
[Federal Register Volume 76, Number 51 (Wednesday, March 16, 2011)]
[Proposed Rules]
[Pages 14472-14539]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-5182]



[[Page 14471]]

Vol. 76

Wednesday,

No. 51

March 16, 2011

Part II





Securities and Exchange Commission





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17 CFR Part 240



Clearing Agency Standards for Operation and Governance; Proposed Rule

  Federal Register / Vol. 76, No. 51 / Wednesday, March 16, 2011 / 
Proposed Rules  

[[Page 14472]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-64017; File No. S7-08-11]
RIN 3235-AL13


Clearing Agency Standards for Operation and Governance

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: In accordance with Section 763 of Title VII (``Title VII'') of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(``Dodd-Frank Act''), Section 805 of Title VIII (``Title VIII'') of the 
Dodd-Frank Act, and Section 17A of the Securities Exchange Act of 1934 
(``Exchange Act''), the Securities and Exchange Commission (``SEC'' or 
``Commission'') is proposing rules regarding registration of clearing 
agencies and standards for the operation and governance of clearing 
agencies. The proposed rules are designed to enhance the regulatory 
framework for the supervision of clearing agencies.

DATES: Comments should be submitted on or before April 29, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-8-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F St., NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-8-11. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F St., NE., Washington, DC 
20549 on official business days between the hours of 10 a.m. and 3 p.m. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Jeffrey Mooney, Assistant Director; 
Peter Curley, Attorney Fellow; Andrew Blake, Special Counsel; Michael 
Milone, Special Counsel; Alison Duncan, Attorney-Adviser; Marta 
Chaffee, Branch Chief; and Andrew Bernstein, Attorney-Adviser, 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 proposing seven new rules 
and an amendment to an existing rule related to clearing agencies, 
including security-based swap clearing agencies. The proposed rules are 
designed to enhance the regulatory framework for the supervision of 
clearing agencies. Specifically, the Commission is proposing to: (1) 
Identify certain minimum standards for all clearing agencies; (2) 
require dissemination of pricing and valuation information by security-
based swap clearing agencies that perform central counterparty 
services; (3) require all clearing agencies to have adequate safeguards 
and procedures to protect the confidentiality of trading information of 
clearing agency participants; (4) exempt certain security-based swap 
dealers and security-based swap execution facilities from the 
definition of a clearing agency; (5) amend rules concerning 
registration of clearing agencies to account for security-based swap 
clearing agencies and to make other technical changes; (6) require all 
clearing agencies to have procedures that identify and address 
conflicts of interest; (7) require standards for all members of 
clearing agency boards of directors or committees; and (8) require all 
clearing agencies to designate a chief compliance officer.

I. Introduction

    On July 21, 2010, President Barack Obama signed the Dodd-Frank Act 
into law.\1\ The Dodd-Frank Act was enacted to, among other things, 
promote the financial stability of the United States by improving 
accountability and transparency in the financial system.\2\ Title VII 
of the Dodd-Frank Act provides the Commission and the Commodity Futures 
Trading Commission (``CFTC'') with the authority to regulate over-the-
counter (``OTC'') derivatives in light of the recent financial crisis, 
which demonstrated the need for enhanced regulation of the OTC 
derivatives market. The Dodd-Frank Act is intended to bolster the 
existing regulatory structure and to provide the Commission and the 
CFTC with effective regulatory tools to oversee the OTC derivatives 
market, which has grown exponentially in recent years and is capable of 
affecting significant sectors of the U.S. economy.\3\
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    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Id. at Preamble.
    \3\ See 156 Cong. Rec. 5878 (daily ed. July 15, 2010) (statement 
of Sen. Dodd).
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    The Dodd-Frank Act provides that the CFTC will regulate ``swaps,'' 
the Commission will regulate ``security-based swaps,'' and the CFTC and 
the Commission will jointly regulate ``mixed swaps.'' \4\ The Dodd-
Frank Act amends the Exchange Act to require, among other things, the 
following: (1) Transactions in security-based swaps must be cleared 
through a clearing agency if they are of a type that the Commission 
determines must be cleared, unless an exemption from mandatory clearing 
applies; (2) transactions in security-based swaps must be reported to a 
registered security-based swap data repository or the Commission; and 
(3) if a security-

[[Page 14473]]

based swap is subject to a clearing requirement, it must be traded on a 
registered trading platform, i.e., a security-based swap execution 
facility or exchange, unless no facility makes such security-based swap 
available for trading.\5\
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    \4\ The Commission and the CFTC, in consultation with the Board 
of Governors of the Federal Reserve System (``Federal Reserve''), 
shall jointly further define the terms ``swap,'' ``security-based 
swap,'' ``swap dealer,'' ``security-based swap dealer,'' ``major 
swap participant,'' ``major security-based swap participant,'' 
``eligible contract participant,'' and ``security-based swap 
agreement.'' Public Law 111-203 Sec.  712(d). Except for the term 
``eligible contract participant'', these terms are defined in 
Sections 721 and 761 of the Dodd-Frank Act. Public Law 111-203 
Sec. Sec.  721, 761. The term ``eligible contract participant,'' is 
defined in Section 1a(18) of the Commodity Exchange Act (``CEA''), 7 
U.S.C. 1a(18), as re-designated and amended by Section 721 of the 
Dodd-Frank Act. Public Law 111-203 Sec.  721. Further, Sections 
721(c) and 761(b) of the Dodd-Frank Act respectively require the 
CFTC to adopt rules to further define the terms ``swap,'' ``swap 
dealer,'' ``major swap participant,'' and ``eligible contract 
participant,'' and permit the Commission to adopt rules to further 
define the terms ``security-based swap,'' ``security-based swap 
dealer,'' ``major security-based swap participant,'' and ``eligible 
contract participant,'' with regard to security-based swaps, for the 
purpose of including transactions and entities that have been 
structured to evade Title VII of the Dodd-Frank Act. Public Law 111-
203 Sec. Sec.  721(c), 761(b). Finally, Section 712(a) of the Dodd-
Frank Act provides that the Commission and CFTC, after consultation 
with the Federal Reserve, shall jointly prescribe regulations 
regarding ``mixed swaps,'' as may be necessary to carry out the 
purposes of Title VII. Public Law 111-203 Sec.  712(a). Consistent 
with the Dodd-Frank statutory structure described above, the 
Commission and CFTC have proposed rules to define these terms. See 
Exchange Act No. 63452 (December 7, 2010), 75 FR 80174 (December 21, 
2010).
    \5\ Section 761 of the Dodd-Frank Act adds Section 3(a)(77) to 
the Exchange Act, which defines the term ``security-based swap 
execution facility'' to mean ``a trading system or platform in which 
multiple participants have the ability to execute or trade security-
based swaps by accepting bids and offers made by multiple 
participants in the facility or system, through any means of 
interstate commerce, including any trading facility that (A) 
facilitates the execution of security-based swaps between persons; 
and (B) is not a national securities exchange.'' See Public Law 111-
203 Sec.  761. The decision of a security-based swap execution 
facility or exchange to list a security-based swap contract for 
trading may not be sufficient to establish that the contract is 
``made available for trading'' by that security-based swap execution 
facility or exchange and therefore cannot be traded in the over-the-
counter market. See Exchange Act Release No. 63825 (February 2, 
2011), 76 FR 10948 (February 28, 2011). The Dodd-Frank Act amends 
the CEA to provide for a similar regulatory framework with respect 
to transactions in swaps regulated by the CFTC.
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    Beginning in December of 2008, the Commission acted to facilitate 
the clearing of OTC security-based swaps by permitting certain clearing 
agencies to clear credit default swaps (``CDS'') on a temporary 
conditional basis.\6\ Consequently, a significant volume of security-
based swaps in the form of CDS transactions are centrally cleared 
today, and the Commission oversees those activities pursuant to the CDS 
Clearing Exemption Orders.\7\
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    \6\ The Commission authorized five entities to clear credit 
default swaps. See Exchange Act Release Nos. 60372 (July 23, 2009), 
74 FR 37748 (July 29, 2009), 61973 (April 23, 2010), 75 FR 22656 
(April 29, 2010) and 63389 (November 29, 2010), 75 FR 75520 
(December 3, 2010) (CDS clearing by ICE Clear Europe Limited); 60373 
(July 23, 2009), 74 FR 37740 (July 29, 2009), 61975 (April 23, 
2010), 75 FR 22641 (April 29, 2010) and 63390 (November 29, 2010), 
75 FR 75518 (December 3, 2010), (CDS clearing by Eurex Clearing AG); 
59578 (March 13, 2009), 74 FR 11781 (March 19, 2009), 61164 
(December 14, 2009), 74 FR 67258 (December 18, 2009), 61803 (March 
30, 2010), 75 FR 17181 (April 5, 2010) and 63388 (November 29, 
2010), 75 FR 75522 (December 3, 2010) (CDS clearing by Chicago 
Mercantile Exchange Inc.); 59527 (March 6, 2009), 74 FR 10791 (March 
12, 2009), 61119 (December 4, 2009), 74 FR 65554 (December 10, 
2009), 61662 (March 5, 2010), 75 FR 11589 (March 11, 2010) and 63387 
(November 29, 2010) 75 FR 75502 (December 3, 2010) (CDS clearing by 
ICE Trust US LLC); 59164 (December 24, 2008), 74 FR 139 (January 2, 
2009) (temporary CDS clearing by LIFFE A&M and LCH.Clearnet Ltd.) 
(collectively, ``CDS Clearing Exemption Orders''). LIFFE A&M and 
LCH.Clearnet Ltd. allowed their order to lapse without seeking 
renewal.
    \7\ Most cleared CDS transactions have cleared at ICE Trust US 
LLC (``ICE Trust'') or ICE Clear Europe Limited (``ICE Clear 
Europe''). However, Eurex Clearing AG (``Eurex'') and the Chicago 
Mercantile Exchange Inc. (``CME'') are also authorized to operate 
pursuant to the CDS Clearing Exemption Orders. As of October 8, 
2010, ICE Trust had cleared approximately $7.1 trillion notional 
amount of CDS contracts based on indices of securities and 
approximately $490 billion notional amount of CDS contracts based on 
individual reference entities or securities. As of October 8, 2010, 
ICE Clear Europe had cleared approximately [euro]3.09 trillion 
notional amount of CDS contracts based on indices of securities and 
approximately [euro]560 billion notional amount of CDS contracts 
based on individual reference entities or securities. See https://www.theice.com/marketdata/reports/ReportCenter.shtml. The Commission 
has obtained data from The Depository Trust and Clearing Corporation 
on new and assigned CDS trades in United States Dollars during the 
month of November 2010 for ICE Trust. Cleared CDS trades represented 
a small fraction of total trades. Specifically, cleared trades were 
5.24% by notional amount of all new or assigned single name trades, 
and 20.69% by notional amount of all new or assigned index trades.
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II. Prescribed Rulemaking for Clearing Agencies

A. Title VII of Dodd-Frank Act

    Title VII of the Dodd-Frank Act added new provisions to the 
Exchange Act that require clearing agencies that clear security-based 
swaps (``security-based swap clearing agencies'') to register with the 
Commission \8\ and require the Commission to adopt rules with respect 
to security-based swap clearing agencies.\9\
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    \8\ Public Law 111-203 Sec.  763(b) (adding subparagraph (g) to 
Section 17A of the Exchange Act. Pursuant to Section 774 of the 
Dodd-Frank Act, the requirement in Section 17A(g) of the Exchange 
Act for securities-based swap clearing agencies to be registered 
with the Commission takes effect on July 16, 2011).
    \9\ Public Law 111-203 Sec.  763(b) (adding subparagraphs (i) 
and (j) to Section 17A of the Exchange Act).
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    Specifically, new Section 17A(j) of the Exchange Act requires the 
Commission to adopt rules governing security-based swap clearing 
agencies.\10\ New Section 17A(i) of the Exchange Act also gives the 
Commission authority to promulgate rules that establish standards for 
security-based swap clearing agencies.\11\ Compliance with any such 
rules is a prerequisite to the registration of a clearing agency with 
the Commission and is also a condition to the maintenance of that 
security-based swap clearing agency's continued registration.\12\
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    \10\ Public Law 111-203 Sec.  763(b) (adding subparagraph (j) to 
Section 17A of the Exchange Act). See also Public Law 111-203 Sec.  
774 of the Dodd-Frank Act (requiring that the provisions of Title 
VII take effect on the later of 360 days after the date of the 
enactment or, to the extent a provision of Title VII requires a 
rulemaking, not less than 60 days after publication of the final 
rule or regulation implementing such provision).
    \11\ Public Law 111-203 Sec.  763(b) (adding subparagraph (i) to 
Section 17A of the Exchange Act).
    \12\ Under the Exchange Act, a clearing agency can be registered 
with the Commission only if the Commission makes a determination 
that the clearing agency satisfies the requirements set forth in 
paragraphs (A) through (I) of Section 17A(b)(3) of the Exchange Act.
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B. Payment, Clearing, and Settlement Supervision Act of 2010

    Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing, 
and Settlement Supervision Act of 2010 (``Clearing Supervision Act''), 
establishes an enhanced supervisory and risk control system for 
systemically important clearing agencies and other financial market 
utilities (``FMUs'').\13\ It provides that the Commission may prescribe 
regulations containing risk management standards, taking into 
consideration relevant international standards and existing prudential 
requirements, for any designated clearing entities it regulates.\14\ 
The Council has not to date made any designations with respect to 
whether any FMU is, or is likely to become, systemically important; 
\15\ however, the

[[Page 14474]]

Commission believes it is beneficial to consider the requirements of 
the Clearing Supervision Act in its proposed rules for clearing 
agencies because the Clearing Supervision Act may apply to one or more 
clearing agencies in the future and the Commission preliminarily 
believes that its goals are consistent with the goals of Section 17A of 
the Exchange Act. Specifically, Congress recognized in the Clearing 
Supervision Act that the operation of multilateral payment, clearing or 
settlement activities may reduce risks for clearing participants and 
the broader financial system, while at the same time creating new risks 
that require multilateral payment, clearing or settlement activities to 
be well-designed and operated in a safe and sound manner.\16\ The 
Clearing Supervision Act is designed, in part, to provide a regulatory 
framework to help deal with such risk management issues, which is 
generally consistent with the Exchange Act requirement that clearing 
agencies be organized in a manner so as to facilitate prompt and 
accurate clearance and settlement, safeguard securities and funds and 
protect investors.\17\
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    \13\ See supra note 1. Under Section 803 of the Clearing 
Supervision Act, clearing agencies may be FMUs. Therefore, the 
Commission may be the Supervisory Agency of a clearing agency that 
is designated as systemically important (``designated clearing 
entities'') by the Financial Stability Oversight Council 
(``Council''). See 12 U.S.C. 5463. The definition of ``FMU,'' which 
is contained in Section 803(6) of the Clearing Supervision Act, 
contains a number of exclusions including, but not limited to, 
designated contract markets, registered futures associations, swap 
data repositories, swap execution facilities, national securities 
exchanges, national securities associations, alternative trading 
systems, security-based swap data repositories, security-based swap 
execution facilities, brokers, dealers, transfer agents, investment 
companies and futures commission merchants. 12 U.S.C. 5462(6)(B). 
The designation of systemic importance hinges on a determination by 
the Council that the failure of, or a disruption to, the functioning 
of the FMU could create, or increase, the risk of significant 
liquidity or credit problems spreading among financial institutions 
or markets and thereby threaten the stability of the financial 
system of the United States. See 12 U.S.C. 5463(a)(2)(A)-(E). The 
designation of an FMU is significant, in part, because it will 
subject such designated entity to heightened oversight consistent 
with the terms of the Clearing Supervision Act. For example, the 
Clearing Supervision Act requires the Supervisory Agency to examine 
at least once annually any FMU that the Council has designated as 
systemically important. The Commission intends to conduct such 
annual statutory cycle examinations on the Commission's fiscal year 
basis. The Commission staff anticipates conducting the first annual 
statutory cycle examination of any designated FMU for which it is 
the Supervisory Agency in the annual cycle following such 
designation.
    \14\ See Section 805(a)(2) of the Clearing Supervision Act. 
Those regulations may govern ``(A) the operations related to 
payment, clearing, and settlement activities of such designated 
clearing entities; and (B) the conduct of designated activities by 
such financial institutions.'' 12 U.S.C. 5464(a)(2).
    \15\ See 12 U.S.C 5321 (among other things establishing the 
Council and designating its voting and nonvoting members. In 
accordance with Section 804 of the Clearing Supervision Act, the 
Council has the authority, on a non-delegable basis and by a vote of 
not fewer than two-thirds of the members then serving, including the 
affirmative vote of its chairperson, to designate those FMUs that 
the Council determines are, or are likely to become, systemically 
important. The Council may, using the same procedures as discussed 
above, rescind such designation if it determines that the FMU no 
longer meets the standards for systemic importance. Before making 
either determination, the Council is required to consult with the 
Federal Reserve and the relevant Supervisory Agency as determined in 
accordance with Section 803(8) of the Clearing Supervision Act). See 
also Section 804 setting forth the procedures for giving entities 30 
days advance notice and the opportunity for a hearing prior to being 
designated as systemically important. 12 U.S.C. 5463.
    \16\ 12 U.S.C. 5461(a)(2).
    \17\ See 15 U.S.C. 78q-1(b)(3)(A).
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C. Section 17A of Exchange Act

    As noted above, in addition to the new authority provided to the 
Commission under Titles VII and VIII of the Dodd-Frank Act, the 
Commission has existing authority over clearing agencies under the 
Exchange Act. For example, entities are required to register with the 
Commission pursuant to Section 17A of the Exchange Act \18\ and Rule 
17Ab2-1,\19\ prior to performing the functions of a clearing agency. 
Under this registration system, the Commission is not permitted to 
grant registration unless it determines that the rules and operations 
of the clearing agency meet the standards set forth in Section 17A.\20\ 
If a clearing agency is granted registration, the Commission oversees 
the clearing agency to facilitate compliance with the Exchange Act 
through the rule filing process for self-regulatory organizations 
(``SROs'') and through on-site examinations by Commission staff. 
Section 17A also gives the Commission authority to adopt rules for 
clearing agencies as necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Exchange Act and prohibits a registered clearing agency 
from engaging in any activity in contravention of these rules and 
regulations.\21\
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    \18\ See 15 U.S.C. 78q-1(b). See also Public Law 111-203 Sec.  
763(b) (adding subparagraph (g) to Section 17 of the Exchange Act).
    \19\ See 17 CFR 240.17b2-1.
    \20\ Specifically, Sections 17A(b)(3)(A)-(I) identify 
determinations that the Commission must make about the rules and 
structure of a clearing agency prior to granting registration. See 
15 U.S.C. 78q-1(b)(3)(A)-(I). The staff of the Commission provided 
guidance on meeting the requirements of Section 17A in its 
Announcement of Standards for the Registration of Clearing Agencies. 
See Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920 
(June 23, 1980).
    \21\ See 15 U.S.C. 78q-1(d).
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III. Proposed Rules Governing Clearing Agencies

    The Commission is proposing several new rules that would set 
standards for the operation and governance of clearing agencies. As 
noted above, the Dodd-Frank Act specifically gives the Commission 
authority to regulate security-based swaps \22\ and to adopt 
regulations addressing risk management standards for designated 
clearing entities that the Commission regulates. In addition to 
considering this specific directive in formulating the proposed rules, 
the Commission preliminarily believes that applying certain rules to 
all clearing agencies would promote financial stability, one of the 
goals of the Dodd-Frank Act, by facilitating prompt and accurate 
clearance and settlement of all securities transactions consistent with 
Section 17A of the Exchange Act while promoting the Dodd-Frank Act's 
stated aims of accountability and transparency.
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    \22\ See supra note 4.
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    The types of clearing agencies that are subject to the proposed 
rules can be divided into four different categories: (i) Clearing 
agencies that offer central counterparty (``CCP'') services for 
transactions in securities that are not security-based swaps, (ii) 
clearing agencies that offer CCP services for transactions in 
securities that are security-based swaps; (iii) clearing agencies that 
provide non-CCP services for transactions in securities that are not 
security-based swaps; and (iv) clearing agencies that provide non-CCP 
services for transactions in securities that are security-based swaps. 
The table below illustrates how the proposed rules would apply to 
different types of clearing agencies. In general, as illustrated in 
column ``A'' in the table, clearing agencies offering CCP services 
(regardless of whether they offer those services for transactions in 
securities that are or are not security-based swaps) would be subject 
to most of the proposed rules.\23\ Clearing agencies that offer only 
non-CCP services would only be subject to certain of the proposed 
rules, depending on whether they offer those services for transactions 
in securities that are not security-based swaps (as illustrated in 
column ``B'' in the table) \24\ or that are security-based swaps (as 
illustrated in column ``C'' in the table).
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    \23\ As noted in the table, proposed Rule 17Aj-1 would only 
apply to CCPs for security-based swap transactions.
    \24\ Within this category, as illustrated in column ``B'', the 
proposed rules distinguish between clearing agencies that provide 
central securities depository services, and those that do not.

                                                   Application of Proposed Rules to Clearing Agencies
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                                                    A  CCP Clearing Services for
                                                   Securities that are or are not    B  Non-CCP Clearing Services in    C Non-CCP Clearing Services for
                                                   Security-Based Swaps (``SBS'')      Securities that are not SBS          Securities that are SBS
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17Ad-22(b)(1): Measurement and management of                                [cir]   .................................  .................................
 credit exposures..............................
17Ad-22(b)(2): Margin requirements.............                             [cir]   .................................  .................................
17Ad-22(b)(3): Financial resources.............                             [cir]   .................................  .................................
17Ad-22(b)(4): Model validation................                             [cir]   .................................  .................................

[[Page 14475]]

 
17Ad-22(b)(5): Non-dealer access...............                             [cir]   .................................  .................................
17Ad-22(b)(6): Portfolio size and transaction                               [cir]   .................................  .................................
 volume thresholds restrictions................
17Ad-22(b)(7): Net capital restrictions........                             [cir]   .................................  .................................
17Ad-22(c)(1): Records of financial resources..                             [cir]   .................................  .................................
17Ad-22(c)(2): Audited financial statements....                             [cir]                              [cir]                              [cir]
17Ad-22(d)(1): Transparent and enforceable                                  [cir]                              [cir]                              [cir]
 rules.........................................
17Ad-22(d)(2): Participation requirements......                             [cir]                              [cir]                              [cir]
17Ad-22(d)(3): Custody of assets and investment                             [cir]                              [cir]                              [cir]
 risk..........................................
17Ad-22(d)(4): Identification and mitigation of                             [cir]                              [cir]                              [cir]
 operational risk..............................
17Ad-22(d)(5): Money settlement risks..........                             [cir]                              [cir]                              [cir]
17Ad-22(d)(6): Cost-effectiveness..............                             [cir]                              [cir]                              [cir]
17Ad-22(d)(7): Links...........................                             [cir]                              [cir]                              [cir]
17Ad-22(d)(8): Governance......................                             [cir]                              [cir]                              [cir]
17Ad-22(d)(9): Information on services.........                             [cir]                              [cir]                              [cir]
17Ad-22(d)(10): Immobilization and               .................................              Would Only Apply to Cle.................................
 dematerialization of stock certificates.......                                               Agencies that Provide Central
                                                                                           Securities Depository (``CSD'')
                                                                                                            Services
17Ad-22(d)(11): Default procedures.............                             [cir]                              [cir]                              [cir]
17Ad-22(d)(12): Timing of settlement finality..                             [cir]                              [cir]   .................................
17Ad-22(d)(13): Delivery versus payment........                             [cir]                              [cir]   .................................
17Ad-22(d)(14): Controls to address              .................................              Would Only Apply to Cle.................................
 participants' failure to settle...............                                               Agencies that Provide CSD
                                                                                                            Services
17Ad-22(d)(15): Physical delivery risks........                             [cir]                              [cir]   .................................
17Aj-1: Dissemination of pricing and valuation               Would Only Apply to Cle.................................  .................................
 information...................................            Agencies that Provide CCP
                                                                 Services for SBS
17Ad-23: Policies and procedures to protect                                 [cir]                              [cir]                              [cir]
 confidentiality of trading information of
 participants..................................
Amendments to Rule 17Ab2-1: Registration of                                 [cir]                              [cir]                              [cir]
 clearing agencies.............................
17Ad-25: Procedures to identify and address                                 [cir]                              [cir]                              [cir]
 conflicts of interests........................
17Ad-26: Standards for board or board committee                             [cir]                              [cir]                              [cir]
 directors.....................................
3Cj-1: Designation of chief compliance officer.                             [cir]                              [cir]                              [cir]
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[[Page 14476]]

A. Proposed Rule 17Ad-22 Standards for All Clearing Agencies

    The Commission is proposing Rule 17Ad-22 to augment the statutory 
requirements under the Exchange Act by establishing minimum 
requirements regarding how clearing agencies must maintain effective 
risk management procedures and controls as well as meet the statutory 
requirements under the Exchange Act on an ongoing basis. For a clearing 
agency to be registered under Section 17A, it must have the ability to 
facilitate the prompt and accurate clearance and settlement of 
transactions, safeguard investor funds and securities, remove 
impediments to and perfect the mechanism of a national clearance and 
settlement system, and generally protect investors.\25\ Also, the 
clearing agency's rules must provide adequate access to qualified 
participants, fair representation of shareholders and participants, 
equitable pricing, fair discipline of participants, and must not impose 
any undue burden on competition.\26\ Section 17A of the Exchange Act 
explicitly provides the Commission with discretion to update the rules 
for clearing agencies consistent with the Exchange Act.\27\ Further, 
Section 805(a) of the Dodd-Frank Act directs the Commission to take 
into consideration relevant international standards and existing 
prudential requirements for clearing agencies that are designated as 
FMUs.\28\ The current international standards most relevant to risk 
management of clearing agencies are the standards developed by the 
Technical Committee of the International Organization of Securities 
Commissions (``IOSCO'') and the Committee on Payment and Settlement 
Systems (``CPSS'') of the Bank for International Settlements that are 
contained in the following reports: Recommendations for Securities 
Settlement Systems (2001) (``RSSS''), and Recommendations for Central 
Counterparties (2004) (``RCCP'') (collectively ``CPSS-IOSCO 
Recommendations'').\29\
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    \25\ See 15 U.S.C. 78q-1.
    \26\ See id.
    \27\ See id.
    \28\ 12 U.S.C. 5464(a)(1).
    \29\ The complete RSSS and RCCP Reports are available on the Web 
site of the Bank for International Settlements at http://www.bis.org/publ/cpss46.htm and http://www.bis.org/publ/cpss64.htm 
respectively.
     The RSSS and RCCP Reports were drafted by IOSCO and CPSS 
(``Task Force''). The Task Force consisted of securities regulators 
and central bankers from 19 countries (i.e., Australia, Belgium, 
Brazil, China, Czech Republic, France, Germany, Hong Kong, India, 
Italy, Japan, Malaysia, Mexico, The Netherlands, Saudi Arabia, 
Singapore, Spain, England, and the United States) and the European 
Union. The U.S. representatives on the Task Force included staff 
from the Commission, the Federal Reserve, and the CFTC. The Federal 
Reserve has incorporated the RSSS and RCCP, as well as the Core 
Principles for Systemically Important Payment Systems, in its 
Federal Reserve Policy on Payment System Risk. The Federal Reserve 
applies these standards in its supervisory process and expects 
systemically important systems, as determined by the Federal Reserve 
and subject to its authority, will complete a self-assessment 
against the standards set forth in the policy. See Policy on Payment 
System Risk, 72 FR 2518 (January 12, 2007).
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    The Commission preliminarily believes that certain aspects of the 
CPSS-IOSCO Recommendations should be made to clearly apply to clearing 
agencies and that such application would further the objectives and 
principles for clearing agencies under the Exchange Act and the Dodd-
Frank Act, including those that are related to sound risk management 
practices and to fair and open access. These international standards 
were formulated by securities regulators and central banks to promote 
sound risk-management practices and encourage the safe design and 
operation of entities that provide clearance and settlement services. 
The Commission is proposing Rule 17Ad-22 (which is consistent with the 
CPSS-IOSCO Recommendations but reflects modifications designed to 
tailor the proposed rule to the Exchange Act and the U.S. clearance and 
settlement system) because the Commission preliminarily believes that 
the rule would help to facilitate prompt and accurate clearance and 
settlement, safeguard securities and funds and protect investors.\30\
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    \30\ See 15 U.S.C. 78q-1(d).
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    The Commission preliminarily believes that the adoption of proposed 
Rule 17Ad-22, which is based on the CPSS-IOSCO Recommendations, and the 
application of this rule to all clearing agencies would have several 
important benefits, including providing a robust framework for 
assessing and addressing the risks within clearing agencies. The 
Commission requests comment on proposed Rule 17Ad-22 and the 
consideration of the CPSS-IOSCO Recommendations in connection with the 
proposed rule. The Commission also requests comment on whether the 
proposed rules are properly tailored to assess and address the risks at 
clearing agencies and whether they are sufficiently clear to enable 
clearing agencies to reasonably determine whether they are in 
compliance with the rules or whether the Commission should provide 
additional guidance.\31\
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    \31\ Several clearing agencies have published their evaluations 
of their compliance with the CPSS-IOSCO Recommendations on their Web 
sites. See http://www.dtcc.com/legal/compliance/assessments.php. In 
addition, several clearing agencies, as part of requests for the CDS 
Clearing Exemption Orders, have represented to the Commission that 
they met the standards set forth in the RCCP. See supra note 6.
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    The Commission notes that IOSCO and the CPSS are currently in the 
process of revising their existing sets of international standards.\32\ 
This review is intended to strengthen and clarify the CPSS-IOSCO 
Recommendations, as well as the CPSS's existing standards for payment 
systems entitled: Core Principles for Systemically Important Payment 
Systems. The Commission may, as international standards evolve, 
consider additional modifications to its rules as the Commission 
determines is appropriate based on its own experience and the 
requirements under the Exchange Act.
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    \32\ In December 2009, IOSCO and CPSS began a comprehensive 
review of existing standards for FMUs, which includes the RSSS and 
RCCP. This review intends to strengthen and clarify the standards 
based on experience with the standards since their publication and 
specifically from lessons learned during the recent financial 
crisis.
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    Proposed Rule 17Ad-22 contains certain additional requirements that 
are not addressed or contemplated by international standards. For 
clearing agencies that perform CCP services, these additional 
requirements are found in the following proposed rules: (1) Rule 17Ad-
22(b)(3), which would require heightened financial resources for 
clearing agencies that provide CCP services for securities that are 
security-based swaps; (2) Rule 17Ad-22(b)(5), which would prohibit 
membership restrictions based on dealer status; (3) Rule 17Ad-22(b)(6), 
which would prohibit membership restrictions based on minimum volume 
and transaction thresholds; (4) Rule 17Ad-22(b)(7), which would 
prohibit restrictions on clearing agency membership based on minimum 
net capital requirements of $50 million or more; and (5) Rule 17Ad-
22(c)(1), which would require calculation and maintenance of records of 
the clearing agency's financial resources. \33\
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    \33\ Proposed Rule 17Ad-22(c)(2) would apply to all clearing 
agencies and require them to post annual audited financial reports 
on their Web sites.
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    In addition, the Commission is proposing additional rules for all 
clearing agencies (whether or not they offer CCP services) that are not 
addressed or contemplated by the international standards. These 
proposed rules would: (1) Require dissemination of pricing and 
valuation information by security-based swap clearing agencies that 
perform CCP services (Proposed Rule 17Aj-1); (2) require all clearing 
agencies to have adequate safeguards and procedures to protect the 
confidentiality of trading information of

[[Page 14477]]

clearing agency participants (Proposed Rule 17Ad-23); (3) exempt 
certain security-based swap dealers and security-based swap execution 
facilities from the definition of a clearing agency (Proposed Rule 
17Ad-24); (4) amend rules concerning registration of clearing agencies 
to account for security-based swap clearing agencies and to make other 
technical changes (Rule 17Ab2-1); (5) require all clearing agencies to 
have procedures that identify and address conflicts of interest 
(Proposed Rule 17A-25); (6) require clearing agencies to set standards 
for all members of their boards of directors or committees (Proposed 
Rule 17Ad-26); and (7) require all clearing agencies to designate a 
chief compliance officer (Proposed Rule 3Cj-1).
1. Proposed Rule 17Ad-22(a)
    Proposed Rule 17Ad-22(a) contains five definitions. Proposed Rule 
17Ad-22(a)(1) would define CCP as a clearing agency that interposes 
itself between counterparties to securities transactions to act 
functionally as the buyer to every seller and as the seller to every 
buyer. Proposed Rule 17Ad-22(a)(2) would define ``central securities 
depository services'' to mean services of a clearing agency that is a 
securities depository as described in Section 3(a)(23) of the Exchange 
Act.\34\ Proposed Rule 17Ad-22(a)(3) would define ``participant'', for 
the limited purposes of proposed Rules 17Ad-22(b)(3) and 17Ad-
22(d)(14), to mean that if a participant controls another participant, 
or is under common control with another participant, then the 
affiliated participants shall be collectively deemed to be a single 
participant. Proposed Rule 17Ad-22(a)(4) would define ``normal market 
conditions'', for the limited purposes of proposed Rules 17Ad-22(b)(1) 
and (2), to mean conditions in which the expected movement of the price 
of cleared securities would produce changes in a clearing agency's 
exposures to its participants that would be expected to breach margin 
requirements or other risk control mechanisms only one percent of the 
time. Proposed Rule 17Ad-22(a)(5) would define ``net capital'', for the 
limited purposes of proposed Rule 17Ad-22(b)(7), to have the same 
meaning as set forth in Rule 15c3-1 under the Exchange Act for broker-
dealers or any similar risk adjusted capital calculation for all other 
prospective clearing members.\35\
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    \34\ [Clearing agency] also means any person, such as a 
securities depository, who (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. 15 U.S.C. 78c(a)(23).
    \35\ As appropriate, the clearing agency would develop risk 
adjusted capital calculations for prospective clearing members that 
are not broker-dealers.
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    The Commission preliminarily believes that these five proposed 
definitions would be consistent with the common meaning of these terms 
as understood in the clearance and settlement industry. In addition, 
the Commission preliminarily believes the definition of ``normal market 
conditions'' would be consistent with international use of that term in 
the context of clearing agency risk management.\36\ The Commission 
intends for these definitions to provide clearing agencies with 
appropriate guidance to determine when requirements under proposed Rule 
17Ad-22 would apply. The Commission requests comment on the proposed 
definitions, including whether any additional clarification would be 
helpful.
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    \36\ In the context of the RCCP, ``normal market conditions'' 
means conditions in which the expected movement of the price of 
cleared securities would produce changes in a clearing agency's 
exposures to its participants that would be expected to breach 
margin requirements or other risk control mechanisms only one 
percent of the time. See CPSS Publications Recommendations for 
Central Counterparties, (November 2004), available at http://www.bis.org/publ/cpss64.htm.
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2. Proposed Rule 17Ad-22(b)
    Proposed Rule 17Ad-22(b) would set forth standards that are 
applicable to clearing agencies that provide CCP services. 
Specifically, the proposed rule would provide standards with respect to 
measurement and management of credit exposures, margin requirements, 
financial resources, and annual evaluations of the performance of the 
clearing agency's margin models. The proposed rule would also require 
membership access to clearing agencies for persons that are not dealers 
or security-based swap dealers, prohibit the use of minimum portfolio 
size and minimum volume transaction thresholds as a condition for 
membership at a clearing agency, and permit membership access to a 
clearing agency by persons with net capital equal to or greater than 
$50 million. The discussion below provides greater detail regarding 
each respective standard covered in proposed Rule 17Ad-22(b). The 
proposed rule is designed to address risks and participant membership 
structures that are specifically linked to the provision of services 
associated with a clearing agency interposing itself between 
counterparties to securities transactions and acting functionally as 
the buyer to every seller and the seller to every buyer (i.e., CCP 
services). Accordingly, the Commission preliminarily believes that 
these requirements would not need to apply to clearing agencies that do 
not provide CCP services because they would not be engaged in 
activities that the proposed rule is designed to address.
    The Commission preliminarily believes that proposed Rule 17Ad-22(b) 
would provide standards designed to help ensure sound risk management 
practices at clearing agencies providing CCP services. Further, the 
Commission preliminarily believes that the requirements of proposed 
Rule 17Ad-22(b) would help ensure that the rules, policies and 
procedures of a clearing agency providing CCP services will be designed 
to promote fair and open access, to promote the prompt and accurate 
clearance and settlement of securities transactions, and to assure the 
safeguarding of securities and funds that are in the custody or control 
of the clearing agency or for which it is responsible.
Proposed Rule 17Ad-22(b)(1): Measurement and Management of Credit 
Exposures
    Proposed Rule 17Ad-22(b)(1) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to measure its 
credit exposures to its participants at least once each day, and limit 
its exposures to potential losses from defaults by its participants in 
normal market conditions \37\ so that the operations of the clearing 
agency would not be disrupted and non-defaulting participants would not 
be exposed to losses that they cannot anticipate or control.
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    \37\ See supra note 36.
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    The Commission preliminarily believes that measurement and 
management of credit exposures can, among other things, reduce the 
likelihood in a participant default scenario that losses from default 
would disrupt the operations of the clearing agency and its non-
defaulting participants and adversely affect the functioning of the 
clearing agency. A clearing agency providing CCP services faces the 
risk that its exposures to participants can change dramatically as a 
result of changes in prices, in positions, or both. Adverse price

[[Page 14478]]

movements can rapidly increase exposures to participants, and 
participants may rapidly change or concentrate their positions through 
new trading. If not appropriately measured and managed, such results 
could lead to significant liabilities accruing at the clearing agency.
    Recognizing that the risks that clearing agencies are likely to 
face will change over time, the Commission is proposing that a clearing 
agency providing CCP services be required to measure its credit 
exposures to its participants at least once each day. The Commission 
preliminarily believes this is the minimum frequency of measurement 
that would permit a clearing agency to effectively consider the risks 
it faces because of the potential for significant changes to the risk 
profiles of its participants to change on a daily basis.
    In addition to requiring clearing agencies to take steps to measure 
their credit exposures to participants, the proposed rule would also 
require clearing agencies to limit their exposures to potential losses 
from participant defaults. By collecting sufficient margin and having 
other resources in place to account for losses arising under normal 
market conditions, the Commission expects that a clearing agency would 
be able to limit its exposures to potential losses from defaults by its 
participants. The Commission preliminarily believes that the proposed 
rule should thereby help ensure prompt and accurate clearance and 
settlement.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(b)(1). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding measurement 
and management of credit exposures sufficiently clear? If not, why not 
and what would be a better alternative?
     How do current practices of clearing agencies providing 
CCP services with respect to measurement and management of credit 
exposures compare to the practices that the Commission proposes to 
require in this rule? What are the expected incremental costs to 
clearing agencies providing CCP services in connection with adding to 
or revising their current practices in order to implement the 
Commission's proposed rule?
     Should the Commission require clearing agencies acting as 
CCPs to use any specific confidence level for limiting potential losses 
under the proposed rule when clearing certain products, or to use 
minimum amounts of market data when calculating credit exposures? Why 
or why not?
     What level of discretion should the Commission allow 
clearing agencies providing CCP services to exercise when measuring and 
managing credit exposure? Are there circumstances when such discretion 
should be limited?
     Is it more difficult for clearing agencies providing CCP 
services and their participants to anticipate and control losses 
associated with certain types of financial products compared to others? 
If so, how should the Commission take this into account when 
establishing rules for clearing agency standards? For example, should 
the Commission require additional risk management measures to be 
applied by clearing agencies providing CCP services when judging the 
risks associated with financial products that trade infrequently or 
when valuation models for the product are not yet broadly accepted in 
the financial market? Why or why not?
     Extremely illiquid security-based swap products may be 
difficult to clear under a conventional CCP clearing model because it 
may be difficult to value them with a degree of accuracy that allows 
the CCP to properly manage the risk of those positions. Should the 
Commission explore developing alternatives to the requirements 
contained in proposed Rule 17Ad-22(b)(1) based on the liquidity of 
products a clearing agency clears? What effect would any such 
requirements have on the potential development of alternative clearing 
models for highly-illiquid products that would convey some of the 
benefits of clearing (such as centralized holding of collateral by a 
third-party custodian, daily adjustment of variation margin amounts, 
daily posting and return of variation margin, independent valuation of 
positions, and prompt close-out of positions held by a defaulting 
market participant)?
     Should the Commission consider requiring clearing agencies 
that provide CCP services to measure exposures to participants more or 
less frequently than a minimum of once daily?
Proposed Rule 17Ad-22(b)(2): Margin Requirements
    Proposed Rule 17Ad-22(b)(2) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to: (i) Use margin 
requirements to limit its credit exposures to participants in normal 
market conditions; \38\ (ii) use risk-based models and parameters to 
set margin requirements; and (iii) review the models and parameters at 
least monthly.
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    \38\ See supra note 36.
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    The Commission preliminarily believes that use of margin 
requirements by clearing agencies providing CCP services to collect 
assets (e.g., cash or securities) from its participants as a way to 
limit exposures to participants in normal market conditions would, 
among other things, provide the clearing agency with assets it could 
readily use to limit losses incurred by a participant in the event of a 
default. By limiting its credit exposure in this manner, a clearing 
agency providing CCP services would be less likely to be subject to 
disruptions in its operations as a result of a participant default, 
thereby promoting prompt and accurate clearance and settlement.
    The Commission also preliminarily believes that risk-based models 
and parameters should be used to set margin requirements because they 
permit a clearing agency providing CCP services to tailor the amount of 
margin collected to the needs of the clearing agency. Specifically, 
models and parameters for collecting margin that account for the risks 
the clearing agency providing CCP services faces when transacting with 
a participant may be more likely to result in effective and efficient 
margin requirements because the level of margin collected would be 
commensurate with the level of risk presented by the participant to the 
clearing agency.
    In addition, the Commission preliminarily believes that the review 
of these models and parameters should be required to occur at least 
monthly. Market conditions and risks are constantly changing and 
therefore the models and parameters used by a clearing agency providing 
CCP services to set margin may not accurately reflect the needs of a 
clearing agency if they are permitted to remain static. The Commission 
recognizes, however, that there may be benefits to maintaining some 
stability with respect to margin levels in order to limit operational 
difficulties. Accordingly, the Commission is proposing that clearing 
agencies providing CCP services be required to review their models and 
parameters at least monthly because the Commission preliminarily 
believes that such time frame would limit the potential that such 
parameters or models will become stale while also providing the 
clearing agency flexibility to maintain some stability with respect

[[Page 14479]]

to determinations for margin requirements.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(b)(2). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding margin 
requirements sufficiently clear? If not, why not and what would be a 
better alternative?
     How do current practices of clearing agencies regarding 
margin requirements compare to the practices that the Commission 
proposes to require in this rule? What are the expected incremental 
costs to clearing agencies in connection with adding to or revising 
their current practices in order to implement the Commission's proposed 
rule?
     Should the Commission require clearing agencies providing 
CCP services to impose any special margin or intraday margin 
requirements in certain circumstances? Are there circumstances when 
special margin or intraday margining would not be appropriate? Why or 
why not?
     Should the Commission allow clearing agencies providing 
CCP services to exercise significant discretion when establishing 
margin practices? Why or why not? Are there circumstances when such 
discretion should be limited? Is there a risk that clearing agencies 
providing CCP services may lower margin standards to compete for 
business? If so, how should the Commission take such factors into 
account when establishing rules for clearing agencies providing CCP 
services?
     Should the Commission consider requiring a clearing agency 
that provides CCP services to review its margin model and parameters 
more or less frequently than at least monthly?
Proposed Rule 17Ad-22(b)(3): Financial Resources
    Proposed Rule 17Ad-22(b)(3) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
sufficient financial resources to withstand, at a minimum, a default by 
the participant to which it has the largest exposure in extreme but 
plausible market conditions, provided that a security-based swap 
clearing agency shall maintain sufficient financial resources to 
withstand, at a minimum, a default by the two participants to which it 
has the largest exposures in extreme but plausible market 
conditions.\39\
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    \39\ See proposed Rule 17Ad-22(a)(3), supra Section II.A.1 
(defining ``participant'' for purposes of proposed Rule 17Ad-
22(b)(3)).
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    The Commission preliminarily believes that requiring a clearing 
agency, other than a security-based swap clearing agency, that provides 
CCP services to maintain sufficient financial resources to withstand, 
at a minimum, a default by the participant to which it has the largest 
exposure in extreme but plausible market conditions would, among other 
things, reduce the likelihood that a default would create losses that 
would disrupt the operations of the clearing agency and adversely 
affect the clearing agency's non-defaulting participants. However, the 
Commission preliminarily believes that security-based swap clearing 
agencies that provide CCP services face additional risk-management 
challenges because of factors unique to the security-based swaps 
market, such as more limited historical information on pricing and the 
jump-to-default risk \40\ associated with certain security-based swaps, 
such as CDS. The Commission preliminarily believes that to promote 
prompt and accurate clearance and settlement and maintain higher levels 
of financial resources to account for these risks, it is important for 
security-based swap clearing agencies that provide CCP services to be 
able to withstand a default by the two participants to which the 
clearing agency has its largest exposures in extreme but plausible 
market conditions. Moreover, the Commission expects that when a 
clearing agency that provides CCP services determines what level of 
financial resources would be sufficient to account for exposures in 
extreme but plausible market conditions, the clearing agency would 
consider potential losses that would be greater than those resulting 
from observed periods of significant volatility or disturbances.
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    \40\ Jump-to-default risk relates to the possibility of a 
reference entity unexpectedly experiencing a credit event over a 
short period resulting in significant changes in the value of any 
CDS contracts written on that particular reference entity. For 
example, a seller of a CDS could be collecting regular premiums with 
little expectation that the reference entity may default. However, 
if that reference entity suddenly experiences a credit event, it 
will trigger an unexpected obligation on the protection seller to 
pay a lump sum, dependent on the size of the contract, to the 
protection buyer. See generally Darrell Duffie and Haoxiang Zhu, 
Does a Central Clearing Counterparty Reduce Counterparty Risk? 
(Stanford Univ. 2010), available at http://www.stanford.edu/~duffie/
DuffieZhu.pdf.
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(b)(3). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding requiring 
clearing agencies providing CCP services to maintain sufficient 
financial resources sufficiently clear? If not, why not and what would 
be a better alternative?
     Should the Commission require all clearing agencies 
providing CCP services, instead of only those clearing security-based 
swaps, to maintain sufficient financial resources to withstand a 
default by the two participants to which it has the largest exposures 
in extreme but plausible market conditions? Should all or any subset of 
clearing agencies be required to maintain sufficient financial 
resources based on more or less than two participant defaults? For 
example, should the financial resources requirements be different for 
certain clearing agencies, such as security-based swap clearing 
agencies or those designated as systemically important under the 
Clearing Supervision Act? Should the Commission require that financial 
resources be measured based on a different standard than resources 
needed to withstand default by a certain number of participants, such 
as a percentage of the total business conducted by the clearing agency?
     How do current practices of clearing agencies pertaining 
to financial resources compare to the practices that the Commission 
proposes to require in this rule? What are the expected incremental 
costs to clearing agencies in connection with adding to or revising 
their current practices in order to implement the Commission's proposed 
rule?
     Are the financial resources standards for clearing 
agencies providing CCP services proposed by the Commission sufficient 
for the proper functioning of a clearing agency? Should a clearing 
agency providing CCP services be able to mutualize losses during a 
default using financial resources designed to cover price movements? 
Should the Commission establish more specific rules? For example, 
should the Commission establish standards for the level of clearing 
agency resources maintained in a guarantee fund as opposed to a margin 
fund, or should clearing agencies providing CCP services be given 
discretion to manage the composition of their financial resources as 
they see fit? Why or why not? Should the Commission establish more 
prescriptive requirements concerning the financial resources of certain 
clearing agencies providing CCP services, such as those

