of Rule 17Ad-22(e) do not 
apply to CSDs, the Commission believes the initial cost of an 
entrant that is a CSD would be lower.
    \129\ CCA Standards adopting release, supra note 6, at 70880 & 
n.755. To estimate the cost of board review for these rules, the 
Commission has used a report by Bloomberg stating that the average 
director works 250 hours and earns $251,000, resulting in an 
estimated $1,000 per hour for board review. See Jeff Green & Hideki 
Suzuki, Board Pay Hits Record $251,000 for 250 Hours, Bloomberg, May 
30, 2013, https://www.bloomberg.com/news/articles/2013-05-30/board-director-pay-hits-record-251-000-for-250-hours. As a proxy for the 
cost of management review, the Commission is estimating $461 per 
hour, based upon the Director of Compliance cost data from SIFMA. 
The Commission estimates the total cost of review for each clearing 
agency as follows: ((Board Review for 32 hours at $1,000 per hour) + 
(Management Review for 16 hours at $500 per hour)) = $40,000. The 
estimate for management review has been updated since the CCA 
Definition proposing release to account for inflation since 2016.
---------------------------------------------------------------------------

c. Effects on Efficiency, Competition, and Capital Formation
    The Commission continues to believe that substantial direct effects 
on efficiency and capital formation are unlikely to flow from the 
impact of the amendments to Rule 17Ad-22 on potential entrants; 
however, potential effects on competition may arise from how the 
amendments affect the regulatory treatment of registered clearing 
agencies and the barriers to entry into the market for services 
provided by CCPs and CSDs.
    As discussed in the CCA Definition proposing release, the 
amendments are likely to result in more consistent regulatory treatment 
of firms that provide similar services to the securities markets.\130\ 
By imposing Rule 17Ad-22(e) on all CCPs and CSDs, regardless of FSOC 
designation or their engagement in activities with a more complex risk 
profile, the amendments mitigate the risk that registered clearing 
agencies with similar businesses are subject to substantially different 
regulatory regimes. The Commission continues to believe that more 
uniform treatment may provide a more level playing field. By contrast, 
in the absence of the amendments to Rule 17Ad-22, an entrant CCP or CSD 
that did not engage in activity with a more complex risk profile could 
initially receive a competitive advantage by being regulated under Rule 
17Ad-22(d) until becoming a designated clearing agency and 
internalizing less of the risk it poses to the financial system.
---------------------------------------------------------------------------

    \130\ See CCA Definition proposing release, supra note 9, at 
70768.
---------------------------------------------------------------------------

    On the other hand, as previously discussed in the CCA Standards 
adopting release and the CCA Definition proposing release, costs 
resulting from regulation under Rule 17Ad-22(e) as a result of the 
amendments may have the effect of raising already high barriers to 
entry.\131\ 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.\132\
---------------------------------------------------------------------------

    \131\ CCA Definition proposing release, supra note 9, at 70769; 
see also CCA Standards adopting release, supra note 6, at 70864-66.
    \132\ See, e.g., Clearing Agency Standards adopting release, 
supra note 5, at 66263 n.481.
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3. Alternatives to the Amended Definition
    In the CCA Definition proposing release, the Commission proposed 
including registered clearing agencies that provided the services of a 
securities settlement system in the definition of ``covered clearing 
agency.'' Among the alternatives discussed in the proposing release was 
a definition that excluded securities settlement services from the 
definition of a covered clearing agency,\133\ which the Commission is 
adopting in this document for the reasons set forth above in Parts II.A 
and D.
---------------------------------------------------------------------------

    \133\ See CCA Definition proposing release, supra note 9, at 
70769.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain 
requirements on federal agencies in connection with the conducting or 
sponsoring of any ``collection of information.'' \134\ 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. Further, 44 U.S.C. 3507(a) provides that, before adopting or 
revising a collection of information requirement, an agency must, among 
other things, publish 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 (i) a title for the collection of 
information; (ii) a summary of the collection of information; (iii) a 
brief description of the need for the information and the proposed use 
of the information; (iv) a description of the likely respondents and 
proposed frequency of response to the collection of information; (v) an 
estimate of the paperwork burden that shall result from the collection 
of information; and (vi) notice that comments may be submitted to the 
agency and director of OMB.\135\
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    \134\ See 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
    \135\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR 
1320.5(a)(1)(iv).
---------------------------------------------------------------------------