[[Page 14480]]

that clear security-based swaps or those that are designated as 
systemically important under the Clearing Supervision Act?
     Should the Commission provide additional guidance 
regarding what constitutes ``extreme but plausible market conditions''? 
Does allowing clearing agencies providing CCP services discretion to 
interpret this term create uncertainty or introduce more risk into the 
financial system than might otherwise be the case?
     What are clearing agencies' providing CCP services and 
their participants' incentives to maintain financial resources to 
withstand the foreseeable consequences of participant defaults? Are 
there identifiable circumstances in which these self-interested 
incentives may vary? For example, do clearing agencies providing CCP 
services with public shareholders have different incentives than 
clearing agencies providing CCP services that are member-owned? Can the 
capital structure of the clearing agency providing CCP services and the 
order in which losses are suffered by defaulting parties, surviving 
participants and any public shareholders affect the level of risk 
accepted by the clearing agency? If so, how should the Commission take 
these factors into account when establishing rules for clearing 
agencies providing CCP services?
Proposed Rule 17Ad-22(b)(4): Model Validation
    Proposed Rule 17Ad-22(b)(4) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide for an 
annual model validation process consisting of evaluating the 
performance of the clearing agency's margin models and the related 
parameters and assumptions associated with such models by a qualified 
person who does not perform functions associated with the clearing 
agency's margin models (except as part of the annual model validation) 
and does not report to a person who performs these functions.\41\
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    \41\ Any person responsible for supervising the operation of the 
clearing agency's margin model would be viewed as performing the 
functions associated with the clearing agency's margin model and 
could not therefore have supervisory authority over the person 
conducting the model validation.
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    The Commission preliminarily believes that clearing agencies that 
provide CCP services need to have a qualified person conduct a review 
of models that are used to set margin levels, along with related 
parameters and assumptions, in order to assure that the models perform 
in a manner that facilitates prompt and accurate clearance and 
settlement of transactions. In determining whether a person is 
qualified to conduct the model validation, clearing agencies providing 
CCP services could consider several factors, including the person's 
experience in validating margin models, expertise in risk management 
generally, and understanding of the clearing agency's operations and 
procedures.
    In addition, the Commission is proposing that the person conducting 
the model validation be a person who does not perform functions 
associated with the clearing agency's margin models (except as part of 
the annual model validation) and does not report to a person who 
performs these functions. The Commission preliminarily believes that a 
review by a person who is not involved in the day-to-day operation of 
the margin model is important to identify potential vulnerabilities or 
limitations and to promote a critical evaluation of the model. This is 
because a person involved in the functions related to the model's 
operation, or someone who reports to such a person, may be less likely 
to critically evaluate the margin model because of preconceived views 
or a desire not to find issues with a model that they help to 
operate.\42\ The Commission preliminarily believes that the person 
validating the clearing agency's margin model should be sufficiently 
free from outside influences so that he or she can be completely candid 
in their assessment of the model.
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    \42\ Proposed Rule 17Ad-22(b)(4), however, would not prevent a 
person conducting the model validation from being employed by the 
clearing agency if the conditions in the proposed rule are 
satisfied. For example, a qualified member of the internal audit 
function that operates under a separate reporting line may be able 
to provide the model validation.
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    Finally, the Commission is proposing that the model validation be 
conducted on an annual basis. The Commission preliminarily believes 
that conducting the model validation on an annual basis would provide a 
sufficiently frequent evaluation period because model performance 
ordinarily would not be expected to vary significantly over short 
periods but should be re-evaluated as market conditions change.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(b)(4). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule requiring clearing 
agencies to provide for a model validation sufficiently clear? If not, 
why not and what would be a better alternative?
     What are the advantages and disadvantages of requiring an 
annual model validation? Should a more or less frequent model 
validation be required? Should the model validation be specifically 
triggered as a result of any material change in the clearing agency, 
such as the introduction of new products or the addition of portfolio 
margining arrangements with other clearing agencies?
     Should the Commission place more or less stringent 
restrictions on the type of person who is permitted to conduct the 
model validation? For example, should the Commission prescribe any 
specific qualifications that the person conducting the model validation 
should have? Should the Commission require an outside consultant be 
engaged to conduct the model validation? Should persons that perform 
functions associated with the clearing agency's margin model be able to 
conduct the model validation?
     Does the proposal provide sufficient or excessive 
separation of the person conducting the model validation from the 
persons who develop and administer the model? In either case, please 
explain. Should the Commission adopt additional requirements to help 
ensure that the persons conducting the model validation are free from 
retaliation and influence? If so, please explain. What costs or burdens 
might such additional requirements impose on the effective validation 
of models?
Proposed Rule 17Ad-22(b)(5): Non-Dealer Member Access
    Proposed Rule 17Ad-22(b)(5) requires a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide the 
opportunity for a person that does not perform any dealer \43\ or 
security-based swap dealer \44\ services to

[[Page 14481]]

obtain membership on fair and reasonable terms at the clearing agency 
in order to clear securities for itself or on behalf of other persons. 
Dealer and security-based swap dealer services generally involve 
services designed to facilitate securities transactions by buying and 
selling securities for a person's own account. The Commission 
preliminarily believes that requiring clearing agencies that perform 
CCP services to allow persons who are not dealers or security-based 
swap dealers to become members of the clearing agency will promote more 
competition in and access to clearing through facilitating indirect 
clearing arrangements, commonly referred to as correspondent clearing. 
Correspondent clearing is an arrangement between a current participant 
of a clearing agency and a non-participant that desires to use the 
clearing agency for clearance and settlement services.
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    \43\ The term ``dealer'' is defined in Section 3(a)(5) of the 
Exchange Act and means any person engaged in the business of buying 
and selling securities for such person's own account through a 
broker or otherwise. The definition contains an exception for a 
person that buys or sells securities for such person's own account, 
either individually or in a fiduciary capacity, but not as a part of 
a regular business. There is also an exception for banks engaging in 
certain specified activities. See 15 U.S.C. 78c(a)(5) for the 
complete definition.
    \44\ Pursuant to Section 761 of the Dodd-Frank Act, the term 
``security-based swap dealer'' is added as Section 3(a)(71) of the 
Exchange Act, 15 U.S.C. 78c(a), and generally means any person who 
(A) holds itself out as a dealer in security-based swaps; (B) makes 
a market in security-based swaps; (C) regularly enters into 
security-based swaps with counterparties as an ordinary course of 
business for its own account; or (D) engages in any activity causing 
it to be commonly known in the trade as a dealer or market maker in 
security-based swaps. See Public Law 111-203, Section 761 for the 
complete definition. See also Exchange Act Release No. 63452 
(December 7, 2010), 75 FR 80174 (December 21, 2010), supra note 4.
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    The Commission has previously noted that in situations where direct 
access to clearing agencies is limited by reasonable participation 
standards firms that do not meet these standards may still be able to 
access clearing agencies through correspondent clearing arrangements 
with direct participants.\45\ Such a process would involve the non-
participant entering into a correspondent clearing arrangement with a 
participant so that the transaction may be submitted by the participant 
to the clearing agency. Thus, the success of correspondent clearing 
arrangements depends on the willingness of participants to enter into 
such arrangements with non-participant firms which may act as direct 
competitors to the participants in the participants' capacity as 
dealers or security-based swap dealers in the market for buying or 
selling the relevant securities. Given that participants that are 
dealers or security-based swap dealers may have an incentive to 
restrict clearing access to potential competitors, correspondent 
clearing arrangements may not be readily established without providing 
participants that do not provide dealer or security-based swap dealer 
services with the ability to become members of a clearing agency and 
thereby help develop correspondent clearing arrangements.
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    \45\ See Exchange Act Release No. 63107 (October 14, 2010), 75 
FR 65882 (October 26, 2010) (Ownership Limitations and Governance 
Requirements for Security-Based Swap Clearing Agencies, Security-
Based Swap Execution Facilities, and National Securities Exchanges 
with Respect to Security-Based Swaps under Regulation MC).
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    At the same time, the Commission recognizes that persons who are 
not dealers or security-based swap dealers may fail to meet other 
standards for membership at a clearing agency, such as the operational 
capabilities required for direct participation. Proposed Rule 17Ad-
22(b)(5) would not prohibit clearing agencies that provide CCP services 
from taking these factors into account when establishing membership 
criteria for non-dealers. Rather, the proposal would prohibit clearing 
agencies that provide CCP services from denying membership on fair and 
reasonable terms to otherwise qualified persons solely by virtue of the 
fact that they do not perform any dealer or security-based swap dealer 
services.
    The Commission preliminarily believes that the incentives of 
persons who do not provide dealer or security-based swap dealer 
services to promote access at the clearing agency that provides CCP 
services would not be limited by a desire to restrict competition in 
the market for buying or selling the relevant securities. Accordingly, 
the Commission preliminarily believes that permitting such persons to 
become members of a clearing agency that provides CCP services may 
foster the development of correspondent clearing arrangements that 
would allow dealers and security-based swap dealers, who may otherwise 
not be able to meet reasonable participation standards of a clearing 
agency, to obtain access to the clearing agency through correspondent 
clearing arrangements. The Commission preliminarily believes this would 
be beneficial because it could result in greater competition in and 
access to clearing.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(b)(5). In addition, the Commission requests 
comments on the following specific issues:
     In addition to prohibiting denial of membership based on 
whether a person provides dealer or security-based swap dealer services 
as a way to facilitate greater indirect access to clearing, should the 
Commission consider other measures to promote access to clearing at 
clearing agencies that provide CCP services, including any requirements 
designed to promote greater direct access to clearing (e.g., adding 
specific membership categories)?
     Should clearing agencies that provide CCP services be 
required to have policies and procedures that are designed to promote 
membership by non-dealers? If so, what would be the advantages and 
disadvantages of requiring the clearing agency to periodically measure 
its performance against the objectives contained in such policies and 
procedures, and who within the clearing agency should be responsible 
for conducting such a review (for instance the chief compliance 
officer)?
     Is the Commission's proposed rule requiring clearing 
agencies that provide CCP services to provide the opportunity for a 
person that does not perform any dealer or security-based swap dealer 
services to obtain membership at the clearing agency to clear 
securities for itself or on behalf of other persons sufficiently clear? 
If not, why not?
     Should the Commission consider more prescriptive 
regulations to specify the criteria that clearing agencies should use 
to grant membership privileges to persons that do not perform any 
dealer or security-based swap dealer services to clear securities for 
themselves or on behalf of other persons? Please explain why or why 
not.
     What are the potential advantages and disadvantages of 
having persons that do not provide dealer or security-based swap dealer 
services as members of a clearing agency?
     If a clearing agency that provides CCP services does not 
have rules that facilitate correspondent clearing, should the 
Commission consider requiring that clearing agency to justify to the 
Commission why its rules do not facilitate correspondent clearing? What 
would be the advantages and disadvantages of such a requirement? What 
are the potential reasons why a clearing agency may not have rules that 
facilitate correspondent clearing arrangements?
     Should the Commission consider limiting the proposed 
requirement for providing membership access to persons who do not 
provide dealer or security-based swap dealer services to a certain 
category of clearing agencies, such as security-based swap clearing 
agencies that provide CCP services or those designated as systemically 
important? Please explain why or why not. In particular, are there 
special considerations, such as market concentration, affecting 
security-based swap clearing agencies that provide CCP services that 
make access to those clearing agencies for non-dealers particularly 
important? If not, why not? If so, what are those considerations and 
how would this requirement address

[[Page 14482]]

them? Do any similar considerations exist, or is there a potential that 
similar considerations could exist in the future, with respect to 
clearing agencies that clear securities other than security-based 
swaps? Would there be any advantages or disadvantages to maintaining 
one standard for all clearing agencies that provide CCP services? 
Please explain.
Proposed Rule 17Ad-22(b)(6): Portfolio Size and Transaction Volume 
Thresholds Restrictions
    Proposed Rule 17Ad-22(b)(6) prohibits a clearing agency that 
provides CCP services from having membership standards that require 
that participants maintain a portfolio of any minimum size or that 
participants maintain a minimum transaction volume. The Commission 
notes that the proposed rule would not prohibit a clearing agency that 
provides CCP services from considering portfolio size and transaction 
volume as one of several factors when reviewing a potential 
participant's operations. Rather, the proposed rule would prohibit the 
establishment of minimum portfolio sizes or transaction volumes that by 
themselves would act as barriers to participation by new participants 
in clearing. Such minimum thresholds would not function as a good 
indicator of whether a participant is able to meet its obligations to a 
clearing agency.\46\ This is because new participants to a clearing 
agency that provides CCP services that do not initially intend to 
transact in substantial size or volume may nevertheless have the 
operational and financial capacity to perform the activities that other 
participants are able to perform. Therefore, the Commission 
preliminarily believes that the proposed rule may help to facilitate 
the requirement in Section 17A of the Exchange Act that the rules of a 
clearing agency permit fair and open access.\47\
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    \46\ Proposed Rule 17Ad-22(b)(6) would not prohibit a clearing 
agency from imposing maximums portfolio sizes or transaction volume 
amounts.
    \47\ See infra note 59.
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(b)(6). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule prohibiting clearing 
agencies that provide CCP services from having membership standards 
that require participants to maintain a portfolio of any minimum size 
or to meet a minimum transaction volume threshold sufficiently clear? 
If not, why not?
     What are the potential advantages and disadvantages of 
prohibiting clearing agency membership standards from requiring 
participants to maintain a minimum portfolio size or meet a minimum 
transaction volume threshold? Please explain.
     Should the Commission consider imposing the proposed 
requirements on all clearing agencies, rather than only those that 
provide CCP services? Why or why not?
     Should the Commission consider prohibiting only security-
based swap clearing agencies that provide CCP services from having 
membership standards that require participants to maintain a minimum 
portfolio size or to maintain a minimum transaction volume? Please 
explain why or why not. In particular, are there special considerations 
affecting security-based swap clearing agencies that provide CCP 
services that make it particularly important to prevent use of these 
specific criteria in their membership standards? If so, what are those 
special considerations and how would this requirement address them? If 
not, in what ways would such a requirement impact the operations of 
security-based swap clearing agencies that provide CCP services and 
other types of clearing agencies? Would there be advantages to 
maintaining one standard for all clearing agencies that provide CCP 
services? Why or why not?
Proposed Rule 17Ad-22(b)(7): Net Capital Restrictions
    Proposed Rule 17Ad-22(b)(7) requires a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide a person 
that maintains net capital \48\ equal to or greater than $50 million 
with the opportunity to obtain membership at the clearing agency, with 
any net capital requirements being scalable so that they are 
proportional to the risks posed by the participant's activities to the 
clearing agency. This means that while a clearing agency that provides 
CCP services could not restrict access to the clearing agency solely 
because a participant does not have a net capital level above $50 
million, the clearing agency's policies and procedures could be 
reasonably designed to limit the activities of the participant in 
comparison to the activities of other participants that maintained a 
higher net capital level. For example, as a way to help make its 
requirements scalable, a clearing agency may elect to place limits on 
its potential exposure to participants operating at certain net capital 
thresholds by restricting the maximum size of the portfolio such 
participants are permitted to maintain at the clearing agency. The 
Commission preliminarily believes that persons that maintain a net 
capital level of $50 million would have sufficient net capital to be 
able to participate at some level in a clearing agency that provides 
CCP services, provided that they are able to comply with other 
reasonable membership standards. Based on broker-dealer reporting data 
available to the Commission, the $50 million threshold for net capital 
is a standard that only approximately 4% of the total number of broker-
dealers could satisfy. Accordingly, the Commission preliminarily 
believes that prohibitions on membership access that are based solely 
on persons having net capital equal to or greater than $50 million 
could introduce unnecessary barriers to clearing access. The Commission 
also preliminarily believes that the proposed rule would facilitate 
sound risk management practices by the clearing agencies by encouraging 
the clearing agencies to examine and articulate the benefits of higher 
net capital requirements as a result of having clearing agencies 
develop scalable membership standards that link the nature and degree 
of participation with the potential risks posed by the participant.\49\
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    \48\ Proposed Rule 17Ad-22(a)(5) would define ``net capital'', 
for the limited purposes of proposed Rule 17Ad-22(b)(7), to have the 
same meaning as set forth in Rule 15c3-1 under the Exchange Act for 
broker-dealers or any similar risk adjusted capital calculation for 
all of other prospective clearing members.
    \49\ The Commission notes there are examples of capital-related 
requirements that differentiate among types of participants. For 
instance, the Fixed Income Clearing Corporation has maintained a $50 
million net worth requirement and $10 million excess net capital 
requirement for its Category 1 Dealer Netting Members and a $25 
million net worth requirement and $10 million excess net capital 
requirement for its Category 2 Dealer Netting Members.
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    Proposed Rule 17Ad-22(b)(7) also permits a clearing agency to 
provide for a higher net capital requirement (i.e., higher than $50 
million) as a condition for membership at the clearing agency if the 
clearing agency demonstrates to the Commission that such a requirement 
is necessary to mitigate risks that could not otherwise be effectively 
managed by other measures, such as scalable limitations on the 
transactions that the participants may clear through the clearing 
agency, and the Commission approves the higher net capital requirement 
as part of a rule filing or

[[Page 14483]]

clearing agency registration application. The Commission preliminarily 
believes that by providing a method for clearing agencies to impose 
higher net capital requirements in circumstances where such 
requirements are necessary to mitigate risks, the proposed rule would 
provide appropriate flexibility for risk management purposes.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(b)(7). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule limiting the ability of 
clearing agencies that provide CCP services to deny membership access 
to participants with $50 million or more in net capital sufficiently 
clear? If not, why not?
     What are advantages or disadvantages of requiring a 
clearing agency that provides CCP services to provide a person that 
maintains a net capital equal to or greater than $50 million with the 
ability to obtain membership at the clearing agency, with any net 
capital requirements being scalable so that they are proportional to 
the risks posed by the participant's activities to the clearing agency?
     Should the Commission consider a higher or lower threshold 
for net capital than the proposed $50 million amount? Please explain 
and describe the rationale for the desired threshold amount.
     Should the Commission consider providing for the 
adjustment of the $50 million net capital threshold to reflect 
inflation, deflation or other factors? If so, how should the Commission 
make such adjustment?
     Would access to clearing agencies that provide CCP 
services by dealers or security-based swap dealers that are not 
currently members of such clearing agencies be significantly improved 
as a result of the proposed requirement?
     Are there any difficulties that clearing agencies that 
provide CCP services may encounter in implementing a system that seeks 
to scale net capital to the risk that a participant brings to a 
clearing agency? Would clearing agencies be able to effectively model 
such risks to prevent the potential of significant losses above the 
amounts of margin collected? How would clearing agencies seek to limit 
the activities of participants to prevent the risk of significant 
losses above the amounts of margin collected?
     Does the proposal, to permit a clearing agency to provide 
for a higher net capital requirement (i.e., higher than $50 million) as 
a condition for membership at the clearing agency if the clearing 
agency demonstrates to the Commission that such a requirement is 
necessary to mitigate risks that could not otherwise be effectively 
managed by other measures, provide sufficient flexibility to be able to 
address potential risk management concerns? Would the proposal lead to 
higher or lower levels of risk at clearing agencies? Please explain.
     Should the Commission consider requiring only security-
based swap clearing agencies that provide CCP services to be subject to 
this requirement? Please explain why or why not. In particular, are 
there special considerations affecting security-based swap clearing 
agencies that provide CCP services, such as market concentration, that 
make it particularly important for a person that maintains net capital 
equal to or greater than $50 million to have the ability to obtain 
membership? If so, what are those special considerations and how would 
this requirement address them? If not, in what ways would this 
requirement impact the operations of security-based swap clearing 
agencies that provide CCP services and other clearing agencies? Would 
there be any advantages or disadvantages to maintaining one requirement 
for all clearing agencies that provide CCP services? Please explain.
3. Proposed Rule 17Ad-22(c)
    Proposed Rule 17Ad-22(c)(1) would provide that each fiscal quarter 
(based on calculations made as of the last business day of the clearing 
agency's fiscal quarter), or at any time upon Commission request, a 
clearing agency that performs central counterparty services shall 
calculate and maintain a record \50\ of the financial resources 
necessary to meet its requirement in proposed Rule 17Ad-22(b)(3) and 
sufficient documentation to explain the methodology it uses to compute 
such financial resource requirement.
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    \50\ See Exchange Act Rule 17a-1 (17 CFR 240.17a-1). Clearing 
agencies may destroy or otherwise dispose of records at the end of 
five years consistent with Exchange Act Rule 17a-6 (17 CFR 240.17a-
6).
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    The Commission preliminarily believes that it would be appropriate 
to require clearing agencies that provide CCP services to make these 
calculations quarterly or at any time based on the request of the 
Commission because this proposed requirement would provide a periodic 
update of the financial resources that are needed as market conditions 
change, while also providing flexibility for the Commission to request 
such calculations on a real-time basis, which may be useful during 
periods of market stress or other circumstances where more timely 
information is desired. These calculations and related documentation 
should help the Commission in its oversight of clearing agencies' 
compliance with proposed Rule 17Ad-22(b)(3) by providing a clear record 
of the method used by the clearing agency providing CCP services to 
maintain sufficient financial resources.
    Proposed Rule 17Ad-22(c)(2) would require a clearing agency to post 
on its Web site an annual audited financial report. Each financial 
report would be required to (i) be a complete set of financial 
statements of the clearing agency for the most recent two fiscal years 
of the clearing agency and be prepared in accordance with U.S. 
generally accepted accounting principles (``U.S. GAAP''), except that 
for a clearing agency that is a corporation or other organization 
incorporated or organized under the laws of any foreign country, the 
financial statements may be prepared according to U.S. GAAP or 
International Financial Reporting Standards as issued by the 
International Accounting Standards Board (``IFRS''); (ii) be audited in 
accordance with standards of the Public Company Accounting Oversight 
Board by a registered public accounting firm that is qualified and 
independent in accordance with Rule 2-01 of Regulation S-X (17 CFR 
210.2-01); and (iii) include a report of the registered public 
accounting firm that complies with paragraphs (a) through (d) of Rule 
2-02 of Regulation S-X (17 CFR 210.2-02). The Commission preliminarily 
believes that requiring the posting of the clearing agency's audited 
annual financial report would provide an additional layer of 
information about the activities and financial strength of the clearing 
agency that market participants may find useful in assessing their use 
of the clearing agency's services.\51\
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    \51\ The requirements of proposed Rule 17Ad-22(c)(2) concerning 
the audited annual financial report would apply individually to each 
respective clearing agency.
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(c). In addition, the Commission requests comments 
on the following specific issues:
     Is the Commission's proposed rule regarding calculating 
and maintaining a record of the financial resources necessary pursuant 
to proposed Rule 17Ad-22(b)(3) sufficiently clear? If not,

[[Page 14484]]

why not and what would be a better alternative?
     How do current practices by clearing agencies providing 
CCP services compare to the practices that the Commission proposes 
requiring in this rule with respect to determining needed financial 
resources? What are the expected incremental costs to clearing agencies 
that provide CCP services in connection with adding to or revising 
their current practices in order to implement the Commission's proposed 
rule?
     Should the Commission require calculation of the financial 
resources related information more or less frequently than quarterly? 
Why or why not?
     Should the Commission require any other financial 
statements of a clearing agency to be posted on its Web site, such as 
quarterly financial statements?
     What are the advantages and disadvantages of permitting a 
financial report to be in compliance with IFRS as an alternative to 
U.S. GAAP? If the Commission adopts the proposal to permit certain 
clearing agencies to report using IFRS as published by the IASB, should 
the Commission require a reconciliation to U.S. GAAP for specified 
accounts? If so, what accounts or items would be most useful to 
participants and other regulators? Would permitting only clearing 
agencies that are incorporated or organized under the laws of any 
foreign country to report under IFRS create any incentives for changing 
jurisdictions of incorporation or organization? If it is permitted, 
should we exclude certain clearing agencies, such as those who fall 
within one or more of the following categories: (i) Those whose 
financial reports have not been audited by an independent public 
accountant inspected by the PCAOB, (ii) those who have not received a 
``clean'' audit opinion, or (iii) those who have previously had to 
correct a material error in their financial statements?
4. Proposed Rule 17Ad-22(d)
    Proposed Rule 17Ad-22(d) would set forth certain standards that 
relate to clearance and settlement processes. The areas addressed 
include: (1) Transparent and enforceable rules and procedures; (2) 
participation requirements; (3) custody of assets and investment risk; 
(4) operational risk; (5) money settlement risk; (6) cost-
effectiveness; (7) links; (8) governance; (9) information on services; 
(10) immobilization and dematerialization of stock certificates; (11) 
default procedures; (12) timing of settlement finality; (13) delivery 
versus payment; (14) risk controls to address participants' failures to 
settle; and (15) physical delivery risks. The discussion below provides 
greater detail regarding each respective standard covered in proposed 
Rule 17Ad-22(d).
Proposed Rule 17Ad-22(d)(1): Transparent and Enforceable Rules and 
Procedures
    Proposed Rule 17Ad-22(d)(1) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for a well founded, 
transparent and enforceable (legally and practically) structure for 
each aspect of their activities in all relevant jurisdictions.\52\ The 
clearing agency should have written policies and procedures\53\ in 
place that, at a minimum, address the significant aspects of a clearing 
agency's operations and risk management in order to provide a well 
founded legal framework and must be clear, internally consistent, and 
readily accessible by the public in order to provide a transparent 
legal framework. In addition, the clearing agency must be able to 
enforce its policies and procedures that contemplate enforcement by the 
clearing agency. Moreover, policies and procedures that govern or 
create remedial measures that a party other than the clearing agency 
(such as a clearing member) can undertake to seek redress or to promote 
compliance with applicable rules must be enforceable.\54\ For the 
clearing agency's policies and procedures to be enforceable, a clearing 
agency must have appropriate means to compel parties to comply in a 
timely manner, including members or service providers of clearing 
agencies that are non-U.S. persons. The Commission preliminarily 
believes this proposed requirement would help to reduce the legal risks 
involved in the clearance and settlement process. Such legal risks 
include, among other things, the likelihood that the policies and 
procedures of a clearing agency are incomplete, opaque, or not 
enforceable and will therefore adversely affect the functioning of the 
clearing agency.\55\ Because they would function to reduce these legal 
risks, the Commission preliminarily believes that well founded, 
transparent and enforceable policies and procedures established by the 
clearing agency to underpin the clearing agency's operational and 
business activities are essential to a clearing agency's ability to 
facilitate the prompt and accurate clearance and settlement of 
securities transactions and safeguard securities and funds as required 
for the protection of investors by Section 17A of the Exchange Act.\56\
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    \52\ A relevant jurisdiction would include, among others, 
activities (i) in the United States, (ii) involving any means of 
interstate commerce, or (iii) in respect to providing clearing 
services to any U.S. person. For clearing agencies that operate in 
multiple jurisdictions, this also could include resolving possible 
conflicts of laws issues that the clearing agency may encounter.
    \53\ Clearing agencies are SROs as defined in Section 3(a)(26) 
of the Exchange Act. A stated policy, practice, or interpretation of 
an SRO, such as a clearing agency's written policies and procedures, 
would generally be deemed to be a proposed rule change. See 17 CFR 
240.19b-4.
    \54\ The Commission preliminarily believes that proposed Rule 
17Ad-22(d)(1) would augment the Exchange Act requirement that the 
rules of the clearing agency must provide that its participants 
shall be appropriately disciplined for any violation of any 
provision of the rules of the clearing agency. See 15 U.S.C. 78q-
1(b)(3)(G).
    \55\ See generally, RSSS Recommendation 1, Legal Framework and 
RCCP Recommendation 1, Legal Risk.
    \56\ 15 U.S.C. 78q-1(a)(1)(A).
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(1). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding policies and 
procedures providing for a well founded, transparent, and enforceable 
legal framework sufficiently clear? If not, why not? Is there a better 
alternative?
     How would this proposal affect the current practices of 
clearing agencies in formulating policies and procedures? Would the 
proposed rule affect the costs of providing clearing agency services? 
Please explain.
     What are the advantages and disadvantages of taking into 
account that legal risks may vary by the types of services offered by 
clearing agencies and whether the clearing agency operates in multiple 
jurisdictions? Are there any considerations, such as issues concerning 
compliance with regulations under various jurisdictions, that the 
Commission should take into account for clearing agencies operating in 
multiple jurisdictions?
     Should the Commission consider more prescriptive rules to 
define how clearing agencies would provide for a well founded, 
transparent and enforceable legal framework? Please explain why or why 
not. Alternatively, should the Commission consider more prescriptive 
rules that would apply in the context of approval of a clearing 
agency's application for registration?
     Should the Commission require a clearing agency to submit 
legal opinions or other supporting evidence to demonstrate the legal 
adequacy of the mechanisms at the clearing agency that

[[Page 14485]]

are in place to handle participant defaults?
Proposed Rule 17Ad-22(d)(2): Participation Requirements
    Proposed Rule 17Ad-22(d)(2) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency. This 
proposed requirement is intended to reduce the likelihood of defaults 
by participants, while also providing flexibility to tailor standards 
that are linked to the obligations of the participant. As a result, the 
Commission preliminarily believes this requirement would protect 
investors and facilitate prompt and accurate clearance and settlement 
by promoting membership standards at clearing agencies that are likely 
to limit the potential for defaults.
    The proposed rule also would require clearing agencies to have 
procedures in place to monitor that participation requirements are met 
on an ongoing basis. Operational and financial stability of 
participants is subject to market forces and can therefore change over 
time. Because participants collectively contribute to the operational 
and financial stability of a clearing agency, the Commission 
preliminarily believes that the proposed requirement to continue to 
monitor compliance with the clearing agency's participation 
requirements supports the Exchange Act requirement that clearing 
agencies are able to facilitate prompt and accurate clearance and 
settlement.\57\
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    \57\ 15 U.S.C 78q-1(b)(3)(A).
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    In addition, clearing agencies would be required to have 
participation requirements that are objective,\58\ publicly disclosed, 
and facilitate fair and open access.\59\ The Commission preliminarily 
believes this requirement would foster compliance with the requirement 
under Section 17A of the Exchange Act that the rules of a clearing 
agency must not be designed to permit unfair discrimination in the 
admission of participants by requiring standards that are designed to 
be measurable, open and fair.\60\
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    \58\ Objective criteria would generally include, but not be 
limited to, criteria that are based on measureable facts such as 
capital requirements.
    \59\ Having open access, in part, involves having a process for 
admission of participants that does not unfairly discriminate. See 
15 U.S.C. 78q-1(b)(3)(F) (``The rules of a clearing agency * * * are 
not designed to permit unfair discrimination in the admission of 
participants or among participants in the use of the clearing 
agency''). In addition, the Dodd-Frank Act added Section 3C to the 
Exchange Act which provides in relevant part: ``(2) OPEN ACCESS.--
The rules of a clearing agency described in paragraph (1) shall-- 
(A) prescribe that all security-based swaps submitted to the 
clearing agency with the same terms and conditions are economically 
equivalent within the clearing agency and may be offset with each 
other within the clearing agency; and (B) provide for non-
discriminatory clearing of a security-based swap executed 
bilaterally or on or through the rules of an unaffiliated national 
securities exchange or security-based swap execution facility.'' 
Public Law 111-203 Sec.  763(a) (adding Section 3C to the Exchange 
Act).
    \60\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(2). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding participation 
requirements sufficiently clear? If not, why not and what would be a 
better alternative?
     How do current practices of registered clearing agencies 
with respect to participation standards compare to the proposed 
requirements in this rule? Are there any expected costs or benefits to 
clearing agencies in connection with adding to or revising their 
participation standards in order to implement this portion of the 
Commission's proposed rule?
     Should the Commission's proposed rule regarding 
participation requirements be more specific? If so, why and in what 
way? Should the Commission's proposed rule regarding participation 
requirements be less specific to allow for greater flexibility? If so, 
why and in what way?
     Should more specific monitoring obligations be imposed to 
ensure compliance with participation standards? For example, should the 
Commission consider mandating an independent review of the process for 
monitoring participants' compliance with the clearing agency's 
participation requirements? Why or why not?
Proposed Rule 17Ad-22(d)(3): Custody of Assets and Investment Risk
    Proposed Rule 17Ad-22(d)(3) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to hold assets in a manner whereby risk 
of loss or of delay in access to them is minimized. Minimizing the risk 
of loss or delay in access is intended to refer to holding assets in 
ways that, to the extent reasonably practicable, would limit the 
potential for loss of those assets and delay in access to them. For 
example, the Commission is aware that clearing agencies currently seek 
to minimize the risk of loss or delay in access by holding assets that 
are highly-liquid (e.g., cash, U.S. Treasury securities or securities 
issued by a U.S. government agency) and engaging banks to custody the 
assets and facilitate settlement. Compliance with the proposed 
requirement is intended to improve the ability of the clearing agency 
to meet its settlement obligations by reducing the likelihood that 
assets securing participant obligations to the clearing agency would be 
unavailable or insufficient when the clearing agency needs to draw on 
them. The proposed rule would also require clearing agencies to invest 
assets in instruments with minimal credit, market, and liquidity risks. 
A requirement that a clearing agency hold assets in instruments with 
minimal credit, market and liquidity risk may promote the clearing 
agency's ability to retrieve these assets promptly. That, in turn, 
could help to increase the potential for a clearing agency to timely 
meet its settlement obligations to its participants.
    The Commission preliminarily believes that proposed Rule 17Ad-
22(d)(3) would strengthen the requirement in Section 17A(b)(3)(F) of 
the Exchange Act that the rules of a clearing agency must be designed 
to ensure the safeguarding of securities and funds in the custody or 
control of the clearing agency or for which the clearing agency is 
responsible.\61\ In this way, the Commission preliminarily believes the 
proposed rule would also promote protection of the financial market 
served by the clearing agency.
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    \61\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(3). In addition, the Commission requests 
comments on the following specific issues:
     Are the proposed rule's requirements regarding custody and 
investment of assets sufficiently clear? If not, why not and what would 
be a better alternative?
     How do current practices of clearing agencies for holding 
or investing in assets compare to the Commission's proposal? What are 
the expected incremental costs to clearing agencies in connection with 
adding to or revising these current practices in order to comply with 
the Commission's proposed rule?
     Are there any other factors not mentioned that the 
Commission should take into consideration with respect to

[[Page 14486]]

minimizing custody of assets and investment risk?
     Should clearing agencies ever be permitted to hold assets 
in instruments that do not have minimal credit, market and liquidity 
risk? If so, why and under what circumstances?
     What measures should clearing agencies have in place to 
minimize risk of loss or delay in access to assets? Should the proposed 
rule specify any such measures?
Proposed Rule 17Ad-22(d)(4): Identification and Mitigation of 
Operational Risk
    Proposed Rule 17Ad-22(d)(4) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify sources of operational risk 
and minimize these risks through the development of appropriate 
systems, controls, and procedures. A clearing agency that develops 
systems, controls and procedures which, taken as a whole, are designed 
to limit the identified sources of operational risk to the extent 
reasonably practicable would be able to satisfy this requirement. The 
proposed rule also would require clearing agencies to implement systems 
that are reliable, resilient and secure and have adequate scalable 
capacity. This should help to ensure that clearing agencies are able to 
operate with minimal disruptions, even during times of market stress 
when there may be greater demands on their systems due to higher 
volume. In addition, the proposed rule would require that clearing 
agencies have business continuity plans that allow for timely recovery 
of operations and ensure the fulfillment of a clearing agency's 
obligations. This requirement would be relevant in the event of, among 
other things, deficiencies in information systems or internal controls, 
human errors, management failures, unauthorized intrusions into 
corporate or production systems, or disruptions from external events 
such as natural disasters.
    The Commission preliminarily believes that the requirements under 
proposed Rule 17Ad-22(d)(4) should collectively help to address risks 
posed by potential operational deficiencies to the clearing agency and 
its participants. Specifically, to help limit disruptions that may 
impede the proper functioning of a clearing agency, the Commission 
preliminarily believes it is imperative that clearing agencies review 
their operations for potential weaknesses and develop appropriate 
systems, controls, and procedures to address weaknesses contemplated 
under the proposed rule. Moreover, the Commission preliminarily 
believes that maintaining reliable, resilient and secure systems with 
adequate backup capability, as well as continuity plans providing for 
timely recovery of operations, are essential components of facilitating 
prompt and accurate clearance and settlement. The Commission intends 
for proposed Rule 17Ad-22(d)(4) to complement the existing guidance 
provided by the Commission in its Automation Review Policy statements 
\62\ and Interagency White Paper on Sound Practices to Strengthen the 
Resilience of the U.S. Financial System.\63\
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    \62\ See Exchange Act Release Nos. 27445 (November 16, 1989), 54 
FR 48704 (``ARP I'') and 29815 (May 9, 1991), 56 FR 22489 (``ARP 
II''). Generally, the guidance in ARP I and ARP II provides for the 
following activities by clearing agencies: (1) Performing periodic 
risk assessments of its automated data processing (``ADP'') systems 
and facilities; (2) providing for the selection of the clearing 
agency's independent auditors by non-management directors and 
authorizing such non-management directors to review the nature, 
scope, and results of all audit work performed; (3) having an 
adequately staffed and competent internal audit department; (4) 
furnishing annually to participants audited financial statements and 
an opinion from an independent public accountant as to the clearing 
agency's system of internal control--including unaudited quarterly 
financial statements also should be provided to participants upon 
request; and (5) developing and maintaining plans to assure the 
safeguarding of securities and funds, the integrity of the ADP 
system, and recovery of securities, funds, or data under a variety 
of loss or destruction scenarios.
    \63\ See Exchange Act Release No. 47638 (April 7, 2003), 68 FR 
17809 (April 11, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(4). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding identification 
and mitigation of operational risk sufficiently clear? If not, why not 
and what would be a better alternative?
     How do current practices of clearing agencies with respect 
to operational risks compare to the practices that the Commission 
proposes to require in this rule? What are the expected incremental 
costs to clearing agencies in connection with adding to or revising 
their current practices relating to operational risks in order to 
implement the Commission's proposed rule?
     Should the Commission's proposal require a specific 
methodology to identify and mitigate operational risk? If so, what is 
the methodology and why should this methodology be required?
     Should the Commission require that business continuity 
plans be tested with participants on an ongoing basis or with a 
specified frequency? Should any other more prescriptive requirements be 
considered by the Commission?
     Would a clearing agency's ability to comply with the 
proposed rule be affected if the clearing agency's operations were 
outsourced to another firm? If so, how should the proposed rule address 
these differences in compliance? Would the need to minimize operational 
risk require limits on the types of operations that can be outsourced 
by clearing agencies? Would the answer depend on whether the function 
was outsourced to an affiliated or unaffiliated firm? Please explain.
Proposed Rule 17Ad-22(d)(5): Money Settlement Risks
    Proposed Rule 17Ad-22(d)(5) would require clearing agencies 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to employ money settlement arrangements 
that eliminate or strictly limit the clearing agency's settlement bank 
risks, that is, its credit and liquidity risks from the use of banks to 
effect money settlements with its participants, and require funds 
transfers to the clearing agency to be final when effected. The 
Commission notes that there are a number of arrangements that clearing 
agencies could establish to comply with the proposed rule. For example, 
a clearing agency could establish criteria for use of banks to effect 
money settlements with its participants that address the banks' 
creditworthiness, access to liquidity, and operational reliability. 
Where practicable, a clearing agency could use multiple settlement 
banks and monitor the concentration of payments among its settlement 
banks. A clearing agency also could employ agreements with such banks 
to ensure that funds transfers to the clearing agency are final when 
effected. In addition, where available, a clearing agency could use a 
central bank to effect money settlements with its participants. Use of 
the Federal Reserve System in the United States or other central bank 
would eliminate the risks associated with using a settlement bank.\64\
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    \64\ The Board of Governors of the Federal Reserve System will 
determine whether systemically important clearing agencies may 
obtain account access from the Federal Reserve System.
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    These proposed requirements are meant to reduce the risk that 
financial obligations related to the activities of a clearing agency 
are not timely settled or discharged with finality. Failure by a bank 
to effectuate timely and final settlement adversely affects the 
clearing

[[Page 14487]]

agency by exposing it to credit and liquidity pressures that can 
destabilize the clearing agency's ability to facilitate prompt and 
accurate clearance and settlement. Accordingly, the Commission is 
proposing this new rule, which is designed to limit the potential that 
the money settlement arrangements cause the clearing agency to face 
higher levels of credit and liquidity risks and to provide assurance 
that funds transfers are final when effected. In addition, the 
Commission preliminarily believes that the proposed rule would assist a 
clearing agency in meeting the requirement of Section 17A(b)(3)(F) of 
the Exchange Act, which requires the rules of a clearing agency to be 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agency or for which it is 
responsible.\65\
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    \65\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(5). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding money 
settlement risk sufficiently clear? If not, why not and what would be a 
better alternative?
     How do current practices regarding money settlement risk 
of clearing agencies compare to the practices that the Commission 
proposes to require in this rule? What are the expected incremental 
costs to clearing agencies in connection with adding to or revising 
their current practices regarding money settlement risk in order to 
implement the Commission's proposed rule?
     Would it be reasonable to eliminate the clearing agency's 
credit and liquidity risks from the use of banks to effect money 
settlements with its participants? If so, how?
     Are there other rules that the Commission should establish 
regarding money settlement risk management, for example, by mandating 
the minimum number of banks that a clearing agency may use to effect 
money settlements with its participants in order to avoid reliance on a 
small number of such banks, or by specifying characteristics of 
financial institutions that may be used by clearing agencies for 
settlement purposes? If so, what would be the appropriate rules and 
what would be the effect of adopting them?
     Should rules for money settlement risk management 
established by the Commission be uniform, or are there circumstances in 
which it would be appropriate for clearing agencies to accept a higher 
level of money settlement risk, such as when transacting in certain 
product categories or with certain types of customers? Could the rules 
proposed by the Commission limit the ability of clearing agencies to 
compete for certain types of business either within the United States 
or internationally? Why or why not?
     Should the Commission adopt rules to govern the clearing 
agency's use of banks that are affiliated with participants in the 
clearing agency? Should the Commission prohibit this practice? Please 
explain.
Proposed Rule 17Ad-22(d)(6): Cost-Effectiveness
    Proposed Rule 17Ad-22(d)(6) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide that their operations are 
cost-effective in meeting the requirements of participants while 
maintaining the safety and security of operations. To maintain safe and 
secure operations, a clearing agency would need to comply with the 
requirements under the Exchange Act and the rules thereunder. For 
example, a clearing agency would need to maintain the ability to comply 
with any recordkeeping or other regulatory requirement. Having clearing 
agencies be mindful of the costs that are incurred by their 
participants, while maintaining such compliance, should help to reduce 
inefficiencies in the provision of clearing agency services. This is 
particularly important in circumstances where clearing agencies may not 
be subject to strong competitive forces (such as when there is only one 
clearing agency for an asset class) for the provision of their services 
and therefore may have less of an incentive to be cost-effective in 
meeting the requirements of participants. Accordingly, the Commission 
preliminarily believes the proposed rule is appropriate in the public 
interest, for the protection of investors, because it would potentially 
help reduce the costs incurred for clearing agency services while also 
maintaining appropriate standards for a clearing agency's operations.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(6). In addition, the Commission requests 
comments on the following specific issues:
     Would the proposed rule help to assure that a clearing 
agency's operations are cost-effective? Does the proposed rule 
establish a standard for maintaining cost-effectiveness that is 
sufficiently clear? If not, why not and how might the rule be altered?
     Are there any other requirements that the Commission 
should include in the rule to help ensure that clearing agencies are 
cost-effective in providing clearing and settlement services while also 
maintaining safe and secure operations and compliance with all 
regulatory requirements?
     Does any specific business model for clearing agencies 
help to promote cost-effectiveness? Should the business model of a 
clearing agency affect the type of rule regarding cost-effectiveness 
that should apply to the clearing agency?
     Should the Commission consider issuing additional guidance 
on how clearing agencies could be cost-effective in meeting the 
requirements of participants while maintaining safe and secure 
operations? If so, what type of guidance would be helpful?
Proposed Rule 17Ad-22(d)(7): Links
    Proposed Rule 17Ad-22(d)(7) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to evaluate the potential sources of 
risks that can arise when the clearing agency establishes links either 
cross-border or domestically to clear trades, and to ensure that these 
risks are managed prudently on an ongoing basis.
    Section 17A(a)(1)(D) of the Exchange Act states that the linking of 
all clearance and settlement facilities and the development of uniform 
standards and procedures for clearance and settlement will reduce 
unnecessary costs and increase the protection of investors and persons 
facilitating transactions by and acting on behalf of investors.\66\ 
Further, Section 17A(b)(3)(F) of the Exchange Act requires that the 
rules of a clearing agency foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions.\67\ In the clearance and settlement process, links should 
help deepen market liquidity and enable participants to trade in other 
markets.\68\ However, by tying the