    Certain provisions of Rule 17Ad-22(e) impose collection of 
information requirements under the PRA. The Commission submitted these 
collections of information to the OMB for review in accordance with 44 
U.S.C. 3507 and 5 CFR 1320.11. Because the Commission is revising the 
respondents under Rule 17Ad-22(e) to account for amended Rule 17Ad-
22(a)(5), the Commission will use the same title and control number: 
``Clearing Agency Standards for Operation and Governance,'' OMB Control 
No. 3235-0695.
    The Commission provided notice of the PRA estimates in the CCA 
Definition proposing release and received no comments in response. The 
Commission continues to believe that the PRA estimates set forth in the 
CCA Definition proposing release are correct, except where changes are 
noted below.

A. Summary of Collection of Information and Use of Information \136\
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    \136\ The Commission notes that the policies and procedures 
required by Rule 17Ad-22(e) would also be used by the Commission as 
part of its ongoing efforts to monitor and enforce compliance with 
the federal securities laws through, among other things, 
examinations and inspections.
---------------------------------------------------------------------------

    As described above, the Commission is adopting amendments to three 
definitions in Rules 17Ad-22(a) and is not altering any of the 
requirements in Rule 17Ad-22(e).\137\ Accordingly, the Collection of 
Information and Use of Information for Rule 17Ad-22(e) previously set 
forth in the CCA Standards adopting release and the CCA Definition 
proposing release remain unchanged.\138\
---------------------------------------------------------------------------

    \137\ See supra Parts I and II.
    \138\ CCA Standards adopting release, supra note 6, at 70881-90; 
CCA Definition proposing release, supra note 9, at 70769-83.
---------------------------------------------------------------------------

B. Respondent Clearing Agencies

    The requirements in Rule 17Ad-22(e) impose a PRA burden on covered 
clearing agencies. Under the prior definition of ``covered clearing 
agency'' adopted in 2016, Rule 17Ad-22(e) applied to five registered 
clearing agencies, including four registered clearing agencies that 
provide CCP services and one registered clearing agency that provides 
CSD services, and the Commission estimated that two additional entities 
might seek to register with the Commission. Accordingly, the Commission 
estimated that the majority of the requirements under Rule 17Ad-22(e) 
would have seven respondents, of which (i) six would be CCPs and one 
would be a CSD, and (ii) two would be

[[Page 28865]]

security-based swap clearing agencies. The Commission further clarified 
that 17 CFR 240.17Ad-22(e)(6) (``Rule 17Ad-22(e)(6)'') would only have 
six respondents because it only applies to CCPs, 17 CFR 240.17Ad-
22(e)(11) (``Rule 17Ad-22(e)(11)'') would only have one respondent 
because it only applies to CSDs, and 17 CFR 240.17Ad-22(e)(14) (``Rule 
17Ad-22(e)(14)'') would only have two respondents because it only 
applies to security-based swap clearing agencies.
    Under the amended definition of ``covered clearing agency'' adopted 
in this document, the Commission estimates that Rule 17Ad-22(e) now 
applies to seven registered clearing agencies, including six registered 
clearing agencies that provide CCP services and one registered clearing 
agency that provides CSD services.\139\ The Commission continues to 
believe that one additional entity might seek to register with the 
Commission in the next three years.\140\ Accordingly, the Commission 
estimates that a majority of the requirements under Rule 17Ad-22(e) 
have eight respondents, of which (i) seven are CCPs and one is a CSD, 
and (ii) three are security-based swap clearing agencies. The 
Commission also notes that Rule 17Ad-22(e)(6) now has seven respondents 
because it applies to CCPs, Rule 17Ad-22(e)(11) continues to have one 
respondent because it only applies to CSDs, and Rule 17Ad-22(e)(14) now 
has three respondents because it only applies to security-based swap 
clearing agencies.
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    \139\ The additional respondent clearing agency subject to Rule 
17Ad-22(e) under the amended definition of ``covered clearing 
agency'' was a registered clearing agency subject to Rule 17Ad-
22(d).
    \140\ In 2016, the Commission registered a new security-based 
swap clearing agency that was not previously a registered clearing 
agency.
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    The PRA analysis for seven of the eight respondents appears in the 
CCA Standards adopting release. Below, the Commission provides a PRA 
analysis for the one additional respondent subject to Rule 17Ad-22(e) 
under the amended definition of ``covered clearing agency,'' thereby 
reflecting the incremental annual reporting and recordkeeping burdens 
resulting from the amended definition. Because the one remaining 
respondent provides CCP services and does not provide CSD services, the 
analysis below does not include Rule 17Ad-22(e)(11).\141\
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    \141\ In addition, in the CCA Definition proposing release, the 
Commission included 17 CFR 240.17Ad-22(c)(1) (``Rule 17Ad-
22(c)(1)'') in the PRA discussion. Because the number of respondents 
for Rule 17Ad-22(c)(1) is unchanged, the analysis below does not 
include Rule 17Ad-22(c)(1).
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C. Total Annual Reporting and Recordkeeping Burdens