[[Page 14488]]

clearing operations of different clearing agencies together, link 
arrangements potentially expose a clearing agency and its members to 
the risk management profile of another clearing organization and to the 
risk of financial loss if that clearing organization experiences a 
default or is otherwise unable to meet its settlement obligations.\69\
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    \66\ 15 U.S.C. 78q-1(a)(1)(D).
    \67\ 15 U.S.C. 78q-1(b)(3)(F).
    \68\ For example, The Depository Trust Company's (``DTC'') 
Canadian Link Service allows qualifying DTC participants to clear 
and settle valued securities transactions with participants of a 
Canadian securities depository. The link is designed to facilitate 
cross-border transactions by allowing participants to use a single 
depository interface for U.S. and Canadian dollar transactions and 
eliminate the need for split inventories. See Exchange Act Release 
Nos. 52784 (November 16, 2005), 71 FR 70902 (November 23, 2005) and 
55239 (February 5, 2007), 72 FR 6797 (February 13, 2007) (File No. 
SR-DTC 2006-15).
    \69\ A clearing agency may be required to enter into a 
participant agreement with the other clearing organization as part 
of the link arrangement, which includes sharing in the loss 
allocations of that clearing organization. See RCCP 4.10.6, supra 
note 29.
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    Although the design and operation of each link will present a 
unique risk profile, clearing agencies potentially face legal, 
operational, credit and liquidity risks from link arrangements. In 
addition, because links can create interdependencies, clearing agencies 
may be affected by systemic risk if there are deficiencies in these 
arrangements. The Commission preliminarily believes that requiring 
clearing agencies to evaluate and monitor any link arrangements they 
maintain is essential to protect the marketplaces that clearing 
agencies serve because the requirement would reduce the likelihood that 
such arrangements perpetuate risks that could create disruptions in the 
operations of clearing agencies. Accordingly, the Commission is 
proposing this rule, which would require clearing agencies to evaluate 
and manage the risks associated with its links.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(7). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding evaluating 
link arrangements and prudently managing the associated risks on an 
ongoing basis sufficiently clear? If not, why not and how might the 
rule be stated more clearly?
     How do current practices of clearing agencies with respect 
to link arrangements meet or fail to meet the standard that the 
Commission proposes to require in this rule? What are the expected 
incremental costs to clearing agencies in connection with adding to or 
revising their current practices for link arrangements to comply with 
the Commission's proposed rule?
     Should the Commission include specific requirements 
regarding the clearing agency's responsibility to evaluate a link for, 
among other things, the other clearing organization's structure, 
financial strength, regulatory and disciplinary history, disaster 
recovery, banking relationships and lines of credit, and risk 
management controls?
     Should the Commission establish additional requirements 
for clearing agencies that create linkages with other parties, such as 
information reporting requirements to the Commission? Would such 
additional requirements reduce or increase the likelihood that linkages 
would be established in appropriate circumstances?
     How could clearing agencies ensure that the laws and 
contractual rules governing linked systems support the design of the 
link and provide adequate protection to both clearing agencies and 
their participants? Are additional rules or requirements needed when a 
link is established with a non-U.S. clearing organization?
     Should the Commission place any limits on or promote the 
use of linked arrangements in light of potential effects on systemic 
risk?
Proposed Rule 17Ad-22(d)(8): Governance
    Proposed Rule 17Ad-22(d)(8) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent to fulfill the public interest requirements in 
Section 17A of Exchange Act applicable to clearing agencies,\70\ to 
support the objectives of owners and participants, and to promote the 
effectiveness of the clearing agency's risk management procedures.\71\
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    \70\ Section 17A(b)(3)(F) of the Exchange Act requires that the 
rules of a clearing agency be designed to protect investors and the 
public interest. 15 U.S.C. 78q-1(b)(3)(F).
    \71\ Proposed Rule 17Ad-22(d)(8) would complement other 
applicable requirements concerning governance at clearing agencies 
that may also separately apply. These other requirements include the 
existing regulatory framework of Section 17A of the Exchange Act and 
the related requirements contemplated by proposed Rule 17Ad-25, as 
well as Section 765 of the Dodd-Frank Act with respect to security-
based swap clearing agencies. See supra Section III.F. (proposing 
that clearing agencies be required to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
identify and address existing or potential conflicts of interest). 
See also Exchange Act Release No. 63107, 75 FR 65882, supra note 45.
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    Clear and transparent governance arrangements promote 
accountability and reliability in the decisions, rules and procedures 
of the clearing agency because they provide interested parties (such as 
owners, participants, and general members of the public) with 
information about how such decisions are made and what the rules and 
procedures are designed to accomplish.\72\ The key components of a 
clearing agency's governance arrangements include the clearing agency's 
ownership structure, the composition and role of its board, the 
structure and role of board committees, reporting lines between 
management and the board, and the processes that ensure management is 
held accountable for the clearing agency's performance.
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    \72\ The Exchange Act currently requires that certain aspects of 
a clearing agency's governance arrangements be made clear and 
transparent. Section 19(b) of the Exchange Act requires that 
clearing agencies, as SROs, file with the Commission any proposed 
rule or any proposed change in, addition to, or deletion from the 
rules of the clearing agency, accompanied by a concise general 
statement of the basis and purpose of the proposed rule change. 15 
U.S.C. 78s(b).
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    Governance arrangements have the potential to play an important 
role in making sure that clearing agencies fulfill the Exchange Act 
requirements that the rules of a clearing agency be designed to protect 
investors and the public interest and to support the objectives of 
owners and participants. Similarly, governance arrangements may promote 
the effectiveness of a clearing agency's risk management procedures by 
creating an oversight framework that fosters a focus on the critical 
role that risk management plays in promoting prompt and accurate 
clearance and settlement.\73\
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    \73\ The role of governance arrangements in promoting effective 
risk management has also been a focus of rules recently proposed by 
the Commission to mitigate conflicts of interest at security-based 
swap clearing agencies. See Exchange Act Release No. 63107, 75 FR 
65882, supra note 45.
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    The Commission preliminarily believes that the requirements 
regarding governance arrangements contained in proposed Rule 17Ad-
22(d)(8) would be appropriate in the public interest and for the 
protection of investors because they would enhance the ability of a 
clearing agency to serve the interests of its various constituents and 
the interests of the general public while maintaining prudent risk 
management processes to promote prompt and accurate clearance and 
settlement.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(8). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding clear and 
transparent governance arrangements sufficiently clear? If not, why not 
and how might the rule be stated more clearly?
     Would the proposed rule require clearing agencies to 
change their current

[[Page 14489]]

practices with respect to governance arrangements? If so, how? What are 
the expected incremental costs to clearing agencies in connection with 
adding to or revising their current practices with respect to 
governance arrangements in order to implement the Commission's proposed 
rule?
     Are there any other requirements that should be included 
in the rule to promote clear and transparent governance arrangements, 
such as mandating specific board or ownership structures? If so, what 
should they be?
     Should the Commission propose more prescriptive 
requirements for the governance of all clearing agencies? If so, what 
should they be? For example, should the Commission specify certain 
reporting lines or board composition?
     How direct should the Commission's role be in the 
oversight and monitoring of the composition and activities of clearing 
agency boards and board committees? If the Commission's role should be 
more direct, what mechanisms or structure would facilitate the 
Commission taking such a role? For example, should the Commission 
consider any additional requirements related to fiduciary duties to 
either enhance mitigation of conflicts or address deficiencies?
Proposed Rule 17Ad-22(d)(9): Information on Services
    Proposed Rule 17Ad-22(d)(9) would require clearing agencies 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide market participants with 
sufficient information for them to identify and evaluate the risks and 
costs associated with using clearing agencies' services. The types of 
information that a clearing agency may disclose, as appropriate, to its 
participants to satisfy this requirement include the clearing agency 
rulebook,\74\ the costs of its services, a description of netting and 
settlement activities the clearing agency provides, procedures relating 
to participants' rights and obligations, information regarding the 
clearing agency's margin methodology, and information regarding the 
``extreme but plausible'' scenarios that the clearing agency uses to 
stress test its financial resources. Requiring a clearing agency to 
disclose information sufficient for participants to identify risks and 
costs associated with using the clearing agency will allow participants 
to make informed decisions about the use of the clearing agency and 
take appropriate actions to mitigate their risks and costs associated 
with the use of the clearing agency. Accordingly, the Commission's 
proposed rule is designed to promote participants' understanding of the 
risks and costs associated with using a clearing agency's services, 
thereby facilitating prompt and accurate clearance and settlement, 
safeguarding securities and funds and protecting investors.\75\
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    \74\ Because clearing agencies are SROs, their rules are 
published by the Commission and are generally available on each 
clearing agency's Web site. Nevertheless, discrete rule proposals 
may not necessarily provide a complete picture of a clearing 
agency's operations and risk mitigation procedures.
    \75\ See 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(9). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding providing 
market participants with sufficient information to identify and 
evaluate the risks and costs associated with using the clearing 
agency's services sufficiently clear? If not, why not and what would be 
a better alternative?
     How do current practices of clearing agencies with respect 
to providing market participants with information meet or fail to meet 
the requirements in the proposed rule? What are the expected 
incremental costs to clearing agencies in connection with adding to or 
revising their current practices in order to implement the proposed 
requirements?
     Should the Commission consider more detailed requirements 
concerning disclosure of certain matters such as pricing information 
and the cost of specific services, as well as default and risk 
management procedures? Why or why not?
     Should any of the examples of the types of information 
that a clearing agency may disclose be specifically required to be 
provided by clearing agencies to their participants or to the public?
Proposed Rule 17Ad-22(d)(10): Immobilization and Dematerialization of 
Stock Certificates
    Proposed Rule 17Ad-22(d)(10) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to immobilize \76\ and dematerialize 
\77\ securities certificates and transfer them by book entry to the 
greatest extent possible when the clearing agency provides central 
securities depository services.\78\ The Commission preliminarily 
believes that the immobilization and dematerialization of securities 
and their transfer by book entry would result in reduced costs and 
risks associated with securities settlements and custody by removing 
the need to hold and transfer many, if not most, physical 
certificates.\79\ The Commission also preliminarily believes that the 
proposed rule would strengthen the requirement in Section 17A(b)(3)(F) 
of the Exchange Act that requires the rules of a clearing agency to 
assure the safeguarding of securities and funds that are in the custody 
or control of the clearing agency or for which it is responsible.\80\
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    \76\ Immobilization refers to any circumstance where an investor 
does not receive a physical certificate upon the purchase of shares 
or is required to physically deliver a certificate upon the sale of 
shares.
    \77\ Dematerialization is the process of eliminating physical 
certificates as a record of security ownership.
    \78\ See proposed Rule 17Ad-22(a)(2) for definition of ``central 
securities depository services.'' In the U.S., DTC is currently the 
only registered clearing agency that provides central securities 
depository services.
    \79\ By concentrating the location of physical securities in a 
single central securities depository, clearing agencies are able to 
centralize the operations associated with custody and transfer and 
reduce costs through economies of scale. Virtually all mutual fund 
securities, government securities, options, and municipal bonds in 
the U.S. are dematerialized and most of the equity and corporate 
bonds in the U.S. market are either immobilized or dematerialized. 
While the U.S. markets have made great strides in achieving 
immobilization and dematerialization for institutional and broker-
to-broker transactions, many industry representatives believe that 
the small percentage of securities held in certificated form impose 
unnecessary risk and expense to the industry and to investors. See 
Exchange Act Release No. 8398 (March 11, 2004), 69 FR 12921 (March 
18, 2004).
    \80\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(10). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding immobilization 
and dematerialization of securities certificates and transferring them 
by book entry to the greatest extent possible sufficiently clear? If 
not, why not and what would be a better alternative?
     How do current practices of clearing agencies regarding 
immobilization and dematerialization of securities certificates compare 
to the practices that the Commission proposes to require in this rule? 
What are the expected incremental costs to clearing agencies in 
connection with adding to or revising their current practices in order 
to implement the Commission's proposed rule?
     What advantages or disadvantages might certificates have 
over securities

[[Page 14490]]

held in book-entry-only form (e.g., proof of ownership in the event of 
a loss of electronic records of ownership)? Under what circumstances, 
if any, should the Commission encourage or discourage the use of 
physical certifications?
Proposed Rule 17Ad-22(d)(11): Default Procedures
    Proposed Rule 17Ad-22(d)(11) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to make key aspects of their default 
procedures publicly available. The Commission preliminarily believes 
that this would provide certainty and predictability to market 
participants about the measures a clearing agency will take in the 
event of a participant default. Key aspects of a clearing agency's 
default procedures should generally include the following: (i) The 
circumstances in which action may be taken (e.g., what events trigger 
mutualization of losses); (ii) who may take those actions (e.g., 
division of responsibilities when clearing agencies operate links to 
other clearing agencies); (iii) the scope of the actions that may be 
taken (e.g., any limits on the total losses that would be mutualized); 
(iv) the mechanisms to address a clearing agency's obligations to non-
defaulting participants (e.g., process for clearing trades guaranteed 
by the clearing agency to which a defaulting participant is a party); 
and (v) the mechanisms to address the defaulting participant's 
obligations to its customers (e.g., process for dealing with defaulting 
participants' customer accounts). The proposed rule also would require 
that clearing agencies establish default procedures that ensure that 
the clearing agency can take timely action to contain losses and 
liquidity pressures \81\ and to continue meeting its obligations when 
due in the event of a participant default. Default procedures, among 
other things, are meant to reduce the likelihood that a default by a 
participant, or multiple participants, will disrupt the clearing 
agency's operations. By creating a framework of default procedures that 
are designed to permit a clearing agency to take actions to contain 
losses and liquidity pressures it faces while continuing to meet its 
obligations, the clearing agency should be in a better position to 
continue providing its services in a manner that promotes accurate 
clearance and settlement during times of market stress.
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    \81\ A clearing agency may be able to contain liquidity 
pressures it faces by taking actions to secure additional sources of 
liquidity or limiting transactions that potentially serve to drain 
liquidity resources.
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    The Commission preliminarily believes that the requirements in 
proposed Rule 17Ad-22(d)(11) would increase the possibility that 
defaults by participants, should they occur, would proceed in an 
orderly and transparent manner. This is because the Commission 
preliminarily believes that the proposed rule would help to ensure that 
all participants are aware of the default process and are able to plan 
accordingly and that clearing agencies would have sufficient time to 
take corrective actions to mitigate potential losses.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(11). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule requiring a clearing 
agency to establish default procedures and make key aspects of those 
default procedures publicly available sufficiently clear? If not, why 
not and what would be a better alternative?
     How do current practices of clearing agencies with respect 
to default procedures compare to the requirements of the proposed rule? 
What are the expected incremental costs to clearing agencies in 
connection with adding to or revising their current practices in order 
to implement the Commission's proposed rule?
     Should the Commission require specific default procedures 
for all clearing agencies, or should clearing agencies have discretion 
to create their own default procedures consistent with the proposed 
rule? Should the default procedures include a resolution plan if the 
clearing agency is unable to obtain sufficient financial resources?
     How much flexibility should a clearing agency have in the 
time it takes to manage a default and perform any liquidation of 
positions?
Proposed Rule 17Ad-22(d)(12): Timing of Settlement Finality
    Proposed Rule 17Ad-22(d)(12) would require clearing agencies 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure that final settlement occurs 
no later than the end of the settlement day and that intraday or real-
time finality is provided where necessary to reduce risks. A clearing 
agency would be able to comply with this requirement by having a 
reasonable process for facilitating final settlement to occur no later 
than the end of the settlement day and for providing intraday or real-
time finality where necessary to reduce risks. Intraday or real-time 
finality may be necessary to reduce risk in circumstances where the 
lack of intraday or real-time finality may impede the clearing agency's 
ability to facilitate prompt and accurate clearance and settlement, 
cause the clearing agency's participants to fail to meet their 
obligations, or cause significant disruptions in the securities 
markets.
    The Commission preliminarily believes that requiring intraday or 
real-time finality for settlements, where such requirement is necessary 
to reduce risks, would facilitate prompt and accurate clearance and 
settlement by providing certainty that a settlement is final and 
irrevocable within a timeframe that is commensurate with the level of 
risk created by the lack of settlement finality. The risks associated 
with lack of settlement finality stem from the undermining of 
confidence that transaction obligations will be discharged by the 
clearing agency or its participants. Moreover, the Commission 
preliminarily believes that settlement finality should occur not later 
than the end of the settlement day to limit the volume of outstanding 
obligations that are subject to settlement at any one time and thereby 
reduce the settlement risk exposure of participants and the clearing 
agency.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(12). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding the timing of 
settlement finality sufficiently clear? If not, why not and what would 
be a better alternative?
     How do current practices of clearing agencies with respect 
to settlement finality compare to the practices that the Commission 
proposes to require in this rule? What are the expected incremental 
costs to clearing agencies in connection with adding to or revising 
their current practices in order to implement the Commission's proposed 
rule?
     What changes, if any, would be created by the requirement 
under the proposed rule that final settlement occur no later than the 
end of the settlement day? Does the proposed rule affect certain 
identifiable categories of market participants differently than others, 
such as smaller entities or entities with limited operations in the 
U.S.? If so, how?

[[Page 14491]]

     Are there operational, legal or regulatory impediments to 
intraday or real-time settlement? Will the proposed standard make it 
harder for clearing agencies to conduct certain types of business for 
which intraday or real-time finality may be difficult? Are any 
additional rules or regulations needed to encourage intraday or real-
time finality to reduce risks?
     Are there circumstances when the requirements of intraday, 
real-time or end of day settlement finality proposed by the rule are 
not feasible or are not beneficial? If so, in what circumstances?
Proposed Rule 17Ad-22(d)(13): Delivery Versus Payment
    Proposed Rule 17Ad-22(d)(13) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to eliminate principal risk by linking 
securities transfers to funds transfers to achieve delivery versus 
payment (``DVP''). DVP is achieved in the settlement process when the 
mechanisms facilitating settlement ensure that delivery occurs if and 
only if payment occurs.\82\
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    \82\ See Bank for International Settlements, Delivery Versus 
Payment in Securities Settlement Systems (1992), available at http://www.bis.org/publ/cpss06.pdf. Three different DVP models can be 
differentiated according to whether the securities and/or funds 
transfers are settled on a gross (trade-by-trade) basis or on a net 
basis.
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    Among other things, DVP eliminates the risk that a party would lose 
some or its entire principal because payment is made only if securities 
are delivered. The Commission preliminarily believes that clearing 
agencies should be required to use this payment method in order to 
reduce the potential that delivery of the security is not appropriately 
matched with payment for a security, thereby impeding the clearing 
agency's ability to facilitate prompt and accurate clearance and 
settlement. Therefore, the Commission is proposing that clearing 
agencies be required to link securities transfers to funds transfers in 
a way that achieves DVP.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(13). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding using DVP to 
eliminate principal risk by linking securities transfers to funds 
transfers sufficiently clear? If not, why not and what would be a 
better alternative?
     How do current practices of clearing agencies for linking 
securities transfers to funds transfers compare to the practices that 
the Commission proposes to require in this rule? What are the expected 
incremental costs to clearing agencies in connection with adding to or 
revising their current practices in order to implement the Commission's 
proposed rule?
     What are the advantages and disadvantages of the proposed 
rule mandating a strict DVP standard? Does the proposed rule affect 
certain identifiable categories of clearing agencies differently than 
others, such as clearing agencies with more diversified post-trade 
services as compared to clearing agencies that specialize in fewer 
activities?
     Are there operational or legal impediments to implementing 
the proposed DVP rule? Would the proposed rule make it more difficult 
for clearing agencies to conduct certain types of business that may 
require a longer settlement cycle, for reasons outside of the clearing 
agency's control? Are any additional rules or regulations needed to 
support achievement of the proposed DVP rule?
     Are there circumstances when DVP is not feasible or 
practicable? If so, when?
Proposed Rule 17Ad-22(d)(14): Risk Controls To Address Participants' 
Failure To Settle
    Proposed Rule 17Ad-22(d)(14) requires clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to institute risk controls, including 
collateral requirements and limits to cover the clearing agency's 
credit exposure to each participant exposure fully, that ensure timely 
settlement in the event that the participant with the largest payment 
obligation is unable to settle when the clearing agency provides 
central securities depository services \83\ and extends intraday credit 
to participants.
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    \83\ See proposed Rule 17Ad-22(a)(2) for definition of ``central 
securities depository services.''
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    Clearing agencies that provide central securities depository 
services may sometimes extend intraday credit to participants to, among 
other things, facilitate timely settlements by providing participants 
with an additional tool to meet delivery obligations. If a participant 
fails to settle its obligations to the clearing agency, the clearing 
agency must cover those obligations to be able to continue to 
facilitate prompt and accurate clearance and settlement.
    The Commission preliminarily believes it is important for clearing 
agencies that provide central securities depository services to 
institute risk controls, including collateral requirements and limits 
to cover the clearing agency's credit exposure to each participant 
exposure fully, that ensure timely settlement in these circumstances to 
address the risk that the participant may fail to settle after credit 
has been extended. The Commission also preliminarily believes that 
requiring the controls to be designed to withstand the inability of the 
participant with the largest payment obligation to settle, in such 
circumstances, would reduce the likelihood of disruptions at the 
clearing agency by having controls in place to account for the largest 
possible loss from any individual participant and thereby help the 
clearing agency to provide prompt and accurate clearance and settlement 
during times of market stress.\84\
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    \84\ As previously indicated, IOSCO and the CPSS are currently 
in the process of revising their existing sets of international 
standards which include those related to a clearing agency's ability 
to withstand participant failures and to meet payment obligations.
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(14). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding risk controls 
to ensure timely settlement for a clearing agency providing central 
securities depository services sufficiently clear? If not, why not and 
what would be a better alternative?
     How do current practices of clearing agencies that provide 
central securities depository services compare to the practices that 
the Commission proposes to require in this rule? What are the expected 
incremental costs to clearing agencies in connection with adding to or 
revising their current practices in order to implement the Commission's 
proposed rule?
     In addition to collateral requirements and limits on 
credit exposure to participants, are there other controls on intra-day 
credit that could be effective in managing settlement risk? If so, 
should the Commission require the use of any of these other risk 
controls?
     What are the advantages and disadvantages of requiring 
that controls be designed to withstand a failure to

[[Page 14492]]

settle by the participant with the largest payment obligation?
     Should the Commission require that the clearing agency be 
able to withstand a settlement failure by more than the largest 
participant? For example, should the Commission require the clearing 
agency be able to withstand a settlement failure by the participants 
with the two largest payment obligations? Why or why not?
Proposed Rule 17Ad-22(d)(15): Physical Delivery Risks
    Proposed Rule 17Ad-22(d)(15) would require clearing agencies 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to disclose to their participants the 
clearing agency's obligations with respect to physical deliveries.\85\ 
For example, if a clearing agency (as part of its operations) takes 
physical delivery of securities from its participants in return for 
payments of cash, then it must inform its participants of the extent of 
the clearing agency's obligations to make payment. A statement by the 
clearing agency to its participants about the clearing agency's 
obligations with respect to physical deliveries, among other things, 
would help to ensure that participants have information that is likely 
to enhance the participants' understanding of their rights and 
responsibilities with respect to using the clearance and settlement 
services of the clearing agency. The Commission preliminarily believes 
that providing such information to participants would promote a shared 
understanding regarding physical delivery practices between the 
clearing agency and its participants which could help reduce the 
potential for fails and thereby facilitate prompt and accurate 
clearance and settlement.
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    \85\ The proposed rule would provide clearing agencies with the 
flexibility to determine the method by which the clearing agency 
will state this information to its participants. However, the 
clearing agencies should take care to develop an approach that 
provides sufficient notice to its participants regarding the 
clearing agency's obligations.
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    The proposed rule would also require clearing agencies to 
reasonably design their operations to identify and manage the risks 
that arise in connection with their obligations for physical 
deliveries. The risks associated with physical deliveries could stem 
from, among other factors, operational limitations with respect to 
assuring receipt of physical deliveries and processing of physical 
deliveries. The Commission preliminarily believes that requiring 
clearing agencies to identify and manage these risks would reduce the 
potential that issues will arise as a result of physical deliveries 
because the clearing agency will have acted preemptively to deal with 
potential issues that may disrupt the clearance and settlement process. 
Accordingly, the Commission preliminarily believes this requirement 
would help a clearing agency to facilitate prompt and accurate 
clearance and settlement consistent with Section 17A of the Exchange 
Act.\86\
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    \86\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-22(d)(15). In addition, the Commission requests 
comments on the following specific issues:
     Is the Commission's proposed rule regarding providing 
information regarding physical delivery and identifying and managing 
risks associated with physical delivery sufficiently clear? If not, why 
not and what would be a better alternative?
     How do current practices of clearing agencies with respect 
to physical delivery compare to the practices that the Commission 
proposes to require in this rule? What are the expected incremental 
costs to clearing agencies in connection with adding to or revising 
their current practices in order to implement the Commission's proposed 
rule?
     What type of information would be useful for participants 
to receive from a clearing agency regarding the clearing agency's 
obligations to participants with respect to physical deliveries? What 
are the advantages or disadvantages of including specific disclosure 
requirements with respect to any of this information?
     Are there physical delivery obligations that clearing 
agencies should not assume or for which the Commission should consider 
additional restrictions?

B. Proposed Rule 17Aj-1 Dissemination of Pricing and Valuation 
Information by Security-Based Swap Clearing Agencies That Perform 
Central Counterparty Services

    The Commission is proposing Rule 17Aj-1 to incorporate requirements 
regarding dissemination of pricing and valuation information in the CDS 
Clearing Exemption Orders into the Commission's rules for security-
based swap clearing agencies.\87\ Recently, the Commission voted to 
extend these temporary conditional exemptions from certain provisions 
of the Federal securities laws until July 16, 2011 to continue to 
facilitate central clearing of certain CDS.\88\ The proposed rule is 
designed in part to continue the existing dissemination requirements 
from the CDS Clearing Exemption Orders which would otherwise expire 
along with those exemption orders.
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    \87\ See, e.g., the CDS Clearing Exemption Order relating to ICE 
Trust. ``[T]his temporary extension is conditioned on ICE Trust, 
directly or indirectly, making available to the public on terms that 
are fair and reasonable and not unreasonably discriminatory: (i) All 
end-of-day settlement prices and any other prices with respect to 
Cleared CDS that ICE Trust may establish to calculate mark-to-market 
margin requirements for ICE Trust clearing members; and (ii) any 
other pricing or valuation information with respect to Cleared CDS 
as is published or distributed by ICE Trust.'' Exchange Act Release 
No. 63387 (November 29, 2010) 75 FR 75502 (December 3, 2010).
    \88\ The extensions of the temporary conditional exemptions 
applied to central clearing of certain CDS by ICE Trust, ICE Clear 
Europe, CME and Eurex. See Exchange Act Release Nos. 63389 (November 
29, 2010), 75 FR 75520 (December 3, 2010); 63390 (November 29, 
2010), 75 FR 75518 (December 3, 2010); 63388 (November 29, 2010), 75 
FR 75522 (December 3, 2010); 63387 (November 29, 2010) 75 FR 75502 
(December 3, 2010) (extending the CDS Clearing Exemption Orders for 
ICE Clear, Eurex, CME and ICE Trust respectively).
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    Proposed Rule 17Aj-1 would require dissemination of pricing and 
valuation information by security-based swap clearing agencies that 
perform CCP services.\89\ In particular, proposed Rule 17Aj-1 would 
require each security-based swap clearing agency that performs CCP 
services to make available to the public, on terms that are fair, 
reasonable, and not unreasonably discriminatory,\90\ all end-of-day 
settlement prices and any other prices for security-based swaps that 
the clearing agency may establish to calculate its participants' mark-
to-market \91\ margin requirements and any

[[Page 14493]]

other price or valuation information with respect to security-based 
swaps as is published or distributed by the clearing agency to its 
participants.\92\ The Commission preliminarily believes this 
requirement should apply to security-based swap clearing agencies that 
perform CCP services because, based on the Commission's oversight 
experience pursuant to the CDS Clearing Exemption Orders, price and 
valuation information with respect to security-based swaps may often be 
limited and such a requirement could help to provide information to 
market participants that may otherwise only be available to the 
participants of a particular clearing agency. Clearing agencies that 
clear standard securities may not face similar limitations on price and 
valuation information. As a result, the Commission is proposing this 
rule only with respect to security-based swap clearing agencies that 
perform CCP services but is requesting comment on whether the rule 
should apply more broadly.
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    \89\ Under the proposed rule, security-based swap clearing 
agencies would be permitted to use different approaches to make 
certain pricing and valuation information available to the public. 
For example, some may choose to engage the services of a third-party 
vendor while others may make the information directly available 
through the clearing agency's Web site or some other means.
    \90\ Proposed Rule 17Aj-1 does not prohibit charges that may be 
assessed with respect to security-based swap clearing agencies 
making this information available to the public as long as such 
charges are fair, reasonable, and not unreasonably discriminatory. 
The fair, reasonable, and not unreasonably discriminatory 
requirements for open access to information pursuant to proposed 
Rule 17Aj-1 are consistent with requirements the Commission adopted 
pursuant to the CDS Clearing Exemption Orders as well as in Rule 
603(a) of Regulation NMS which requires all exchanges, alternative 
trading systems, and other broker-dealers that offer individual data 
feeds to make the data available on terms that are fair and 
reasonable and not unreasonably discriminatory. See 17 CFR 
242.603(a).
    \91\ In this specific context of the margin practices of 
security-based swap clearing agencies, the term ``mark-to-market'' 
refers to the variation margin practices used by a clearing agency 
to account for ongoing fluctuations in the market value of its 
participants' security-based swap positions.
    \92\ Clearing agencies may destroy or otherwise dispose of 
records at the end of five years consistent with Rule 17a-6 of the 
Exchange Act. See 17 CFR 240.17a-6.
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    As noted above, the Commission granted the CDS Clearing Exemption 
Orders to promote the use of CCPs with respect to CDS.\93\ Section 
763(b) of the Dodd-Frank Act provides that certain security-based swap 
clearing agencies will be deemed registered for the purpose of clearing 
security-based swaps (``Deemed Registered Provision'').\94\ The Deemed 
Registered Provision becomes effective on July 16, 2011.\95\ After the 
Deemed Registered Provision becomes effective, certain clearing 
agencies would no longer need an exemption from registration as a 
clearing agency under Section 17A of the Exchange Act in order to clear 
security-based swaps.\96\ Proposed Rule 17Aj-1 would require 
securities-based swap clearing agencies that perform CCP services, once 
registered, to make publicly available the same pricing and valuation 
information required by the CDS Clearing Exemption Orders.
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    \93\ See discussion supra in Section I.
    \94\ See Public Law 111-203 Sec.  763(b) (adding new Section 
17A(l) to the Exchange Act. Under this Deemed Registered Provision, 
eligible clearing agencies will be required to comply with all 
requirements of the Exchange Act, and the rules thereunder, 
applicable to registered clearing agencies to the extent it clears 
security-based swaps after the effective date of the Deemed 
Registered Provision, including, for example, the obligation to file 
proposed rule changes under Section 19(b) of the Exchange Act.
    \95\ See Public Law 111-203 Sec.  774.
    \96\ ICE Trust, ICE Clear Europe and CME are each eligible for 
the Deemed Registered Provision based on the specified criteria in 
Section 763(b) of the Dodd-Frank Act. See Exchange Act Release Nos. 
63389 (November 29, 2010), 75 FR 75520 (December 3, 2010); 63390 
(November 29, 2010), 75 FR 75518 (December 3, 2010); 63388 (November 
29, 2010), 75 FR 75522 (December 3, 2010); 63387 (November 29, 
2010), 75 FR 75502 (December 3, 2010) (extending the CDS Clearing 
Exemption Orders for ICE Clear, Eurex, CME and ICE Trust 
respectively).
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    The clearing agencies operating pursuant to the CDS Clearing 
Exemption Orders have been generating model end-of-day settlement 
prices for CDS, which they in turn provide to clearing members and use 
to establish margin requirements for member positions. Pursuant to the 
terms of the CDS Clearing Exemption Orders, these clearing agencies 
have also made this information available to the public. The Commission 
preliminarily believes that public availability of this information and 
other related pricing data has helped to improve fairness, efficiency, 
and market competition by making available to all market participants 
data that may otherwise be available to only a limited subset of market 
participants. For example, end-of-day settlement prices generated by 
security-based swap clearing agencies represent pricing during the 
lifecycle of a security-based swap. As a result, this end-of-day 
pricing information would generally not be captured as part of any pre- 
or post-trade market data and may therefore provide additional 
information for market participants to consider in determining the 
value of the same or similar security-based swap positions. 
Accordingly, the Commission is proposing Rule 17Aj-1 to incorporate the 
current requirements for dissemination of price and valuation 
information under the CDS Clearing Exemption Orders.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Aj-1. In addition, the Commission requests comments on 
the following specific issues:
     Is the current requirement in the CDS Clearing Exemption 
Orders to provide certain pricing information helpful in promoting 
price transparency and efficiency in the CDS market? If so, why? If 
not, why not? Are there ways in which the requirement could be 
improved, for instance to ensure better access to those who may want to 
access the information but find it difficult to obtain?
     Have market participants found the standard to make 
information available to the public on terms that are fair, reasonable, 
and not unreasonably discriminatory sufficiently clear? If not, what 
type of additional guidance would be useful? Should it be expanded to 
apply to all clearing agencies? Why or why not?
     Is there any other pricing information, such as with 
respect to valuation of security-based swaps by clearing agencies, that 
the Commission should consider requiring security-based swap clearing 
agencies to make available to the public?

C. Proposed Rule 17Ad-23 Clearing Agency Policies and Procedures To 
Protect the Confidentiality of Trading Information of Clearing Agency 
Participants

    The Commission is proposing Rule 17Ad-23 to require all clearing 
agencies to establish, implement, maintain, and enforce written 
policies and procedures that are reasonably designed to protect the 
confidentiality of transaction information received by the clearing 
agency. Such transaction information may include, but is not limited 
to, trade data, position data, and any non-public personal information 
about a clearing agency participant or any of its participants' 
customers. The Commission preliminarily believes that such policies and 
procedures would help to limit the potential misuse of confidential 
information that could impede prompt and accurate clearance and 
settlement and reduce confidence in the operations of the clearing 
agency.
    The proposed rule also provides that the required written policies 
and procedures shall include, but are not limited to, (a) limiting 
access to confidential trading information of clearing members to those 
employees of the clearing agency who are operating the system or 
responsible for its compliance with applicable laws or rules and (b) 
limitations on personal trading by employees and agents of the clearing 
agency. This proposed requirement would incorporate certain conditions 
under the CDS Clearing Exemption Orders previously granted to security-
based swap clearing agencies related to the confidential treatment of 
proprietary information of participants.\97\ As an intermediary in

[[Page 14494]]

security transactions, a clearing agency receives confidential 
information which, if not protected, could disclose the terms of market 
participant's trades, trading strategies, or non-public personal 
information. The Commission believes that the requirement that clearing 
agencies operating under the CDS Clearing Exemption Orders develop 
policies and procedures to limit access to confidential information and 
develop standards restricting trading that may be based on confidential 
information has contributed to the formation of more robust controls 
limiting the potential misuse of confidential information (such as 
trading based on non-public information) and therefore preliminarily 
believes that it would be appropriate for all clearing agencies to be 
subject to these requirements.
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    \97\ See, e.g., CDS Clearing Exemption Order for ICE Trust. 
``ICE Trust shall establish and maintain adequate safeguards and 
procedures to protect clearing members' confidential trading 
information. Such safeguards and procedures shall include: (A) 
Limiting access to the confidential trading information of clearing 
members to those employees of ICE Trust who are operating the system 
or responsible for its compliance with this exemption or any other 
applicable rules; and (B) establishing and maintaining standards 
controlling employees of ICE Trust trading for their own accounts. 
ICE Trust must establish and maintain adequate oversight procedures 
to ensure that the safeguards and procedures established pursuant to 
this condition are followed.'' Exchange Act Release Nos. 59527 
(March 6, 2009), 74 FR 10791 (March 12, 2009), Exchange Act Release 
No. 61119 (December 4, 2009), 74 FR 65554 (December 10, 2009) and 
Exchange Act Release No. 61662 (March 5, 2010), 75 FR 11589 (March 
11, 2010) and 63387 (November 29, 2010), 75 FR 75502 (December 3, 
2010).
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Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-23. In addition, the Commission requests comments on 
the following specific issues:
     How do clearing agencies currently maintain 
confidentiality of the transaction information they receive? How do 
those practices compare to what the proposed rule requires? What are 
the expected incremental costs to clearing agencies in connection with 
adding to or revising their current practices to implement the 
Commission's proposed rule?
     Is the current requirement in the CDS Clearing Exemption 
Orders helpful in restricting the misuse of confidential information in 
the CDS market? If so, why? If not, why not? Are there ways in which 
the requirement could be improved, for instance by permitting fewer 
restrictions on access to information within a clearing agency?
     In addition to the types of transaction information 
discussed, what other kinds of transaction information do clearing 
agencies receive? To what extent would this information be non-public?
     How do clearing agencies monitor or restrict their 
employees' and agents' trading activities? What are the advantages or 
disadvantages of such methods?
     Should the Commission propose any specific restrictions 
(such as prohibitions on trading) instead of having clearing agencies 
develop their own policies and procedures?
     Should the Commission require the written policies and 
procedures of the clearing agency to provide for a clear audit trail of 
transaction information that is processed by the clearing agency? 
Please explain.
     Instead of applying this proposed rule to all clearing 
agencies, should the Commission consider requiring that only certain 
types of clearing agencies be subject to this requirement (e.g., 
security-based swap clearing agencies)? Why or why not?

D. Proposed Rule 17Ad-24: Exemption From Clearing Agency Definition for 
Certain Registered Securities-Based Swap Dealers and Registered 
Security-Based Swap Execution Facilities

    Section 3(a)(23)(B) of the Exchange Act currently excludes from the 
definition of clearing agency certain national securities exchanges, 
dealers, and certain other entities.\98\ These exclusions are designed 
to limit the potential for overlapping or duplicative requirements that 
may otherwise be imposed on these regulated entities. Because the Dodd-
Frank Act creates new categories of entities in the security-based swap 
markets that may perform functions similar to the functions performed 
by the excluded entities under Section 3(a)(23)(B) of the Exchange Act 
in the traditional securities markets, the Commission is considering 
whether a similar exclusion from the definition of clearing agency may 
be warranted.
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    \98\ 15 U.S.C. 78c(a)(23)(B). The term ``clearing agency'' does 
not include (i) any Federal Reserve bank, Federal home loan bank, or 
Federal land bank; (ii) any national securities exchange or 
registered securities association solely by reason of its providing 
facilities for comparison of data respecting the terms of settlement 
of securities transactions effected on such exchange or by means of 
any electronic system operated or controlled by such association; 
(iii) any bank, broker, dealer, building and loan, savings and loan, 
or homestead association, or cooperative bank if such bank, broker, 
dealer, association, or cooperative bank would be deemed to be a 
clearing agency solely by reason of functions performed by such 
institution as part of customary banking, brokerage, dealing, 
association, or cooperative banking activities, or solely by reason 
of acting on behalf of a clearing agency or a participant therein in 
connection with the furnishing by the clearing agency of services to 
its participants or the use of services of the clearing agency by 
its participants, unless the Commission, by rule, otherwise provides 
as necessary or appropriate to assure the prompt and accurate 
clearance and settlement of securities transactions or to prevent 
evasion of this title; (iv) any life insurance company, its 
registered separate accounts, or a subsidiary of such insurance 
company solely by reason of functions commonly performed by such 
entities in connection with variable annuity contracts or variable 
life policies issued by such insurance company or its separate 
accounts; (v) any registered open-end investment company or unit 
investment trust solely by reason of functions commonly performed by 
it in connection with shares in such registered open-end investment 
company or unit investment trust, or (vi) any person solely by 
reason of its performing functions described in 15 U.S.C. 
78c(a)(25)(E).
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    The Commission preliminarily believes that exemptions from the 
clearing agency definition with respect to registered security-based 
swap dealers' and registered security-based swap execution facilities' 
activities, which are comparable to functions carved out from the 
definition of clearing agency for dealers and exchanges in the 
traditional securities markets, is necessary and appropriate, in the 
public interest, and is consistent with the protection of investors 
because it would mitigate the potential for overlapping or duplicative 
requirements consistent with prior exclusions from the definition of 
the term clearing agency. Accordingly, pursuant to the Commission's 
authority under Section 36 of the Exchange Act,\99\ the Commission is 
proposing Rule 17Ad-24 to exempt certain registered security-based swap 
dealers and registered security-based swap execution facilities from 
the definition of clearing agency.
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    \99\ 15 U.S.C. 78mm. Section 36 of the Exchange Act authorizes 
the Commission to conditionally or unconditionally exempt any 
person, security, or transaction, or any class of classes of 
persons, securities, or transactions, from any provision or 
provisions of the Exchange Act or any rule or regulation thereunder, 
by rule, regulation, or order, to the extent that such exemption is 
necessary or appropriate in the public interest, and is consistent 
with the protection of investors.
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    Specifically, proposed Rule 17Ad-24 would provide that a registered 
security-based swap dealer would not be considered a clearing agency 
solely by reason of functions it performs as part of customary dealing 
activities, or solely because it acts on behalf of a clearing agency or 
a participant in connection with services performed by the clearing 
agency. For example, a security-based swap dealer that acts as an 
intermediary in making payments or deliveries or both in connection 
with transactions in securities as part of its customary dealing 
activities would not be considered a clearing agency. The exemptions in 
proposed Rule 17Ad-24 for security-based swap dealers mirror exclusions 
already applicable to dealers under Section 3(a)(23)(B) of the Exchange 
Act.
    In addition, proposed Rule 17Ad-24 provides that a registered 
security-based swap execution facility would not be considered a 
clearing agency solely because it provides facilities for comparison of 
data relating to the terms

[[Page 14495]]

of settlement of securities transactions effected on such registered 
security-based swap execution facility. The exemptions in proposed Rule 
17Ad-24 for security-based swap execution facilities mirror exclusions 
applicable to national securities exchanges under Section 3(a)(23)(B) 
of the Exchange Act.
    The Commission cautions, however, that security-based swap dealers 
and security-based swap execution facilities that engage in clearing 
agency activities beyond the scope of the proposed exemptions could be 
considered a clearing agency under the broad definition in Section 
3(a)(23) of the Exchange Act. Moreover, other participants in the 
security-based swap market could also qualify as a clearing agency 
given the broad definition of clearing agency under the Exchange Act.
    If a participant in the security-based swap market qualified as a 
clearing agency, it would be required to register with the Commission. 
Section 763(b) of the Dodd-Frank Act adds a new Section 17A(g) to the 
Exchange Act, which directs entities that use instrumentalities of 
interstate commerce to perform clearing agency functions for security-
based swaps to register with the Commission. The Commission notes that 
the definition of clearing agency under Section 3(a)(23)(A) of Exchange 
Act is defined broadly to include any person who:
     Acts as an intermediary in making payments or deliveries 
or both in connection with transactions in securities;
     Provides facilities for the comparison of data regarding 
the terms of settlement of securities transactions, to reduce the 
number of settlements of securities transactions, or for the allocation 
of securities settlement responsibilities;
     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 
(such as a securities depository); or
     Otherwise permits or facilitates the settlement of 
securities transactions or the hypothecation or lending of securities 
without physical delivery of securities certificates (such as a 
securities depository).\100\
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    \100\ 15 U.S.C. 78c(a)(23)(A).
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    Based on this broad definition, the Commission preliminarily 
believes that certain service providers that facilitate security-based 
swap contract management may meet the clearing agency definition. The 
Commission preliminarily believes the following activities, if engaged 
in by security-based swap market participants, would qualify these 
participants as clearing agencies and therefore trigger the statutory 
requirement to register as clearing agencies: \101\
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    \101\ The Commission stresses that the functions highlighted 
herein are not an exhaustive list and urges each security-based swap 
lifecycle event service provider to consider whether its functions 
place it within the clearing agency definition.
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     Collateral Management Activities. Collateral management 
involves calculating collateral requirements and facilitating the 
transfer of collateral between counterparties. Entities that calculate 
net payment obligations among counterparties for security-based swaps 
and provide instructions for payments, including with respect to 
quarterly interest, credit events, and upfront fees, are likely acting 
as an intermediary in making payments or deliveries or both in 
connection with transactions in securities. As a result of acting as 
such an intermediary in making payments or deliveries or both in 
connection with transactions in securities, the Commission 
preliminarily believes that these entities would fall within the 
definition of a clearing agency \102\ and would generally need to 
register.
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    \102\ See supra note 98 and accompanying text.
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     Trade Matching Services. ``Matching service'' is the term 
that is used to describe the process whereby an intermediary compares 
each market participant's trade data regarding the terms of settlement 
of securities transactions, in order to reduce the number of 
settlements of securities transactions, or to allocate securities 
settlement responsibilities. An intermediary that captures trade 
information regarding a securities transaction and performs an 
independent comparison of that information which results in the 
issuance of binding matched terms to the transaction is providing 
matching services and falls within the definition of clearing 
agency.\103\ As a result of comparing each market participant's trade 
data regarding the terms of settlement of securities transactions, in 
order to reduce the number of settlements of securities transactions, 
or to allocate securities settlement responsibilities, the Commission 
preliminarily believes that entities providing these trade ``matching 
services'' with respect to security-based swaps would meet the 
statutory definition of a clearing agency \104\ and would generally 
need to register.\105\ However, the Commission also preliminarily 
believes that providing preliminary comparisons, such as those provided 
by certain affirmation and novation service providers that are followed 
by independent comparisons that result in the issuance of legally 
binding matched terms, would generally not fall within the definition 
of clearing agency. Similarly, the Commission preliminarily believes 
that reconciliation service providers that function solely to permit 
parties to reconcile trade information records with their 
counterparties would generally not fall within the definition of 
clearing agency.
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    \103\ See also Exchange Act Release No. 39829 (April 6, 1998), 
63 FR 17943 (April 13, 1998) (File No. S7-10-98) (``A vendor that 
provides a matching service will actively compare trade and 
allocation information and will issue the affirmed confirmation that 
will be used in settling the transaction.'').
    \104\ See supra note 98 and accompanying text.
    \105\ See Exchange Act Release No. 63727 (January 14, 2011) 76 
FR 3859 (January 21, 2011) (discussing generally, at footnotes 20 
through 22 and the accompanying text, the confirmation process for 
security-based swap transactions and the Commission's preliminary 
expectations about the role of matching services in that setting).
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     Tear Up/Compression Services (``Tear Up services'').\106\ 
Based on discussions between the Commission staff and market 
participants, the Commission understands that Tear Up service providers 
generally operate in the following manner:
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    \106\ Tear-up or multilateral portfolio trade compression 
services for OTC derivatives seek to eliminate unnecessary or 
duplicative trades from the market while maintaining a market 
participant's overall exposure or risk in the market. This allows 
dealers to reduce operational risk, freeing up liquidity and 
capital. By reducing the gross notional outstanding of OTC 
derivatives in normal times, portfolio trade compression provides 
effective measures to address the risk associated with 
uncoordinated, disorderly close-out transactions in individual 
dealers of the positions of a defaulting major dealer. Compression 
is offered by several vendors and major market participants are now 
engaged in regular compression exercises. See Financial Stability 
Board, Implementing OTC Derivatives Market Reforms, (October 25, 
2010), available at http://www.Financialstabilityboard.org/publications/r_101025.pdf.
---------------------------------------------------------------------------

    [cir] Tear Up services execute an algorithm seeking to reduce the 
gross notional value of trades and the total number of trades but do 
not alter the counterparty risk or market risk associated with the 
trades beyond specified parameters.
    [cir] When using a Tear Up service, the users send all transactions 
they are willing to terminate to the service. Each user sets tolerances 
for counterparty exposures it is willing to absorb and how much money 
it is willing to pay in trade termination costs. The submitted 
transactions are matched using an

[[Page 14496]]

algorithm and tolerances specified by the user.
    [cir] The service then proposes terminations across all parties who 
participated, including, payments for termination. The users consider 
the proposal, check their own records, and, if they choose to accept 
the proposal, fax or otherwise notify their acceptance to the service. 
If the service receives acceptances from all users, the transaction is 
considered binding and the relevant transactions are considered 
terminated.
    [cir] The users generally exchange payments and confirmations 
outside the service. The Tear Up service will send the completed files 
to a third party service provider for matching and the ``torn up'' 
transactions are terminated in bulk at the security-based swap data 
repository. The security-based swap data repository maintains a record 
of which parties terminated the ``torn up'' trades.
    The Commission preliminarily believes that a Tear Up service 
provider that performs these functions would generally fall within the 
definition of clearing agency and would need to register because, among 
other activities, it would be acting as an intermediary that provides 
facilities for the comparison of data regarding the terms of settlement 
of securities transactions, to reduce the number of settlements of 
securities transactions, or the allocation of securities settlement 
responsibilities.\107\
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    \107\ See supra note 98 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of the proposed 
exemptions from the definition of clearing agency for registered 
security-based swap dealers and registered security-based swap 
execution facilities in proposed Rule 17Ad-24. The Commission also 
requests comments on which activities fall within the definition of 
clearing agency, particularly within the context of activities in the 
security-based swap market. In addition, the Commission requests 
comments on the following specific issues:
     What are the advantages or disadvantages of the Commission 
granting the proposed exemptions from the definition of clearing 
agency? If there are disadvantages to these proposed exemptions, what 
are they and how do they compare to the benefits?
     Under what circumstances are market participants likely to 
use the proposed exemptions for registered security-based swap dealers 
and registered security-based swap execution facilities? Are there any 
additional terms or conditions that the Commission should consider 
imposing with respect to the proposed exemptions? Are there any 
advantages or disadvantages related to the proposed exemptions that the 
Commission should consider?
     Under Section 17A(b)(3)(I) of the Exchange Act, the rules 
of a clearing agency should not impose any undue burden on competition. 
Should the Commission augment this statutory requirement by adopting 
rules that prohibit clearing agencies from entering into certain types 
of arrangements? If so, which arrangements, and why? In particular, 
should the Commission promulgate rules concerning any revenue sharing 
arrangements used by clearing agencies? Please explain why or why not. 
Are revenue sharing arrangements common among clearing agencies? How 
are they used? Are revenue sharing arrangements a manner of directing 
funds to a subset of clearing members, which funds otherwise could 
support a general reduction of clearing costs that could be equitably 
distributed among members? If the Commission adopts rules regarding 
revenue sharing, what aspects of the revenue sharing arrangements 
should the rules address and how might the rules be designed to promote 
competition and fair access to the clearing agency? If the Commission 
promulgates rules regarding certain arrangements, how should the 
Commission mitigate the potential risk of unduly limiting the ability 
of clearing agencies to develop new commercial arrangements?
     Are there any additional entities for which the Commission 
should consider providing exemptions with respect to the definition of 
clearing agency, particularly in the context of the security-based swap 
market? If so, why would providing such exemptions be necessary or 
appropriate in the public interest, and consistent with the protection 
of investors? Under what terms and conditions should the Commission 
consider providing such exemptions?
     Is there additional information about any of the security-
based swap services described by the Commission that would affect the 
consideration of whether these activities trigger the definition of 
clearing agency?
     Are there any other security-based swap services that may 
fall within the clearing agency definition? If so, what are those 
services? Why would they be appropriately classified as clearing agency 
functions?
     If a security-based swap clearing agency that does not 
provide CCP services is required to register with the Commission as a 
clearing agency, are there certain requirements that are applicable or 
proposed to be applicable to other clearing agencies that should not 
apply to these security-based swap clearing agencies? For example:
    [cir] Should non-CCP security-based swap clearing agencies be 
subject to proposed Regulation MC,\108\ which the Commission proposed 
on October 14, 2010 to mitigate the potential conflicts of interest 
that could exist at certain entities, including security-based swap 
clearing agencies, through conditions and structures relating to 
ownership, voting, and governance of these entities? Why or why not? 
Should proposed Regulation MC apply to some but not all security-based 
swap clearing agencies that do not provide CCP services? If so, which 
ones?
---------------------------------------------------------------------------

    \108\ See Exchange Act Release No. 63107, 75 FR 65882, supra 
note 45.
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    [cir] Should non-CCP security-based swap clearing agencies be 
subject to proposed Rule 17Ad-25, which would require clearing agencies 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify and address existing or 
potential conflicts of interest? Why or why not? Should proposed Rule 
17Ad-25 apply to some but not all security-based swap clearing agencies 
that do not provide CCP services? If so, which ones?
    [cir] Should non-CCP security-based swap clearing agencies be 
subject to proposed Rule 17Ad-26, which would require each clearing 
agency to establish governance standards for its board or board 
committee members? Why or why not? Should proposed Rule 17Ad-26 apply 
to some but not all security-based swap clearing agencies that do not 
provide CCP services? If so, which ones?
     What are the costs associated with requiring the types of 
entities described above that do not offer CCP services to register as 
a clearing agency and operate as an SRO (including compliance with 
ongoing SRO rule filings requirements)? Please consider both the 
initial and ongoing costs, and please consider the burdens that such 
requirements may place on the ability of these entities to operate in a 
commercially viable manner. Are there competitors who might offer 
competing services (either in the United States or abroad) without 
being subject to these requirements? Are these costs offset by 
regulatory requirements or industry commitments to use certain 
security-based swap service providers that fall within the definition 
of a clearing agency? What implications would registration of these 
entities have for the security-based swap

[[Page 14497]]

markets more generally, and for the availability of their services to 
market participants?

E. Proposed Amendment of Rule 17Ab2-1: Registration of Clearing 
Agencies

    The Commission is proposing to amend Rule 17Ab2-1(c) regarding the 
registration of clearing agencies. Rule 17Ab2-1(c) currently provides 
that, if requested by an applicant, the Commission may grant a 
temporary registration providing for exemptions from certain 
registration requirements in Section 17A(b)(3) of the Exchange Act. 
Prior to the Dodd-Frank Act's amendments to the Exchange Act, the 
Commission was not restricted in its ability to grant exemptions from 
registration requirements to any category of clearing agencies. 
Therefore, the exemptions discussed in Rule 17Ab2-1(c) applied with 
respect to all clearing agencies.
    The Dodd-Frank Act amended Section 36 of the Exchange Act and 
altered the Commission's authority to provide exemptions from the 
registration requirements applicable to security-based swap clearing 
agencies pursuant to Section 17A(g) of the Exchange Act.\109\ 
Accordingly, the Commission proposes to amend Rule 17Ab2-1 to reflect 
these changes. Specifically, the proposal would amend Rule 17Ab2-1(c) 
to clarify that when granting a temporary registration, the Commission 
may do so for ``a specific period of time and may exempt, other than 
for purposes of section 17A(g) of the Act, the registrant from one or 
more of the requirements * * * ''. The Commission preliminarily 
believes this proposed amendment to Rule 17Ab2-1(c), clarifying how the 
rule would operate in light of changes to the Commission's exemptive 
authority under Section 36 of the Exchange Act with respect to Section 
17A(g) of the Exchange Act, is appropriate given the change to the 
Commission's exemptive authority under Section 36 of the Exchange Act 
effected by the Dodd-Frank Act.\110\
---------------------------------------------------------------------------

    \109\ See Section 772 of Public Law 111-203, 124 Stat. 1376 
(2010) amending Section 36 of the Exchange Act.
    \110\ Id.
---------------------------------------------------------------------------

    The Commission also proposes other technical changes to Rule 17Ab2-
1(c) unrelated to the Dodd-Frank Act that the Commission preliminarily 
believes would help in the administration of the rule pertaining to 
temporary registrations and would thereby be appropriate in the public 
interest, for the protection of investors.\111\ Specifically, the 
Commission proposes to amend Rule 17Ab2-1(c) to clarify that the 
temporary registration may be issued at the discretion of the 
Commission. The Commission preliminarily believes that the ability to 
grant a temporary registration provides useful flexibility to further 
evaluate whether a clearing agency is meeting required standards before 
granting a permanent registration. Operational, resource, internal 
control or other issues may only become apparent after a clearing 
agency has commenced operations. In addition, the proposal would amend 
the current provision indicating that the Commission may grant the 
temporary registration for eighteen months or such longer period as the 
Commission may provide by order, to state that the Commission may grant 
the temporary registration for twenty-four months or such longer period 
as the Commission may provide by order.\112\ The Commission 
preliminarily believes that the temporary registration process should 
explicitly provide greater time to allow the clearing agency to operate 
before registration becomes final because doing so would enhance the 
Commission's capacity to provide oversight that promotes prompt and 
accurate clearance and settlement.
---------------------------------------------------------------------------

    \111\ See 15 U.S.C. 78q-1(d).
    \112\ This change would also include a conforming change to the 
timing for granting a non-temporary registration.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comments on all aspects of the 
proposed amendments to Rule 17Ab2-1. In addition, the Commission 
requests comments on the following specific issues:
     Are the proposed changes to Rule 17Ab2-1 setting forth the 
restrictions on providing exemptions with respect to security-based 
swap clearing agencies sufficiently clear?
     Would any additional changes to Rule 17Ab2-1 regarding how 
the clearing agency registration requirements apply with respect to 
security-based swap clearing agencies be beneficial to market 
participants?
     What are the advantages and disadvantages of the proposed 
changes to the temporary registration process, such as stating the 
temporary registration may be issued at the discretion of the 
Commission and the revisions to the timeframe for the temporary 
registration?

F. Proposed Rule 17Ad-25: Clearing Agency Procedures To Identify and 
Address Conflicts of Interest

    The Commission is proposing Rule 17Ad-25 to require clearing 
agencies to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to identify and reasonably existing 
or potential conflicts of interest.\113\ For example, there may be 
actual or potential conflicts of interest between the activities of a 
clearing agency and the interests of its participants or board members, 
which could affect decision making by officers or directors or actions 
by participants in seeking to influence its operations. The proposed 
rule also would require the clearing agency's policies and procedures 
to be reasonably designed to minimize conflicts of interest in decision 
making by the clearing agency.
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    \113\ Proposed Rule 17Ad-25 would complement other applicable 
requirements concerning conflicts of interests at clearing agencies 
that may also separately apply. These other requirements include the 
existing regulatory framework of Section 17A of the Exchange Act and 
the conflicts-related requirements contemplated by proposed Rule 
17Ad-22(d)(8) as well as Section 765 of the Dodd-Frank Act with 
respect to security-based swap clearing agencies. See supra Section 
III.A. (proposing that clearing agencies be required to have 
governance arrangements that are clear and transparent to fulfill 
Exchange Act requirements and to support the objectives of owners 
and participants and promote the effectiveness of the clearing 
agency's risk management procedures). See also Exchange Act Release 
No. 63107, 75 FR 65882, supra note 45.
---------------------------------------------------------------------------

    The Commission preliminarily believes it is important for clearing 
agencies to evaluate their activities and determine potential sources 
for conflicts of interests that exist within their organization and to 
reasonably address such conflicts so that they do not disrupt the 
clearing agency's ability to facilitate prompt and accurate clearance 
and settlement. The Commission also preliminarily believes that 
requiring clearing agencies, under proposed Rule 17Ad-25, to have 
reasonably designed policies and procedures to minimize conflicts of 
interest in decision making by the clearing agency would facilitate the 
development of tailored policies and procedures that mitigate conflicts 
specific to the clearing agency's business. Moreover, the Commission 
preliminarily believes the proposed rule would be useful in 
facilitating its oversight of clearing agencies by providing a 
documented plan against which the Commission could evaluate a clearing 
agency's efforts to mitigate conflicts and potentially provide the 
Commission with a better understanding of the potential sources of 
conflicts for a specific clearing agency.

[[Page 14498]]

Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-25. In addition, the Commission requests comments on 
the following specific issues:
     Under the proposal, clearing agencies would be required to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify and address existing or 
potential conflicts of interest. Such policies and procedures would 
also be required to be reasonably designed to minimize conflicts of 
interest in decision making by the clearing agency. Should the 
Commission require any specific measures to address conflicts of 
interests, such as mandating certain boards or board committee 
compositions with respect to all clearing agencies instead of using a 
policies and procedures approach? What are the advantages and 
disadvantages of a more prescriptive approach?
     What, if any, additional guidance by the Commission would 
be helpful regarding how clearing agencies should evaluate their own 
activities and determine the potential sources of conflicts?
     Should the Commission consider requiring only certain 
types of clearing agencies (e.g., security-based swap clearing 
agencies) to be subject to this requirement? Please explain why or why 
not. Are there special considerations, such as market concentration, 
affecting security-based swap clearing agencies that make it 
particularly important for them to establish, implement, maintain and 
enforce written policies and procedures to identify and address 
existing or potential conflicts of interest? If so, what are those 
special considerations and how would this requirement address them? If 
not, how would various types of clearing agencies be affected by this 
requirement? Would there be advantages to maintaining one requirement 
for all clearing agencies? Why or why not?

G. Proposed Rule 17Ad-26: Standards for Board or Board Committee 
Directors

    The Commission is proposing Rule 17Ad-26 to require clearing 
agencies to establish governance standards for their directors serving 
on the board or board committees. The Commission preliminarily believes 
that directors serving on the board and board committees of a clearing 
agency play a vital role in creating a framework that supports prompt 
and accurate clearance and settlement because of their role in the 
decision-making process within a clearing agency. Accordingly, the 
expertise, diversity of perspectives, conduct and incentives of 
directors serving on the board and board committees of a clearing 
agency are likely to affect its effective operation. For example, a 
lack of expertise by board members or board committee members may deter 
them from challenging decisions by management and lessen the potential 
that management will escalate appropriate issues for the board's 
consideration. In addition, clearing agencies should consider the 
extent to which persons who have been found to have violated the 
securities laws, or other similar laws or statutes, may not be fit to 
serve on the clearing agency's board or board committees. Moreover, a 
lack of clear guidance as to the roles and responsibilities of 
directors and procedures for assessing their performance may negatively 
impact the efficient functioning of the clearing agency.
    Therefore, the Commission is proposing Rule 17Ad-26 to require that 
clearing agencies establish and articulate baseline standards for 
appointing and retaining their directors, which may help to increase 
the potential that directors' actions will benefit the clearing 
organization. The proposed rule specifies that the clearing agency's 
standards must address the following areas:
     A clear articulation of the roles and responsibilities of 
directors serving on the clearing agency's board and any board 
committees;
     Director qualifications providing criteria for expertise 
in the securities industry, clearance and settlement of securities 
transactions, and financial risk management; \114\
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    \114\ The Commission notes that in other contexts under the 
Exchange Act certain persons have been required to meet 
qualification standards. For example, Section 15(b)(7) requires all 
Commission-registered brokers and dealers to meet such standards of 
operational capability and all natural persons associated with 
registered brokers and dealers to meet such standards of training, 
experience, competence, and such other qualifications as the 
Commission finds necessary or appropriate in the public interest or 
for the protection of investors. See 15 U.S.C. 78o(b)(7). Section 
15(b)(7) permits the Commission to rely on the rules of certain SROs 
in devising and administering these requirements. For example, the 
NASD Rule 1000 series contains registration and qualification 
requirements for registered representatives and principals 
associated with FINRA-member firms. In addition, NASD Rule 3010 
requires all FINRA members to have a supervisory system that 
provides for, among other things, reasonable efforts to determine 
that all supervisory personnel are qualified by virtue of experience 
or training to carry out their assigned responsibilities.
---------------------------------------------------------------------------

     Disqualifying factors concerning serious legal misconduct, 
including violations of the Federal securities laws; and \115\
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    \115\ The Exchange Act and the rules promulgated thereunder 
contain a number of restrictions on the ability of certain 
registered entities, including clearing agencies, brokers, dealers, 
transfer agents and other SROs, to be associated with persons 
subject to a ``statutory disqualification,'' as such term is defined 
in Section 3(a)(39) of the Exchange Act. 15 U.S.C. 78c(a)(39). For 
example, Section 17A(b)(4) of the Exchange Act provides that a 
``registered clearing agency may, and in cases in which the 
Commission, by order, directs as appropriate in the public interest 
shall, deny participation to any person subject to a statutory 
disqualification.'' 12 U.S.C. 78q-1(b)(4).
---------------------------------------------------------------------------

     Policies and procedures for the periodic review by the 
board or board committees of the performance of individual members.
    The proposed rule would require the clearing agency to clearly 
articulate the roles and responsibilities of directors serving on the 
clearing agency's board and any board committees. This would involve 
the clearing agency setting forth the duties of directors and the 
functions within the clearing agency for which they are responsible. 
The Commission preliminarily believes that such a delineation of 
responsibilities will help to focus directors' efforts to areas that 
promote the effective operations of a clearing agency.
    The proposed rule would also require that the clearing agency 
establish director qualifications that address the clearing agency's 
criteria for expertise in the securities industry, clearance and 
settlement of securities transactions and financial risk management 
because each of these would have a bearing on the director's ability to 
understand the operations and risks of a clearing agency. When 
developing these criteria, clearing agencies could consider the 
specialized needs of individual board committees, the overall mix of 
expertise within the board or on a committee, and the benefits of 
having members with different backgrounds (e.g., regulatory, trading, 
and risk management experience). The Commission preliminarily believes 
that this requirement would be beneficial because it could provide 
greater focus within a clearing agency for the selection of directors 
that have appropriate expertise, as determined by the clearing agency, 
which would facilitate the ability of the clearing agency to provide 
prompt and accurate clearance and settlement.
    In addition, the proposed rule would require the development of 
disqualifying factors concerning serious legal misconduct, including 
violations of the Federal securities laws. For example, a clearing 
agency might consider whether to preclude a person

[[Page 14499]]

who has had a securities license denied, suspended, revoked or 
restricted by a regulatory authority from serving as a director. The 
Commission preliminarily believes that such qualification criteria are 
important with respect to identifying potential issues that would call 
into question the ability of the persons who are responsible for the 
governance of the clearing agency to ensure that it complies with 
applicable laws and regulations.
    Finally, the proposed rule would require the clearing agency to 
establish policies and procedures for the periodic review by the board 
or a board committee of the performance of its individual members. As 
previously noted, the Commission preliminarily believes that directors 
serving on the board or board committees of a clearing agency play a 
vital role in creating a framework that supports prompt and accurate 
clearance and settlement because of their role in decision-making 
processes. Therefore, the Commission preliminarily believes that the 
board, or a board committee, should establish policies and procedures 
for the periodic review of the performance of the relevant directors. 
Such a review should consider the contributions that the directors are 
making to the clearing agency and to its ability to operate in an 
effective manner. The policies and procedures for such a review, to be 
developed by the clearing agency as appropriate given its particular 
circumstances, might include self-assessments, peer review procedures, 
or the use of internal or external parties or consultants to facilitate 
an evaluation of the performance of each relevant director.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 17Ad-26. In addition, the Commission requests comments on 
the following specific issues:
     Are there any additional standards for director or board 
committee members that the Commission should consider requiring? Should 
any of the requirements in proposed Rule 17Ad-26 be modified or 
changed? If so, how?
     How direct should the Commission's role be in the 
oversight and monitoring of the composition and activities of clearing 
agency boards and board committees? If the Commission's role should be 
more direct, what mechanisms or structure would facilitate the 
Commission taking such a role? For example, should the Commission 
consider any additional requirements related to fiduciary duties to 
either enhance mitigation of conflicts or address deficiencies?
     What, if any, additional guidance by the Commission would 
be helpful regarding standards for a clearing agency's directors?
     Should the Commission develop more or less prescriptive 
requirements regarding standards for directors or board committee 
members? What are the advantages or disadvantages of any contemplated 
approach?
     The Commission has previously proposed independence 
requirements with respect to the board and board committees of 
security-based swap clearing agencies. Should the boards of all 
clearing agencies consist of a certain proportion of independent 
directors? Please explain why or why not.
     Should the Commission require clearing agencies to develop 
any limits on the type or amount of compensation that directors may 
receive, such as including prohibiting compensation of independent and 
other non-management directors from being linked to the business 
performance of the clearing agency, or being subject to discretion of 
management? Please explain.
     Should the Commission consider requiring only certain 
types of clearing agencies (e.g., security-based swap clearing 
agencies) to be subject to this requirement? Please explain why or why 
not. Are there special considerations, such as market concentration, 
affecting security-based swap clearing agencies that make these 
governance requirements particularly important for them? If so, what 
are those special considerations and how would this requirement address 
them? If not, how would clearing agencies that provide different types 
of clearing services be affected by the application of this 
requirement? Would there be advantages to maintaining one requirement 
for all clearing agencies? Why or why not?

H. Proposed Rule 3Cj-1 Designation of Chief Compliance Officer

    The Dodd-Frank Act amended the Exchange Act to require each 
clearing agency to appoint a chief compliance officer (``CCO'') and 
specifies the CCO's duties.\116\ The Commission is proposing Rule 3Cj-1 
to establish requirements concerning a clearing agency's CCO. In 
particular, proposed Rule 3Cj-1 would incorporate the duties of a 
clearing agency's CCO that are enumerated in Exchange Act Section 3C(j) 
\117\ and impose additional requirements.
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    \116\ Public Law 111-203, Sec.  763(a) (adding Exchange Act 
Section 3C(j)).
    \117\ Id.
---------------------------------------------------------------------------

    Consistent with the requirements under Section 3C(j) of the 
Exchange Act, proposed Rule 3Cj-1(a) would require each clearing agency 
to designate a CCO. The Commission preliminarily believes that a 
clearing agency would not necessarily need to hire an additional person 
to serve as its CCO. Instead, a clearing agency could designate an 
individual already employed by the clearing agency as its CCO.
    Consistent with the requirements under Section 3C(j) of the 
Exchange Act, under proposed Rule 3Cj-1(b), each CCO shall: (1) Report 
directly to the board or to a senior officer of the clearing agency; 
(2) in consultation with its board or the senior officer of the 
registered clearing agency, resolve any conflicts of interest that may 
arise; (3) be responsible for administering each policy and procedure 
that is required to be established pursuant to Section 3C of the 
Exchange Act and rules and regulations thereunder; (4) ensure 
compliance with the Exchange Act and the rules and regulations 
thereunder; (5) establish policies and procedures for the prompt 
remediation of any compliance issues identified by the CCO, and (6) 
establish and follow appropriate procedures for the prompt handling of 
management response, remediation, retesting, and closing of non-
compliance issues.
    In order to clarify the requirements under Section 3C(j) of the 
Exchange Act, the Commission is also proposing (as part of proposed 
Rule 3Cj-1(e)) to define the term senior officer for purposes of 
proposed Rule 3Cj-1 to include the chief executive officer, or other 
equivalent officer. As the chief executive officer is generally the 
most senior officer in a clearing agency, the Commission preliminarily 
believes that such officer should be identified as the responsible 
individual for purposes of the proposed rule because it would help to 
promote enhanced focus on compliance issues and thereby potentially 
lead to more effective operations at a clearing agency.
    Consistent with the requirements under Section 3C(j) of the 
Exchange Act, proposed Rule 3Cj-1(c) would require the CCO to prepare, 
sign and submit an annual compliance report that describes (i) the 
compliance of the clearing agency with the Federal securities laws and 
the rules and regulations thereunder, and (ii) each policy and 
procedure of the clearing agency (including the code of ethics and 
conflict of interest policies of

[[Page 14500]]

the registered clearing agency). Also consistent with the requirements 
under Section 3C(j) of the Exchange Act, proposed Rule 3Cj-1(c) would 
require the annual compliance report to accompany each appropriate 
financial report of the clearing agency that is required to be 
furnished to the Commission pursuant to the Exchange Act and the rules 
thereunder. Finally, the CCO must certify under penalty of law that the 
compliance report is accurate and complete.
    In addition, to clarify and enhance the requirements under Section 
3C(j) of the Exchange Act, the Commission is proposing to require that 
each annual compliance report:
     Be submitted to the board of directors and audit committee 
(or equivalent bodies) of the clearing agency promptly after the date 
of execution of the required certification and prior to filing of the 
report with the Commission;
     Be filed with the Commission in a tagged data format in 
accordance with the instructions contained in the EDGAR Filer Manual, 
as described in Rule 301 of Regulation S-T; \118\ and
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    \118\ The term ``tag'' (including the term ``tagged'') refers to 
an identifier that highlights specific information submitted to the 
Commission that is in the format required by the EDGAR Filer Manual, 
as described in Rule 301 of Regulation S-T. See 17 CFR 32.301. The 
term ``EDGAR Filer Manual'' is defined in Rule 11 of Regulation S-T 
as ``the current version of the manual prepared by the Commission 
setting out the technical format requirements for an electronic 
submission.'' See 17 CFR 232.11. If the Commission adopts Rule 3Cj-1 
as proposed, it is possible that clearing agencies might be required 
to file the annual compliance report in paper until such time as an 
electronic filing system is operational and capable of receiving the 
annual compliance report. The Commission would notify clearing 
agencies as soon as the electronic filing system can accept filings 
of annual compliance reports.
---------------------------------------------------------------------------

     Be filed with the Commission within 60 days after the end 
of the fiscal year covered by such report.
    The Commission preliminarily believes it would be appropriate to 
require that the annual compliance report be submitted to the board of 
directors and audit committee (or equivalent bodies) prior to filing of 
the report with the Commission because it would help to focus attention 
at senior levels of the clearing agency on the contents of the report 
that is being filed with the Commission. This in turn could help to 
promote a robust compliance program at the clearing agency by ensuring 
appropriate attention and response at the Board level.
    In addition, the Commission preliminarily believes that it would be 
appropriate for clearing agencies to file the report with the 
Commission in a tagged data format in accordance with the instructions 
contained in the EDGAR Filer Manual in order to provide an electronic 
system for submitting this report that builds on an existing framework 
for filings to the Commission. This in turn should help to ease the 
potential administrative burdens on clearing agencies. As previously 
noted, the proposed rule would also require that the annual compliance 
report be filed with the Commission within 60 days after the end of the 
fiscal year covered by such report. The report would be subject to 
public availability and the Commission anticipates making such report 
available through its EDGAR system. The Commission preliminarily 
believes such time frame would be appropriate because it should give 
clearing agencies adequate time to review and draft a report based on 
actions that occurred during the prior year, while also limiting the 
potential that the information would be stale and thus not be as useful 
in the Commission's oversight of the clearing agency.
Request for Comment
    The Commission generally requests comments on all aspects of 
proposed Rule 3Cj-1. In addition, the Commission requests comments on 
the following specific issues:
     Is the definition of ``senior officer'' appropriate? If 
not, is it over-inclusive or under-inclusive and how should it be 
defined?
     Should the Commission include in its proposed rule a 
requirement that a CCO's compensation must be approved by the board?
     Should the Commission include in its proposed rule a 
requirement that a CCO may only be removed by action of the board?
     Are there other measures that would further enhance the 
independence and effectiveness of a CCO and that should be prescribed 
in a rule, such as requiring that a CCO not perform any other 
functions?
     Should the Commission impose any additional duties on a 
CCO of a clearing agency?
     Should the Commission provide guidance in its proposed 
rules about the CCO's procedures for the remediation of non-compliance 
issues?
     What is the likely effect of the Commission's proposed 
rule on the development of the financial markets? Would the proposed 
rule impede the establishment of clearing agencies?
     Does requiring the compliance report to be filed annually 
with the Commission within sixty days after the end of the fiscal year 
covered by such report give a clearing agency enough time to prepare 
the report? Should the Commission consider a longer or short time 
frame? Please explain.
     Should the Commission require submission of the CCO 
compliance report to the board before or after submission to the 
Commission? How would submission of the compliance report to the board 
before or after submission to the Commission affect the board's review 
of the compliance report?
     Should the Commission prescribe any specific method of 
review by the board with respect to the CCO compliance report? For 
example, should the Commission require that (i) the CCO compliance 
report include, as appropriate, recommended actions to be taken by the 
clearing agency to improve compliance or correct any compliance 
deficiencies, (ii) the board review any such recommendations and 
determine whether to approve them, and (iii) the clearing agency notify 
the Commission if the board declines to approve such recommendations, 
or approves different actions than those recommended in the CCO 
compliance report? What are the advantages and disadvantages of such an 
approach? Should clearing agencies be required to have the CCO report 
directly to the board instead of also permitting reporting to a senior 
officer of the clearing agency? What would be the advantages and 
disadvantages of requiring the CCO to report to the board?

IV. General Request for Comments

    The Commission seeks comment on all aspects of the proposed rules 
with respect to clearing agencies. The Commission particularly requests 
comment from the point of view of investors, entities that are 
registered as clearing agencies, are likely to become registered 
clearing agencies, entities operating platforms that currently trade or 
clear security-based swaps, broker-dealers, and financial institutions.
    Title VII requires that the SEC consult and coordinate to the 
extent possible with the CFTC for the purposes of assuring regulatory 
consistency and comparability, to the extent possible, and states that 
in adopting rules, the CFTC and SEC shall treat functionally or 
economically similar products or entities in a similar manner. In the 
process of developing the proposed rules the Commission staff has 
consulted with the CFTC staff.
    The CFTC is adopting rules related to derivatives clearing 
organizations (``DCO'') in connection with Section 725

[[Page 14501]]

of the Dodd-Frank Act.\119\ Understanding that the Commission and the 
CFTC regulate different products and markets, and as such, 
appropriately may be proposing alternative regulatory requirements, we 
request comments on the effect of any differences between the 
Commission and CFTC approaches to the regulation of clearing agencies 
and DCOs respectively. Specifically, would the regulatory approaches 
under the Commission's proposed rulemaking pursuant to Sections 17A(d), 
17A(j) and 3C(j) under the Exchange Act and the CFTC's proposed 
rulemaking pursuant to Section 725 of the Dodd-Frank Act result in 
duplicative or inconsistent requirements for market participants 
subject to both regulatory regimes or result in gaps between those 
regimes? If so, in what ways do commenters believe that such 
duplication, inconsistencies, or gaps should be minimized? Do 
commenters believe the approaches proposed by the Commission and the 
CFTC to govern clearing agencies and DCOs are comparable? If not, why? 
Do commenters believe there are approaches that would result in more 
comparable treatment? If so, what are they and what would be the 
advantages and disadvantages of adopting such approaches? Do commenters 
believe that it would be appropriate for the Commission to adopt an 
approach proposed by the CFTC that differs from our proposal? If so, 
which one?
---------------------------------------------------------------------------

    \119\ See 75 FR 63113 (October 14, 2010) and 75 FR 77576 
(December 13, 2010).
---------------------------------------------------------------------------

    Commenters should, when possible, provide the Commission with 
empirical data to support their views. Commenters suggesting 
alternative approaches should provide comprehensive proposals, 
including any conditions or limitations that they believe should apply, 
the reasons for their suggested approaches, and their analysis 
regarding why their suggested approaches would satisfy the statutory 
mandates of the Exchange Act with respect to clearing agencies.

V. Paperwork Reduction Act

    Certain provisions of the proposed rules would impose new 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\120\ Accordingly, the 
Commission has submitted the information to the Office of Management 
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507 and 5 
CFR 1320.11. The title of the new collection of information is Clearing 
Agency Standards for Operation and Governance. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid OMB 
control number.
---------------------------------------------------------------------------

    \120\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Summary of Collection of Information

1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
    Proposed Rule 17Ad-22(b)(1) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(1) would require a clearing agency that provides CCP services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to measure its credit exposures to its 
participants at least once each day, and limit its exposures to 
potential losses from defaults by its participants in normal market 
conditions so that the operations of the clearing agency would not be 
disrupted and non-defaulting participants would not be exposed to 
losses that they cannot anticipate or control.
b. Margin Requirements
    Proposed Rule 17Ad-22(b)(2) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(2) would require a clearing agency that provides CCP services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to: (i) Use margin requirements to limit 
its credit exposures to participants in normal market conditions; (ii) 
use risk-based models and parameters to set margin requirements; and 
(iii) review the models and parameters at least monthly.
c. Financial Resources
    Proposed Rule 17Ad-22(b)(3) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(3) would require a clearing agency that provides CCP services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to maintain sufficient financial 
resources to withstand, at a minimum, a default by the participant to 
which it has the largest exposure in extreme but plausible market 
conditions, and if the clearing agency provides CCP services for 
security-based swaps then a default by the two participants to which it 
has the largest exposures in extreme but plausible market conditions; 
provided that if a participant controls another participant or is under 
common control with another participant, then the affiliated 
participants shall be collectively deemed to be a single participant.
d. Model Validation
    Proposed Rule 17Ad-22(b)(4) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(4) would require a clearing agency that provides CCP services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for an annual model 
validation consisting of evaluating the performance of the clearing 
agency's margin models and the related parameters and assumptions 
associated with such models by a qualified person who does not perform 
functions associated with the clearing agency's margin models (except 
as part of the annual model validation) and does not report to such a 
person.
e. Non-Dealer Access
    Proposed Rule 17Ad-22(b)(5) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(5) would require a clearing agency that provides CCP services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide the opportunity for a person 
that does not perform any dealer or security-based swap dealer services 
to obtain membership at the clearing agency to clear securities for 
itself or on behalf of other persons.
f. Portfolio Size and Transaction Volume Thresholds Restrictions
    Proposed Rule 17Ad-22(b)(6) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(6) would require a clearing agency that provides CCP services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to have membership standards that do not 
require that participants maintain a portfolio of any minimum size or 
that participants maintain a minimum transaction volume.
g. Net Capital Restrictions
    Proposed Rule 17Ad-22(b)(7) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(7) would require a clearing agency that provides CCP services to 
establish,

[[Page 14502]]

implement, maintain and enforce written policies and procedures 
reasonably designed to provide a person that maintains net capital 
equal to or greater than $50 million with the ability to obtain 
membership at the clearing agency, with any net capital requirements 
being scalable so that they are proportional to the risks posed by the 
participant's activities to the clearing agency. The proposed rule also 
permits a clearing agency to provide for a higher net capital 
requirement (i.e., higher than $50 million) as a condition for 
membership at the clearing agency if the clearing agency demonstrates 
to the Commission that such a requirement is necessary to mitigate 
risks that could not otherwise be effectively managed by other 
measures, such as scalable limitations on the transactions that the 
participants may clear through the clearing agency, and the Commission 
approves the higher net capital requirement as part of a rule filing or 
clearing agency registration application.
h. Record of Financial Resources
    Proposed Rule 17Ad-22(c)(1) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(c)(1) would require that each fiscal quarter (based on calculations 
made as of the last business day of the clearing agency's fiscal 
quarter), or at any time upon Commission request, a clearing agency 
that performs CCP services shall calculate and maintain a record of the 
financial resources necessary to meet the requirement in proposed Rule 
17Ad-22Ad-22(b)(3) and sufficient documentation to explain the 
methodology it uses to compute such financial resource requirement.
i. Annual Audited Financial Report
    Proposed Rule 17Ad-22(c)(2) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed rule 17Ad-
22(c)(2) would require a clearing agency to post on its Web site an 
annual financial report which must (i) be a complete set of financial 
statements of the clearing agency for the most recent two fiscal years 
and be prepared in accordance with U.S. GAAP, except that for a 
clearing agency that is a corporation or other organization 
incorporated or organized under the laws of any foreign country the 
financial statements may be prepared according to U.S. GAAP or IFRS, 
(ii) be audited in accordance with standards of the Public Company 
Accounting Oversight Board by a registered public accounting firm that 
is qualified and independent in accordance with rule 2-01 of Regulation 
S-X (17 CFR 210.2-01), (iii) include a report of the registered public 
accounting firm that complies with paragraphs (a) through (d) of Rule 
2-02 of Regulation S-X (17 CFR 210.2-02).
j. Transparent and Enforceable Rules and Procedures
    Proposed Rule 17Ad-22(d)(1) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(1) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for a well founded, transparent, and enforceable 
legal framework for each aspect of its activities in all relevant 
jurisdictions.
k. Participation Requirements
    Proposed Rule 17Ad-22(d)(2) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(2) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to require participants to have sufficient financial resources 
and robust operational capacity to meet obligations arising from 
participation in the clearing agency. Clearing agencies would also be 
required to have procedures in place to monitor that participation 
requirements are met on an ongoing basis, and to have participation 
requirements that are objective, publicly disclosed, and permit fair 
and open access.
l. Custody of Assets and Investment Risk
    Proposed Rule 17Ad-22(d)(3) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(3) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to hold assets in a manner that minimizes risk of loss or 
delay in access to them and to invest assets in instruments with 
minimal credit, market, and liquidity risks.
m. Identification and Mitigation of Operational Risk
    Proposed Rule 17Ad-22(d)(4) contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(4) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to: (i) Identify sources of operational risk and minimize them 
through the development of appropriate systems, controls, and 
procedures; (ii) implement systems that are reliable, resilient and 
secure, and have adequate, scalable capacity; and (iii) have business 
continuity plans that allow for timely recovery of operations and 
fulfillment of a clearing agency's obligations.
n. Money Settlement Risks
    Proposed Rule 17Ad-22(d)(5) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(5) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to employ money settlement arrangements that eliminate or 
strictly limit the clearing agency's settlement bank risks, that is, 
its credit and liquidity risks from the use of banks to effect money 
settlements with its participants, and require funds transfers to the 
clearing agency to be final when effected.
o. Cost-Effectiveness
    Proposed Rule 17Ad-22(d)(6) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(6) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to be cost-effective in meeting the requirements of 
participants while maintaining safe and secure operations.
p. Links
    Proposed Rule 17Ad-22(d)(7) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(7) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to evaluate the potential sources of risks that can arise when 
the clearing agency establishes links either cross-border or 
domestically to clear trades and ensure that the risks are managed 
prudently on an ongoing basis.
q. Governance
    Proposed Rule 17Ad-22(d)(8) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(8) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to have governance arrangements that are clear and transparent 
to fulfill the public interest requirements in Section 17A of the 
Exchange Act applicable to clearing

[[Page 14503]]

agencies, to support the objectives of owners and participants, and to 
promote the effectiveness of the clearing agency's risk management 
procedures.
r. Information on Services
    Proposed Rule 17Ad-22(d)(9) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(9) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide market participants with sufficient information for 
them to identify and evaluate the risks and costs associated with using 
their services.
s. Immobilization and Dematerialization of Stock Certificates
    Proposed Rule 17Ad-22(d)(10) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(10) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to immobilize or dematerialize securities certificates and 
transfer them by book entry to the greatest extent possible if the 
clearing agency performs central securities depository services.
t. Default Procedures
    Proposed Rule 17Ad-22(d)(11) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(11) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to make key aspects of the clearing agency's default 
procedures publicly available and to establish default procedures that 
ensure that the clearing agency can take timely action to contain 
losses and liquidity pressures and to continue meeting its obligations 
in the event of a participant default.
u. Timing of Settlement Finality
    Proposed Rule 17Ad-22(d)(12) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(12) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to ensure that final settlement occurs no later than the end 
of the settlement day and that intraday or real-time finality is 
provided where necessary to reduce risks.
v. Delivery Versus Payment
    Proposed Rule 17Ad-22(d)(13) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(13) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to eliminate principal risk linking securities transfers to 
funds transfers in a way that achieves DVP.
w. Risk Controls To Address Participants' Failure To Settle
    Proposed Rule 17Ad-22(d)(14) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(14) would require clearing agencies that perform central 
securities depository services to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to 
institute risk controls when the clearing agency extends intraday 
credit to participants, including collateral requirements and limits to 
cover the clearing agency's credit exposure to each participant fully, 
and that ensure timely settlement in the event that the participant 
with the largest payment obligation is unable to settle. If a 
participant controls another participant or is under common control 
with another participant, then the affiliated participants shall be 
collectively deemed to be a single participant.
x. Physical Delivery Risks
    Proposed Rule 17Ad-22(d)(15) would contain ``collection of 
information requirements'' within the meaning of the PRA. Proposed Rule 
17Ad-22(d)(15) would require clearing agencies to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to state to its participants the clearing agency's obligations 
with respect to physical deliveries. Clearing agencies would also be 
required to identify and manage the risks that arise in connection with 
these obligations.
2. Dissemination of Pricing and Valuation Information by Security-Based 
Swap Clearing Agencies That Perform Central Counterparty Services
    Proposed Rule 17Aj-1 contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Aj-1 is 
designed to preserve the information dissemination requirement from the 
CDS Clearing Exemption Orders.\121\ The proposed rule would require 
every security-based swap clearing agency that performs CCP services to 
make available to the public all end-of-day settlement prices and any 
other prices with respect to security-based swaps that it may use to 
calculate mark-to-market \122\ margin requirements for its 
participants. Proposed Rule 17Aj-1 also would require every security-
based swap clearing agency that performs CCP services to make available 
to the public any other pricing or valuation information with respect 
to security-based swaps that it otherwise publishes or makes available 
to its participants. Proposed Rule 17Aj-1 would not require that this 
information be made available to the public free of charge. Instead, it 
would require that the information be provided to the public on terms 
that are fair, reasonable and not unreasonably discriminatory.
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    \121\ See generally note 6 (providing citations to the CDS 
Clearing Exemption Orders).
    \122\ See supra note 91 (explaining that in the specific context 
of the margin practices of security-based swap clearing agencies, 
the term ``mark-to-market'' implies the variation margin practices 
used by the clearing agency to account for ongoing fluctuations in 
the market value of its participants' security-based swap 
positions).
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3. Clearing Agency Policies and Procedures To Protect the 
Confidentiality of Trading Information of Clearing Agency Participants
    Proposed Rule 17Ad-23 contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-23 
would require each registered clearing agency to establish, implement, 
maintain and enforce written policies and procedures designed to 
protect the confidentiality of any and all transaction information that 
the clearing agency receives. Such transaction information may include, 
but is not limited to, trade data, position data, and any non-public 
personal information about a clearing agency member or participant or 
any of its members' or participants' customers. The proposed rule also 
provides that the required policies and procedures shall include, but 
are not limited to, (a) limiting access to confidential trading 
information of clearing members to those employees of the clearing 
agency who are operating the system or responsible for its compliance 
with any other applicable laws or rules and (b) standards controlling 
employees and agents of the clearing agency trading for their personal 
benefit or the benefit of others.

[[Page 14504]]

4. Exemption From Clearing Agency Definition for Certain Registered 
Securities-Based Swap Dealers and Registered Security-Based Swap 
Execution Facilities
    Proposed Rule 17Ad-24 provides that a registered security-based 
swap dealer would not be considered a clearing agency solely by reason 
of functions performed by such institution as part of customary dealing 
activities, or solely because it acts on behalf of a clearing agency or 
a participant in connection with services performed by the clearing 
agency. In addition, proposed Rule 17Ad-24 provides that a registered 
security-based swap execution facility would not be considered a 
clearing agency solely because it provides facilities for comparison of 
data relating to the terms of settlement of securities transactions. 
Accordingly, the rule does not impose recordkeeping or information 
collection requirements, or other collections of information that 
require approval of the OMB under 44 U.S.C. 3501, et seq. Thus, it 
would not be a ``collection of information'' within the meaning of the 
PRA.
5. Registration of Clearing Agencies
    The proposed amendment to Rule 17Ab2-1 would mainly clarify that 
when granting a temporary registration the Commission may do so for ``a 
specific period of time and may exempt, other than for purposes of 
Section 17A(g) of the Act, the registrant from one or more of the 
requirements * * *''. Accordingly, the proposed rule does not impose 
recordkeeping or information collection requirements, or other 
collections of information that require approval of the OMB under 44 
U.S.C. 3501, et seq. Thus, it would not be a ``collection of 
information'' within the meaning of the PRA.
6. Clearing Agency Procedures To Identify and Address Conflicts of 
Interest
    Proposed Rule 17Ad-25 contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-25 
would require each clearing agency to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
identify and address existing or potential conflicts of interest, as 
well as that address methods of minimizing conflicts of interest in 
decision-making at the clearing agency.
7. Standards for Board or Board Committee Directors
    Proposed Rule 17Ad-26 contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-26 
outlines the proposed standards that would a registered clearing agency 
would be required to establish for its board members and board 
committee members. These standards include at least the following 
areas: (i) A clear articulation of the roles and responsibilities of 
directors serving on the clearing agency's board and any board 
committees; (ii) director qualifications providing criteria for 
expertise in the securities industry, clearance and settlement of 
securities transactions, and financial risk management; (iii) 
disqualifying factors concerning serious legal misconduct, including 
violations of the Federal securities laws; and (iv) policies and 
procedures for the periodic review by the board or a board committee of 
the performance of its individual members.
8. Designation of Chief Compliance Officer
    Proposed Rule 3Cj-1 contains ``collection of information 
requirements'' within the meaning of the PRA. Proposed Rule 3Cj-1 would 
require each registered clearing agency to designate a CCO. Under 
proposed Rule 3Cj-1(b), the CCO would be responsible for, among other 
matters, establishing policies and procedures for the remediation of 
non-compliance issues identified by the CCO and establishing and 
following appropriate procedures for the prompt handling of management 
response, remediation, retesting, and closing of compliance issues.
    Under Proposed Rule 3Cj-1(c), the CCO would also be responsible for 
preparing and signing an annual compliance report that contains a 
description of (i) the compliance of the clearing agency with respect 
to the Federal securities laws and the rules and regulations 
thereunder, and (ii) each policy and procedure of the clearing agency 
of the compliance officer (including the code of ethics and conflict of 
interest policies of the registered clearing agency). This compliance 
report must accompany each appropriate financial report of the clearing 
agency that is required to be furnished to the Commission pursuant to 
the Exchange Act and the rules thereunder and include a certification 
that, under penalty of law, the compliance report is accurate and 
complete.
    Additionally, the compliance report would be required to: (i) Be 
submitted to the board of directors and audit committee (or equivalent 
bodies) of the clearing agency promptly after the date of execution of 
the required certification and prior to filing of the report with the 
Commission, (ii) be filed with the Commission in a tagged data format 
in accordance with the instructions contained in the EDGAR Filer Manual 
as described in Rule 301 of Regulation S-T, and (iii) be filed with the 
Commission within 60 days after the end of the fiscal year covered by 
such report.