    The amendments adopted in this document increase by one the 
estimated number of respondent clearing agencies for some aspects of 
Rule 17Ad-22(e), as previously discussed. The amendments do not affect 
the Commission's rationales and estimates for the annual reporting and 
recordkeeping burdens under Rule 17Ad-22(e) as set forth in the CCA 
Standards adopting release.\142\ Below, the Commission therefore 
summarizes the initial and annual burden estimates for each rule that 
the Commission expects will impose a burden on a new respondent 
clearing agency subject to Rule 17Ad-22(e) under the amended definition 
of ``covered clearing agency'' and then provides the corresponding 
increase in the total burden estimate that results under Rule 17Ad-
22(e).
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    \142\ See CCA Standards adopting release, supra note 6, at 
70891-99.
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1. Initial and Annual Burden Estimates
    For 17 CFR 240.17Ad-22(e)(1), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of eight 
hours and an annual burden of three hours.\143\
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    \143\ These figures were calculated as follows: Assistant 
General Counsel for 2 hours + Compliance Attorney for 6 hours = 8 
hours of initial burden; Compliance Attorney for 3 hours = 3 hours 
of annual burden.
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    For 17 CFR 240.17Ad-22(e)(2), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 25 hours 
and an annual burden of five hours.\144\
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    \144\ These figures were calculated as follows: Assistant 
General Counsel for 14 hours + Compliance Attorney for 11 hours = 25 
hours of initial burden; Compliance Attorney for 5 hours = 5 hours 
of annual burden.
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    For 17 CFR 240.17Ad-22(e)(3), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 57 hours 
and an annual burden of 49 hours.\145\
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    \145\ These figures were 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 of initial burden; Compliance 
Attorney for 8 hours + Administrative Assistant for 3 hours + Senior 
Business Analyst for 5 hours + Risk Management Specialist for 33 
hours = 49 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(4), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 219 hours 
and an annual burden of 62 hours.\146\
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    \146\ These figures were calculated as follows: Assistant 
General Counsel for 74 hours + Compliance Attorney for 45 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 = 219 hours of initial burden; 
Compliance Attorney for 26 hours + Administrative Assistant for 3 
hours + Senior Business Analyst for 3 hours + Risk Management 
Specialist for 30 hours = 62 hours of annual burden.
    The CCA Definition proposing release incorrectly stated the 
calculations for the initial burden (as 200 hours) and annual burden 
(as 60 hours). These estimates have been corrected for this release 
and reflect the PRA estimates that the Commission provided to OMB 
for this rulemaking.
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    For 17 CFR 240.17Ad-22(e)(5), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 42 hours 
and an annual burden of 36 hours.\147\
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    \147\ These figures were 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 of initial burden; Compliance 
Attorney for 6 hours + Risk Management Specialist for 30 hours = 36 
hours of annual burden.
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    For Rule 17Ad-22(e)(6), the Commission continues to estimate that a 
respondent clearing agency incurs an initial burden of 180 hours and an 
annual burden of 60 hours.\148\
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    \148\ These figures were 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 of initial burden; 
Compliance Attorney for 24 hours + Administrative Assistant for 3 
hours + Senior Business Analyst for 3 hours + Risk Management 
Specialist for 30 hours = 60 hours of annual burden.
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    For Rule 17Ad-22(e)(7), the Commission continues to estimate that a 
respondent clearing agency incurs an initial burden of 330 hours and an 
annual burden of 128 hours.\149\
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    \149\ These figures were 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 of initial burden; 
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 of annual burden.
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    For 17 CFR 240.17Ad-22(e)(8), (9), (10), and (12), the Commission 
continues to estimate, for each rule, that a respondent clearing agency 
incurs an initial burden of 12 hours and an annual burden of five 
hours.\150\
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    \150\ These figures were 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 of initial burden; Compliance Attorney for 5 
hours = 5 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(13), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 41 hours 
and an annual burden of seven hours.\151\
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    \151\ These figures were calculated as follows: Assistant 
General Counsel for 6 hours + Compliance Attorney for 11 hours + 
Senior Business Analyst for 12 hours + Computer Operations Manager 
for 12 hours = 41 hours of initial burden; Compliance Attorney for 7 
hours = 7 hours of annual burden.
     The CCA Definition proposing release incorrectly stated the 
calculations for the initial burden (as 60 hours) and annual burden 
(as 9 hours). These estimates have been corrected for this release 
and reflect the PRA estimates that the Commission provided to OMB 
for this rulemaking.