B. Proposed Use of Information

1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
    As discussed above, proposed Rule 17Ad-22(b)(1) would require a 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to measure its credit exposures to its participants at least 
once each day, and limit its exposures to potential losses from 
defaults by its participants in normal market conditions so that the 
operations of the clearing agency would not be disrupted and non-
defaulting participants would not be exposed to losses that they cannot 
anticipate or control. The purpose of the collection of information is 
to enable the clearing agency to monitor and limit its exposures to its 
participants.
b. Margin Requirements
    As discussed above, proposed Rule 17Ad-22(b)(2) would require a 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to: (i) Use margin requirements to limit its credit exposures 
to participants in normal market conditions; (ii) use risk-based models 
and parameters to set margin requirements; and (iii) review the models 
and parameters at least monthly. The purpose of the collection of 
information is to enable the clearing agency to maintain sufficient 
collateral or margin.
c. Financial Resources
    As discussed above, proposed Rule 17Ad-22(b)(3) would require a 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain sufficient financial resources to withstand, at a 
minimum, a default by the participant to which it has the largest 
exposure in extreme but plausible market conditions, and if the 
clearing agency provides CCP services for security-based swaps then a 
default by the two participants to which it has the largest exposures 
in extreme but

[[Page 14505]]

plausible market conditions; provided that if a participant controls 
another participant or is under common control with another 
participant, the affiliated participant and the participant shall be 
deemed to be a single participant. The purpose of the collection of 
information is to enable the clearing agency to satisfy all of its 
settlement obligations in the event of a participant default.
d. Model Validation
    As discussed above, proposed Rule 17Ad-22(b)(4) would require a 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for an annual model validation. The purpose of the 
collection of information is to enable the clearing agency to obtain an 
assessment of its margin model by a qualified, independent person.
e. Non-Dealer Access
    As discussed above, proposed Rule 17Ad-22(b)(5) would require a 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide the opportunity for a person that does not perform 
any dealer or security-based swap dealer services to obtain membership 
at the clearing agency to clear securities for itself or on behalf of 
other persons. The purpose of the collection of information is to 
enable more market participants to obtain indirect access to clearing 
agencies.
f. Portfolio Size and Transaction Volume Restrictions
    As discussed above, proposed Rule 17Ad-22(b)(6) would require a 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to have membership standards that do not require that 
participants maintain a portfolio of any minimum size or that 
participants maintain a minimum transaction volume. The purpose of the 
collection of information is to remove unnecessary barriers to 
participation in clearing agencies that provide CCP services.
g. Net Capital Restrictions
    As discussed above, proposed Rule 17Ad-22(b)(7) would require a 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide a person that maintains net capital equal to or 
greater than $50 million with the ability to obtain membership at the 
clearing agency, with any net capital requirements being scalable so 
that they are proportional to the risks posed by the participant's 
activities to the clearing agency. The rule also permits a clearing 
agency to provide for a higher net capital requirement (i.e., higher 
than $50 million) as a condition for membership at the clearing agency 
if the clearing agency demonstrates to the Commission that such a 
requirement is necessary to mitigate risks that could not otherwise be 
effectively managed by other measures, such as scalable limitations on 
the transactions that the participants may clear through the clearing 
agency, and the Commission approves the higher net capital requirement 
as part of a rule filing or clearing agency registration application. 
The purpose of the collection of information is to remove unnecessary 
barriers to clearing access by market participants with a net capital 
level above $50 million, while at the same time facilitating sound risk 
management practices by clearing agencies by encouraging them to 
examine and articulate the benefits that higher net capital 
requirements would create through having clearing agencies develop 
scalable membership standards that links the activities any 
participants could potentially engage in with the potential risks posed 
by the participant.
h. Record of Financial Resources
    As discussed above, proposed Rule 17Ad-22(c)(1) would require that 
each fiscal quarter (based on calculations made as of the last business 
day of the clearing agency's fiscal quarter), or at any time upon 
Commission request, a clearing agency that performs CCP services shall 
calculate and maintain a record of the financial resources necessary to 
meet the requirement in proposed Rule 17Ad-22c)(3) and sufficient 
documentation to explain the methodology it uses to compute such 
financial resource requirement. The purpose of the collection of 
information is to enable the Commission to monitor the financial 
resources of clearing agencies that provide CCP services.
i. Annual Audited Financial Report
    As discussed above, proposed Rule 17Ad-22(c)(2) would require a 
clearing agency that provides CCP services to post on its Web site an 
annual audited financial report that must (i) be a complete set of 
financial statements of the clearing agency for the most recent two 
fiscal years and be prepared in accordance with U.S. GAAP, except that 
for a clearing agency that is a corporation or other organization 
incorporated or organized under the laws of any foreign country the 
financial statements may be prepared according to U.S. GAAP or IFRS; 
(ii) be audited in accordance with standards of the Public Company 
Accounting Oversight Board by a registered public accounting firm that 
is qualified and independent in accordance with rule 2-01 of Regulation 
S-X (17 CFR 210.2-01); and (iii) include a report of the registered 
public accounting firm that complies with paragraphs (a) through (d) of 
Rule 2-02 of Regulation S-X (17 CFR 210.2-02). The purpose of the 
collection of information is to enable the Commission to monitor the 
financial resources of clearing agencies that provide CCP services.
j. Transparent and Enforceable Rules and Procedures
    As discussed above, proposed Rule 17Ad-22(d)(1) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for a well 
founded, transparent, and enforceable legal framework for each aspect 
of their activities in all relevant jurisdictions. The purpose of the 
collection of information is to help ensure that clearing agencies' 
policies and procedures do not cause confusion or legal uncertainty 
among their participants because they are unclear, incomplete or 
conflict with other applicable laws or judicial precedent.
k. Participation Requirements
    As discussed above, proposed Rule 17Ad-22(d)(2) has three principle 
requirements related to establishing, implementing, maintaining and 
enforcing written policies and procedures for participation 
requirements. First, it would require clearing agencies to require 
participants to have sufficient financial resources and robust 
operational capacity to meet their obligations. The purpose of the 
collection of information is to enable clearing agencies to ensure that 
only persons with sufficient financial and operational capacity are 
direct participants. Second, clearing agencies would be required to 
have procedures in place to monitor that participation requirements are 
met on an ongoing basis. The purpose of the collection of information 
is to help clearing agencies identify a participant experiencing 
financial difficulties before the participant fails to meet its 
settlement obligations. Third, a clearing agency's participation 
requirements would have to be objective, publicly disclosed, and permit 
fair and open access. The purpose of the collection of information is 
to ensure that all qualified persons

[[Page 14506]]

can access a clearing agency's services on an equivalent basis.
l. Custody of Assets and Investment Risk
    As discussed above, proposed Rule 17Ad-22(d)(3) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to hold assets in a manner 
that minimizes risk of loss or delay in access to them, and to invest 
assets in instruments with minimal credit, market, and liquidity risks. 
The purpose of the collection of information is to enable clearing 
agencies to access their financial resources quickly so that they 
settle securities transactions on time and at the agreed upon terms.
m. Identification and Mitigation of Operational Risk
    As discussed above, proposed Rule 17Ad-22(d)(4): Would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to: (i) Identify sources of 
operational risk and minimize them through the development of 
appropriate systems, controls, and procedures; (ii) implement systems 
that are reliable, resilient and secure, and have adequate, scalable 
capacity; and (iii) have business continuity plans that allow for 
timely recovery of operations and fulfillment of a clearing agency's 
obligations. The purpose of the collection of information is to ensure 
that clearing agencies can maintain operations in the event of an 
operational problem, natural disaster or other similar event.
n. Money Settlement Risks
    As discussed above, proposed Rule 17Ad-22(d)(5) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to employ money settlement 
arrangements that eliminate or strictly limit the clearing agency's 
settlement bank risks, that is, its credit and liquidity risks from the 
use of banks to effect money settlements with its participants, and 
require funds transfers to the clearing agency to be final when 
effected. The purpose of the collection of information is to promote 
reliability in a clearing agency's settlement operations.
o. Cost-Effectiveness
    As discussed above, proposed Rule 17Ad-22(d)(6) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to be cost-effective in 
meeting the requirements of participants while maintaining safe and 
secure operations. The purpose of the collection of information is to 
help ensure that the services of clearing agencies do not become too 
expensive.
p. Links
    As discussed above, proposed Rule 17Ad-22(d)(7) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to evaluate the potential 
sources of risks that can arise when the clearing agency establishes 
links either cross-border or domestically to clear trades, and ensure 
that the risks are managed prudently on an ongoing basis. The purpose 
of the collection of information is to help ensure that clearing 
agencies adequately assess the risks associated with establishing a 
link with another clearing organization.
q. Governance
    As discussed above, proposed Rule 17Ad-22(d)(8) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to have governance 
arrangements that are clear and transparent to fulfill the public 
interest requirements in Section 17A of the Exchange Act applicable to 
clearing agencies; to support the objectives of owners and 
participants; and to promote the effectiveness of the clearing agency's 
risk management procedures. The purpose of the collection of 
information is to promote boards of directors that exercise sufficient 
oversight of the clearing agency's management and appropriately 
represent the interests of relevant stakeholders.
r. Information on Services
    As discussed above, proposed Rule 17Ad-22(d)(9) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide market 
participants with sufficient information for them to identify and 
evaluate the risks and costs associated with using their services. The 
purpose of the collection of information is to help market participants 
identify the risks and costs associated with using the clearing agency 
and would allow market participants to make informed decisions about 
the use of the clearing agency and take appropriate actions to mitigate 
their risks and costs associated with the use of the clearing agency.
s. Immobilization and Dematerialization of Stock Certificates
    As discussed above, proposed Rule 17Ad-22(d)(10) would require 
clearing agencies that perform central securities depository services 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to immobilize or dematerialize 
securities certificates and transfer them by book entry to the greatest 
extent possible. The purpose of the collection of information is to 
enable clearing agencies to promote greater efficiency in the 
settlement of securities transactions and reduce risk by transferring 
securities by book entry movements.
t. Default Procedures
    As discussed above, proposed Rule 17Ad-22(d)(11) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to make key aspects of 
their default procedures publicly available and to establish default 
procedures that ensure that the clearing agency can take timely action 
to contain losses and liquidity pressures and to continue meeting its 
obligations in the event of a participant default. The purpose of the 
collection of information is to foster a greater understanding by 
market participants of possible steps a clearing agency may take when a 
participant defaults and possibly reduce the likelihood of market 
participants taking actions based on incorrect information.
u. Timing of Settlement Finality
    As discussed above, proposed Rule 17Ad-22(d)(12) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to ensure that final 
settlement occurs no later than the end of the settlement day and 
require that intraday or real-time finality be provided where necessary 
to reduce risks. The purpose of the proposed rule is to promote 
consistent standards of timing and reliability in the settlement 
process.
v. Delivery Versus Payment
    As discussed above, proposed Rule 17Ad-22(d)(13) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to eliminate principal risk 
by linking securities transfers to funds transfers in a way that 
achieves delivery versus payment. The purpose of the proposed rule is 
to eliminate principal risk in the transfer of securities and funds.

[[Page 14507]]

w. Risk Controls To Address Participant's Failure To Settle
    As discussed above, proposed Rule 17Ad-22(d)(14) would require 
clearing agencies that perform central securities depository services 
and extend intraday credit to participants to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to institute risk controls, including collateral requirements 
and limits to cover the clearing agency's credit exposure to each 
participant fully, and ensure timely settlement in the event that the 
participant with the largest payment obligation is unable to settle. 
The purpose of the collection of information is to enable clearing 
agencies to satisfy their settlement obligations on time and for the 
agreed upon terms.
x. Identification and Management of Physical Delivery Risks
    As discussed above, proposed Rule 17Ad-22(d)(15) would require 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to state to their 
participants the clearing agency's obligations with respect to physical 
deliveries and to identify and manage the risks that arise in 
connection with these obligations. The purpose of the collection of 
information is to provide the clearing agency's participants with 
sufficient information to evaluate the risks and costs associated with 
participation in the clearing agency.
2. Dissemination of Pricing and Valuation Information by Security-Based 
Swap Clearing Agencies That Perform Central Counterparty Services
    As discussed above, proposed Rule 17Aj-1 would require security-
based swap clearing agencies that perform CCP services to make 
available to the public all end-of-day settlement prices and any other 
prices with respect to security-based swaps that it may use to 
calculate mark-to-market margin requirements for its participants and 
any other pricing or valuation information with respect to security-
based swaps that it otherwise publishes or makes available to its 
participants. The purpose of the collection of information is to help 
improve fairness, efficiency and market competition by providing market 
participants and, more generally, the public with a source of pricing 
data on security-based swaps that may otherwise be difficult to obtain.
3. Clearing Agency Policies and Procedures To Protect the 
Confidentiality of Trading Information of Clearing Agency Participants
    As discussed above, proposed Rule 17Ad-23 would require each 
registered clearing agency to establish, implement, maintain and 
enforce written policies and procedures designed to protect the 
confidentiality of any and all transaction information that the 
clearing agency receives. Such transaction information may include, but 
is not limited to, trade data, position data, and any non-public 
personal information about a clearing agency member or participant or 
any of its members or participant's customers. The proposed rule also 
provides that the required policies and procedures shall include, but 
are not limited to: (a) Limiting access to confidential trading 
information of clearing members to those employees of the clearing 
agency who are operating the system or responsible for its compliance 
with any other applicable laws or rules and (b) standards controlling 
employees and agents of the clearing agency trading for their personal 
benefit or the benefit of others. The purpose of the collection of 
information is to foster confidence in clearing agencies by market 
participants.
4. Clearing Agency Procedures To Identify and Address Conflicts of 
Interest
    As discussed above, proposed Rule 17Ad-25 would require each 
registered clearing agency to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to identify 
and address existing or potential conflicts of interest and that are 
reasonably designed to minimize conflicts of interest in decision-
making at the clearing agency. The purpose of the collection of 
information is to enable the Commission to examine and evaluate a 
clearing agency's efforts to minimize conflicts and help to ensure the 
transparent, equitable operation of the clearing agency.
5. Standards for Board or Board Committee Directors
    As discussed above, proposed Rule 17Ad-26 would require that a 
registered clearing agency establish certain governance standards 
applicable to its board or board committee members. The proposed 
collection of information is to help improve the effectiveness of a 
clearing agency's board of directors.
6. Designation of Chief Compliance Officer
    As discussed above, proposed Rule 3Cj-1 would require each 
registered clearing agency to designate a CCO who would establish and 
oversee the implementation of certain policies and procedures relating 
to non-compliance issues, as well as prepare, sign and submit an annual 
compliance report. The proposed collection of information should 
promote better compliance by clearing agencies with all applicable 
laws, regulations and policies.

C. Respondents

1. Standards in Proposed Rule 17Ad-22(b) That Impose a PRA Burden
    The standards in proposed Rule 17Ad-22(b) that the Commission 
preliminarily believes impose a PRA burden are 17Ad-22(b)(1), (2), (3), 
(4), (5), (6) and (7). The requirements in proposed Rules 17Ad-
22(b)(1), (2), (3), (4), (5), (6) and (7) would apply to all clearing 
agencies that perform central counterparty services. There are 
currently four clearing agencies authorized to provide CCP services for 
security-based swap transactions pursuant to the CDS Clearing Exemption 
Orders.\123\ The Commission estimates, based on staff discussions with 
industry representatives, that there could conceivably be one or two 
more entities that clear security-based swaps in the future. Thus, the 
Commission estimates that four to six clearing agencies may seek to 
clear security-based swaps.\124\ The Commission is using the higher 
estimate of six security-based swap clearing agencies for this PRA 
analysis. There are also eleven additional clearing agencies currently 
registered with the Commission,\125\ of which only three are currently 
performing central counterparty services. Thus, for these provisions, 
the Commission estimates that there would be nine respondents.\126\
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    \123\ See supra note 6.
    \124\ The Commission preliminarily believes that there is a 
potential for new security-based swap clearing agencies to form but 
does not expect there to be a large number based on the significant 
level of capital and other financial resources needed for the 
formation of a clearing agency.
    \125\ There are four clearing agencies with active operations 
currently registered with the Commission, plus seven registered 
clearing agencies that are inactive. Although the inactive entities 
may not be acting as clearing agencies, for purposes of the PRA the 
Commission is estimating 11 total clearing agencies.
    \126\ This figure was calculated as follows: 6 clearing agencies 
providing CCP services for security-based swaps + 3 registered 
clearing agencies providing CCP services = 9 respondent clearing 
agencies.

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[[Page 14508]]

2. Standards in Proposed Rule 17Ad-22(c) That Impose a PRA Burden
    The standards in proposed Rule 17Ad-22(c) that the Commission 
preliminarily believes impose a PRA burden are 17Ad-22(c)(1) and (2). 
The requirements of proposed Rule 17Ad-22(c)(1) would apply to all 
clearing agencies that perform CCP services. As noted above, there are 
currently four clearing agencies authorized to provide CCP services for 
security-based swap transactions pursuant to the CDS Clearing Exemption 
Orders,\127\ and there could conceivably be one or two more entities 
that clear security-based swaps in the future. Thus, the Commission 
estimates that four to six clearing agencies may seek to clear 
security-based swaps.\128\ The Commission is using the higher estimate 
of six respondent clearing agencies for this PRA analysis. There are 
also eleven additional clearing agencies currently registered with the 
Commission,\129\ of which only three are currently performing central 
counterparty services. Thus, for proposed Rule 17Ad-22(c)(1), the 
Commission estimates that there would be nine respondents.\130\
---------------------------------------------------------------------------

    \127\ See supra note 6.
    \128\ See supra note 124 and accompanying text.
    \129\ See supra note 125.
    \130\ See supra note 126.
---------------------------------------------------------------------------

    The requirements of proposed Rule 17Ad-22(c)(2) would apply to all 
clearing agencies. Therefore, the Commission preliminarily believes 
that these PRA burdens would be imposed on all clearing agencies 
registered with the Commission. As noted above, there are currently 
four clearing agencies authorized to clear security-based swaps 
pursuant to the CDS Clearing Exemption Orders.\131\ The Commission 
estimates, based on staff discussions with industry representatives, 
that there could conceivably be one or two more entities that clear 
security-based swaps in the future. Thus, the Commission estimates that 
four to six clearing agencies may seek to clear security-based 
swaps.\132\ The Commission is using the higher estimate of six for the 
PRA analysis. There are also eleven additional clearing agencies 
currently registered with the Commission.\133\ Thus, for proposed Rule 
17Ad-22(c)(2), the Commission estimates that there would be seventeen 
respondents.\134\
---------------------------------------------------------------------------

    \131\ See supra note 6.
    \132\ See supra note 124 and accompanying text.
    \133\ See supra note 125.
    \134\ This figure was calculated as follows: 6 clearing agencies 
providing CCP services for security-based swaps + 11 additional 
registered clearing agencies = 17 respondent clearing agencies.
---------------------------------------------------------------------------

3. Standards in Proposed Rule 17Ad-22(d) That Impose a PRA Burden
    In proposed Rule 17Ad-22(d), the requirements that the Commission 
preliminarily believes impose a PRA burden are 17Ad-22(d)(1), (2), (3), 
(4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15). 
The Commission preliminarily believes that these PRA burdens would be 
imposed on all clearing agencies registered with the Commission. As 
noted above, there are currently four clearing agencies authorized to 
clear security-based swaps pursuant to the CDS Clearing Exemption 
Orders.\135\ The Commission estimates based on staff discussions with 
industry representatives, that there could conceivably be one or two 
more entities that clear security-based swaps in the future. Thus, the 
Commission estimates that four to six clearing agencies may seek to 
clear security-based swaps.\136\ The Commission is using the higher 
estimate of six for the PRA analysis. There are also eleven additional 
clearing agencies currently registered with the Commission.\137\ Thus, 
for these provisions, the Commission estimates that there would be 
seventeen respondents.\138\
---------------------------------------------------------------------------

    \135\ See supra note 6.
    \136\ See supra note 124.
    \137\ See supra note 125.
    \138\ See supra note 134.
---------------------------------------------------------------------------

4. Dissemination of Pricing and Valuation Information by Security-Based 
Swap Clearing Agencies That Perform Central Counterparty Services
    The requirements of proposed Rule 17Aj-1 to disseminate pricing and 
valuation information with respect to security-based swaps would apply 
to every security-based swap clearing agency that performs CCP 
services. As noted above, there are currently four entities providing 
CCP services for security-based swaps that are authorized to do so 
pursuant to the CDS Clearing Exemption Orders,\139\ and there could 
conceivably be one or two more entities that clear security-based swaps 
in the future. Thus, the Commission estimates that four to six clearing 
agencies that provide CCP services may seek to clear security-based 
swaps.\140\ The Commission is using the higher estimate of six 
respondent clearing agencies for this PRA analysis.
---------------------------------------------------------------------------

    \139\ See supra note 6.
    \140\ See supra note 124 and accompanying text.
---------------------------------------------------------------------------

5. Clearing Agency Policies and Procedures To Protect the 
Confidentiality of Trading Information of Clearing Agency Participants
    The safeguards and procedures applicable to the confidential 
treatment of trading information received by a clearing agency under 
proposed Rule 17Ad-23 would apply to all clearing agencies registered 
with the Commission. As noted above, there are currently four clearing 
agencies authorized to clear security-based swaps pursuant to the CDS 
Clearing Exemption Orders,\141\ and there could conceivably be one or 
two more entities that clear security-based swaps in the future. Thus, 
the Commission estimates that four to six clearing agencies may seek to 
clear security-based swaps.\142\ The Commission is using the higher 
estimate of six respondent clearing agencies for this PRA analysis. 
There are also eleven additional clearing agencies currently registered 
with the Commission.\143\ Thus, for this provision, the Commission 
estimates that there would be seventeen respondents.\144\
---------------------------------------------------------------------------

    \141\ See supra note 6.
    \142\ See supra note 124 and accompanying text.
    \143\ See supra note 125.
    \144\ See supra note 134.
---------------------------------------------------------------------------

6. Clearing Agency Procedures To Identify and Address Conflicts of 
Interest
    The conflicts of interest policies and procedures to be adopted by 
clearing agencies pursuant to proposed Rule 17Ad-25 would apply to all 
clearing agencies registered with the Commission. As noted above, there 
are currently four clearing agencies authorized to clear security-based 
swaps pursuant to the CDS Clearing Exemption Orders,\145\ and that 
there could conceivably be one or two more entities that clear 
security-based swaps in the future. Thus, the Commission estimates that 
four to six clearing agencies may seek to clear security-based 
swaps.\146\ The Commission is using the higher estimate of six 
respondent clearing agencies for this PRA analysis. There are also 
eleven additional clearing agencies currently registered with the 
Commission.\147\ Thus, for this provision, the Commission estimates 
that there would be seventeen respondents.\148\
---------------------------------------------------------------------------

    \145\ See supra note 6.
    \146\ See supra note 124 and accompanying text.
    \147\ See supra note 125.
    \148\ See supra note 134.
---------------------------------------------------------------------------

7. Standards for Board or Board Committee Directors
    The board and board committee directors governance standards to be

[[Page 14509]]

established by clearing agencies pursuant to proposed Rule 17Ad-26 
would apply to all clearing agencies registered with the Commission. As 
noted above, there are currently four clearing agencies authorized to 
clear security-based swaps pursuant to the CDS Clearing Exemption 
Orders,\149\ and there could conceivably be one or two more entities 
that clear security-based swaps in the future. Thus, the Commission 
estimates that four to six clearing agencies may seek to clear 
security-based swaps.\150\ The Commission is using the higher estimate 
of six respondent clearing agencies for this PRA analysis. There are 
also eleven additional clearing agencies currently registered with the 
Commission.\151\ Thus, for this provision, the Commission estimates 
that there would be seventeen respondents.\152\
---------------------------------------------------------------------------

    \149\ See supra note 6.
    \150\ See supra note 124 and accompanying text.
    \151\ See supra note 125.
    \152\ See supra note 134.
---------------------------------------------------------------------------

8. Designation of Chief Compliance Officer
    The provisions regarding CCOs of proposed Rule 3Cj-1 would apply to 
all clearing agencies registered with the Commission. As noted above, 
there are currently four clearing agencies authorized to clear 
security-based swaps pursuant to the CDS Clearing Exemption 
Orders,\153\ and there could conceivably be one or two more entities 
that clear security-based swaps in the future. Thus, the Commission 
estimates that four to six clearing agencies may seek to clear 
security-based swaps.\154\ The Commission is using the higher estimate 
of six respondent clearing agencies for this PRA analysis. There are 
also eleven additional clearing agencies currently registered with the 
Commission.\155\ Thus, for this provision, the Commission estimates 
that there would be seventeen respondents.\156\
---------------------------------------------------------------------------

    \153\ See supra note 6.
    \154\ See supra note 124 and accompanying text.
    \155\ See supra note 125.
    \156\ See supra note 134.
---------------------------------------------------------------------------

D. Total Annual Reporting and Recordkeeping Burden

1. Standards for Clearing Agencies Reporting Requirements
a. Measurement and Management of Credit Exposures
    Proposed Rule 17Ad-22(b)(1) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to measure its 
credit exposures to its participants at least once a day and limit its 
exposures to potential losses from defaults by its participants in 
normal market conditions so that the operations of the clearing agency 
would not be disrupted and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control. The exact 
nature of any rules and procedures a clearing agency would likely 
establish to support this requirement is likely to vary between 
clearing agencies. However, there are estimates of the burden imposed 
by similar policies and procedures requirements in Regulation NMS and 
in proposed requirements for security-based swap data repositories 
(``SDRs'').\157\ Specifically, Rule 611 of Regulation NMS, referred to 
as the ``Order Protection Rule'', requires trading centers to 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to prevent trade-throughs on that trading 
center of protected quotations in NMS stocks, unless an exception 
applies.\158\ While the requirements underlying those estimates are not 
identical to this requirement for clearing agencies, the Commission 
preliminarily believes that for PRA purposes the requirement for 
policies and procedures to be created and maintained by SRO and non-SRO 
trading centers in Rule 611 of Regulation NMS is similar in nature and 
scope to this requirement for clearing agencies to create policies and 
procedures.
---------------------------------------------------------------------------

    \157\ See Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR 
37496 (June 29, 2005) (discussing in Section VIII.A.4. the time 
needed from legal, compliance, information technology and business 
operations personnel to create policies and procedures for 
preventing and monitoring trade-throughs) and 63347 (November 19, 
2010), 75 FR 77306 (December 10, 2010) (discussing in Section V.D.7. 
the time needed for SDRs to establish and enforce written policies 
and procedures reasonably designed to minimize conflicts of 
interest).
    \158\ See 17 CFR 242.611.
---------------------------------------------------------------------------

    Accordingly, the Commission believes that the burdens imposed on 
respondents to create policies and procedures in both contexts would be 
roughly equivalent. In its adoption of the final Order Protection Rule, 
the Commission estimated the approximate hourly burdens imposed on 
trading centers that are SROs and on trading centers that are not SROs 
to establish written policies and procedures that are reasonably 
designed to prevent execution of trade-throughs. For SRO trading 
centers, the Commission estimated that creating written policies and 
procedures would require approximately 270 hours and require efforts 
from the various skill sets of the clearing agency's legal, compliance, 
information technology and business operations personnel. For non-SRO 
trading centers, the Commission estimated an approximate hourly burden 
of 210 hours to meet the same requirement. This difference between the 
hourly burden imposed on non-SRO trading centers and SRO trading 
centers is primarily due to a slightly lower expectation for the hourly 
burden imposed on the legal and compliance staff at a non-SRO trading 
center.
    The Commission preliminarily believes that this hourly burden 
estimate of 210 hours for non-SRO trading centers under Regulation NMS 
is an appropriate estimate for the burden that would be imposed on 
clearing agencies to create policies and procedures because, as 
discussed below, recent assessments of the registered U.S. clearing 
agencies support the conclusion that clearing agencies and their rule 
books generally meet or exceed analogous standards of operation and 
governance to those standards within proposed Rule 17Ad-22.\159\ 
Therefore, those findings and the Commission's experience in oversight 
of clearing agencies support a preliminary view that the requirements 
in the rules for clearing agencies proposed by the Commission would in 
many cases impose a burden on legal and compliance personnel at 
clearing agencies that would involve adjustments to a registered 
clearing agency's rule book and its policies and procedures rather than 
creation of entirely separate policies and procedures to support 
entirely new operations and practices.
---------------------------------------------------------------------------

    \159\ See infra note 291.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(1) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 1,890 hours.\160\ The

[[Page 14510]]

Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \160\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours. 
See Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR 37496 
(June 29, 2005) (Section VIII.A.4. finding a burden of 210 hours 
needed for non-SRO trading centers to create one policy and 
procedure) and 63347 (November 19, 2010), 75 FR 77306 (December 10, 
2010) (Section V.D.7. finding a burden of 210 hours needed for an 
SDR to create one policy and procedure).
    The Commission based these estimates on the estimates for non-
SRO trading centers that appear in Exchange Act Release Nos. 51808 
and 63347 because the Commission preliminarily believes that the 
existing clearing agency requirements under Section 17A of the 
Exchange Act make these proposed burdens more similar to the less 
burdensome requirements for non-SRO trading centers than the burdens 
for SRO trading centers.
---------------------------------------------------------------------------

    Clearing agencies that provide CCP services would be required to 
measure their credit exposures as required by proposed Rule 17Ad-
22(b)(1) on an ongoing basis. The Commission expects that the exact 
burden of administering the procedures for monitoring custody and 
investment standards would vary depending on how frequently each 
clearing agency may need to update its procedures. Based on the 
analogous policies and procedures requirements and the corresponding 
burden estimates in Regulation NMS and for security-based swap data 
repositories, the Commission estimates that the ongoing requirements of 
this rule would impose an aggregate annual burden of 60 hours on each 
respondent clearing agency, corresponding to an aggregate annual burden 
for all respondent clearing agencies of 540 hours.\161\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \161\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent clearing agencies = 540 hours for all 
respondent clearing agencies. See Exchange Act Release Nos. 51808 
(June 9, 2005), 70 FR 37496 (June 29, 2005) (Section VIII.A.4. 
estimating that it would take the average SRO and non-SRO trading 
center approximately two hours per month of internal legal time and 
three hours of internal compliance time to ensure that its written 
policies and procedures are up-to-date and remain in compliance 
amounting to an annual burden of 60 hours per year per respondent) 
and 63347 (November 19, 2010), 75 FR 77306 (December 10, 2010) 
(Section V.D.7. estimating the time needed for SDRs to establish and 
enforce written policies and procedures).
---------------------------------------------------------------------------

b. Margin Requirements
    Proposed Rule 17Ad-22(b)(2) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to use margin 
requirements to limit its credit exposures to participants in normal 
market conditions and use risk-based models and parameters to set 
margin requirements and review them at least monthly. The exact nature 
of any rules and procedures a clearing agency would likely establish to 
support this requirement is likely to vary between clearing agencies. 
However, there are estimates of the burden imposed by similar policies 
and procedures requirements in Regulation NMS and in proposed 
requirements for security-based swap data repositories.\162\ While the 
requirements underlying those estimates are not identical to this 
requirement for clearing agencies, the Commission preliminarily 
believes that for PRA purposes there is similarity in the burden to 
create policies and procedures.
---------------------------------------------------------------------------

    \162\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(2) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 1,890 hours.\163\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \163\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours. 
See supra note 160.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their custody and 
investment standards required by proposed Rule 17Ad-22(b)(2) on an 
ongoing basis. The Commission expects that the exact burden of 
administering the procedures for monitoring custody and investment 
standards would vary depending on how frequently each clearing agency 
may need to update its procedures. Based on the analogous policies and 
procedures requirements and the corresponding burden estimates in 
Regulation NMS and for security-based swap data repositories, the 
Commission estimates that the ongoing requirements of this rule would 
impose an aggregate annual burden of 60 hours on each respondent 
clearing agency, corresponding to an aggregate annual burden for all 
respondent clearing agencies of 540 hours.\164\ The Commission solicits 
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \164\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent clearing agencies = 540 hours for all 
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------

c. Financial Resources
    Proposed Rule 17Ad-22(b)(3) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to maintain 
sufficient financial resources to withstand, at a minimum, a default by 
the participant to which it has the largest exposure in extreme but 
plausible market conditions, and if the clearing agency provides CCP 
services for security-based swaps then a default by the two 
participants to which it has the largest exposures in extreme but 
plausible market conditions; provided that if a participant controls 
another participant or is under common control with another 
participant, the affiliated participant and the participant shall be 
deemed to be a single participant. The exact nature of any rules and 
procedures a clearing agency would likely establish to support this 
requirement is likely to vary between clearing agencies. However, there 
are estimates of the burden imposed by similar policies and procedures 
requirements in Regulation NMS and in proposed requirements for 
security-based swap data repositories.\165\ While the requirements 
underlying those estimates are not identical to this requirement for 
clearing agencies, the Commission preliminarily believes that for PRA 
purposes there is similarity in the burden to create policies and 
procedures.
---------------------------------------------------------------------------

    \165\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(3) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 1,890 hours.\166\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \166\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours. 
See supra note 160.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their financial 
resources standards required by proposed Rule 17Ad-22(b)(3) on an 
ongoing basis. The Commission expects that the exact burden of 
administering the procedures for financial resources standards would 
vary depending on how frequently each clearing agency may need to 
update its procedures. Based on the analogous policies and procedures 
requirements and the corresponding burden estimates in Regulation NMS 
and for security-based swap data repositories, the Commission estimates 
that the ongoing requirements of this rule would impose an aggregate 
annual burden of 60 hours on each respondent clearing agency, 
corresponding to an aggregate annual burden for all respondent clearing

[[Page 14511]]

agencies of 540 hours.\167\ The Commission solicits comment regarding 
the accuracy of this estimate.
---------------------------------------------------------------------------

    \167\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent clearing agencies = 540 hours for all 
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------

d. Model Validation
    As discussed above, proposed Rule 17Ad-22(b)(4) would require a 
clearing agency that provides CCP services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for an annual model validation. The Commission 
preliminarily believes this requirement would help to ensure that a 
clearing agency's margin model remains effective in determining the 
appropriate margin level. The exact nature of any rules and procedures 
a clearing agency would likely establish to support this requirement is 
likely to vary between clearing agencies. However, there are estimates 
of the burden imposed by similar policies and procedures requirements 
in Regulation NMS and in proposed requirements for security-based swap 
data repositories.\168\ While the requirements underlying those 
estimates are not identical to this requirement for clearing agencies, 
the Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \168\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(4) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 1,890 hours.\169\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \169\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours. 
See supra note 160.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their model 
validation standards required by proposed Rule 17Ad-22(b)(4) on an 
ongoing basis. The Commission expects that the exact burden of 
administering the procedures for model validation standards would vary 
depending on how frequently each clearing agency may need to update its 
procedures. Based on the analogous policies and procedures requirements 
and the corresponding burden estimates in Regulation NMS and for 
security-based swap data repositories, the Commission estimates that 
the ongoing requirements of this rule would impose an aggregate annual 
burden of 60 hours on each respondent clearing agency, corresponding to 
an aggregate annual burden for all respondent clearing agencies of 540 
hours.\170\ The Commission solicits comment regarding the accuracy of 
this estimate.
---------------------------------------------------------------------------

    \170\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent clearing agencies = 540 hours for all 
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------

    Based on its oversight of clearing agencies, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(4) would impose 
an annual burden on all respondent clearing agencies of 6,480 
hours.\171\ The Commission solicits comment regarding the accuracy of 
this estimate.
---------------------------------------------------------------------------

    \171\ This figure was calculated as follows: Consultant at 30 
hours per week x 12 weeks x 2 Consultants x 9 respondent clearing 
agencies = 6,480 hours.
---------------------------------------------------------------------------

e. Non-Dealer Access
    Proposed Rule 17Ad-22(b)(5) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide the 
opportunity for a person that does not perform any dealer or security-
based swap dealer services to obtain membership at the clearing agency 
to clear securities for itself or on behalf of other persons. The exact 
nature of the procedures a clearing agency would establish to support 
this requirement is likely to vary between clearing agencies. However, 
there are estimates of the burden imposed by similar policies and 
procedures requirements in Regulation NMS and in proposed requirements 
for security-based swap data repositories.\172\ While the requirements 
underlying those estimates are not identical to this requirement for 
clearing agencies, the Commission preliminarily believes that for PRA 
purposes there is similarity in the burden to create policies and 
procedures.
---------------------------------------------------------------------------

    \172\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(5) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 1,890 hours.\173\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \173\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours. 
See supra note 160.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their membership 
standards required by proposed Rule 17Ad-22(b)(5) on an ongoing basis. 
The Commission expects that the exact burden of administering the 
procedures for granting membership to persons that do not perform any 
dealer or security-based swap dealer services would vary depending on 
how frequently each clearing agency may need to update its procedures. 
Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and for security-based 
swap data repositories, the Commission estimates that the ongoing 
requirements of this rule would impose an aggregate annual burden of 60 
hours on each respondent clearing agency, corresponding to an aggregate 
annual burden for all respondent clearing agencies of 540 hours.\174\ 
The Commission solicits comment regarding the accuracy of this 
estimate.
---------------------------------------------------------------------------

    \174\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent clearing agencies = 540 hours for all 
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------

f. Portfolio Size and Transaction Volume Thresholds Restrictions
    Proposed Rule 17Ad-22(b)(6) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to have membership 
standards that do not require that participants maintain a portfolio of 
any minimum size or that participants maintain a minimum transaction 
volume. The exact nature of the procedures a clearing agency would 
establish to support this requirement is likely to vary between 
clearing agencies. However, there are estimates of the burden imposed 
by similar policies and procedures requirements in Regulation NMS and 
in proposed requirements for security-based swap data 
repositories.\175\ While the requirements underlying those estimates 
are not identical to this requirement for clearing agencies, the 
Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \175\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the

[[Page 14512]]

corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(6) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 1,890 hours.\176\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \176\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours. 
See supra note 160.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their membership 
standards required by proposed Rule 17Ad-22(b)(6) on an ongoing basis. 
The Commission expects that the exact burden of administering the 
procedures for not having membership standards that require 
participants to maintain a portfolio of any minimum size or that 
participants maintain a minimum transaction volume would vary depending 
on how frequently each clearing agency may need to update its 
procedures. Based on the analogous policies and procedures requirements 
and the corresponding burden estimates in Regulation NMS and for 
security-based swap data repositories, the Commission estimates that 
the ongoing requirements of this rule would impose an aggregate annual 
burden of 60 hours on each respondent clearing agency, corresponding to 
an aggregate annual burden for all respondent clearing agencies of 540 
hours.\177\ The Commission solicits comment regarding the accuracy of 
this estimate.
---------------------------------------------------------------------------

    \177\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent clearing agencies = 540 hours for all 
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------

g. Net Capital Requirements
    Proposed Rule 17Ad-22(b)(7) would require a clearing agency that 
provides CCP services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to provide a person 
that maintains a net capital equal to or greater than $50 million with 
the ability to obtain membership at the clearing agency, with any net 
capital requirements being scalable so that they are proportional to 
the risks posed by the participant's activities to the clearing agency. 
The exact nature of the procedures a clearing agency would establish to 
support this requirement is likely to vary between clearing agencies. 
However, there are estimates of the burden imposed by similar policies 
and procedures requirements in Regulation NMS and in proposed 
requirements for security-based swap data repositories.\178\ While the 
requirements underlying those estimates are not identical to this 
requirement for clearing agencies, the Commission preliminarily 
believes that for PRA purposes there is similarity in the burden to 
create policies and procedures.
---------------------------------------------------------------------------

    \178\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(7) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 1,890 hours.\179\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \179\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x nine respondent clearing agencies = 1,890 
hours. See supra note 160.
---------------------------------------------------------------------------

    Clearing agencies may need to update these policies and procedures 
over time, particularly due to the fact that proposed Rule 17Ad-
22(b)(7) permits a clearing agency to provide for a higher net capital 
requirement (i.e., higher than $50 million) as a condition for 
membership at the clearing agency if the clearing agency demonstrates 
to the Commission that such a requirement is necessary to mitigate 
risks that could not otherwise be effectively managed by other 
measures, such as scalable limitations on the transactions that the 
participants may clear through the clearing agency, and the Commission 
approves the higher net capital requirement as part of a rule filing or 
clearing agency registration application. While the number of times 
each clearing agency will need to update its policies and procedures to 
revise its net capital requirements is likely to vary, both over time 
and between clearing agencies, such changes may occur as a result of an 
annual review of a clearing agency's operations and default mechanisms. 
For the same reasons as discussed above, the Commission believes that 
the estimates of the burden imposed by the policies and procedures 
requirements in Regulation NMS and in proposed requirements for 
security-based swap data repositories \180\ are sufficiently similar to 
serve as a basis for these estimates. Accordingly, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(b)(7) would impose 
an annual burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate annual burden on all respondent clearing 
agencies of 1,890 hours.\181\ The Commission solicits comment regarding 
the accuracy of this estimate.
---------------------------------------------------------------------------

    \180\ See supra note 157.
    \181\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x nine respondent clearing agencies = 1,890 
hours. See supra note 160.
---------------------------------------------------------------------------

    Clearing agencies that provide CCP services would be required to 
administer their net capital requirements required by proposed Rule 
17Ad-22(b)(7) on an ongoing basis. The Commission expects that the 
exact burden of administering the net capital requirements would vary 
depending on how frequently each clearing agency providing CCP services 
may need to update its procedures. Based on the analogous policies and 
procedures requirements and the corresponding burden estimates in 
Regulation NMS and for security-based swap data repositories, the 
Commission estimates that the ongoing requirements of this rule would 
impose an aggregate annual burden of 60 hours on each respondent 
clearing agency, corresponding to an aggregate annual burden for all 
respondent clearing agencies of 540 hours.\182\ The Commission solicits 
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \182\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent clearing agencies = 540 hours for all 
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------

h. Record of Financial Resources
    As detailed above, pursuant to proposed Rule 17Ad-22(c)(1), 
clearing agencies that perform central counterparty services would be 
required each fiscal quarter (based on calculations made as of the last 
business day of the clearing agency's fiscal quarter), or at any time 
upon Commission request, to calculate and maintain a record of the 
financial resources necessary to meet the requirement in proposed Rule 
17Ad-22(c)(1) and sufficient documentation to explain the methodology 
it uses to compute such financial resource requirement.
    The exact nature of the procedures a clearing agency would 
establish to support this requirement is likely to vary between 
clearing agencies. However, there are estimates of the burden imposed 
by similar policies and procedures requirements in Regulation

[[Page 14513]]

NMS and in proposed requirements for security-based swap data 
repositories.\183\ While the requirements underlying those estimates 
are not identical to this requirement for clearing agencies, the 
Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \183\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(c)(1) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 1,890 hours.\184\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \184\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours. 
See supra note 160.
---------------------------------------------------------------------------

    Based on its oversight of clearing agencies, the Commission 
believes that the respondent clearing agencies already have 
methodologies designed to ensure that in providing CCP services the 
clearing agency can withstand a default by the participant to which the 
clearing agency has the largest exposure in extreme but plausible 
market conditions.\185\ Because clearing agencies that provide CCP 
services already use such methodologies, the Commission preliminarily 
believes the one-time burden imposed would involve adjustments needed 
to synthesize and format existing information in a manner sufficient to 
explain the methodology the clearing agency uses to meet the 
requirement of proposed Rule 17Ad-22(c)(1). The Commission 
preliminarily believes these adjustments would impose a one-time burden 
of 100 hours on each clearing agency, corresponding to an aggregate 
one-time burden imposed on all clearing agencies of 900 hours.\186\ The 
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \185\ See, e.g., International Monetary Fund, Publication of 
Financial Sector Assessment Program Documentation--Detailed 
Assessment of Observance of the National Securities Clearing 
Corporation's Observance of the CPSS-IOSCO Recommendations for 
Central Counterparties, 10 (2010) (assessing National Securities 
Clearing Corporation's observance of Recommendation 5 from the RCCP 
that a CCP should maintain sufficient financial resources to 
withstand, at a minimum, the default of a participant to which it 
has the largest exposure in extreme but plausible market conditions 
and noting that NSCC began evaluating itself against this standard 
in 2009 and has back-testing results to support that during the 
period from January through April 2009 there was sufficient 
liquidity to cover the needs of the failure of the largest 
affiliated family 99.98 percent of the time), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf.
    \186\ This figure was calculated as follows: ((Chief Compliance 
Officer at 40 hours) + (Computer Operations Department Manager at 40 
hours) + (Senior Programmer at 20 hours)) = 100 hours x 9 respondent 
clearing agencies = 900 hours. See infra note 253 and accompanying 
text.
---------------------------------------------------------------------------

    On an ongoing basis, the Commission estimates that for a clearing 
agency to generate the required reports concerning its financial 
resources would impose a burden of three hours per respondent clearing 
agency per quarter. This amounts to an annual burden of 12 hours for 
each clearing agency and corresponds to an aggregate annual burden of 
108 hours for all respondent clearing agencies.\187\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \187\ This figure was calculated as follows: ((Compliance 
Attorney at 1 hour) + (Computer Operations Department Manager at 2 
hours)) = 3 hours per quarter x 4 quarters per year = 12 hours per 
year x 9 respondent clearing agencies = 108 hours.
---------------------------------------------------------------------------

    Clearing agencies providing CCP services would also be required to 
administer any procedures used to support compliance with Rule 17Ad-
22(c)(1) on an ongoing basis. The Commission expects that the exact 
burden of administering the procedures for granting membership to 
persons that do not perform any dealer or security-based swap dealer 
services would vary depending on how frequently each clearing agency 
may need to update its procedures. Based on the analogous policies and 
procedures requirements and the corresponding burden estimates in 
Regulation NMS and for security-based swap data repositories, the 
Commission estimates that the ongoing requirements of this rule would 
impose an aggregate annual burden of 60 hours on each respondent 
clearing agency, corresponding to an aggregate annual burden for all 
respondent clearing agencies of 540 hours.\188\ The Commission solicits 
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \188\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent clearing agencies = 540 hours for all 
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------

i. Annual Audited Financial Report
    Proposed Rule 17Ad-22(c)(2) would also require that a clearing 
agency post on its Web site an annual financial report. Each financial 
report shall (i) be a complete set of financial statements of the 
clearing agency for the most recent two fiscal years and be prepared in 
accordance with U.S. GAAP, except that for a clearing agency that is a 
corporation or other organization incorporated or organized under the 
laws of any foreign country the financial statements may be prepared 
according to U.S. GAAP or IFRS; (ii) be audited in accordance with 
standards of the Public Company Accounting Oversight Board by a 
registered public accounting firm that is qualified and independent in 
accordance with Rule 2-01 of Regulation S-X; and (iii) include report 
of the registered public accounting firm that complies with paragraphs 
(a) through (d) of Rule 2-02 of Regulation S-X.
    The exact nature of the procedures a clearing agency would 
establish to support this requirement is likely to vary between 
clearing agencies. However, there are estimates of the burden imposed 
by similar policies and procedures requirements in Regulation NMS and 
in proposed requirements for security-based swap data 
repositories.\189\ While the requirements underlying those estimates 
are not identical to this requirement for clearing agencies, the 
Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \189\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(c)(2) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\190\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \190\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 160.
---------------------------------------------------------------------------

    The Commission preliminarily believes, based on its oversight of 
clearing agencies, that the one-time burden imposed by the rule would 
involve systems adjustments at the clearing agency needed to facilitate 
posting of the annual audited financial report to the clearing agency's 
Web site. The Commission preliminarily believes these adjustments would 
impose a one-time burden of 100 hours on each clearing agency, 
corresponding to an aggregate one-time burden imposed on

[[Page 14514]]

all clearing agencies of 1,700 hours.\191\ The Commission solicits 
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \191\ This figure was calculated as follows: ((Chief Compliance 
Officer at 40 hours) + (Computer Operations Department Manager at 40 
hours) + (Senior Programmer at 20 hours)) = 100 hours x 9 respondent 
clearing agencies = 900 hours. See infra note 253 and accompanying 
text.
---------------------------------------------------------------------------

    On an ongoing basis, clearing agencies would be required to 
administer any policies and procedures used to support compliance with 
Rule 17Ad-22(c)(2). The Commission expects that the exact burden of 
administering the procedures for facilitating an annual audit report of 
the clearing agency and posting that annual audit report to the 
clearing agency's Web site would vary. However, based on the analogous 
policies and procedures requirements and the corresponding burden 
estimates in Regulation NMS and for security-based swap data 
repositories, the Commission estimates that the ongoing requirements of 
this rule would impose an aggregate annual burden of 60 hours on each 
respondent clearing agency, corresponding to an aggregate annual burden 
for all respondent clearing agencies of 1,020 hours.\192\ The 
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \192\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all 
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------

    The Commission estimates based on its experience with entities of 
similar size to the respondents to this collection, that these reports 
would generally require on average 500 hours annually per respondent 
clearing agency to generate and cost $500,000 for independent public 
accounting services. Thus, the Commission preliminarily believes this 
corresponds to an aggregate annual burden to all clearing agencies of 
8,500 hours and $8,500,000.\193\ The Commission solicits comment as to 
the accuracy of this estimate.
---------------------------------------------------------------------------

    \193\ See Exchange Act Release No. 63347 (November 19, 2010), 75 
FR 77306 (December 10, 2010) (Section VI.F.2. discussing the time 
the Commission preliminarily estimates an SDR would need to prepare 
and file annual financial reports with the Commission pursuant to 
proposed Rule 13n-11(f) and (g)). This figure was calculated as 
follows: Senior Accountant at 500 hours x 17 respondent clearing 
agencies = 8,500 hours.
---------------------------------------------------------------------------

j. Transparent and Enforceable Rules and Procedures
    Proposed Rule 17Ad-22(d)(1) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for a well founded, 
transparent and enforceable legal framework. The exact nature of the 
policies and procedures a clearing agency would establish is likely to 
vary between clearing agencies. However, there are estimates of the 
burden imposed by similar policies and procedures requirements in 
Regulation NMS and in proposed requirements for SDRs.\194\ Based on the 
analogous policies and procedures requirements and the corresponding 
burden estimates in Regulation NMS and in the proposed requirements for 
security-based swap data repositories, the Commission preliminarily 
estimates that proposed Rule 17Ad-22(d)(1) would impose a one-time 
burden on each respondent clearing agency of 210 hours, corresponding 
to an aggregate one-time burden on all respondent clearing agencies of 
3,570 hours.\195\ The Commission solicits comment regarding the 
accuracy of this estimate.
---------------------------------------------------------------------------

    \194\ See supra note 157.
    \195\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their rules and 
procedures to ensure they provide for a well founded, transparent and 
enforceable legal framework on an ongoing basis. The Commission expects 
that the exact burden of administering the procedures for monitoring 
participation standards would vary depending on how frequently each 
clearing agency may need to update its rules and procedures. Based on 
the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and for security-based 
swap data repositories, the Commission estimates that the ongoing 
requirements of this rule would impose an aggregate annual burden of 60 
hours on each respondent clearing agency, corresponding to an aggregate 
annual burden for all respondent clearing agencies of 1,020 hours.\196\ 
The Commission solicits comment regarding the accuracy of this 
estimate.
---------------------------------------------------------------------------