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[[Page 28866]]

    For Rule 17Ad-22(e)(14), the Commission continues to estimate that 
a respondent clearing agency incurs an initial burden of 36 hours and 
an annual burden of six hours.\152\
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    \152\ These figures were 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 of initial burden; Compliance Attorney for 6 
hours = 6 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(15), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 210 hours 
and an annual burden of 48 hours.\153\
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    \153\ These figures were 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 of initial burden; Compliance 
Attorney for 42 hours + Administrative Assistant for 3 hours + 
Senior Business Analyst for 3 hours = 48 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(16), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 20 hours 
and an annual burden of six hours.\154\
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    \154\ These figures were 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 of initial burden; Compliance Attorney for 6 
hours = 6 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(17), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 28 hours 
and an annual burden of six hours.\155\
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    \155\ These figures were 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 4 hours + Senior 
Programmer for 2 hours = 28 hours of initial burden; Compliance 
Attorney for 6 hours = 6 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(18), (19), and (20), the Commission 
continues to estimate, for each rule, that a respondent clearing agency 
incurs an initial burden of 44 hours and an annual burden of seven 
hours.\156\
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    \156\ These figures were 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 of initial burden; Compliance 
Attorney for 7 hours = 7 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(21), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 32 hours 
and an annual burden of 11 hours.\157\
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    \157\ These figures were calculated as follows: Assistant 
General Counsel for 10 hours + Compliance Attorney for 7 hours + 
Computer Operations Manager for 10 hours + Senior Business Analyst 
for 5 hours = 32 hours of initial burden; Compliance Attorney for 5 
hours + Administrative Assistant for 3 hours + Senior Business 
Analyst for 3 hours = 11 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(22), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 24 hours 
and an annual burden of five hours.\158\
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    \158\ These figures were 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 of initial burden; Compliance 
Attorney for 5 hours = 5 hours of annual burden.
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    For 17 CFR 240.17Ad-22(e)(23), the Commission continues to estimate 
that a respondent clearing agency incurs an initial burden of 138 hours 
and an annual burden of 34 hours.\159\
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    \159\ These figures were 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 of initial burden; Compliance 
Attorney for 34 hours = 34 hours of annual burden.
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    2. Total Burden Estimate
    For the rules above, the Commission estimates that a respondent 
clearing agency incurs a total initial burden of 1,570 hours and an 
annual burden of 507 hours.\160\
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    \160\ The Commission notes that these estimates are slightly 
higher than those stated in the CCA Definition proposing release 
after correcting for the errors previously noted above. See supra 
notes 146 and 151.
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D. Collection of Information is Mandatory

    The collection of information requirements for the rules above 
continue to be mandatory.

E. Confidentiality

    As required under Rule 17Ad-22(e), the policies and procedures 
developed pursuant to the rules above would be communicated, as 
applicable, to the participants of each respondent clearing agency and 
the public. A respondent clearing agency is also required to preserve 
such policies and procedures in accordance with, and for the periods 
specified in, 17 CFR 240.17a-1 and 240.17a-4(e)(7). 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.\161\
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    \161\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of 
Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of 
the Freedom of Information Act provides an exemption for matters 
that are contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions. See 5 U.S.C. 552(b)(8).
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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.\162\ Section 603(a) of the Administrative Procedure Act,\163\ 
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.'' \164\ The Commission 
certified in the CCA Definition proposing release, pursuant to Section 
605(b) of the RFA, that the proposed rules would not, if adopted, have 
a significant impact on a substantial number of small entities.\165\ 
The Commission received no comments on this certification.
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    \162\ See 5 U.S.C. 601 et seq.
    \163\ 5 U.S.C. 603(a).
    \164\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this rulemaking, are set forth in 17 CFR 
240.0-10.
    \165\ See 5 U.S.C. 605(b).
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A. Registered Clearing Agencies