    \196\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours.
---------------------------------------------------------------------------

k. Participation Requirements
    Proposed Rule 17Ad-22(d)(2) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to have procedures in place to monitor 
that their participation requirements are met on an ongoing basis. The 
exact nature of the procedures a clearing agency would establish is 
likely to vary between clearing agencies. However, there are estimates 
of the burden imposed by similar policies and procedures requirements 
in Regulation NMS and in proposed requirements for security-based swap 
data repositories.\197\ While the requirements underlying those 
estimates are not identical to this requirement for clearing agencies, 
the Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \197\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(2) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\198\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \198\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their 
participation requirements required by proposed Rule 17Ad-22(d)(2) on 
an ongoing basis. The Commission expects that the exact burden of 
administering the procedures for monitoring participation requirements 
would vary depending on how frequently each clearing agency may need to 
update its procedures. Based on the analogous policies and procedures 
requirements and the corresponding burden estimates in Regulation NMS 
and for security-based swap data repositories, the Commission estimates 
that the ongoing requirements of this rule would impose an aggregate 
annual burden of 60 hours on each respondent clearing agency, 
corresponding to an aggregate annual burden for all respondent clearing 
agencies of 1,020 hours.\199\ The Commission solicits comment regarding 
the accuracy of this estimate.
---------------------------------------------------------------------------

    \199\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See 
supra note 196.
---------------------------------------------------------------------------

    Additionally, proposed Rule 17Ad-22(d)(2) would require clearing 
agencies to publicly disclose their participation requirements. Based 
on staff discussions with respondents that are already subject to a 
similar requirement in the CDS Clearing Exemption Orders to make 
publicly available certain pricing and

[[Page 14515]]

valuation information for security-based swaps,\200\ the Commission 
estimates that the one-time burden for a security-based swap clearing 
agency to comply with the requirements of proposed Rule 17Ad-22(d)(2) 
would involve slight adjustments to computer data systems that would 
already be in place as part of its clearing agency operations under 
Exchange Act Section 17A. The Commission preliminarily believes that a 
similar analysis would apply to each of the other registered clearing 
agencies. Therefore, the Commission does not anticipate that new 
hardware, such as additional computer equipment, would be required. 
Instead, the Commission broadly estimates that a clearing agency's 
adjustments to its systems to meet the requirements of proposed Rule 
17Ad-22(d)(2) would impose a one-time burden of 100 hours on each 
respondent clearing agency, corresponding to an aggregate one-time 
burden imposed on all respondent clearing agencies of 1,700 hours.\201\ 
The Commission solicits comment regarding the accuracy of this 
estimate.
---------------------------------------------------------------------------

    \200\ See infra notes 251-254 and accompanying text.
    \201\ This figure was calculated as follows: ((Chief Compliance 
Officer at 40 hours) + (Computer Operations Department Manager at 40 
hours) + (Senior Programmer at 20 hours)) = 100 hours x 17 
respondent clearing agencies = 1,700 hours. See infra note 253 and 
accompanying text.
---------------------------------------------------------------------------

    Respondent clearing agencies would also have an ongoing 
responsibility to make their participation requirements available. Also 
based on staff discussion with respondents that are already subject to 
the requirement in the CDS Clearing Exemption Orders to make certain 
pricing and valuation information publicly available, the Commission 
preliminarily believes that the ongoing burden would be limited and 
would likely involve maintenance and troubleshooting of computer 
systems used to facilitate dissemination of participant requirements. 
Therefore, the Commission preliminarily estimates this would impose an 
annual aggregate burden of 60 hours for each respondent clearing 
agency, which corresponds to an ongoing aggregate annual burden of 
1,020 hours for all respondent clearing agencies.\202\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \202\ This figure was calculated as follows: Computer Operations 
Department Manager at 60 hours annually x 17 respondent clearing 
agencies = 1,020 hours for all respondent clearing agencies. See 
supra note 196.
---------------------------------------------------------------------------

l. Identification and Mitigation of Custody of Assets and Investment 
Risk
    Proposed Rule 17Ad-22(d)(3) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to hold assets in a manner that 
minimizes risk of loss or delay in access to them, and to invest assets 
in instruments with minimal credit, market, and liquidity risks. The 
exact nature of any rules and procedures a clearing agency would likely 
establish to support this requirement is likely to vary between 
clearing agencies. However, there are estimates of the burden imposed 
by similar policies and procedures requirements in Regulation NMS and 
in proposed requirements for security-based swap data 
repositories.\203\ While the requirements underlying those estimates 
are not identical to this requirement for clearing agencies, the 
Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \203\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(3) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\204\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \204\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their custody and 
investment standards required by proposed Rule 17Ad-22(d)(3) on an 
ongoing basis. The Commission expects that the exact burden of 
administering the procedures for monitoring custody and investment 
standards would vary depending on how frequently each clearing agency 
may need to update its procedures. Based on the analogous policies and 
procedures requirements and the corresponding burden estimates in 
Regulation NMS and for security-based swap data repositories, the 
Commission estimates that the ongoing requirements of this rule would 
impose an aggregate annual burden of 60 hours on each respondent 
clearing agency, corresponding to an aggregate annual burden for all 
respondent clearing agencies of 1,020 hours.\205\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \205\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all 
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------

m. Identification and Mitigation of Operational Risk
    Proposed Rule 17Ad-22(d)(4) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify and have procedures in 
place, including business continuity plans, to minimize sources of 
operational risk. The exact nature of the procedures a clearing agency 
would establish is likely to vary between clearing agencies. However, 
there are estimates of the burden imposed by similar policies and 
procedures requirements in Regulation NMS and in proposed requirements 
for security-based swap data repositories.\206\ While the requirements 
underlying those estimates are not identical to this requirement for 
clearing agencies, the Commission preliminarily believes that for PRA 
purposes there is similarity in the burden to create policies and 
procedures.
---------------------------------------------------------------------------

    \206\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(4) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\207\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \207\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their operational 
standards required by proposed Rule 17Ad-22(d)(4) on an ongoing basis. 
The Commission expects that the exact burden of administering the 
procedures for monitoring operational risks would vary depending on how 
frequently each clearing agency may need to update its procedures. 
Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and for security-based 
swap data repositories, the Commission estimates that the ongoing 
requirements of this rule would impose an aggregate annual burden of 60 
hours

[[Page 14516]]

on each respondent clearing agency, corresponding to an aggregate 
annual burden for all respondent clearing agencies of 1,020 hours.\208\ 
The Commission solicits comment regarding the accuracy of this 
estimate.
---------------------------------------------------------------------------

    \208\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all 
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------

n. Money Settlement Risks
    Proposed Rule 17Ad-22(d)(5) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to employ money settlement arrangements 
that eliminate or strictly limit the clearing agency's settlement bank 
risks, that is, its credit and liquidity risks from the use of banks to 
effect money settlements with its participants; and require funds 
transfers to the clearing agency to be final when effected. The exact 
nature of any rules and procedures a clearing agency would likely 
establish to support this requirement is likely to vary between 
clearing agencies. However, there are estimates of the burden imposed 
by similar policies and procedures requirements in Regulation NMS and 
in proposed requirements for security-based swap data 
repositories.\209\ While the requirements underlying those estimates 
are not identical to this requirement for clearing agencies, the 
Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \209\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(5) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\210\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \210\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their settlement 
arrangements required by proposed Rule 17Ad-22(d)(5) on an ongoing 
basis. The Commission expects that the exact burden of administering 
the procedures for monitoring settlement arrangements would vary 
depending on how frequently each clearing agency may need to update its 
procedures. Based on the analogous policies and procedures requirements 
and the corresponding burden estimates in Regulation NMS and for 
security-based swap data repositories, the Commission estimates that 
the ongoing requirements of this rule would impose an aggregate annual 
burden of 60 hours on each respondent clearing agency, corresponding to 
an aggregate annual burden for all respondent clearing agencies of 
1,020 hours.\211\ The Commission solicits comment regarding the 
accuracy of this estimate.
---------------------------------------------------------------------------

    \211\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all 
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------

o. Cost-Effectiveness
    Proposed Rule 17Ad-22(d)(6) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to be cost effective in meeting the 
requirements of participants while maintaining safe and secure 
operations. The exact nature of any rules and procedures a clearing 
agency would likely establish to support this requirement is likely to 
vary between clearing agencies. However, there are estimates of the 
burden imposed by similar policies and procedures requirements in 
Regulation NMS and in proposed requirements for security-based swap 
data repositories.\212\ While the requirements underlying those 
estimates are not identical to this requirement for clearing agencies, 
the Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \212\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(6) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\213\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \213\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their cost-
effectiveness standards required by proposed Rule 17Ad-22(d)(6) on an 
ongoing basis. The Commission expects that the exact burden of 
administering the procedures for monitoring cost-effectiveness 
standards would vary depending on how frequently each clearing agency 
may need to update its procedures. Based on the analogous policies and 
procedures requirements and the corresponding burden estimates in 
Regulation NMS and for security-based swap data repositories, the 
Commission estimates that the ongoing requirements of this rule would 
impose an aggregate annual burden of 60 hours on each respondent 
clearing agency, corresponding to an aggregate annual burden for all 
respondent clearing agencies of 1,020 hours.\214\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \214\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all 
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------

p. Links
    Proposed Rule 17Ad-22(d)(7) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to evaluate the potential sources of 
risks that can arise when the clearing agency establishes links either 
cross-border or domestically to clear trades and ensure that the risks 
are managed prudently on an ongoing basis. The exact nature of any 
rules and procedures a clearing agency would likely establish to 
support this requirement is likely to vary between clearing agencies. 
However, there are estimates of the burden imposed by similar policies 
and procedures requirements in Regulation NMS and in proposed 
requirements for security-based swap data repositories.\215\ While the 
requirements underlying those estimates are not identical to this 
requirement for clearing agencies, the Commission preliminarily 
believes that for PRA purposes there is similarity in the burden to 
create policies and procedures.
---------------------------------------------------------------------------

    \215\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(7) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time

[[Page 14517]]

burden on all respondent clearing agencies of 3,570 hours.\216\ The 
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \216\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their links 
arrangements as required by proposed Rule 17Ad-22(d)(7) on an ongoing 
basis. The Commission expects that the exact burden of administering 
the procedures for monitoring links arrangements would vary depending 
on how frequently each clearing agency may need to update its 
procedures. Based on the analogous policies and procedures requirements 
and the corresponding burden estimates in Regulation NMS and for 
security-based swap data repositories, the Commission estimates that 
the ongoing requirements of this rule would impose an aggregate annual 
burden of 60 hours on each respondent clearing agency, corresponding to 
an aggregate annual burden for all respondent clearing agencies of 
1,020 hours.\217\ The Commission solicits comment regarding the 
accuracy of this estimate.
---------------------------------------------------------------------------

    \217\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all 
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------

q. Governance
    Proposed Rule 17Ad-22(d)(8) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent to fulfill the public interest requirements in 
Section 17A of the Act applicable to clearing agencies, to support the 
objectives of owners and participants, and to promote the effectiveness 
of the clearing agency's risk management procedures. The exact nature 
of any rules and procedures a clearing agency would likely establish to 
support this requirement is likely to vary between clearing agencies. 
However, there are estimates of the burden imposed by similar policies 
and procedures requirements in Regulation NMS and in proposed 
requirements for security-based swap data repositories.\218\ While the 
requirements underlying those estimates are not identical to this 
requirement for clearing agencies, the Commission preliminarily 
believes that for PRA purposes there is similarity in the burden to 
create policies and procedures.
---------------------------------------------------------------------------

    \218\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(8) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\219\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \219\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their governance 
arrangements as required by proposed Rule 17Ad-22(d)(8) on an ongoing 
basis. The Commission expects that the exact burden of administering 
the procedures for monitoring governance arrangements would vary 
depending on how frequently each clearing agency may need to update its 
procedures. Based on the analogous policies and procedures requirements 
and the corresponding burden estimates in Regulation NMS and for 
security-based swap data repositories, the Commission estimates that 
the ongoing requirements of this rule would impose an aggregate annual 
burden of 60 hours on each respondent clearing agency, corresponding to 
an aggregate annual burden for all respondent clearing agencies of 
1,020 hours.\220\ The Commission solicits comment regarding the 
accuracy of this estimate.
---------------------------------------------------------------------------

    \220\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all 
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------

    Based on information from respondents that are already subject to a 
similar requirement in the CDS Clearing Exemption Orders to make 
publicly available certain pricing and valuation information with 
respect to security-based swaps,\221\ the Commission estimates that the 
one-time burden for a clearing agency to provide transparency about its 
governance arrangements to fulfill the public interest requirements in 
Section 17A of the Exchange Act would involve slight adjustments to 
data systems that would already be in place as part of the clearing 
agency's operations. Therefore, the Commission does not anticipate that 
new hardware, such as additional computer equipment, would be required. 
Instead, the Commission broadly estimates that for a clearing agency to 
adjust its systems to meet the requirements of proposed Rule 17Ad-
22(d)(8) would impose a one-time burden of 100 hours on each respondent 
clearing agency, corresponding to an aggregate one-time burden imposed 
on all respondent clearing agencies of 1,700 hours.\222\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \221\ See infra notes 251-254 and accompanying text.
    \222\ This figure was calculated as follows: ((Chief Compliance 
Officer at 40 hours) + (Computer Operations Department Manager at 40 
hours) + (Senior Programmer at 20 hours)) x 17 respondent clearing 
agencies = 1,700 hours. See infra note 253 and accompanying text.
---------------------------------------------------------------------------

r. Information on Services
    Proposed Rule 17Ad-22(d)(9) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide market participants with 
sufficient information for them to identify and evaluate the risks and 
costs associated with using their services. The exact nature of any 
rules and procedures a clearing agency would likely establish to 
support this requirement is likely to vary between clearing agencies. 
However, there are estimates of the burden imposed by similar policies 
and procedures requirements in Regulation NMS and in proposed 
requirements for security-based swap data repositories.\223\ While the 
requirements underlying those estimates are not identical to this 
requirement for clearing agencies, the Commission preliminarily 
believes that for PRA purposes there is similarity in the burden to 
create policies and procedures.
---------------------------------------------------------------------------

    \223\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(9) would impose a 
one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\224\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \224\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.

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

[[Page 14518]]

    Respondent clearing agencies would also have an ongoing 
responsibility to make this information available. Also based on 
informal comments from respondents already subject to a similar 
requirement in the CDS Clearing Exemption Orders to make certain 
pricing and valuation information with respect to security-based swaps 
publicly available, the Commission preliminarily believes that the 
ongoing burden would be limited and would likely involve maintenance 
and troubleshooting of computer systems used to facilitate 
dissemination of information responsive to Rule 17Ad-22(d)(9). 
Therefore, the Commission preliminarily estimates this would impose an 
annual aggregate burden of 60 hours for each respondent clearing 
agency, which corresponds to an ongoing aggregate annual burden of 
1,020 hours for all respondent clearing agencies.\225\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \225\ This figure was calculated as follows: Computer Operations 
Department Manager at 60 hours annually x 17 respondent clearing 
agencies = 1,020 hours for all respondent clearing agencies. See 
supra note 196.
---------------------------------------------------------------------------

    Based on information from respondents that are already subject to a 
similar requirement in the CDS Clearing Exemption Orders to make 
publicly available certain pricing and valuation information with 
respect to security-based swaps,\226\ the Commission estimates that the 
one-time burden to provide market participants with sufficient 
information for them to identify and evaluate accurately the risks and 
costs associated with using a clearing agency's services would involve 
slight adjustments to data systems that would already be in place as 
part of the clearing agency's operations under Exchange Act Section 
17A. Therefore, the Commission does not anticipate that new hardware, 
such as additional computer equipment, would be required. Instead, the 
Commission broadly estimates that for a clearing agency to adjust its 
systems to meet the requirements of proposed Rule 17Ad-22(d)(9) would 
impose a one-time burden of 100 hours on each respondent clearing 
agency, corresponding to an aggregate one-time burden imposed on all 
respondent clearing agencies of 1,700 hours.\227\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \226\ See infra notes 251-254 and accompanying text.
    \227\ This figure was calculated as follows: ((Chief Compliance 
Officer at 40 hours) + (Computer Operations Department Manager at 40 
hours) + (Senior Programmer at 20 hours)) x 17 respondent clearing 
agencies = 1,700 hours. See infra note 253 and accompanying text.
---------------------------------------------------------------------------

s. Immobilization and Dematerialization of Stock Certificates
    Proposed Rule 17Ad-22(d)(10) would require clearing agencies that 
provide central securities depository services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to immobilize or dematerialize securities certificates and 
transfer them by book entry to the greatest extent possible. The exact 
nature of any rules and procedures a clearing agency would likely 
establish to support this requirement is likely to vary between 
clearing agencies. However, there are estimates of the burden imposed 
by similar policies and procedures requirements in Regulation NMS and 
in proposed requirements for security-based swap data 
repositories.\228\ While the requirements underlying those estimates 
are not identical to this requirement for clearing agencies, the 
Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \228\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17AAd-22d)(10) would impose 
a one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\229\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \229\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies that provide central securities depository 
services would be required to administer their standards for 
immobilizing or dematerializing securities certificates as required by 
proposed Rule 17AAd-22d)(10) on an ongoing basis. The Commission 
expects that the exact burden of administering the procedures for 
immobilizing and dematerializing securities certificates would vary 
depending on how frequently each clearing agency may need to update its 
procedures. Based on the analogous policies and procedures requirements 
and the corresponding burden estimates in Regulation NMS and for 
security-based swap data repositories, the Commission estimates that 
the ongoing requirements of this rule would impose an aggregate annual 
burden of 60 hours on each respondent clearing agency, corresponding to 
an aggregate annual burden for all respondent clearing agencies of 1020 
hours.\230\ The Commission solicits comment regarding the accuracy of 
this estimate.
---------------------------------------------------------------------------

    \230\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agency = 1020 hours for all 
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------

t. Default Procedures
    Proposed Rule 17AAd-22d)(11) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to make key aspects of the clearing 
agency's default procedures publicly available and to establish default 
procedures that ensure that the clearing agency can take timely action 
to contain losses and liquidity pressures and to continue meeting its 
obligations in the event of a participant default. The exact nature of 
the procedures a clearing agency would establish is likely to vary 
between clearing agencies. However, there are estimates of the burden 
imposed by similar policies and procedures requirements in Regulation 
NMS and in proposed requirements for security-based swap data 
repositories.\231\ While the requirements underlying those estimates 
are not identical to this requirement for clearing agencies, the 
Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \231\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17AAd-22d)(11) would impose 
a one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\232\
---------------------------------------------------------------------------

    \232\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their default 
standards required by proposed Rule 17AAd-22d)(11) on an ongoing basis. 
The Commission expects that the exact burden of administering the 
procedures

[[Page 14519]]

for monitoring default standards would vary depending on how frequently 
each clearing agency may need to update its procedures. Based on the 
analogous policies and procedures requirements and the corresponding 
burden estimates in Regulation NMS and for security-based swap data 
repositories, the Commission estimates that the ongoing requirements of 
this rule would impose an aggregate annual burden of 60 hours on each 
respondent clearing agency, corresponding to an aggregate annual burden 
for all respondent clearing agencies of 1,020 hours.\233\ The 
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \233\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See 
supra note 196.
---------------------------------------------------------------------------

    Based on information from respondents that are already subject to a 
similar requirement in the CDS Clearing Exemption Orders to make 
publicly available certain pricing and valuation information with 
respect to security-based swaps,\234\ the Commission estimates that the 
one-time burden for a clearing agency to make key aspects of its 
default procedures publicly available would involve slight adjustments 
to data systems that would already be in place as part of the clearing 
agency's operations under Section 17A of the Exchange Act. Therefore, 
the Commission does not anticipate that new hardware, such as 
additional computer equipment, would be required. Instead, the 
Commission broadly estimates that for a clearing agency to adjust its 
systems to meet the requirements of proposed Rule 17AAd-22d)(11) would 
impose a one-time burden of 100 hours on each respondent clearing 
agency, corresponding to an aggregate one-time burden imposed on all 
respondent clearing agencies of 1,700 hours.\235\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \234\ See infra notes 251-254 and accompanying text.
    \235\ This figure was calculated as follows: ((Chief Compliance 
Officer at 40 hours) + (Computer Operations Department Manager at 40 
hours) + (Senior Programmer at 20 hours)) x 17 respondent clearing 
agencies = 1,700 hours. See infra note 253 and accompanying text.
---------------------------------------------------------------------------

u. Timing of Settlement Finality
    Proposed Rule 17Ad-22(d)(12) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure that final settlement occurs 
no later than the end of the settlement day and require that intraday 
or real-time finality be provided where necessary to reduce risks. The 
exact nature of the procedures a clearing agency would establish is 
likely to vary between clearing agencies. However, there are estimates 
of the burden imposed by similar policies and procedures requirements 
in Regulation NMS and in proposed requirements for security-based swap 
data repositories. While the requirements underlying those estimates 
are not identical to this requirement for clearing agencies, the 
Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(12) would impose 
a one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\236\
---------------------------------------------------------------------------

    \236\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their settlement 
finality standards required by proposed Rule 17Ad-22(d)(12) on an 
ongoing basis. The Commission expects that the exact burden of 
administering the procedures for ensuring the timing of settlement 
finality would vary depending on how frequently each clearing agency 
may need to update its procedures. Based on the analogous policies and 
procedures requirements and the corresponding burden estimates in 
Regulation NMS and for security-based swap data repositories, the 
Commission estimates that the ongoing requirements of this rule would 
impose an aggregate annual burden of 60 hours on each respondent 
clearing agency, corresponding to an aggregate annual burden for all 
respondent clearing agencies of 1,020 hours.\237\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \237\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See 
supra note 196.
---------------------------------------------------------------------------

v. Delivery Versus Payment
    Proposed Rule 17Ad-22(d)(13) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to eliminate principal risk by linking 
securities transfers to funds transfers in a way that achieves delivery 
versus payment. The exact nature of the procedures a clearing agency 
would establish is likely to vary between clearing agencies. However, 
there are estimates of the burden imposed by similar policies and 
procedures requirements in Regulation NMS and in proposed requirements 
for security-based swap data repositories.\238\ While the requirements 
underlying those estimates are not identical to this requirement for 
clearing agencies, the Commission preliminarily believes that for PRA 
purposes there is similarity in the burden to create policies and 
procedures.
---------------------------------------------------------------------------

    \238\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(13) would impose 
a one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\239\
---------------------------------------------------------------------------

    \239\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their delivery 
versus payment standards required by proposed Rule 17Ad-22(d)(13) on an 
ongoing basis. The Commission expects that the exact burden of 
administering the procedures for delivery versus payment would vary 
depending on how frequently each clearing agency may need to update its 
procedures. Based on the analogous policies and procedures requirements 
and the corresponding burden estimates in Regulation NMS and for 
security-based swap data repositories, the Commission estimates that 
the ongoing requirements of this rule would impose an aggregate annual 
burden of 60 hours on each respondent clearing agency, corresponding to 
an aggregate annual burden for all respondent clearing agencies of 
1,020 hours.\240\ The Commission solicits comment regarding the 
accuracy of this estimate.
---------------------------------------------------------------------------

    \240\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See 
supra note 196.
---------------------------------------------------------------------------

w. Risk Controls To Address Participants' Failure To Settle
    Proposed Rule 17Ad-22(d)(14) would require clearing agencies to 
establish, implement, maintain and enforce

[[Page 14520]]

written policies and procedures reasonably designed to institute risk 
controls, including collateral requirements and limits to cover the 
clearing agency's credit exposure to each participant exposure fully, 
and that ensure timely settlement in the event that the participant 
with the largest payment obligation is unable to settle when the 
clearing agency provides central securities depository services and 
extends intraday credit to participants. The exact nature of any rules 
and procedures a clearing agency would likely establish to support this 
requirement is likely to vary between clearing agencies. However, there 
are estimates of the burden imposed by similar policies and procedures 
requirements in Regulation NMS and in proposed requirements for 
security-based swap data repositories.\241\ While the requirements 
underlying those estimates are not identical to this requirement for 
clearing agencies, the Commission preliminarily believes that for PRA 
purposes there is similarity in the burden to create policies and 
procedures.
---------------------------------------------------------------------------

    \241\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(14) would impose 
a one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\242\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \242\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies that provide central securities depository 
services would be required to administer their risk control standards 
required by proposed Rule 17Ad-22(d)(14) on an ongoing basis. The 
Commission expects that the exact burden of administering the 
procedures for risk controls, including collateral requirements and 
limits to cover the clearing agency's credit exposure to each 
participant exposure fully and that ensure timely settlement in the 
event that the participant with the largest payment obligation is 
unable to settle would vary depending on how frequently each clearing 
agency may need to update its procedures. Based on the analogous 
policies and procedures requirements and the corresponding burden 
estimates in Regulation NMS and for security-based swap data 
repositories, the Commission estimates that the ongoing requirements of 
this rule would impose an aggregate annual burden of 60 hours on each 
respondent clearing agency, corresponding to an aggregate annual burden 
for all respondent clearing agencies of 1,020 hours.\243\ The 
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \243\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all 
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------

x. Identification and Management of Physical Delivery Risks
    Proposed Rule 17Ad-22(d)(15) would require a clearing agency to 
state to its participants the clearing agency's obligations with 
respect to physical deliveries and to identify and manage the risks 
that arise in connection with these obligations. The exact form in 
which a clearing agency would state to its participants the clearing 
agency's obligations with respect to physical deliveries and to 
identify and manage the risks in connection with those obligations is 
likely to vary between clearing agencies. However, there are estimates 
of the burden imposed by similar policies and procedures requirements 
in Regulation NMS and in proposed requirements for security-based swap 
data repositories.\244\ While the requirements underlying those 
estimates are not identical to this requirement for clearing agencies, 
the Commission preliminarily believes that for PRA purposes there is 
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------

    \244\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-22(d)(15) would impose 
a one-time burden on each respondent clearing agency of 210 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 3,570 hours.\245\ The Commission solicits comment 
regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \245\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their physical 
delivery standards required by proposed Rule 17Ad-22(d)(15) on an 
ongoing basis. The Commission expects that the exact burden of 
administering the procedures for monitoring physical delivery standards 
would vary depending on how frequently each clearing agency may need to 
update its procedures. Based on the analogous policies and procedures 
requirements and the corresponding burden estimates in Regulation NMS 
and for security-based swap data repositories, the Commission estimates 
that the ongoing requirements of this rule would impose an aggregate 
annual burden of 60 hours on each respondent clearing agency, 
corresponding to an aggregate annual burden for all respondent clearing 
agencies of 1,020 hours.\246\ The Commission solicits comment regarding 
the accuracy of this estimate.
---------------------------------------------------------------------------

    \246\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See 
supra note 196.
---------------------------------------------------------------------------

    Based on information from respondents that are already subject to a 
similar requirement in the CDS Clearing Exemption Orders to make 
publicly available certain pricing and valuation information with 
respect to security-based swaps,\247\ the Commission estimates that the 
one-time burden for a clearing agency to state to its participants its 
obligations with respect to physical deliveries would involve slight 
adjustments to data systems that would already be in place as part of 
the clearing agency's operations under Section 17A of the Exchange Act. 
Therefore, the Commission does not anticipate that new hardware, such 
as additional computer equipment, would be required. Instead, the 
Commission broadly estimates that for a clearing agency to adjust its 
systems to meet the requirements of proposed Rule 17Ad-22(d)(15) would 
impose a one-time burden of 100 hours on each respondent clearing 
agency, corresponding to an aggregate one-time burden imposed on all 
respondent clearing agencies of 1,700 hours.\248\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \247\ See infra notes 251-254 and accompanying text.
    \248\ This figure was calculated as follows: ((Chief Compliance 
Officer at 40 hours) + (Computer Operations Department Manager at 40 
hours) + (Senior Programmer at 20 hours)) x 17 respondent clearing 
agencies = 1,700 hours. See infra note 253 and accompanying text.
---------------------------------------------------------------------------

Total Burden
    The Commission preliminarily believes that for all respondent 
clearing agencies the aggregate paperwork burdens contained in proposed 
Rules

[[Page 14521]]

17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10), (11), 
(12), (13), (14), (15), (b)(1), (2), (3), (4), (5), (6), (7), (c)(1) 
and (2) would impose a one-time burden of 83,343 hours \249\ and an 
ongoing annual burden of 39,658 hours.\250\ The Commission solicits 
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \249\ This figure combines the one-time burdens for proposed 
Rules 17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10), 
(11), (12), (13), (14), (15), (b)(1), (2), (3), (4), (5), (6), (7), 
(c)(1) and (2) and was calculated as follows: (((3,570 hours x 16 
standards pursuant to proposed Rules 17Ad-22(d)(1), (2), (3), (4), 
(5), (6), (7), (8), (9), (10), (11), (12), (13), (14), (15) and 
(d)(2) = 57,123 hours) + (1,890 hours x 8 standards pursuant to 
proposed Rules 17Ad-22(b)(1), (2), (3), (4), (5), (6), (7) and 
(d)(1) = 15,120 hours) + (1,700 hours x 6 systems adjustments 
pursuant to Rules 17Ad-22(d)(2), (8), (9), (11), (15), (d)(2) = 
10,200 hours) + (900 hours x 1 systems adjustment pursuant to Rule 
17Ad-22(c)(1)) = 83,343 hours.
    \250\ This figure combines the annual burdens for proposed Rules 
17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10), (11), 
(12), (13), (14), (15), (b)(1), (2), (3), (4), (5), (6), (7), (c)(1) 
and (2) and was calculated as follows: ((1,020 hours x 16 standards 
to be administered pursuant to Rules 17Ad-22(d)(1), (2), (3), (4), 
(5), (6), (7), (8), (9), (10), (11), (12), (13), (14), (15) and 
(d)(2) = 16,320 hours) + (540 hours x 8 standards to be administered 
pursuant to proposed Rules 17Ad-22(b)(1), (2), (3), (4), (5), (6), 
(7) and (d)(1) = 4,320 hours) + (1,020 hours x 2 ongoing efforts to 
maintain and troubleshoot computer systems used to facilitate 
dissemination of information responsive to Rules 17Ad-22(d)(2) and 
(9) = 2,040 hours) + (6,480 hours to prepare the annual model 
validation required pursuant to Rule 17Ad-22(b)(4)) + (1,890 hours 
to prepare revised policies and procedures providing for a higher 
net capital requirement pursuant to Rule 17Ad-22(b)(7) + (108 hours 
to generate the financial information required pursuant to Rule 
17Ad-22(c)(1)) + (8,500 hours to coordinate the posting of financial 
information to the clearing agency's Web site as required pursuant 
to Rule 17Ad-22(c)(2)) = 39,658 hours.
---------------------------------------------------------------------------

2. Dissemination of Pricing and Valuation Information by Security- 
Based Swap Clearing Agencies That Perform Central Counterparty Services
    The requirement for dissemination of pricing and valuation 
information in proposed Rule 17Aj-1 would effectively require each of 
the entities authorized to provide CCP services for security-based 
swaps pursuant to the CDS Clearing Exemption Orders \251\ to continue 
the information dissemination practices they already perform. These 
entities generate end of day settlement prices and other model prices 
for security-based swaps, which can be used to establish margin 
requirements for participant positions and could provide prices in the 
event of a default scenario. As outlined above, the Commission 
estimates a total of six respondents would be subject to this 
requirement.\252\
---------------------------------------------------------------------------

    \251\ See supra note 6.
    \252\ See supra notes 139-140 and accompanying text. The 
Commission notes that clearing agencies operating under the existing 
CDS Clearing Exemption Orders may not need to make additional 
changes to meet the requirements of the proposed rule because they 
are already subject to similar conditions as part of the orders. 
However, for purposes of this PRA analysis the Commission assumes 
that these would be new requirements.
---------------------------------------------------------------------------

    Based on information from respondents that are already subject to a 
similar requirement in the CDS Clearing Exemption Orders to disseminate 
pricing and valuation information, the Commission preliminarily 
believes that the requirements of proposed Rule 17Aj-1 would impose 
one-time and ongoing burdens on respondent clearing agencies. For 
instance, compliance professionals may need to work with information 
technology and operations professionals to accurately memorialize in 
writing the specific policy and procedure requirements regarding the 
dissemination of pricing and valuation information. Information 
technology personnel may be relied on to develop or modify computer 
programs that facilitate the requirements of the policies and 
procedures.
    The Commission estimates that the one-time burden for a security-
based swap clearing agency to comply with the requirements of proposed 
Rule 17Aj-1 would involve slight adjustments to data systems that would 
already be in place as part of the operation of the respondent as a 
registered clearing agency that provides CCP services for security-
based swaps. Therefore, the Commission does not anticipate that new 
hardware, such as additional computer equipment, would be required. 
Instead, the Commission broadly estimates that for a clearing agency to 
adjust its systems to meet the requirements of proposed Rule 17Aj-1 
would impose a one-time burden of 100 hours on each respondent clearing 
agency, corresponding to an aggregate one-time burden imposed on all 
respondent clearing agencies of 600 hours.\253\ The Commission solicits 
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \253\ This figure was calculated as follows: ((Chief Compliance 
Officer at 40 hours) + (Computer Operations Department Manager at 40 
hours) + (Senior Programmer at 20 hours)) = 100 hours x 6 respondent 
clearing agencies = 600 hours.
---------------------------------------------------------------------------

    Respondent clearing agencies would also have an ongoing 
responsibility to make their relevant pricing and valuation information 
available. Based on informal comments from respondents that are already 
subject to a similar requirement in the CDS Clearing Exemption Orders, 
the Commission preliminarily believes that the ongoing burden would be 
limited and would likely involve maintenance and troubleshooting of 
computer systems used to facilitate dissemination of covered pricing 
and valuation information. Therefore, the Commission preliminarily 
estimates this would impose an annual aggregate burden of 60 hours for 
each respondent clearing agency, which corresponds to an ongoing 
aggregate annual burden of 360 hours for all respondent clearing 
agencies.\254\ The Commission solicits comment regarding the accuracy 
of this estimate.
---------------------------------------------------------------------------

    \254\ This figure was calculated as follows: Computer Operations 
Department Manager at 60 hours annually x 6 respondent clearing 
agencies = 360 hours.
---------------------------------------------------------------------------

3. Clearing Agency Policies and Procedures To Protect the 
Confidentiality of Trading Information of Clearing Agency Participants
    Proposed Rule 17Ad-23 would require each clearing agency to 
establish, maintain and enforce written policies and procedures 
designed to protect the confidentiality of clearing members' trading 
information. As outlined above, the Commission estimates a total of 17 
respondents to this requirement.\255\
---------------------------------------------------------------------------

    \255\ See supra notes 141-144 and accompanying text.
---------------------------------------------------------------------------

    Based on the staff's conversations with respondents that are 
already subject to a similar policies and procedures requirement as 
part of the CDS Clearing Exemption Orders, the Commission preliminarily 
believes that establishing, maintaining and enforcing written policies 
and procedures to protect confidential information of clearing members 
would require collaboration and coordination across business units 
within the clearing agency. For instance, legal or compliance 
professionals may need to work with information technology and 
operations professionals to accurately memorialize in writing the 
specific policy and procedure requirements that the clearing agency 
decides to establish. Information technology personnel may be heavily 
relied on to develop or modify computer programs that facilitate the 
requirements of the policies and procedures. Developing business 
practices that are synchronized with the policies and procedures may 
also entail coordination with the clearing agency's human resources or 
risk management personnel to ensure effective adoption of any employee 
training created to inform employees about trading restrictions or 
other areas of the policies and procedures that impact them.
    The exact nature of the written policies and procedures a clearing 
agency would establish is likely to vary. However, based on preliminary

[[Page 14522]]

information from respondents that are affected by similar requirements 
under the CDS Clearing Exemption Orders and also based on the 
Commission's experience in administering those orders, the Commission 
preliminarily believes that the proposed rule would impose a one-time 
burden on each respondent clearing agency of 610 hours, corresponding 
to an aggregate one-time burden on all respondent clearing agencies of 
10,370 hours.\256\ The Commission solicits comment regarding the 
accuracy of this estimate.
---------------------------------------------------------------------------

    \256\ This figure was calculated as follows: ((Chief Compliance 
Officer at 210 hours) + (Computer Operations Department Manager at 
180 hours) + (Senior Programmer at 180 hours) + (Senior Risk 
Management Specialist at 40 hours)) = 610 hours x 17 respondent 
clearing agencies = 10,370 hours.
---------------------------------------------------------------------------

    Also based on information from respondents that have been subject 
to the CDS Clearing Exemption Orders, the Commission preliminarily 
believes that a clearing agency would likely purchase computer software 
from a third party vendor that the clearing agency would then use to 
implement the aspects of its policies and procedures designed to 
restrict, as appropriate, the trading of clearing agency employees for 
their own account and to prevent misuse and misappropriation of 
participant information protected by the rule. The cost of such 
computer software is likely to vary according to the specific policies 
and procedures of the clearing agency (i.e., based on the number of 
licenses it may need to cover its employees, the types of services it 
needs the software to provide, etc.). However the Commission 
preliminarily estimates that the rule would impose a one-time cost of 
approximately $10,000 dollars on each clearing agency, corresponding to 
an aggregate one-time burden on all clearing agencies of $170,000.\257\ 
The Commission solicits comment regarding the accuracy of this 
estimate.
---------------------------------------------------------------------------

    \257\ This figure was calculated as follows: $10,000 dollars in 
software costs per respondent clearing agency x 17 respondent 
clearing agencies = $170,000.
---------------------------------------------------------------------------

    The Commission also preliminarily understands from respondents 
subject to the similar requirement in the CDS Clearing Exemption Orders 
that monitoring and enforcing the written policies and procedures 
required by proposed Rule 17Ad-23 would likely require resource 
commitments from many of the same business units needed to develop such 
policies and procedures. For instance, as part of the effort to 
restrict, as appropriate, trading by clearing agency employees for 
their own accounts and to prevent misuse and misappropriation of 
information protected by the rule, the Commission preliminarily 
believes a clearing agency would need to devote fifty percent of the 
work hours of a full-time, compliance attorney. The Commission 
preliminarily expects this resource commitment may, among other things, 
take the form of obtaining and reviewing brokerage statements of 
clearing agency employees and reviewing their e-mails. Time for 
employee training related to the requirements of the policies and 
procedures, troubleshooting any computer systems designed to protect 
information in connection with the policies and procedures, and 
amendments to the policies and procedures are also factors that may 
contribute to the ongoing burden on clearing agencies. Accordingly, the 
Commission preliminarily estimates the rule would impose an annual 
aggregate burden on each respondent of 1,128 hours, corresponding to an 
aggregate annual burden on all clearing agencies of 19,176 hours.\258\ 
The Commission solicits comment regarding the accuracy of this 
estimate.
---------------------------------------------------------------------------

    \258\ This figure was calculated as follows ((Compliance 
Attorney at 4 hours per business day x 260 business days per year) = 
1040 hours per year + (Computer Operations Department Manager at 40 
hours per year) + (Senior Programmer at 40 hours per year) + (Senior 
Risk Management Specialist at 8 hours per year)) = 1,128 hours per 
year x 17 respondent clearing agencies = 19,176 hours per year.
---------------------------------------------------------------------------

4. Clearing Agency Procedures To Identify and Address Conflicts of 
Interest
    Proposed Rule 17Ad-25 would require each clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures that are reasonably designed to identify and address 
existing or potential conflicts of interest and minimize conflicts of 
interest in the decision-making process of the clearing agency. As 
outlined above, the Commission estimates a total of 17 respondents to 
this requirement.\259\
---------------------------------------------------------------------------

    \259\ See supra notes 145-148 and accompanying text.
---------------------------------------------------------------------------

    The exact nature of the policies and procedures a clearing agency 
would establish is likely to vary between clearing agencies. For 
instance, legal or compliance professionals may need to work to 
accurately memorialize in writing the specific policy and procedure 
requirements regarding conflicts of interest. Information technology 
personnel may be relied on to develop, modify or implement computer 
programs that facilitate the requirements of the policies and 
procedures.
    There are estimates of the burden imposed by similar policies and 
procedures requirements in Regulation NMS and in proposed requirements 
for security-based swap data repositories.\260\ While the requirements 
underlying those estimates are not identical to this requirement for 
clearing agencies, the Commission preliminarily believes that for PRA 
purposes there is similarity in the burden to create policies and 
procedures.
---------------------------------------------------------------------------

    \260\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily estimates that proposed Rule 17Ad-25 would impose a one-
time burden on each respondent clearing agency of 420 hours, 
corresponding to an aggregate one-time burden on all respondent 
clearing agencies of 7,140 hours.\261\ Also based on the estimates in 
Regulation NMS and for security-based swap data repositories, the 
Commission estimates that a burden of $40,000 in initial outside legal 
costs would be incurred per respondent clearing agency for an aggregate 
outside cost burden of $680,000 for all clearing agencies.\262\ The 
Commission solicits comment regarding the accuracy of these estimates.
---------------------------------------------------------------------------

    \261\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours to create one policy and procedure x 2 policies 
and procedures x 17 respondent clearing agencies = 7,140 hours. See 
supra note 195.
    \262\ This estimated $680,000 figure has been calculated as 
follows: $400 per hour cost for outside legal services x 50 hours x 
2 policies and procedures x 17 clearing agencies. This is the same 
estimate used by the Commission for these services in the proposed 
consolidated audit trail rule. See Exchange Act Release No. 62174 
(May 26, 2010), 75 FR 32556 (June 8, 2010).
---------------------------------------------------------------------------

    For a clearing agency to monitor, enforce, and potentially adjust 
its policies and procedures in connection with proposed Rule 17Ad-25, 
the Commission preliminarily believes these activities would impose an 
ongoing aggregate annual burden on each respondent clearing agency of 
120 hours, corresponding to an aggregate annual ongoing burden for all 
respondents of 2,040 hours.\263\ The Commission solicits comment 
regarding the accuracy of these estimates.
---------------------------------------------------------------------------

    \263\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours to 
administer one policy and procedure x 2 policies and procedures = 
2,040 hours. See supra note 196.