    The amendments to Rule 17Ad-22 apply to registered clearing 
agencies that are CCPs and CSDs. For the purposes of Commission 
rulemaking and as applicable to the amendments to Rule 17Ad-22, 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.\166\
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    \166\ See 17 CFR 240.0-10(d).
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    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission,\167\ the Commission

[[Page 28867]]

believes that all such registered clearing agencies exceed the 
thresholds defining ``small entities'' set out above. While other 
clearing agencies may emerge and seek to register as clearing agencies 
with the Commission, the Commission does not believe that any such 
entities would be ``small entities'' as defined in 17 CFR 240.0-
10(d).\168\ Accordingly, the Commission believes that any such 
registered clearing agencies will exceed the thresholds for ``small 
entities'' set forth in in 17 CFR 240.0-10.
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    \167\ In 2018, DTCC processed $1.854 quadrillion in financial 
transactions. Within DTCC, DTC settled $122.6 trillion of securities 
and held securities valued at $52.2 trillion, NSCC processed an 
average daily value of $1269.7 billion in equity securities, and 
FICC cleared $1.165 quadrillion of transactions in government 
securities and $58.7 trillion of transactions in agency mortgage-
backed securities. DTCC, 2018 Annual Report, http://www.dtcc.com/annuals/2018/#/financial-performance. OCC cleared more than 5.2 
billion contracts and held margin of $111.8 billion at the end of 
2018. OCC, 2018 Annual Report, https://www.theocc.com/components/docs/about/annual-reports/occ-2018-annual-report.pdf. In addition, 
Intercontinental Exchange (``ICE'') averaged daily trade volume of 
over 6.2 million and revenues of $5 billion in 2018. See ICE at a 
glance, https://www.theice.com/publicdocs/ICE_at_a_glance.pdf. LCH 
SA cleared [euro]612 billion in 2018 with clearing fee revenue of 
[euro]19.9 million. LCH SA, 2018 Financial Statements, https://www.lch.com/system/files/media_root/LCH%20Group%20Holdings%20Limited%20-%202018%20%20Financial%20Statements.pdf.
    \168\ The Commission based this determination on its review of 
public sources of financial information about registered clearing 
agencies. In addition, Parts III (Economic Analysis) and IV 
(Paperwork Reduction Act) above discuss, among other things, the 
economic impact, including the estimated compliance costs and 
burdens, of the amended definition.
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B. Certification

    For the reasons described above, the Commission certifies that the 
amendments to Rule 17Ad-22 will not have a significant economic impact 
on a substantial number of small entities.

VI. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act, the Office of Information 
and Regulatory Affairs has designated these rules as not a major rule, 
as defined by 5 U.S.C. 804(2).

VII. Statutory Authority

    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 is adopting amendments to Rule 17Ad-22.

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 amended as follows:

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

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

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 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., and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; 
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.17Ad-22 is also issued under 12 U.S.C. 5461 et seq.
* * * * *

0
2. Amend Sec.  240.17Ad-22 by revising paragraphs (a)(3), (5), and (16) 
to read as follows:

Sec.  240.17Ad-22   Standards for clearing agencies.

    (a) * * *
    (3) Central securities depository means a clearing agency that is a 
securities depository as described in Section 3(a)(23)(A) of the Act 
(15 U.S.C. 78c(a)(23)(A)).
* * * * *
    (5) Covered clearing agency means a registered clearing agency that 
provides the services of a central counterparty or central securities 
depository.
* * * * *
    (16) Sensitivity analysis means an analysis that involves analyzing 
the sensitivity of a model to its assumptions, parameters, and inputs 
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 conditions;
    (ii) Uses actual portfolios and, where applicable, hypothetical 
portfolios that reflect the characteristics of proprietary positions 
and customer positions;
    (iii) Considers the most volatile relevant periods, where 
practical, that have been experienced by the markets served by the 
clearing agency; and
    (iv) 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.
* * * * *

    By the Commission.

    Dated: April 9, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-07905 Filed 5-13-20; 8:45 am]
 BILLING CODE 8011-01-P