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

[[Page 14523]]

5. Standards for Board or Board Committee Directors
    Proposed Rule 17Ad-26 outlines the proposed governance standards 
that clearing agencies would be required to establish for board or 
board committee directors. As outlined above, the Commission estimates 
a total of 17 respondents to this requirement.\264\
---------------------------------------------------------------------------

    \264\ See supra notes 149-152 and accompanying text.
---------------------------------------------------------------------------

    The exact nature of the policies and procedures a clearing agency 
would establish is likely to vary between clearing agencies. For 
instance, legal or compliance professionals may need to work with a law 
firm to accurately memorialize in writing the specific policy and 
procedure requirements regarding the selection of directors. However, 
as noted above in the discussion of the burdens associated with 
proposed Rule 17Ad-25, there are estimates of similar burdens imposed 
by policies and procedures requirements in Regulation NMS and in the 
proposed requirements for security-based swap data repositories.\265\ 
While the requirements underlying those estimates are not identical to 
this requirement for clearing agencies, the Commission preliminarily 
believes that there is sufficient similarity between them for PRA 
purposes that the burden would be roughly equivalent.
---------------------------------------------------------------------------

    \265\ See supra note 157.
---------------------------------------------------------------------------

    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories, the Commission 
preliminarily believes that this rule would impose an aggregate one-
time burden on each respondent clearing agency of 210 hours to create 
the minimum standards required by the rule, corresponding to a one-time 
aggregate burden for all clearing agencies of 3,570 hours.\266\ The 
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \266\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours. 
See supra note 195.
---------------------------------------------------------------------------

    The Commission also estimates, based on similar requirements and 
the corresponding burdens in Regulation NMS and for security-based swap 
data repositories that a total burden of $20,000 in outside legal costs 
would be incurred by each respondent clearing agency, corresponding to 
an aggregate cost burden of $340,000 for all respondent clearing 
agencies.\267\ The Commission solicits comment regarding the accuracy 
of this information.
---------------------------------------------------------------------------

    \267\ This estimated figure was calculated as follows: ($400 per 
hour cost for outside legal services x 50 hours) x 17 respondent 
clearing agencies = $170,000. See supra note 262.
---------------------------------------------------------------------------

    Clearing agencies would be required to administer their governance 
standards required by proposed Rule 17Ad-26 on an ongoing basis. The 
Commission expects that the exact burden of administering the 
governance standards would vary depending on factors that include, but 
are not limited to, how frequently a clearing agency elects new board 
members and how many board and board committee members are involved 
with the governance of each clearing agency. These factors would 
influence the time spent evaluating potential new board members as well 
as the time needed to assess existing board members at least annually 
for compliance with the standards.
    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS and for security-based 
swap data repositories, the Commission estimates that the ongoing 
requirements of this rule would impose an aggregate annual burden of 60 
hours on each respondent clearing agency, corresponding to an aggregate 
annual burden for all respondent clearing agencies of 1,020 hours.\268\ 
The Commission solicits comment regarding the accuracy of this 
information. The proposed rule also encourages clearing agencies to use 
a third party to facilitate completion of the board's annual assessment 
of its members against its governance standards. The Commission 
estimates that using a third party would impose an average annual 
burden of 20 hours on each respondent clearing agency, corresponding to 
aggregate of 340 hours all clearing agencies.\269\ The Commission 
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \268\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See 
supra note 196.
    \269\ This figure was calculated as follows: Consultant at 20 
hours x 17 respondent clearing agencies = 340 hours.
---------------------------------------------------------------------------

6. Designation of Chief Compliance Officer
    Under proposed Rule 3Cj-1(b), a registered clearing agency's CCO 
would be responsible for, among other matters, (1) establishing 
policies and procedures for the remediation of non-compliance issues 
identified by the CCO and (2) establishing and following appropriate 
procedures for the handling of management response, remediation, 
retesting and closing of non-compliance issues. As outlined above, the 
Commission estimates a total of 17 respondents to this 
requirement.\270\
---------------------------------------------------------------------------

    \270\ See supra note 153-156 and accompanying text.
---------------------------------------------------------------------------

    The exact nature of the policies and procedures a clearing agency 
would establish is likely to vary between clearing agencies. However, 
as noted in the discussion of the estimated burdens for proposed Rules 
17Ad-25 and 17Ad-26, there are similarly positioned requirements and 
corresponding burden estimates in Regulation NMS and in the proposed 
requirements for security-based swap data repositories.\271\ The 
proposed rule requirements that create the estimated PRA burden for the 
CCO of a security-based swap data repository \272\ are highly-similar 
to the proposed requirements for the CCO of a clearing agency in Rule 
3Cj-1(b).\273\ This is because both rules are predicated on statutory 
provisions of the Exchange Act that contain statutory requirements that 
mirror one another to a large degree.\274\ Therefore, the Commission 
preliminarily believes that for PRA purposes the burdens would be 
roughly equivalent.
---------------------------------------------------------------------------

    \271\ See supra note 157.
    \272\ See Exchange Act Release No. 63347 (November 19, 2010), 75 
FR 77306 (December 10, 2010) (proposed Rules 13n-11(c)(6),(7) and 
13n-11(d), (h). See generally Public Law 111-203 Sec.  763(a) 
(adding Section 3C(n)(6) to the Exchange Act).
    \273\ Compare Public Law 111-203 Sec.  763(a) adding Section 
3C(j) to the Exchange Act concerning requirements for the CCO of a 
clearing agency with Public Law 111-203 Sec.  763(a) adding Section 
3C(n)(6) concerning requirements for the CCO of an SDR.
    \274\ Compare Public Law 111-203 Sec.  763(a) adding Section 
3C(j) to the Exchange Act concerning requirements for the CCO of a 
clearing agency with Public Law 111-203 Sec.  763(a) adding Section 
3C(n)(6) concerning requirements for the CCO of an SDR.
---------------------------------------------------------------------------

    Consequently, the Commission preliminarily estimates that the two 
requirements for the CCO of a clearing agency under proposed Rule 3Cj-1 
would require 420 hours to create policies and procedures, 
corresponding to a total burden of 7,140 hours initially.\275\ The 
Commission also preliminarily estimates 120 hours to administer each 
policy and procedure per year per respondent, corresponding to 1,200 
hours on average annually.\276\

[[Page 14524]]

The Commission preliminarily believes that this work will be conducted 
internally and solicits comments regarding the accuracy of this 
information. The Commission solicits comment regarding the accuracy of 
these estimates.
---------------------------------------------------------------------------

    \275\ This figure was calculated as follows: ((Assistant General 
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 210 hours to create one policy and procedure x 2 policies 
and procedures x 17 respondent clearing agencies = 7,140 hours. See 
supra note 195.
    \276\ This figure was calculated as follows: (Compliance 
Attorney at 60 hours x 17 respondent clearing agencies) = 1,020 
hours to administer one policy and procedure x 2 policies and 
procedures = 2,040 hours. See supra note 196.
---------------------------------------------------------------------------

    Also, based on the similarly positioned burdens in Regulation NMS 
and in the proposed requirements for the CCO of a security-based swaps 
data repository, the Commission preliminarily estimates that a total of 
$40,000 in initial outside legal costs would be incurred by each 
respondent clearing agency. This corresponds to an aggregate, one-time 
outside cost burden of $680,000 for all clearing agencies.\277\ The 
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------

    \277\ This figure was calculated as follows: (($400 per hour 
cost for outside legal services x 50 hours) x (2 policies and 
procedures)) x 17 clearing agencies = $680,000. See supra note 262.
---------------------------------------------------------------------------

    The CCO would also be required under proposed Rule 3Cj-1(c) to 
prepare, sign and submit (to the clearing agency's board of directors 
and audit committee (or equivalent bodies) and to the Commission) an 
annual compliance report that contains a description of (i) the 
compliance of the clearing agency with respect to the Federal 
securities laws and the rules and regulations thereunder, and (ii) each 
policy and procedure of the clearing agency of the compliance officer 
(including the code of ethics and conflict of interest policies of the 
registered clearing agency). Based upon the Commission's experience 
with similar reports, the Commission preliminarily estimates that this 
would require an average of 54 hours per respondent per year. Thus, the 
Commission preliminarily estimates an aggregate annual burden of 918 
hours on all respondent clearing agencies.\278\ Because the report will 
be submitted by the internal CCO, the Commission preliminarily does not 
expect any external costs. The Commission solicits comments regarding 
the accuracy of this estimate.
---------------------------------------------------------------------------

    \278\ This figure is based on the following: ((Compliance 
Attorney at 50 hours) + (Senior Systems Analyst at 4 hours)) x 17 
clearing agencies = 918 hours.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
    The collection of information relating to measuring credit 
exposures to its participants at least once a day and limiting its 
exposures to potential losses from defaults by its participants in 
normal market conditions so that the operations of the clearing agency 
would not be disrupted and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control under proposed 
Rule 17Ad-22(b)(1) would be mandatory for all clearing agencies that 
provide CCP services.
b. Margin Requirements
    The collection of information relating to using margin requirements 
to limit credit exposures to participants in normal market conditions 
and using risk-based models and parameters to set margin requirements 
and review them at least monthly under proposed Rule 17Ad-22(b)(2) 
would be mandatory for all clearing agencies that provide CCP services.
c. Financial Resources
    The collection of information relating to maintaining sufficient 
financial resources to withstand, at a minimum, a default by the 
participant to which it has the largest exposure in extreme but 
plausible market conditions, and if the clearing agency provides CCP 
services for security-based swaps then a default by the two 
participants to which it has the largest exposures in extreme but 
plausible market conditions; provided that if a participant controls 
another participant or is under common control with another 
participant, then the affiliated participants shall be collectively 
deemed to be a single participant under proposed Rule 17Ad-22(b)(3) 
would be mandatory for all clearing agencies that provide CCP services.
d. Model Validation
    The collection of information relating to providing for an annual 
model validation consisting of evaluating the performance of the 
clearing agency's margin models and the related parameters and 
assumptions associated with such models by a qualified person who does 
not perform functions associated with the clearing agency's margin 
models (except as part of the annual model validation) and does not 
report to a person who performs these functions under proposed Rule 
17Ad-22(b)(4) would be mandatory for all clearing agencies that provide 
CCP services.
e. Non-Dealer Access
    The collection of information relating to providing the opportunity 
for a person that does not perform any dealer or security-based swap 
dealer services to obtain membership at the clearing agency to clear 
securities for itself or on behalf of other persons under proposed Rule 
17Ad-22(b)(5) would be mandatory for all clearing agencies that provide 
CCP services.
f. Net Capital Requirements
    The collection of information relating to providing the opportunity 
for a person that maintains net capital equal to or greater than $50 
million with the ability to obtain membership at the clearing agency, 
with any net capital requirements being scalable so that they are 
proportional to the risks posed by the participant's activities to the 
clearing agency; provided, however, that the clearing agency may 
provide for a higher net capital requirement as a condition for 
membership at the clearing agency if the clearing agency demonstrates 
to the Commission that such a requirement is necessary to mitigate 
risks that could not otherwise be effectively managed by other measures 
and the Commission approves the higher net capital requirement as part 
of a rule filing or clearing agency registration application under 
proposed Rule 17Ad-22(b)(7) would be mandatory for all clearing 
agencies that provide CCP services.
g. Record of Financial Resources
    The collection of information each fiscal quarter, or at any time 
upon request by the Commission, relating to the calculation and 
maintenance of a record of the financial resources necessary to meet 
the requirements of proposed Rule 17Ad-22(b)(3) under proposed Rule 
17Ad-22(c)(1) would be mandatory for all clearing agencies that perform 
CCP services.
h. Annual Audited Financial Report
    The collection of information relating to the annual audited 
financial report that shall (i) be a complete set of financial 
statements of the clearing agency for the most recent two fiscal years 
and be prepared in accordance with U.S. GAAP, except that for a 
clearing agency that is a corporation or other organization 
incorporated or organized under the laws of any foreign country the 
financial statements may be prepared according to U.S. GAAP or IFRS; 
(ii) be audited in accordance with standards of the Public Company 
Accounting Oversight Board by a registered public accounting firm that 
is qualified and independent in accordance with Rule 2-01 of Regulation 
S-X (17 CFR 210.2-01); and (iii) include a report of the registered 
public accounting firm that complies with paragraphs (a) through (d) of 
Rule

[[Page 14525]]

2-02 of Regulation S-X (17 CFR 210.2-02) under proposed Rule 17Ad-
22(c)(2) would be mandatory for all clearing agencies.
i. Transparent and Enforceable Rules and Procedures
    The collection of information relating to policies and procedures 
providing for a well founded, transparent, and enforceable legal 
framework for each aspect of its activities in all relevant 
jurisdictions under proposed Rule 17Ad-22(d)(1) would be mandatory for 
all clearing agencies.
j. Participation Requirements
    The collection of information relating to requiring participants to 
have sufficient financial resources and robust operational capacity to 
meet obligations arising from participation in the clearing agency; 
have procedures in place to monitor that participation requirements are 
met on an ongoing basis; and have participation requirements that are 
objective, publicly disclosed, and permit fair and open access under 
proposed Rule 17Ad-22(d)(2) would be mandatory for all clearing 
agencies.
k. Identification and Mitigation of Custody of Assets and Investment 
Risk
    The collection of information relating to holding assets in a 
manner whereby risk of loss or of delay in its access to them is 
minimized; and investing assets in instruments with minimal credit, 
market and liquidity risks under proposed Rule 17Ad-22(d)(3) would be 
mandatory for all clearing agencies.
l. Identification and Mitigation of Operational Risk
    The collection of information relating to identifying sources of 
operational risk and minimizing them through the development of 
appropriate systems, controls, and procedures; implementing systems 
that are reliable, resilient and secure, and have adequate, scalable 
capacity; and having business continuity plans that allow for timely 
recovery of operations and fulfillment of a clearing agency's 
obligations under proposed Rule 17Ad-22(d)(4) would be mandatory for 
all clearing agencies.
m. Money Settlement Risks
    The collection of information relating to employing money 
settlement arrangements that eliminate or strictly limit the clearing 
agency's settlement bank risks, that is, its credit and liquidity risks 
from the use of banks to effect money settlements with its 
participants; and requiring funds transfers to the clearing agency to 
be final when effected under proposed Rule 17Ad-22(d)(5) would be 
mandatory for all clearing agencies.
n. Cost-Effectiveness
    The collection of information relating to being cost-effective in 
meeting the requirements of participants while maintaining safe and 
secure operations under proposed Rule 17Ad-22(d)(6) would be mandatory 
for all clearing agencies.
o. Links
    The collection of information relating to evaluating the potential 
sources of risk for any link arrangements the clearing agency 
establishes and prudently managing those risks under proposed Rule 
17Ad-22(d)(7) would be mandatory for all clearing agencies.
p. Governance
    The collection of information relating to having governance 
arrangements that are clear and transparent to fulfill the public 
interest requirements in Section 17A of the Exchange Act applicable to 
clearing agencies, to support the objectives of owners and 
participants, and to promote the effectiveness of the clearing agency's 
risk management procedures under proposed Rule 17Ad-22(d)(8) would be 
mandatory for all clearing agencies.
q. Information on Services
    The collection of information relating to providing market 
participants with sufficient information for them to identify and 
evaluate the risks and costs associated with using its services under 
proposed Rule 17Ad-22(d)(9) would be mandatory for all clearing 
agencies.
r. Immobilization and Dematerialization of Stock Certificates
    The collection of information relating to immobilization and 
dematerialization of securities certificates and transferring them by 
book entry to the greatest extent possible under proposed Rule 17Ad-
22(d)(10) would be mandatory for all clearing agencies that perform 
central securities depository services.
s. Default Procedures
    The collection of information relating to making key aspects of the 
clearing agency's default procedures publicly available and 
establishing default procedures that ensure that the clearing agency 
can take timely action to contain losses and liquidity pressures and to 
continue meeting its obligations in the event of a participant default 
under proposed Rule 17Ad-22(d)(11) would be mandatory for all clearing 
agencies.
t. Risk Controls To Address Participants' Failure To Settle
    The collection of information relating to instituting risk controls 
including collateral requirements and limits to cover the clearing 
agency's credit exposure to each participant exposure fully, and that 
ensure timely settlement in the event that the participant with the 
largest payment obligation is unable to settle when the clearing agency 
provides central securities depository services and extends intraday 
credit to participants, provided that if a participant controls another 
participant or is under common control with another participant then 
the affiliated participants shall be collectively deemed to be a single 
participant, under proposed Rule 17Ad-22(d)(14) would be mandatory for 
all clearing agencies.
u. Identification and Management of Physical Delivery Risks
    The collection of information relating to stating to participants 
the clearing agency's obligations with respect to physical deliveries 
and identifying and managing the risks from those obligations under 
proposed Rule 17Ad-22(d)(15) would be mandatory for all clearing 
agencies.
2. Dissemination of Pricing and Valuation Information by Security- 
Based Swap Clearing Agencies That Perform Central Counterparty Services
    The collection of information relating to the dissemination of 
pricing and valuation information of security-based swaps under 
proposed Rule 17Aj-1 would be mandatory for all security-based swap 
clearing agencies that perform CCP services.
3. Clearing Agency Policies and Procedures To Protect the 
Confidentiality of Trading Information of Clearing Agency Participants
    The collection of information relating to the establishment, 
maintenance and enforcement of written policies and procedures under 
proposed Rule 17Ad-23 pertaining to the confidentiality of trading 
information would be mandatory for all clearing agencies.
4. Clearing Agency Procedures To Identify and Address Conflicts of 
Interest
    The collection of information relating to the establishment, 
implementation, maintenance and enforcement of written policies and 
procedures reasonably designed to identify and address conflicts of 
interest under proposed Rule 17Ad-25 would be mandatory for all 
clearing agencies.

[[Page 14526]]

5. Standards for Board or Board Committee Directors
    The collection of information relating to board or board committee 
directors governance standards under proposed Rule 17Ad-26 would be 
mandatory for all clearing agencies.
6. Designation of Chief Compliance Officer
    The collection of information relating to the CCO under proposed 
Rule 3Cj-1 requirements would be mandatory for all clearing agencies.

F. Confidentiality

1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
    The collection of information relating to the measurement and 
management of credit exposures under proposed Rule 17Ad-22(b)(1) would 
be provided to the Commission staff but not subject to public 
availability.
b. Margin Requirements
    The collection of information relating to margin requirements under 
proposed Rule 17Ad-22(b)(2) would be provided to the Commission staff 
but not subject to public availability.
c. Financial Resources
    The collection of information relating to financial resources under 
proposed Rule 17Ad-22(b)(3) would be provided to the Commission staff 
but not subject to public availability.
d. Model Validation
    The collection of information relating to conducting an annual 
model validation under proposed Rule 17Ad-22(b)(4) would be provided to 
the Commission staff but not subject to public availability.
e. Non-Dealer Access
    The collection of information relating to non-dealer access under 
proposed Rule 17Ad-22(b)(5) would be provided to the Commission staff 
but not subject to public availability.
f. Net Capital Requirements
    The collection of information relating to the procedures for net 
capital requirements under proposed Rule 17Ad-22(b)(7) would be 
provided to the Commission staff but not subject to public 
availability.
g. Record of Financial Resources
    The collection of information relating to the calculation and 
maintenance by a clearing agency that provides CCP services of a 
quarterly report describing the financial resources necessary to meet 
the requirements of proposed Rule 17Ad-22(b)(3) would be provided to 
the Commission staff under proposed Rule 17Ad-22(c)(1) but would not be 
subject to public availability.
h. Annual Audited Financial Report
    The collection of information relating to the annual audited 
financial report published to the clearing agency's Web site under 
proposed Rule 17Ad-22(c)(2) would be subject to public availability.
i. Transparent and Enforceable Rules and Procedures
    The collection of information relating to a clearing agency's well 
founded, transparent and enforceable legal framework under proposed 
Rule 17Ad-22(d)(1) would be provided to the Commission staff but not 
subject to public availability.
j. Participation Requirements
    The collection of information relating to the procedures for 
monitoring and publicly disseminating the participation requirements 
under proposed Rule 17Ad-22(d)(2) would be provided to the Commission 
staff and would be subject to public availability.
k. Custody of Assets and Investment Risk
    The collection of information relating minimizing custody and 
investment risk under proposed Rule 17Ad-22(d)(3) would be provided to 
the Commission staff but not subject to public availability.
l. Identification and Mitigation of Operational Risk
    The collection of information relating to identifying and 
minimizing operational risk under proposed Rule 17Ad-22(d)(4) would be 
provided to the Commission staff but not subject to public 
availability.
m. Money Settlement Risks
    The collection of information relating to the procedures for money 
settlement arrangements under proposed Rule 17Ad-22(d)(5) would be 
provided to the Commission staff but not subject to public 
availability.
n. Cost-Effectiveness
    The collection of information relating to being cost-effective 
under proposed Rule 17Ad-22(d)(6) would be provided to the Commission 
staff but not subject to public availability.
o. Links
    The collection of information relating to evaluating potential 
sources of risk in links arrangements under proposed Rule 17Ad-22(d)(7) 
would be provided to the Commission staff but not subject to public 
availability.
p. Governance
    The collection of information relating to a clearing agency's 
governance arrangements under proposed Rule 17Ad-22(d)(8) would be 
provided to the Commission staff but not subject to public 
availability.
q. Information on Services
    The collection of information relating to the provision of 
sufficient information to market participants under proposed Rule 17Ad-
22(d)(9) would be provided to the Commission staff and market 
participants but not subject to public availability.
r. Immobilization and Dematerialization of Stock Certificates
    The collection of information relating to the procedures for 
immobilizing and dematerializing stock certificates under proposed Rule 
17Ad-22(d)(10) would be provided to the Commission staff but not 
subject to public availability.
s. Default Procedures
    The collection of information relating to the establishment and 
maintenance of default procedures under proposed Rule 17Ad-22(d)(11) 
would be subject to public availability.
t. Risk Controls To Address Participants' Failure To Settle
    The collection of information relating to risk controls to address 
participants' failure to settle under proposed Rule 17Ad-22(d)(14) 
would be provided to the Commission staff, but not subject to public 
availability.
u. Identification and Management of Physical Delivery Risks
    The collection of information relating to the statement and 
management of physical delivery risk under proposed Rule 17Ad-22(d)(15) 
would be provided to the Commission staff, but not subject to public 
availability.
2. Dissemination of Pricing and Valuation Information by Security- 
Based Swap Clearing Agencies That Perform Central Counterparty Services
    The collection of information relating to the dissemination of 
pricing and valuation information under proposed Rule 17Aj-1 would be 
subject to public availability.

[[Page 14527]]

3. Clearing Agency Policies and Procedures To Protect the 
Confidentiality of Trading Information of Clearing Agency Participants
    The collection of information pertaining to the establishment, 
maintenance and enforcement of written policies and procedures 
pertaining to the confidentiality of trading information under proposed 
Rule 17Ad-23 would be provided to the Commission staff and would be 
subject to public availability.
4. Clearing Agency Procedures To Identify and Address Conflicts of 
Interest
    The collection of information relating to the establishment, 
implementation, maintenance and enforcement of written policies and 
procedures reasonably designed to identify and address conflicts of 
interest under proposed Rule 17Ad-25 would be provided to the 
Commission staff and would be subject to public availability.
5. Standards for Board or Board Committee Directors
    The collection of information relating to board or board committee 
directors governance standards under proposed Rue 17Ad-26 would be 
provided to the Commission staff and would be subject to public 
availability.
6. Designation of Chief Compliance Officer
    The collection of information relating to the CCO under proposed 
Rule 3Cj-1 would be provided to the Commission staff and would be 
subject to public availability.

G. Retention Period of Recordkeeping Requirements

    Registered clearing agencies will be required to retain all 
correspondence and other communications reduced to writing (including 
comment letters) to and from such clearing agency for a period of not 
less than five years, the first two years of which are to be in a place 
immediately available to the Commission staff for inspection and 
examination, pursuant to the recordkeeping requirements set forth in 
Rule 17a-1 of the Exchange Act.

H. Request for Comment

    The Commission invites comments on all of the above estimates. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission requests comment in 
order to: (a) Evaluate whether the collection of information is 
necessary for the proper performance of our functions, including 
whether the information will have practical utility; (b) evaluate the 
accuracy of our estimate of the burden of the collection of 
information; (c) determine whether there are ways to enhance the 
quality, utility and clarity of the information to be collected; and 
(d) evaluate whether there are ways to minimize the burden of the 
collection of information on those who respond, including through the 
use of automated collection techniques or other forms of information 
technology.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090, with reference to File No. S7-8-11. Requests 
for materials submitted to OMB by the Commission with regard to this 
collection of information should be in writing, with reference to File 
No. S7-8-11, and be submitted to the Securities and Exchange 
Commission, Office of Investor Education and Advocacy, 100 F Street, 
NE., Washington, DC 20549-0213. As OMB is required to make a decision 
concerning the collections of information between 30 and 60 days after 
publication, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication.

VI. Consideration of Costs and Benefits \279\
---------------------------------------------------------------------------

    \279\ The hourly rates use for professionals used throughout 
this Section VI. Consideration of Costs and Benefits are taken from 
the Securities Industry and Financial Markets Association's 
Management & Professional Earnings in the Securities Industry 2010, 
modified by the Commission's staff to account for an 1800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead.
---------------------------------------------------------------------------

    The Commission is proposing several new rules that would set 
standards for the operation and governance of clearing agencies. In 
part, the Dodd-Frank Act is intended to promote financial stability in 
the financial system of the United States by improving accountability 
and transparency.\280\ Key aspects of the framework of the Dodd-Frank 
Act specifically give the Commission authority to regulate security-
based swaps \281\ and to prescribe regulations containing risk 
management standards for designated clearing entities that the 
Commission regulates. In addition to considering these specific 
concerns in formulating the proposed rules, the Commission believes 
that designing several of the proposed rules to be applicable to all 
clearing agencies promotes financial stability by facilitating prompt 
and accurate clearance and settlement of securities transactions 
consistent with Section 17A of the Exchange Act while concurrently 
promoting the Dodd-Frank Act's stated aims of accountability and 
transparency.
---------------------------------------------------------------------------

    \280\ See supra note 2.
    \281\ See supra note 3.
---------------------------------------------------------------------------

    Proposed Rules 17Ad-22 through 17Ad-26 and 3Cj-1 would establish 
operational standards for registered clearing agencies and require 
those clearing agencies to adopt written policies and procedures 
pertaining to, among other matters, the confidential treatment of 
trading information received by the clearing agency, identifying and 
addressing conflicts of interest, establishing board governance 
standards and designating a CCO for the clearing agency. Proposed Rule 
17Aj-1 would require the public dissemination of certain pricing and 
valuation information by clearing agencies that perform CCP services 
with respect to security-based swaps. Finally, the proposed amendments 
to existing Rule 17Ab2-1 would modify the temporary registration 
process for clearing agencies.
    The Commission is sensitive to the costs and benefits imposed by 
its rules and has identified the following costs and benefits. In 
particular, the discussion below is focused on the costs and benefits 
flowing from the decisions proposed by the Commission to fulfill the 
mandates of the Dodd-Frank Act rather than the mandates of the Dodd-
Frank Act itself. However, to the extent that the Commission's 
discretion is aligned to take full advantage of the benefits intended 
by the Dodd-Frank Act, the two types of benefits are not entirely 
separable. The Commission requests that commenters provide data and any 
other information or statistics on which they relied on to reach any 
conclusions.

A. Standards for Clearing Agencies

    The standards set forth under proposed Rule 17Ad-22 build off of 
the recommendations of the CPSS-IOSCO RSSS and RCCP, adjusted to 
conform to the U.S. system for clearing agency regulation and to adopt 
those tailored standards as rule requirements. Included in this 
proposed rule is the requirement that each fiscal quarter (based on 
calculations made as of the last business day of the clearing agency's 
fiscal quarter), or at any time upon Commission request, a clearing

[[Page 14528]]

agency that performs central counterparty services shall calculate and 
maintain a record of the financial resources necessary to comply with 
proposed Rule 17Ad-22(b)(3), as well as sufficient documentation to 
explain the methodology it uses to compute such financial resource 
requirement.
1. Benefits
    The proposed standards are intended to provide benefits to clearing 
agencies and the markets they serve by promoting implementation of 
measures that would enhance the safety and efficiency of clearing 
agencies and reduce systemic risk. Safe and reliable clearing agencies 
are essential not only for the stability of the securities markets they 
serve but often also to payment systems, which may be used by a 
clearing agency or may themselves use a clearing agency to transfer 
collateral. The safety of securities settlement arrangements and post-
trade custody arrangements is also critical to the goal of protecting 
the assets of investors from claims by creditors of intermediaries and 
other entities that perform various functions in the operation of the 
clearing agency.
    Permitting persons who do not provide dealer or security-based swap 
dealer services to become members of a clearing agency, as required 
under proposed Rule 17Ad-22(b)(5), should foster the development of 
correspondent clearing arrangements that would allow dealers and 
security-based swap dealers, who may otherwise not be able to meet 
reasonable participation standards of a clearing agency, to obtain 
access to the clearing agency through correspondent clearing 
arrangements, thereby increasing competition among clearing agencies. 
The net capital requirements contained in proposed Rule 17Ad-22(b)(7) 
would help remove an overly burdensome barrier to clearing agency 
access for market participants with a net capital level of at least $50 
million, and promote greater direct access to clearing agencies. 
Entities that become participants will also benefit from an elimination 
of fee costs that the entities might otherwise have incurred to gain 
indirect access to the clearing agency through existing participants 
with higher levels of net capital. Proposed Rule 17Ad-22(b)(7) also may 
facilitate greater competition among market participants of varying 
sizes because smaller market participants may not incur additional cost 
to clear and settle transactions.
    Finally, the standards in proposed Rule 17Ad-22(d) have the 
potential to mitigate various risks associated with providing clearing 
agency services by establishing standards to address (1) transparent 
and enforceable rules and procedures; (2) participation requirements; 
(3) custody of assets and investment risk; (4) operational risk; (5) 
money settlement risk; (6) cost-effectiveness; (7) links; (8) 
governance; (9) information on services; (10) immobilization and 
dematerialization of stock certificates; (11) default procedures; (12) 
timing of settlement finality; (13) delivery versus payment; (14) risk 
controls to address participants' failures to settle; and (15) physical 
delivery risks. This should help to create a framework for the 
operation of clearing agencies that would promote sound and efficient 
practices by the clearing agency. Moreover, standards relating to 
measurement and management of credit exposures, margin requirements, 
and financial resources should act as a helpful tool to manage systemic 
risk as increasing amounts of clearance and settlement activity is 
centralized within clearing agencies. At the same time, requiring 
annual evaluations of the performance of the clearing agency's margin 
models should help to ensure that clearing agencies' margin models 
perform in a manner that facilitates prompt and accurate clearance and 
settlement of transactions.
2. Costs
    As noted above, the standards contained in proposed Rules 17Ad-
22(b)(1), (2), (3), (4), (5), (6), (7), (c)(1), (2), (d)(1), (2), (3), 
(4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15) 
would impose certain burdens and related costs on respondent clearing 
agencies. As discussed in section V.D.1., based on policies and 
procedures requirements for Regulation NMS and security-based swap data 
repositories and based on staff conversations with industry 
representatives, the Commission has estimated the burdens and related 
costs of these requirements for clearing agencies.
    The proposed clearing agency standards in proposed Rules 17Ad-
22(b)(1), (2), (3), (4), (5), (6), (7), (c)(1), (2), (d)(1), (2), (3), 
(4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15) 
would require respondent clearing agencies to create policies and 
procedures. The requirements would impose one-time costs of 
approximately $26,084,488 in the aggregate for all respondent clearing 
agencies.\282\ The standards contained in proposed Rules 17Ad-22(b)(4), 
(c)(2), (d)(2), (8), (9), (11) and (15) would also impose one-time 
costs on clearing agencies that are related to the adjustment of 
systems. With respect to proposed Rules 17Ad-22(b)(2), (d)(2), (8), 
(9), (11) and (15), this adjustment would be related to facilitating 
compliance with requirements to provide information or make information 
available. Proposed Rule 17Ad-22(b)(4) would require one-time systems 
adjustments related to the capability to perform an annual model 
validation. These adjustments would amount to a one-time cost of 
approximately $4,182,480 in the aggregate for all respondent clearing 
agencies.\283\ Consequently, this results in a total one-time burden 
imposed by proposed Rule 17Ad-22 of approximately $30,266,968 in the 
aggregate for all respondent clearing agencies.\284\
---------------------------------------------------------------------------

    \282\ This figure was calculated as follows: ((Assistant General 
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77 
hours at $320 per hour) + (Computer Operations Department Manager 
for 23 hours at $367 per hour) + (Senior Business Analyst for 23 
hours at $232 per hour)) = $75,827 x 16 standards pursuant to 
proposed Rules 17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), 
(9), (10), (11), (14), (15) and (c)(2) = $1,213,232 x 17 respondent 
clearing agencies = $20,624,944) + (($75,827 x 8 standards pursuant 
to proposed Rules 17Ad-22(b)(1), (2), (3), (4), (5), (6), (7) and 
(c)(1) = $606,616 x 9 clearing agencies = $5,459,544) = $26,084,488. 
See supra note 195.
    \283\ This figure was calculated as follows: ((Chief Compliance 
Officer for 40 hours at $423 per hour) + (Computer Department 
Operations Manager for 40 hours at $367 per hour) + (Senior 
Programmer for 20 hours at $304 per hour) = $37,680 x proposed Rules 
17Ad-22(d)(2), (8), (9), (11), (15) and (d)(2)) = $226,080 x 17 
respondent clearing agencies = $3,843,360 + ($37,680 x 9 clearing 
agencies for proposed Rules 17Ad-22(b)(4) = $339,120) = $4,182,480. 
See supra note 253.
    \284\ This $30,266,968 figure is the sum of the one-time costs 
calculated in note 282, $26,084,488, plus the one-time costs 
calculated in note 283, $4,182,480.
---------------------------------------------------------------------------

    The standards contained in Rule 17Ad-22 would also impose ongoing 
costs on clearing agencies. For example, the proposed clearing agency 
standards in proposed Rules 17Ad-22(b)(1), (2), (3), (4), (5), (6), 
(7), (c)(1), (2), (d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10), 
(11), (14) and (15) would collectively require respondent clearing 
agencies to perform certain ongoing monitoring and enforcement 
activities with respect to the policies and procedures the clearing 
agency creates in response to the proposed standard. Accordingly, the 
Commission preliminarily believes that those ongoing activities would 
impose total annual costs of approximately $6,660,800 in the aggregate 
for all respondent clearing agencies.\285\
---------------------------------------------------------------------------

    \285\ This figure was calculated as follows: ((Compliance 
Attorney for 60 hours at $320 per hour = $19,200 x 16 standards 
pursuant to proposed Rules 17Ad-22(d)(1), (2), (3), (4), (5), (6), 
(7), (8), (9), (10), (11), (12), (13), (14), (15) and (c)(2) = 
$307,200 x 17 respondent clearing agencies = $5,222,400) + ($19,200 
x 8 standards pursuant to proposed Rules 17Ad-22(b)(1), (2), (3), 
(4), (5), (6), (7) and (c)(1) = $153,600 x 9 clearing agencies = 
$1,382,400)) = $6,660,800. See supra note 196.

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[[Page 14529]]

    Proposed Rule 17Ad-22(b)(4) would entail ongoing costs. To meet the 
requirements of the proposed Rule 17Ad-22(b)(4) to provide for an 
annual model validation, the Commission preliminarily believes clearing 
agencies would hire a consulting firm that dedicates two consultants to 
the project. The Commission estimates that this requirement would 
impose an ongoing annual cost of approximately $432,000 for each 
respondent, which corresponds to a total annual cost of approximately 
$7,776,000 in the aggregate for all respondent clearing agencies.\286\
---------------------------------------------------------------------------

    \286\ This figure was calculated as follows: 2 Consultants for 
30 hours per week at $600 per hour = $36,000 per week x 12 weeks = 
$432,000 per clearing agency x 9 clearing agencies = $7,776,000.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(b)(6) would impose ongoing costs on the nine 
estimated clearing agencies that provide CCP services. The rule would 
impose these ongoing costs to the extent that staff from the legal, 
compliance, risk or other departments at the clearing agency providing 
CCP services would be responsible for ensuring that the clearing 
agency's membership standards do not require participants to maintain a 
portfolio of a minimum size or to maintain a minimum transaction volume 
threshold. This gate-keeping responsibility required in Rule 17Ad-
22(b)(6) is unlikely to require the complete work hours of a full-time 
employee. Instead, as an ongoing cost related to preventing these 
specific types of participation standards, the cost would likely 
represent a fraction of total staff time and related costs. Based on 
the Commission's experience regulating clearing agencies that provide 
CCP services, it is unlikely that such a clearing agency would 
frequently seek to change its membership requirements in a way that 
would be inconsistent with proposed Rule 17Ad-22(b)(6). Therefore, the 
fractional cost imposed on the clearing agency by the proposed rule 
would likely be small compared to the clearing agency's overall cost of 
paying the same staff to perform their other job responsibilities.
    In addition, proposed Rule 17Ad-22(b)(7) may require a clearing 
agency that provides CCP services to update its policies and procedures 
relating to its net capital requirements if it determines that the 
clearing agency should provide for a higher net capital requirement 
(i.e., higher than $50 million) as a condition for membership. This 
work would entail the preparation of potentially one new policy 
annually reflecting the clearing agency's updated net capital 
requirements. To meet these ongoing requirements of proposed Rule 17Ad-
22(b)(7), the Commission preliminarily estimates a total annual cost of 
$682,443 in the aggregate for all respondent clearing agencies.\287\ 
The proposed rule's requirement that a clearing agency that provides 
CCP services must provide a person with net capital equal to or greater 
than $50 million with the ability to obtain membership at the clearing 
agency (with any net capital requirements being scalable so that they 
are proportional to the risks posed to the clearing agency by the 
participant's activities) would also impose costs on the operations of 
the clearing agency. Specifically, certain clearing agencies that 
provide CCP services would likely need to revise their admission 
criteria so that they are scalable and still provides for effective 
measures to limit the risks that smaller members present to the 
clearing agency. This would involve implementation and oversight of any 
measures such as heightened margin requirements, limited access to 
clearing services, portfolio and transaction requirements, or other 
risk management measures used as part of the scalable membership 
classes that would be designed by the clearing agency under the 
proposed rule.
---------------------------------------------------------------------------

    \287\ This figure was calculated as follows: ((Assistant General 
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77 
hours at $320 per hour) + (Computer Operations Department Manager 
for 23 hours at $367 per hour) + (Senior Business Analyst for 23 
hours at $232 per hour)) = $75,827 x 1 new policy annually in 
response to Rule 17Ad-22(b)(7) = $75,827 x 9 respondent clearing 
agencies = $682,443. See supra note 195.
---------------------------------------------------------------------------

    The requirements in proposed Rules 17Ad-22(c)(1) and (2) would also 
impose ongoing costs on clearing agencies. Under proposed Rule 17Ad-
22(c)(1), the requirement for a clearing agency that provides CCP 
services to calculate and maintain a record of the financial resources 
necessary to meet the requirements of proposed Rule 17Ad-22(b)(3), as 
well as sufficient documentation to explain the methodology it uses to 
compute such financial resource requirement, would require the efforts 
of clearing agency compliance and operational personnel to create the 
reports, properly document them and ensure the reports and supporting 
documentation are properly record kept. To meet these ongoing 
requirements of proposed Rule 17Ad-22(c)(1), the Commission 
preliminarily estimates a total annual cost of $37,944.\288\
---------------------------------------------------------------------------

    \288\ This figure was calculated as follows (Compliance Attorney 
for 1 hour at $320 per hour) + (Computer Operations Department 
Manager for 2 hours at $367)) = $1,054 per quarter x 4 quarters per 
year = $4216 per year x 9 clearing agencies = $37,944.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(c)(2) would require each clearing agency to 
post on its Web site an annual audited financial report. Each financial 
report would have to: (i) be a complete set of financial statements of 
the clearing agency for the most recent two fiscal years and be 
prepared in accordance with U.S. GAAP, except that for a clearing 
agency that is a corporation or other organization incorporated or 
organized under the laws of any foreign country the financial 
statements may be prepared according to U.S. GAAP or IFRS as issued by 
the International Accounting Standards Board; (ii) be audited in 
accordance with standards of the Public Company Accounting Oversight 
Board by a registered public accounting firm that is qualified and 
independent in accordance with Rule 2-01 of Regulation S-X (17 CFR 
210.2-01); and (iii) include a report of the registered public 
accounting firm that complies with paragraphs (a) through (d) of Rule 
2-02 of Regulation S-X (17 CFR 210.2-02). This requirement would 
necessitate work hours of compliance personnel and finance personnel at 
the clearing agency to compile relevant data, organize and analyze that 
data, and then post it to the clearing agency's Web site consistent 
with the rule. The requirement would also require the services of a 
registered public accounting firm. The Commission estimates those 
services would cost approximately $500,000 annually. Therefore, to meet 
the ongoing requirements of proposed Rule 17Ad-22(c)(2) the Commission 
estimates a total annual cost of approximately $10,239,984 in the 
aggregate for all respondent clearing agencies.\289\
---------------------------------------------------------------------------

    \289\ This figure was calculated as follows: ((Senior Accountant 
for 500 hours at $198 per hour) + (Senior Systems Analyst for 8 
hours at $259 per hour) + (Compliance Attorney for 4 hours at $320) 
= $102,352 + $500,000 for independent public accounting services = 
$602,352 x 17 respondent clearing agencies = $10,239,984. See supra 
notes 192 and 193.
---------------------------------------------------------------------------

    Consequently, this results in a total, annual burden imposed by 
proposed Rule 17Ad-22 of approximately $25,397,171.\290\
---------------------------------------------------------------------------

    \290\ This $25,397,171 figure is the sum of the aggregate annual 
costs estimated in note 285, $6,660,800, plus the aggregate annual 
cost estimated in note 286, $7,776,000, plus the aggregate cost 
estimated in note 287, $682,443, plus the aggregate annual cost 
estimated in note 288, $37,944, plus the aggregate annual cost 
estimated in note 289, $10,239,984.
---------------------------------------------------------------------------

    Recent assessments of the registered U.S. clearing agencies support 
the conclusion that these entities generally meet or exceed analogous 
standards of operation and governance to those that are contained 
within Rule 17Ad-22. Those findings support a view that the

[[Page 14530]]

requirements of proposed Rule 17Ad-22 would not be likely to require 
the clearing agencies to build new infrastructure or modify operations 
to continue to meet the standards.\291\ The Commission's oversight of 
the entities clearing CDS pursuant to the CDS Clearing Exemption Orders 
forms the basis for a similar belief that no associated start-up costs 
would be imposed because those entities already represent through the 
CDS Clearing Exemption Orders that they meet the CPSS-IOSCO standards 
for central counterparties, which impose similar requirements to those 
contained in proposed Rule 17Ad-22.
---------------------------------------------------------------------------

    \291\ See generally International Monetary Fund, Publication of 
Financial Sector Assessment Program Documentation--Detailed 
Assessment of Observance of the National Securities Clearing 
Corporation's Observance of the CPSS-IOSCO Recommendations for 
Central Counterparties 4-29 (2010), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf; International Monetary Fund, 
Publication of Financial Sector Assessment Program Documentation--
Detailed Assessment of Observance of the Depository Trust Company's 
Observance of the CPSS-IOSCO Recommendations for Securities 
Settlement Systems 4-40 (2010), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10128.pdf.
---------------------------------------------------------------------------

B. Dissemination of Pricing and Valuation Information by Security-Based 
Swap Clearing Agencies That Perform Central Counterparty Services

    The Commission is proposing new Rule 17Aj-1 which would require 
every security-based swap clearing agency that performs CCP services to 
make available to the public all end-of-day settlement prices and any 
other prices with respect to security-based swaps that it may establish 
to calculate mark-to-market \292\ margin requirements for its 
participants. Proposed Rule 17Aj-1 would also require security-based 
swap clearing agencies that perform CCP services to make available to 
the public any other pricing or valuation information with respect to 
security-based swaps that it otherwise publishes or makes available to 
its participants. Under the proposed rule, this information is not 
required to be made available to the public free of charge. Instead, it 
must be provided to the public on terms that are fair, reasonable and 
not unreasonably discriminatory.
---------------------------------------------------------------------------

    \292\ See supra note 91 (explaining the specific meaning of 
``mark-to-market'' in the context of the margin practices of 
security-based swap clearing agency margin practices).
---------------------------------------------------------------------------

1. Benefits
    Proposed Rule 17Aj-1 would provide a publicly available source of 
pricing and valuation information for pricing and valuation in the 
security-based swap markets. The Commission recognizes that other 
market mechanism created under the Dodd-Frank Act, such as security-
based swap data repositories and security-based swap execution 
facilities, will also generate security-based swap pricing data. Under 
the Dodd-Frank Act, all security-based swap transactions are required 
to be reported to a security-based swap data repository, or, if such 
data repository does not exist, to the Commission.\293\ Consequently, 
security-based swap data repositories would consolidate post-trade 
information about security-based swaps that the Commission 
preliminarily believes would be helpful for analyzing the security-
based swap market as a whole and identifying its risks.\294\ Similarly, 
security-based swap execution facilities will provide important pre-
trade information about security-based swaps.
---------------------------------------------------------------------------

    \293\ See Public Law 111-203, Sec. Sec.  763(i) and 766(a) 
(adding Exchange Act Sections 13(m)(1)(G) and 13A(A)(1), 
respectively). The Dodd-Frank Act amends the CEA to provide for a 
similar regulatory framework with respect to transactions in swaps 
regulated by the CFTC.
    \294\ See Exchange Act Release No. 63347 (November 19, 2010), 75 
FR 77306 (December 10, 2010) (discussing in Section II, Role, 
Regulation, and Business Models of SDRs, that the enhanced 
transparency provided by an SDR is important to help regulators and 
others monitor the build-up and concentration of risk exposures in 
the security-based swaps market).
---------------------------------------------------------------------------

    However, the Commission preliminarily believes that pricing and 
valuation information generated by clearing agencies would add value 
beyond pre- and post-trade pricing information. Rather than basing risk 
management of clearance and settlement on pre- or post- trade pricing 
that may be stale, or may be inappropriate to facilitate a clearing 
agency's risk management practices for other reasons, clearing agencies 
frequently generate their own prices for security-based swaps, either 
through consensus pricing or pricing models. Those prices are then used 
to inform the clearing agency's margin requirements for its 
participants and the risk management of the clearing facility.
    End-of-day pricing information is pricing during the life of a 
security-based swap that is not otherwise available from pre- and post- 
trade market sources--for instance from a security-based swap execution 
facility or security-based swap data repository. Therefore, the 
Commission preliminarily believes public availability of the end-of-day 
pricing information, as well as any other pricing information the 
security-based swap clearing agency publishes or distributes with 
respect to security-based swaps can provide helpful transparency to 
market participants about the value of similar security-based swap 
positions they may hold. Accordingly, the Commission preliminarily 
believes that requiring the information to be made publicly available 
on terms that are fair, reasonable and not unreasonably discriminatory 
improves fairness, efficiency, and market competition by providing 
availability to data that may otherwise be difficult for some market 
participants to obtain.
2. Costs
    The proposed rule requiring dissemination of pricing and valuation 
information would impose initial and ongoing costs on security-based 
swap clearing agencies. To establish the necessary pricing and 
valuation infrastructure to satisfy Rule 17Aj-1, security-based swap 
clearing agencies that perform CCP services would bear the cost of 
establishing the applicable infrastructure capabilities. The Commission 
notes that entities providing CCP services for security-based swaps are 
currently required by the CDS Clearing Exemption Orders to disseminate 
pricing and valuation information.
    As noted above in section V.D.2., based on staff conversations with 
industry representatives already subject to similar requirements under 
the CDS Clearing Exemption Orders, the Commission preliminarily 
estimates that the one-time burden for a security-based swap clearing 
agency that performs CCP services to comply with the requirements of 
proposed Rule 17Aj-1 would only involve adjustments to computing 
systems required as part of registration. The Commission estimates that 
for a clearing agency to adjust its systems beyond the specifications 
associated with registration would impose a one-time cost of 
approximately $37,680 on each respondent clearing agency, corresponding 
to a total one-time aggregate cost imposed on all respondent clearing 
agencies of approximately $226,080.\295\
---------------------------------------------------------------------------

    \295\ This figure was calculated as follows: ((Chief Compliance 
Officer for 40 hours at $423) + (Computer Operations Department 
Manager for 40 hours at $367) + (Senior Programmer for 20 hours at 
$304)) = $37,680 dollars x 6 respondent clearing agencies = 
$226,080. See supra note 253.
---------------------------------------------------------------------------

    To meet the requirements of the proposed rule, security-based swap 
clearing agencies that perform CCP services would have a continuous 
responsibility to make the relevant pricing and valuation information 
available. The Commission estimates this imposes an ongoing annual 
aggregate burden of $22,020 for each respondent, which corresponds to 
an

[[Page 14531]]

ongoing aggregate annual cost of $132,120 for all respondent clearing 
agencies.\296\
---------------------------------------------------------------------------

    \296\ This figure was calculated as follows: Computer Operations 
Department Manager for 60 hours at $367 dollars per hour = $22,020 x 
6 security-based swap clearing agencies = $132,120. See supra note 
254.
---------------------------------------------------------------------------

C. Clearing Agency Policies and Procedures To Protect the 
Confidentiality of Trading Information of Clearing Agency Participants

    Proposed Rule 17Ad-23 would require each registered clearing agency 
to establish, maintain and enforce written policies and procedures 
designed to protect the confidentiality of any and all transaction 
information that the clearing agency receives. Such transaction 
information may include, but is not limited to, trade data, position 
data, and any non-public personal information about a clearing agency 
member or participant or any of its members or participant's customers. 
The proposed rule also provides that the required policies and 
procedures shall include, but are not limited to, (a) limiting access 
to confidential trading information of clearing members to those 
employees of the clearing agency who are operating the system or 
responsible for its compliance with any other applicable laws or rules 
and (b) standards controlling employees and agents of the clearing 
agency trading for their personal benefit or the benefit of others.
1. Benefits
    The proposed standards are intended to promote implementation of 
adequate measures taken by a clearing agency to safeguard data, which 
can increase market participants' confidence in the safety and 
reliability of a clearing agency. Trade data stored by a clearing 
agency should be protected from loss, leakage, unauthorized access and 
other processing risks. It is necessary for a clearing agency to apply 
information security and system integrity objectives to its own 
operations to protect trade data during transmission and dissemination. 
These protections for trade data benefit participants by helping to 
ensure, for instance, that participant trade data is not leaked to 
other market participants who may attempt to use that information to 
front run participant trades or misappropriate it in other ways. 
Protections for trade data by a clearing agency also generate the 
benefit to participants of promoting the confidence among participants 
and their customers that use of a clearing agency to clear and settle 
trades will not result in economic or reputational harm to the clearing 
agency's users. This, in turn, promotes overall marketplace confidence 
in the clearance and settlement system for securities transactions.
2. Costs
    Proposed Rule 17Ad-23 would impose costs on a clearing agency to 
establish procedures to protect the confidentiality of trading 
information of participants. However, the entities providing CCP 
services for security-based swaps pursuant to the CDS Clearing 
Exemption Orders already maintain and enforce safeguards to protect the 
confidentiality of trading information of participants as part of those 
orders. While the Commission notes that those respondents may not need 
to make additional, one-time changes to meet the requirements of 
proposed Rule 17Ad-23, the Commission is assuming for the purpose of 
this cost-benefit analysis that proposed Rule 17Ad-23 would impose one-
time costs on them. As discussed above in section V.D.3., based on 
staff discussions with industry representatives already subject to 
similar requirements under the CDS Clearing Exemption Orders, the 
Commission has estimated the burdens and related costs of these 
requirements for clearing agencies.
    The Commission does anticipate the rule would impose one-time costs 
at the remaining six clearing agencies related to the coordinated 
research and development costs between compliance, legal, operational, 
and information technology staff. Protecting confidential information 
in compliance with the requirements of the proposed rule would likely 
necessitate drawing on expertise and knowledge from each of these 
areas. The number of employees and number of employee hours required to 
deliver the necessary information could vary slightly between clearing 
agencies given that clearing agencies may divide the skill sets of 
their employees differently. However, for a clearing agency to create 
policies and procedures protecting the confidentiality of trading 
information of participants, the Commission believes the rule would 
impose a one-time cost on each clearing agency of approximately 
$227,290, corresponding to an aggregate one-time cost to all respondent 
clearing agencies of approximately $3,863,930.\297\
---------------------------------------------------------------------------

    \297\ This figure was calculated as follows ((Chief Compliance 
Officer for 210 hours at $423 per hour) + (Computer Operations 
Department Manager for 180 hours at $367 per hour) + (Senior 
Programmer for 180 hours at $304 per hour) + (Risk Management 
Specialist for 40 hours at $192 per hour) + ($10,000 software 
costs)) = $227,290 x 17 respondent clearing agencies = $3,863,930. 
See supra note 256.
---------------------------------------------------------------------------

    The rule would also impose ongoing costs associated with storing 
confidential data in the form and manner prescribed by the clearing 
agency's policies and procedures, which would be designed to control 
access to that information. Such costs are likely to include monitoring 
and testing of the integrity of the access controls on the data and 
potentially updating those controls as new technology becomes available 
or as the clearing agency modifies the safeguarding requirements within 
the policies and procedures. The Commission believes these 
responsibilities would impose an ongoing annual cost per clearing 
agency of approximately $56,942, corresponding to an annual aggregate 
cost to all clearing agencies of approximately $7,990,544.\298\
---------------------------------------------------------------------------

    \298\ This figure was calculated as follows: Compliance Attorney 
at 4 hours per business day x 260 business days per year = 1,040 
hours per year at $423 per hour + ((Computer Operations Department 
Manager for 40 hours per year at $367 per hour) + (Senior Programmer 
for 40 hours per year at $304 per hour) + (Senior Risk Management 
Specialist at 8 hours per year at $409 per hour)) = $470,032 x 17 
respondent clearing agencies = $7,990,544. See supra note 258.
---------------------------------------------------------------------------

D. Exemption From Clearing Agency Definition

    The Commission is proposing new Rule 17Ad-24 which would exempt 
from the definition of clearing agency, as defined in Section 
3(a)(23)(A) of the Exchange Act, certain registered security-based swap 
dealers and security-based swap execution facilities.
1. Benefits
    The proposed rule described in this section would provide for the 
exclusion of certain registered security-based swap dealers and 
registered security-based swap execution facilities from the definition 
of a clearing agency. The proposed rule is intended to avoid subjecting 
these entities, where appropriate, to multiple registrations when doing 
so would impose overlapping or duplicative requirements with marginal 
benefits or no benefits to safeguarding securities and funds and 
protecting investors.
2. Costs
    The Commission anticipates any costs associated with the proposed 
rule are likely to be minimal. Registered security-based swap dealers 
and registered security-based swap execution facilities that perform 
certain limited clearing agency functions could rely on the proposed 
exemption upon determining that their clearing agency

[[Page 14532]]

functions are within the scope of the rule.

E. Amendment of 17Ab2-1 Registration of Clearing Agencies

    Proposed Rule 17Ab2-1 would provide for amendments to Section 
17Ab2-1 of the Exchange Act and extends certain timeframes associated 
with the registration of clearing agencies.
1. Benefits
    A modernized temporary registration process can serve as a useful 
tool by giving the Commission the option to examine a clearing agency 
after it becomes operational, but in advance of its registration being 
final. For example, a newly formed security-based swap clearing agency 
may only be able to provide materials regarding its anticipated 
activities when completing its CA-1 registration form. However, there 
may be value in examining the security-based swap clearing agency once 
it becomes operational. This has the benefit of informing the 
Commission by observations made through examinations and/or monitoring 
of active operations.
2. Costs
    The amendments to the Rule 17Ab2-1 relate specifically to the 
operations of the Commission and the timing of its ability to grant 
temporary registrations for clearing agencies. As a result, the 
Commission preliminarily believes that the proposed amendments to Rule 
17Ab2-1 are unlikely to impose costs to clearing agencies other than 
those that currently exist.

F. Procedures To Identify and Address Conflicts of Interest

    Proposed Rule 17Ad-25 would require registered clearing agencies to 
establish, implement, maintain and enforce written policies reasonably 
designed to identify and address existing or potential conflicts of 
interest and minimize conflicts of interest in decision-making at the 
clearing agency.
1. Benefits
    Requiring a clearing agency to create written policies and 
procedures designed to identify conflicts of interest would help a 
clearing agency evaluate its particular organization and activities and 
determine areas that might undermine the clearing agency's core 
business of clearing and settling securities transactions. A documented 
plan provides a clear set of guidelines that can focus the clearing 
agency's evaluation and ensure consistency in the way those evaluations 
are performed. Similarly, if conflicts are identified, the policies and 
procedures offer a standard method of approaching those conflicts to 
make sure they are addressed. The procedures would also provide a 
documented plan against which the Commission could evaluate a clearing 
agency's efforts to mitigate conflicts and provide the Commission with 
a better understanding of those areas of operation and organization 
about which a clearing agency may be particularly concerned.
2. Costs
    Creating written policies and procedures under proposed Rule 17Ad-
25 that are reasonably designed to identify and address conflicts of 
interest would necessitate an evaluation by each clearing agency of the 
areas in its operation that are likely to be susceptible to conflicts 
of interest. This review is an exercise likely to require collaboration 
between the board of directors of the clearing agency and senior 
management given that many of the potential conflicts are likely to 
revolve around the participant admissions and voting rights practices 
of the clearing agency. After the review, the Commission anticipates 
that the compliance or legal staff of the clearing agency would be 
assigned to draft policies and procedures.
    As discussed in section V.D.4., the Commission preliminarily 
believes that there are analogous policies and procedures requirements 
for Regulation NMS and in the proposed requirements for security-based 
swap data repositories that are informative of the burdens and related 
costs to clearing agencies under proposed Rule 17Ad-25. The Commission 
believes that the one-time cost to research and create the policies and 
procedures would be approximately $191,654 for each clearing agency, 
corresponding to a one-time aggregate cost to all clearing agencies of 
approximately $3,258,118.\299\ Costs would also be incurred by the 
clearing agency to monitor and enforce the policies and procedures. The 
Commission preliminarily believes this would impose an annual cost of 
approximately $38,400 per clearing agency, corresponding to an annual 
aggregate burden to all clearing agencies of approximately 
$652,800.\300\
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    \299\ This figure was calculated as follows: ((Assistant General 
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77 
hours at $320 per hour) + (Computer Operations Department Manager 
for 23 hours at $367 per hour) + (Senior Business Analyst for 23 
hours at $232 per hour)) = $75,827 x 2 policies and procedures + 
$40,000 in one-time outside legal costs = $191,654 x 17 respondent 
clearing agencies = $3,258,118. See supra notes 261 and 262.
    \300\ This figure was calculated as follows: Compliance Attorney 
for 60 hours at $320 per hour = $19,200 x 2 policies and procedures 
= $38,400 x 17 respondent clearing agencies = $652,800. See supra 
note 263.
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G. Standards for Board or Board Committee Directors

    Proposed Rule 17Ad-26 would set forth governance standards that 
clearing agencies would be required to establish with respect to their 
board members and board committee directors. These standards would 
include at least the following areas: (i) A clear articulation of the 
roles and responsibilities of directors serving the clearing agency's 
board and any board committees; (ii) director qualifications providing 
criteria for expertise in the securities industry, clearance and 
settlement of securities transactions, and financial risk management; 
(iii) disqualifying factors concerning serious legal misconduct, 
including violations of the Federal securities laws; and (iv) policies 
and procedures for the periodic review by the board or a board 
committee of the performance of its individual members.
1. Benefits
    Clearing agencies are at the heart of the settlement process. 
Moreover, because their activities are subject to significant economies 
of scale, many are sole providers of clearing and settlement services 
to the market they serve. Therefore, their performance is a critical 
determinant of the safety and efficiency of those markets. No single 
set of governance arrangements is appropriate for all clearing agencies 
within the various securities markets and regulatory schemes. However, 
an effectively governed clearing agency should meet certain key minimum 
requirements. Among these are delivering sound risk management; 
ensuring a clear separation between reporting lines for risk management 
and other clearing agency operations, meeting public interest 
requirements, identifying those principally responsible for achieving 
the clearing agencies governance objectives, and disclosing the extent 
to which these objectives have been met.
    Requiring registered clearing agencies to establish standards for 
their board and board committee members helps to ensure that well-
qualified individuals contribute to effective governance of a clearing 
agency. Board members who can provide guidance by drawing on expertise 
in the securities industry, clearance and settlement, and risk 
management are well positioned to

[[Page 14533]]

make decisions that account for the positions of the various 
participants in the market the clearing agency serves as well as to 
balance those perspectives with the goals of stability and efficiency 
of the clearing agency. In the interest of promoting informed and 
balanced decision making in governance, requiring each clearing agency 
to establish governance standards that include disqualifying factors 
concerning serious legal misconduct, including violations of the 
Federal securities laws, would help clearing agencies evaluate whether 
persons who have been found to have violated the securities laws, or 
other similar laws or statutes, may not be fit to serve on the clearing 
agency's board or board committees.
    Proposed Rule 17Ad-26 would also benefit the clearing agency and 
its participants by creating a degree of certainty in the role and 
responsibility of each director and in defining instances appropriate 
for removal of a director. The requirement for a clear articulation of 
the role and responsibility of each director focuses the governance 
resources of the clearing agency and provides commonly understood 
boundaries with respect to what is expected of each director. Clearly 
articulating those expectations can help the directors understand how 
to make individual contributions to the governance of the clearing 
agency as well as the ways in which they are expected to work with one 
another to govern the clearing agency effectively.
    Finally, requiring clearing agencies to establish policies and 
procedures for the periodic review by the board or a board committee of 
the performance of its individual members would support prompt and 
accurate clearance and settlement because directors play a vital role 
in the decision-making processes of the clearing agency. These reviews 
would promote focused analysis on the contributions that directors make 
to the clearing agency and how those contributions are particularly 
valuable or could be adjusted or improved to better support the 
clearing agency's ability to operate in effectively.
2. Costs
    Proposed Rule 17Ad-26 would set forth governance standards 
applicable to a clearing agency's board members and board committee 
directors. The rule would require clearing agencies to adopt procedural 
frameworks that inform the governance of the clearing agency.
    Proposed Rule 17Ad-26 would require a clearing agency to incur 
research and development costs associated with creating standards for 
its board members and board committee members. The Commission 
anticipates that there would likely need to be a coordinated effort 
between different business units within a clearing agency to develop 
these standards. As discussed in section V.D.5., the Commission 
preliminarily believes that there are analogous policies and procedures 
requirements for Regulation NMS and in the proposed requirements for 
security-based swap data repositories that are informative of the 
burdens and related costs for clearing agencies under proposed Rule 
17Ad-26. The Commission believes that the one-time cost to a clearing 
agency imposed by the rule would be approximately $95,827, 
corresponding to a one-time aggregate cost to all clearing agencies of 
approximately $1,629,059.\301\
---------------------------------------------------------------------------

    \301\ This figure was calculated as follows: ((Assistant General 
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77 
hours at $320 per hour) + (Computer Operations Department Manager 
for 23 hours at $367 per hour) + (Senior Business Analyst for 23 
hours at $232 per hour)) = $75,827 + $20,000 in one-time outside 
legal costs = $95,827 x 17 respondent clearing agencies = 
$1,629,059. See supra notes 266 and 267.
---------------------------------------------------------------------------

    Also involved would be the time of the clearing agency's employees 
that would be devoted to maintaining application of the standards to 
the incumbent directors, evaluating new directors and evaluating the 
incumbent directors on an annual basis. For example, the Commission 
preliminarily believes that a compliance attorney at a clearing agency 
may be asked to update the clearing agency's standards to clearly 
reflect the roles and responsibilities of the clearing agency's 
directors. Similarly, time of a compliance attorney may be needed to 
amend the standards with respect to director qualifications and 
disqualifying factors for service if the clearing agency decides to 
make changes to those aspects of its governance standards. The 
Commission preliminarily believes that the annual cost to each clearing 
agency would be approximately $19,200, corresponding to an annual 
aggregate cost to all clearing agencies of approximately $326,000.\302\ 
In addition, the Commission preliminarily believes that third party 
facilitation of the annual review of the incumbent board members would 
also impose an ongoing annual cost of $6,000 for each respondent, which 
corresponds to a total annual cost of $102,000 in the aggregate for all 
respondent clearing agencies.\303\ An employee at the clearing agency 
may be expected to help arrange and coordinate such a third-party 
review of the clearing agency's board members, which would also factor 
into the ongoing, annual cost to a clearing agency.
---------------------------------------------------------------------------

    \302\ This figure was calculated as follows: Compliance Attorney 
for 60 hours at $320 per hour = $19,200 x 17 respondent clearing 
agencies = $326,400. See supra note 268.
    \303\ This figure was calculated as follows: One Consultant for 
20 hours at $600 per hour = $12,000 x 17 respondent clearing 
agencies = $204,000. See supra note 269.
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H. Proposed Rule 3Cj-1 Designation of Chief Compliance Officer

    Proposed Rule 3Cj-1 would incorporate the requirements of Section 
3Cj of the Exchange Act and impose additional requirements. Proposed 
Rule 3Cj-1 would require each registered clearing agency to designate a 
CCO. Under proposed Rule 3Cj-1(b), the CCO would be responsible for, 
among other matters, establishing policies and procedures for the 
remediation of non-compliance issues identified by the CCO and 
establishing and following appropriate procedures for the prompt 
handling of management response, remediation, retesting, and closing of 
non-compliance issues.
    Under Proposed Rule 3Cj-1(c), the CCO would also be responsible for 
preparing and signing an annual compliance report that contains a 
description of (i) the compliance of the clearing agency with respect 
to the Federal securities laws and the rules and regulations 
thereunder, and (ii) each policy and procedure of the clearing agency 
of the compliance officer (including the code of ethics and conflict of 
interest policies of the registered clearing agency). This compliance 
report must accompany each appropriate financial report of the clearing 
agency that is required to be furnished to the Commission pursuant to 
the Exchange Act and the rules thereunder and include a certification 
that, under penalty of law, the compliance report is accurate and 
complete.
    Additionally, the compliance report would be required to: (i) Be 
submitted to the board of directors and audit committee (or equivalent 
bodies) of the clearing agency promptly after the date of execution of 
the required certification and prior to filing of the report with the 
Commission; (ii) be filed with the Commission in a tagged data format 
in accordance with the instructions contained in the EDGAR Filer 
Manual, as described in Rule 301 of Regulation S-T; and (iii) be filed 
with the Commission within 60 days after the end of the fiscal year 
covered by such report.
1. Benefits
    Proposed Rule 3Cj-1 is designed to ensure that clearing agencies 
comply with Federal securities laws, including the Exchange Act and the 
rules and

[[Page 14534]]

regulations promulgated thereunder. Although entities currently 
operating as clearing agencies already may have CCOs in place, Section 
3C(j) of the Exchange Act and proposed Rule 3Cj-1 would make it a 
required practice.
    The designation of a CCO would help ensure that each clearing 
agency complies with the written policies and procedures it adopts. The 
Commission expects requiring this safeguard would in turn facilitate 
accurate data reporting by clearing agencies to the Commission and 
improve the Commission's understanding of operations across all the 
clearing agencies it oversees.
    Proposed Rule 3Cj-1 would focus on creating a compliance structure 
that is transparent and minimizes conflicts. Section 3C(j) of the 
Exchange Act provides flexibility in permitting the CCO to report 
either to the clearing agency's board or to a senior officer. Because 
the Commission is concerned that a clearing agency's commercial 
interests might discourage a clearing agency's CCO from making 
forthright disclosure about compliance failures of the clearing agency, 
the proposed rule would insulate the CCO from management pressures by 
preventing a senior officer of a clearing agency from removing the CCO 
or determining the CCO's compensation without the approval of a 
majority of the clearing agency's board. This would provide the benefit 
of aligning the CCO's position within the clearing agency with having 
the CCO serve as a mechanism that freely encourages compliance.
    The reliability of clearance and settlement services depends on the 
integrity of a clearing agency's operations. As a result of the 
proposed rule, the accuracy, reliability, and integrity of the clearing 
agency would be less likely to be harmed by violations of the 
securities laws because experience has shown that strong internal 
compliance programs lower the likelihood of securities laws violations 
and enhance the likelihood that any violations that do occur will be 
detected and corrected. The designation of a CCO, who will, among other 
things, monitor the clearing agency's compliance with the Exchange Act 
(including Section 17A) and the rules and regulations thereunder and 
with the relevant clearing agency policies and procedures, will help 
ensure that each clearing agency complies with the written policies and 
procedures it adopts.
2. Costs
    As discussed in section V.D.6., the Commission preliminarily 
believes that there are analogous policies and procedures requirements 
for Regulation NMS and in the proposed requirements for security-based 
swap data repositories that are informative of the burdens and related 
costs for clearing agencies under proposed Rule 3Cj-1.
    The establishment of a designated CCO and compliance with the 
accompanying responsibilities of a CCO would impose certain costs on 
each clearing agency. The Commission estimates that the average initial 
costs associated with establishing policies and procedures for the 
remediation of non-compliance issues identified by the CCO and 
establishing and following appropriate procedures for the handling, 
management response, remediation, retesting, and closing of non-
compliance issues would require approximately 420 hours of employee 
time and approximately $40,000 for each clearing agency, and the 
average ongoing paperwork cost would be 120 hours for each clearing 
agency. In addition, each clearing agency would be required to hire a 
CCO to comply with the proposed rules, at an annual cost of 
approximately $761,400 for each clearing agency.\304\ Therefore, the 
aggregate initial estimated dollar cost per year to each clearing 
agency would be approximately $191,654 for each respondent clearing 
agency, corresponding to an aggregate initial estimated cost to all 
respondent clearing agencies of approximately $3,258,118 \305\ and the 
aggregate ongoing estimated dollar cost per year would be approximately 
$13,596,600 \306\ to comply with the proposed rule.
---------------------------------------------------------------------------

    \304\ This figure was calculated as follows: Chief Compliance 
Officer for 1,800 hours at $423 per hour = $761,400. See supra note 
279 regarding hourly rates for professionals taken from SIFMA's 
Management & Professional Earnings in the Securities Industry 2010, 
and modified by the Commission's staff.
    \305\ This figure was calculated as follows: ((Assistant General 
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77 
hours at $320 per hour) + (Computer Operations Department Manager 
for 23 hours at $367 per hour) + (Senior Business Analyst for 23 
hours at $232 per hour)) = $75,827 x 2 policies and procedures + 
$40,000 in one-time outside legal costs = $191,654 x 17 respondent 
clearing agencies = $3,258,118. See supra notes 275 and 277.
    \306\ This figure was calculated as follows: Compliance Attorney 
for 60 hours at $320 per hour = $19,200 x 2 policies and procedures 
= $38,400 + $761,400 for the annual salary of a Chief Compliance 
Officer = $799,800 x 17 respondent clearing agencies = $13,596,600. 
See supra notes 276 and 304.
---------------------------------------------------------------------------

    The Commission estimates that the average ongoing paperwork cost 
associated with preparing, signing and submitting annual compliance 
reports pursuant to proposed Rule 3Cj-1(c)(iii) and (iv) would be 54 
hours for each respondent clearing agency, corresponding to an annual 
cost of $17,036 for each clearing agency and an aggregate annual cost 
of $289,612 for all respondent clearing agencies.\307\
---------------------------------------------------------------------------

    \307\ This figure was calculated as follows: ((Compliance 
Attorney for 50 hours at $320 per hour) + (Senior Systems Analyst 
for 4 hours at $259 per hour)) = $17,036 x 17 respondent clearing 
agencies = $289,612. See supra note 278.
---------------------------------------------------------------------------

    The Commission believes that currently-existing clearing agencies 
already maintain compliance programs that are overseen by a CCO or an 
individual who effectively serves as a CCO. In addition, such clearing 
agencies may prepare compliance reports presented to senior management 
and/or the clearing agency's board and board committees as part of 
their current business practice. Therefore, the Commission expects that 
clearing agencies with substantial commitments to compliance would 
probably incur only minimal costs in connection with the adoption of 
the proposed rule. However, for a clearing agency that does not already 
prepare these types of annual compliance reports as part of its 
compliance program, the requirements under proposed Rule 3Cj-1 would 
likely require the labor of clearing agency staff and impose direct 
costs on the clearing agency as described above.

I. Request for Comment

    The Commission solicits comments on the benefits and costs related 
to proposed Rules 17Ad-22, 17Ad-23, 17Ad-24, 17Ad-25, 17Ad-26, 17Ab2-1, 
3Cj-1 and 17j-1. The Commission specifically requests comments on the 
initial and ongoing costs associated with these rules and the costs 
associated with any personnel that may be necessary to support 
compliance with the rules. Are there additional costs that the 
Commission should consider? Are there alternatives that the Commission 
should consider? Do the estimates accurately reflect the costs that are 
discussed? Please describe and, to the extent practicable, quantify the 
costs associated with any comments that are submitted.
    The Commission requests data to quantify the costs and the value of 
the benefits discussed above. The Commission seeks estimates of these 
costs and benefits, as well as any costs and benefits not addressed, 
which may result from the adoption of the proposed rules. Commenters 
should provide analysis and empirical data to support their views.

[[Page 14535]]

VII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 23(a) of the Exchange Act \308\ requires the Commission, 
when making rules and regulations under the Exchange Act, to consider 
the effect a new rule would have on competition. Section 23(a)(2) 
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.\309\ Section 3(f) of the Exchange Act 
\310\ requires the Commission, when engaging in rulemaking that 
requires it to consider whether an action is necessary or appropriate 
in the public interest, to consider, in addition to the protection of 
investors, whether the action would promote efficiency, competition, 
and capital formation.
---------------------------------------------------------------------------

    \308\ 15 U.S.C. 78w(a).
    \309\ 15 U.S.C. 78w(a)(2).
    \310\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The economic effects of the proposed rules were discussed in detail 
in the costs and benefits section.\311\ These effects encompassed 
effects on economic efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \311\ See discussion supra at Section VI. Consideration of Costs 
and Benefits and accompanying subsections A. through E.
---------------------------------------------------------------------------

    To reiterate, proposed Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 
and the proposed amendments to Rule 17Ab2-1 would set standards for the 
operation and governance of registered clearing agencies. These 
proposed rules are intended to further the purposes of the Exchange Act 
and to promote transparency and accountability consistent with the 
stated goals of the Dodd-Frank Act.\312\
---------------------------------------------------------------------------

    \312\ See supra note 2 and accompanying text.
---------------------------------------------------------------------------

    Evidence from the securities markets suggests that clearing 
agencies over the long-run tend to converge to a small number of 
entities or even a single entity. In part, the Commission preliminarily 
believes that this is because clearing activities are characterized by 
high start-up costs and low marginal costs so that there are large 
economies of scale. For example, currently all trades executed on the 
eight U.S. based options exchanges are cleared at The Options Clearing 
Corporation, and trades executed on the U.S. equity markets, composed 
of exchanges, alternative trading platforms, and OTC trading, are 
cleared at National Securities Clearing Corporation. In this same way, 
it is possible that a single security-based swap clearing agency may 
prove itself through market forces to be the most-efficient mechanism 
to serve all security-based swap clearing participants by delivering 
the lowest-cost services.
    As noted above, the current market structure for clearing agencies 
includes four registered clearing agencies and four entities operating 
pursuant to the CDS Clearing Exemption Orders that are eligible to 
become registered security-based swap clearing agencies pursuant to the 
Deemed Registered Provision of the Dodd-Frank Act. In addition, the 
Commission preliminarily believes there may be entities using 
instrumentalities of interstate commerce to perform collateral 
management, trade matching, Tear Up Services or similar security-based 
swap lifecycle event services that consequently may trigger the 
clearing agency registration requirement.\313\
---------------------------------------------------------------------------

    \313\ See supra note 101 and accompanying text (noting that this 
list of services that may trigger clearing agency registration is 
not exhaustive and urging every security-based swap lifecycle event 
service provider to consider whether their function places them 
within the clearing agency definition).
---------------------------------------------------------------------------

    The intent of the proposed rules concerning standards for clearing 
agency operations and governance standards of clearing agencies is to 
promote the prompt and accurate clearance and settlement of securities 
transactions, including security-based swap transactions, by requiring 
certain minimum standards at clearing agencies. The Commission 
preliminarily believes that these requirements would ensure resilient 
and cost-effective clearing agency operations as well as promote 
transparent and effective clearing agency governance that would 
consequently support confidence among market participants in clearing 
agencies' ability to serve as efficient mechanisms for clearance and 
settlement and to facilitate capital formation.
    Additionally, the Commission believes that proposed Rule 17Aj-1 
would support efficiency and the capital formation process by promoting 
security-based swap price transparency so that market participants have 
access to more information to value their security-based swap 
positions. Under the Dodd-Frank Act, all security-based swap 
transactions are required to be reported to a security-based swap data 
repository, or, if no such data repository exists, to the 
Commission.\314\ Consequently, security-based swap data repositories 
consolidate post-trade information about security-based swaps. The 
Commission preliminarily believes this is helpful for analyzing the 
security-based swap market as a whole and identifying its risks.\315\ 
Similarly, security-based swap execution facilities provide important 
pre-trade information about security-based swaps. In addition, there 
are also financial services information firms that provide certain 
security-based swap pricing data.
---------------------------------------------------------------------------

    \314\ See Public Law 111-203, Sec. Sec.  763(i) and 766(a) 
(adding Exchange Act Sections 13(m)(1)(G) and 13A(A)(1), 
respectively). The Dodd-Frank Act amends the CEA to provide for a 
similar regulatory framework with respect to transactions in swaps 
regulated by the CFTC.
    \315\ See Exchange Act Release No. 63347 (November 19, 2010), 75 
FR 77306 (December 10, 2010) (discussing in Section II, Role, 
Regulation, and Business Models of SDRs, that the enhanced 
transparency provided by an SDR is important to help regulators and 
others monitor the build-up and concentration of risk exposures in 
the security-based swap market).
---------------------------------------------------------------------------

    However, the Commission preliminarily believes that the pricing and 
valuation information generated by security-based swap clearing 
agencies adds value beyond these pre- and post-trade pricing sources as 
well as information that may be available from firms that provide 
financial services data. This is because proposed Rule 17Aj-1 would 
require a security-based swap clearing agency that performs CCP 
services to produce end-of-day settlement prices for all security-based 
swaps that it clears. This end-of-day pricing information represents 
pricing during the life of a security-based swap that is unique because 
it is not available from pre- and post-trade sources.
    The Commission also preliminarily believes that this information is 
distinct from pricing information made available by firms that sell 
certain security-based swap pricing date, because each clearing 
agency's prices are generated daily while pricing information available 
through other sources may rely on various methods to derive a price--
for instance an average of the bid and ask for a particular security-
based swap or an executed trade price that would otherwise be stale but 
that has been adjusted through certain modeling practices to estimate a 
current price. Therefore, the Commission preliminarily believes that 
the public availability of these end-of-day settlement prices, as well 
as any other pricing information the security-based swap clearing 
agency publishes or distributes with respect to security-based swaps 
can provide helpful transparency to market participants about the 
current value of their security-based swap positions. Accordingly, the 
Commission preliminarily believes that requiring this information to be 
made publicly available on terms that are fair, reasonable and not 
unreasonably discriminatory improves fairness, efficiency, and market 
competition by

[[Page 14536]]

providing availability to pricing information that may otherwise be 
difficult for some market participants to obtain and that, among other 
benefits, would allow those market participants to be better-informed 
about the fair value of their security-based swap positions and to try 
to more efficiently manage the utility of those positions within their 
portfolio.
    The Commission requests comment on the possible effects of proposed 
Rules 17Ad-22, 17Ad-23, 17Ad-24, 17Ad-25, 17Ad-26, 17Aj-1, 3Cj-1 and 
the amendments to Rule 17Ab2-1 on efficiency, competition, and capital 
formation. The Commission requests that commenters provide views and 
supporting information regarding any such effects. The Commission 
recognizes that such effects may be difficult to quantify. The 
Commission seeks comment on possible anti-competitive effects of the 
proposed rules not already identified. The Commission also requests 
comments regarding the competitive effects of pursuing alternative 
regulatory approaches that are consistent with Sections 763 and 805 of 
the Dodd-Frank Act and Section 17A of the Exchange Act. In addition, 
the Commission requests comment on how the other provisions of the 
Dodd-Frank Act for which Commission rulemaking is required will 
interact with and influence the competitive effects of the proposed 
rules under proposed Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 and 
the amendments to Rule 17Ab2-1.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\316\, the Commission must advise the OMB as 
to whether the proposed rule constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in: (i) An annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (ii) 
a major increase in costs or prices for consumers or individual 
industries; or (iii) significant adverse effect on competition, 
investment or innovation. If a rule is ``major,'' its effectiveness 
will generally be delayed for sixty days pending Congressional review.
---------------------------------------------------------------------------

    \316\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential impact of proposed 
Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 and the amendments to Rule 
17Ab2-1 on the economy on an annual basis, any potential increase in 
costs or prices for consumers or individual industries, and any 
potential effect on competition, investment or innovation. Commenters 
are requested to provide empirical data and other factual support for 
their view to the extent possible.

IX. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \317\ requires the 
Commission, in promulgating rules, to consider the impact of those 
rules on small entities. Section 603(a) \318\ of the Administrative 
Procedure Act,\319\ 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.'' \320\ Section 605(b) of the RFA states that this 
requirement shall not apply to any proposed rule which, if adopted, 
would not have a significant economic impact on a substantial number of 
small entities.\321\
---------------------------------------------------------------------------

    \317\ 5 U.S.C. 601 et seq.
    \318\ 5 U.S.C. 603(a).
    \319\ 5 U.S.C. 551 et seq.
    \320\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' The Commission has 
adopted definitions for the term ``small entity'' for the purposes 
of rulemaking in accordance with the RFA. These definitions, as 
relevant to this proposed rulemaking, are set forth in Rule 0-10, 17 
CFR 240.0-10.
    \321\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

A. Registered Clearing Agencies

    Proposed Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 and amended 
Rule 17Ab2-1 would apply to all registered clearing agencies and set 
standards for the operation and governance of such clearing agencies. 
For the purposes of Commission rulemaking and as applicable to proposed 
Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 and amended Rule 17Ab2-1, 
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.\322\ Under the standards adopted 
by the Small Business Administration, small entities in the finance 
industry include the following: (i) For entities engaged in investment 
banking, securities dealing and securities brokerage activities, 
entities with $6.5 million or less in annual receipts; (ii) for 
entities engaged in trust, fiduciary and custody activities, entities 
with $6.5 million or less in annual receipts; and (iii) funds, trusts 
and other financial vehicles with $6.5 million or less in annual 
receipts.\323\
---------------------------------------------------------------------------

    \322\ 17 CFR 240.0-10(d).
    \323\ 13 CFR 121.201, Section 52.
---------------------------------------------------------------------------

    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission and the four entities 
clearing security-based swaps pursuant to the CDS Clearing Exemption 
Orders,\324\ the Commission preliminarily believes that such entities 
exceed the thresholds defining ``small entities'' set out above. While 
other clearing agencies may emerge and become eligible to operate as 
clearing agencies and while other security-based swap lifecycle event 
service providers may be required to register as clearing agencies, the 
Commission preliminarily does not believe that any such entities would 
be ``small entities'' as defined in Exchange Act Rule 0-10.\325\ 
Furthermore, we believe it is unlikely that any clearing agencies, 
security-based swap clearing agencies or security-based swap lifecycle 
event services providers would have annual receipts of less than $6.5 
million. Accordingly, the Commission believes that any registered 
clearing agencies will exceed the thresholds for ``small entities'' set 
forth in Exchange Act Rule 0-12.
---------------------------------------------------------------------------

    \324\ As of July 21, 2010, the following four clearing agencies 
are eligible to clear security-based swaps as a result of having 
been granted temporary exemptive orders to operate as clearing 
agencies for CDS: CME, Eurex, ICE Trust and ICE Clear Europe.
    \325\ See 17 CFR 240.0-10(d). The Commission based this 
determination on its review of public sources of financial 
information about existing CCPs serving the OTC derivatives market 
and lifecycle event service providers.
---------------------------------------------------------------------------

B. Certification

    In the Commission's preliminary view, proposed Rules 17Ad-22 
through 17Ad-26, 17Aj-1, 3Cj-1 and amended Rule 17Ab2-1 would not have 
a significant economic impact on a substantial number of small entities 
for the purposes of the RFA. For the reasons described above, the 
Commission certifies that the proposed rules would not have a 
significant economic impact on a substantial number of small entities. 
The Commission requests comment regarding this certification. The 
Commission requests that commenters describe the nature of any impact 
on small entities, including clearing agencies, other counterparties to 
security-based swap transactions and

[[Page 14537]]

security-based swap lifecycle event service providers, and provide 
empirical data to support the extent of the impact.

X. Statutory Basis and Proposed Rule Text

    Pursuant to the Exchange Act, particularly, Sections 17A(d) 
thereof, 15 U.S.C. 78q-1(d), Sections 17A(i), 17A(j) and 3C(j) thereof, 
Public Law 111-203, Sec.  763, 124 Stat. 1841 (2010), and Sections 
30(b) and 30(c) thereof, 15 U.S.C. 78dd(b) and (c), and Section 
805(a)(2) of the Clearing Supervision Act, 12 U.S.C. 5464(a)(2), the 
Commission proposes: (1) New Rules 17Ad-22(a), 17Ad-22(d), 17Ad-23, 
17Ad-24, 17Ad-25, 17Ad-26 and 3Cj-1, which would govern clearing 
agencies; (2) new Rules 17Ad-22(b) and (c), which would govern clearing 
agencies that perform central counterparty services; (3) new Rule 17Aj-
1, which would govern security-based swap clearing agencies that 
provide central counterparty services; and (4) to amend Rule 17Ab2-1.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE

    1. The authority citation for Part 240 is amended by adding the 
following citations in numerical order to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-4, 78p, 78q, 78q-1, 
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350; and 12 
U.S.C. 5221(e)(3), unless otherwise noted.
* * * * *
    Section 240.3Cj-1 is also issued under Pub. L. 111-203, Sec.  
763, 124 Stat. 1841 (2010).
* * * * *
    Sections 240.17Ad-22 through 240.17Ad-26 are also issued under 
12 U.S.C. 5464(a)(2).
* * * * *
    2. Section 240.3Cj-1 is added to read as follows:


Sec.  240.3Cj-1  Designation of chief compliance officer.

    (a) In general. Each clearing agency shall designate a chief 
compliance officer. The compensation and removal of the chief 
compliance officer shall require the approval of a majority of the 
clearing agency's board.
    (b) Duties. The chief compliance officer shall:
    (1) Report directly to the board of directors or to the senior 
officer of the clearing agency;
    (2) In consultation with its board, a body performing a function 
similar thereto, or the senior officer of the registered clearing 
agency, resolve any conflicts of interest that may arise;
    (3) Be responsible for administering each policy and procedure that 
is required to be established pursuant to section 3C of the Act (15 
U.S.C. 78c-3) and the rules and regulations thereunder;
    (4) Ensure compliance with the Act and the rules and regulations 
thereunder;
    (5) Establish policies and procedures for the prompt remediation of 
any non-compliance issues identified by the chief compliance officer; 
and
    (6) Establish and follow appropriate procedures for the prompt 
handling, management response, remediation, retesting, and closing of 
non-compliance issues.
    (c) Annual Reports--(1) In general. The chief compliance officer 
shall annually prepare and sign a report that contains a description 
of:
    (i) The compliance of the clearing agency with respect to the 
Federal securities laws and the rules and regulations thereunder; and
    (ii) Each policy and procedure of the clearing agency of the 
compliance officer (including the code of ethics and conflict of 
interest policies of the registered clearing agency).
    (2) Requirements. An annual compliance report under this section 
shall:
    (i) Accompany each appropriate financial report of the clearing 
agency that is required to be furnished to the Commission pursuant to 
the Act and the rules thereunder;
    (ii) Include a certification that, under penalty of law, the 
compliance report is accurate and complete;
    (iii) Be submitted to the board of directors and audit committee 
(or equivalent bodies) of the clearing agency promptly after the date 
of execution of the required certification and prior to filing of the 
report with the Commission; and
    (iv) Be filed with the Commission in a tagged data format in 
accordance with the instructions contained in the EDGAR Filer Manual, 
as described in Rule 301 of Regulation S-T (17 CFR 232.301).
    (v) Be filed with the Commission within 60 days after the end of 
the fiscal year covered by such report.
    (d) For purposes of this section, references to senior officer 
shall include the chief executive officer, or other equivalent officer.
    3. Section 240.17Ab2-1 is amended by revising paragraph (c) to read 
as follows:


Sec.  240.17Ab2-1  Registration of clearing agencies.

* * * * *
    (c)(1) The Commission, upon the request of a clearing agency or 
upon the election of the Commission, may grant registration of the 
clearing agency in accordance with sections 17A(b) and 19(a)(1) of the 
Act for a specific period of time and may exempt, other than for 
purposes of section 17A(g) of the Act, the registrant from one or more 
of the requirements as to which the Commission is directed to make a 
determination pursuant to paragraphs (A) through (I) of section 
17A(b)(3) of the Act, provided that any such registration shall be 
effective only for twenty-four months from the date the registration is 
made effective (or such longer period as the Commission may provide by 
order).
    (2) In the case of any clearing agency registered in accordance 
with paragraph (c)(1) of this section, not later than fifteen months 
from the date such registration is made effective (or such longer 
period as the Commission may provide by order) the Commission either 
will grant registration in accordance with sections 17A(b) and 19(a)(1) 
of the Act, without, as applicable, exempting the registrant from one 
or more of the requirements as to which the Commission is directed to 
make a determination pursuant to subparagraphs (A) through (I) of 
section 17A(b)(3) of the Act or without limiting the duration of the 
registration, or will institute proceedings in accordance with section 
19(a)(1)(B) of the Act to determine whether registration should be 
denied at the expiration of the registration granted in accordance with 
paragraph (c)(1) of this section.
    4. Section 240.17Ad-22 is added to read as follows:


Sec.  240.17Ad-22  Standards for clearing agencies.

    (a) Definitions--(1) Central counterparty means a clearing agency 
that interposes itself between the counterparties to securities 
transactions, acting functionally as the buyer to every seller and the 
seller to every buyer.
    (2) Central securities depository services means services of a 
clearing agency that is a securities depository as described in section 
3(a)(23) of the Act.

[[Page 14538]]

    (3) Participant as used in paragraphs (b)(3) and (d)(14) of this 
section means that if a participant controls another participant or is 
under common control with another participant then the affiliated 
participants shall be collectively deemed to be a single participant 
for purposes of that subparagraph.
    (4) Normal market conditions as used in paragraphs (b)(1) and (2) 
of this section means conditions in which the expected movement of the 
price of cleared securities would produce changes in a clearing 
agency's exposures to its participants that would be expected to breach 
margin requirements or other risk control mechanisms only one percent 
of the time.
    (5) Net capital as used in paragraph (b)(7) of this section means 
net capital as defined in Rule 15c3-1 under the Act for broker-dealers 
or any similar risk adjusted capital calculation for all other 
prospective clearing members.
    (b) A clearing agency that performs central counterparty services 
shall establish, implement, maintain and enforce written policies and 
procedures reasonably designed to:
    (1) Measure its credit exposures to its participants at least once 
a day and limit its exposures to potential losses from defaults by its 
participants in normal market conditions so that the operations of the 
clearing agency would not be disrupted and non-defaulting participants 
would not be exposed to losses that they cannot anticipate or control.
    (2) Use margin requirements to limit its credit exposures to 
participants in normal market conditions and use risk-based models and 
parameters to set margin requirements and review them at least monthly.
    (3) Maintain sufficient financial resources to withstand, at a 
minimum, a default by the participant to which it has the largest 
exposure in extreme but plausible market conditions; provided that a 
security-based swap clearing agency shall maintain sufficient financial 
resources to withstand, at a minimum, a default by the two participants 
to which it has the largest exposures in extreme but plausible market 
conditions.
    (4) Provide for an annual model validation consisting of evaluating 
the performance of the clearing agency's margin models and the related 
parameters and assumptions associated with such models by a qualified 
person who does not perform functions associated with the clearing 
agency's margin models (except as part of the annual model validation) 
and does not report to a person who performs these functions.
    (5) Provide the opportunity for a person that does not perform any 
dealer or security-based swap dealer services to obtain membership at 
the clearing agency to clear securities for itself or on behalf of 
other persons.
    (6) Have membership standards that do not require that participants 
maintain a portfolio of any minimum size or that participants maintain 
a minimum transaction volume.
    (7) Provide a person that maintains net capital equal to or greater 
than $50 million with the ability to obtain membership at the clearing 
agency, with any net capital requirements being scalable so that they 
are proportional to the risks posed by the participant's activities to 
the clearing agency; provided, however, that the clearing agency may 
provide for a higher net capital requirement as a condition for 
membership at the clearing agency if the clearing agency demonstrates 
to the Commission that such a requirement is necessary to mitigate 
risks that could not otherwise be effectively managed by other measures 
and the Commission approves the higher net capital requirement as part 
of a rule filing or clearing agency registration application.
    (c) Record of financial resources and annual audited financial 
report. (1) Each fiscal quarter (based on calculations made as of the 
last business day of the clearing agency's fiscal quarter), or at any 
time upon Commission request, a clearing agency that performs central 
counterparty services shall calculate and maintain a record, in 
accordance with Sec.  240.17a-1 of this chapter, of the financial 
resources necessary to meet the requirements of paragraph (b)(3) of 
this rule and sufficient documentation to explain the methodology it 
uses to compute such financial resource requirement.
    (2) Each clearing agency shall post on its Web site an annual 
audited financial report. Each financial report shall:
    (i) Be a complete set of financial statements of the clearing 
agency for the most recent two fiscal years of the clearing agency and 
be prepared in accordance with U.S. generally accepted accounting 
principles, except that for a clearing agency that is a corporation or 
other organization incorporated or organized under the laws of any 
foreign country the financial statements may be prepared in accordance 
with U.S. generally accepted accounting principles or International 
Financial Reporting Standards as issued by the International Accounting 
Standards Board;
    (ii) Be audited in accordance with standards of the Public Company 
Accounting Oversight Board by a registered public accounting firm that 
is qualified and independent in accordance with Rule 2-01 of Regulation 
S-X (17 CFR 210.2-01); and
    (iii) Include a report of the registered public accounting firm 
that complies with paragraphs (a) through (d) of Rule 2-02 of 
Regulation S-X (17 CFR 210.2-02).
    (d) Each clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable:
    (1) Provide for a well founded, transparent, and enforceable legal 
framework for each aspect of its activities in all relevant 
jurisdictions.
    (2) Require participants to have sufficient financial resources and 
robust operational capacity to meet obligations arising from 
participation in the clearing agency; have procedures in place to 
monitor that participation requirements are met on an ongoing basis; 
and have participation requirements that are objective, publicly 
disclosed, and permit fair and open access.
    (3) Hold assets in a manner whereby risk of loss or of delay in its 
access to them is minimized; and invest assets in instruments with 
minimal credit, market and liquidity risks.
    (4) Identify sources of operational risk and minimize them through 
the development of appropriate systems, controls, and procedures; 
implement systems that are reliable, resilient and secure, and have 
adequate, scalable capacity; and have business continuity plans that 
allow for timely recovery of operations and fulfillment of a clearing 
agency's obligations.
    (5) Employ money settlement arrangements that eliminate or strictly 
limit the clearing agency's settlement bank risks, that is, its credit 
and liquidity risks from the use of banks to effect money settlements 
with its participants; and require funds transfers to the clearing 
agency to be final when effected.
    (6) Be cost-effective in meeting the requirements of participants 
while maintaining safe and secure operations.
    (7) Evaluate the potential sources of risks that can arise when the 
clearing agency establishes links either cross-border or domestically 
to clear trades, and ensure that the risks are managed prudently on an 
ongoing basis.
    (8) Have governance arrangements that are clear and transparent to 
fulfill the public interest requirements in section 17A of the Act 
applicable to clearing agencies, to support the objectives of owners 
and participants,

[[Page 14539]]

and to promote the effectiveness of the clearing agency's risk 
management procedures.
    (9) Provide market participants with sufficient information for 
them to identify and evaluate the risks and costs associated with using 
its services.
    (10) Immobilize or dematerialize securities certificates and 
transfer them by book entry to the greatest extent possible when the 
clearing agency provides central securities depository services.
    (11) Make key aspects of the clearing agency's default procedures 
publicly available and establish default procedures that ensure that 
the clearing agency can take timely action to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of a participant default.
    (12) Ensure that final settlement occurs no later than the end of 
the settlement day; and require that intraday or real-time finality-be 
provided where necessary to reduce risks.
    (13) Eliminate principal risk by linking securities transfers to 
funds transfers in a way that achieves delivery versus payment.
    (14) Institute risk controls, including collateral requirements and 
limits to cover the clearing agency's credit exposure to each 
participant exposure fully, that ensure timely settlement in the event 
that the participant with the largest payment obligation is unable to 
settle when the clearing agency provides central securities depository 
services and extends intraday credit to participants.
    (15) State to its participants the clearing agency's obligations 
with respect to physical deliveries and identify and manage the risks 
from these obligations.
    5. Section 240.17Ad-23 is added to read as follows:


Sec.  240.17Ad-23  Clearing agency policies and procedures to protect 
the confidentiality of trading information of clearing agency 
participants.

    Each clearing agency shall establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to protect 
the confidentiality of any and all transaction information that the 
clearing agency receives. Such policies and procedures shall include, 
but are not limited to:
    (a) Limiting access to confidential trading information of clearing 
members to those employees of the clearing agency who are operating the 
system or responsible for its compliance with any other applicable laws 
or rules; and
    (b) Standards controlling employees and agents of the clearing 
agency trading for their personal benefit or the benefit of others.
    6. Section 240.17Ad-24 is added to read as follows:


Sec.  240.17Ad-24  Exemption from clearing agency definition for 
certain registered securities based swap dealers and registered 
security-based swap execution facilities.

    A registered security-based swap dealer and a registered security-
based swap execution facility shall be exempt from inclusion in the 
term clearing agency, as defined in section 3(a)(23)(A) of the Act, 
where such registered security-based swap dealer or registered 
security-based swap execution facility would be deemed to be a clearing 
agency solely by reason of functions performed by such institution as 
part of customary dealing activities or providing facilities for 
comparison of data respecting the terms of settlement of securities 
transactions effected on such registered security-based swap execution 
facility, respectively, or solely by reason of acting on behalf of a 
clearing agency or participant therein in connection with the 
furnishing by the clearing agency of services to its participants or 
the use of services of the clearing agency by its participants.
    7. Section 240.17Ad-25 is added to read as follows:


Sec.  240.17Ad-25  Clearing agency procedures to identify and address 
conflicts of interest.

    Each clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to identify 
and address existing or potential conflicts of interest. Such policies 
and procedures must also be reasonably designed to minimize conflicts 
of interest in decision making by the clearing agency.
    8. Section 240.17Ad-26 is added to read as follows:


Sec.  240.17Ad-26  Standards for board or board committee members.

    (a) Each clearing agency shall establish governance standards for 
its board members and board committee members.
    (b) Such standards shall address at least the following areas:
    (1) A clear articulation of the roles and responsibilities of 
directors serving on the clearing agency's board and any board 
committees;
    (2) Director qualifications providing criteria for expertise in the 
securities industry, clearance and settlement of securities 
transactions, and financial risk management;
    (3) Disqualifying factors concerning serious legal misconduct, 
including violations of the Federal securities laws; and
    (4) Policies and procedures for the periodic review by the board or 
a board committee of the performance of its individual members.
    9. Section 240.17Aj-1 is added to read as follows:


Sec.  240.17Aj-1  Dissemination of pricing and valuation information by 
security-based swap clearing agencies that perform services as a 
central counterparty.

    Each security-based swap clearing agency that performs services as 
a central counterparty shall make available to the public, on terms 
that are fair and reasonable and not unreasonably discriminatory, all 
end-of-day settlement prices and any other prices with respect to 
security-based swaps that the clearing agency may establish to 
calculate mark-to-market margin requirements for its participants and 
any other pricing or valuation information with respect to security-
based swaps as is published or distributed by the clearing agency to is 
participants.

    Dated: March 3, 2011.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-5182 Filed 3-15-11; 8:45 am]
BILLING CODE 8011-01-P


