
[Federal Register Volume 77, Number 213 (Friday, November 2, 2012)]
[Rules and Regulations]
[Pages 66219-66286]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-26407]



[[Page 66219]]

Vol. 77

Friday,

No. 213

November 2, 2012

Part II





 Securities and Exchange Commission





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17 CFR Part 240





 Clearing Agency Standards; Final Rule

  Federal Register / Vol. 77 , No. 213 / Friday, November 2, 2012 / 
Rules and Regulations  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-68080; File No. S7-08-11]
RIN 3235 AL13


Clearing Agency Standards

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting a new rule in accordance with the 
Securities Exchange Act of 1934 (``Exchange Act''), and the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank 
Act''). The new rule establishes minimum requirements regarding how 
registered 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.

DATES:  Effective Date: January 2, 2013.

FOR FURTHER INFORMATION CONTACT: Jeffrey Mooney, Assistant Director; 
Katherine Martin, Senior Special Counsel; Doyle Horn, Special Counsel; 
Stephanie Park, Special Counsel; or Justin Byrne, Attorney-Advisor; 
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 adopting rules for the 
operation of a registered clearing agency that identify minimum 
standards designed to enhance the regulatory framework for clearing 
agency supervision.

Table of Contents

I. Background
    A. Statutory Framework for the Regulation of Clearing Agencies
    1. Introduction
    2. Section 17A of the Exchange Act
    3. The Dodd-Frank Act
    a. Title VII of the Dodd-Frank Act
    b. Title VIII of the Dodd-Frank Act
    B. International Considerations
II. Overview of Proposal and General Comments Received on the 
Proposing Release and Commission Response
    A. Summary of the Clearing Agency Standards Proposing Release
    B. General Comments Received on the Proposing Release and the 
Commission Response
    1. Timing of Implementation
    2. Special Attention to Risk Management Standards
    3. Coordinated U.S. Domestic and International Standards
    4. Appropriate Distinctions Between Clearing Agencies
III. Description of Rule 17Ad-22
    A. Overview and Scope
    B. Definitions--Rule 17Ad-22(a)
    C. Risk Management Requirements for Central Counterparties: 
Rules 17Ad-22(b)(1)-(4)
    1. Rule 17Ad-22(b)(1): Measurement and Management of Credit 
Exposures
    2. Rule 17Ad-22(b)(2): Margin Requirements
    3. Rule 17Ad-22(b)(3): Financial Resources
    4. Rule 17Ad-22(b)(4): Model Validation
    D. Participant Access Standards for Central Counterparties: 
Rules 17Ad-22(b)(5)-(7)
    1. Rule 17Ad-22(b)(5): Non-Dealer Member Access
    2. Rule 17Ad-22(b)(6): Portfolio Size and Transaction Volume 
Thresholds Restrictions
    3. Rule 17Ad-22(b)(7): Net Capital Restrictions
    E. Record of Financial Resources and Annual Audited Financial 
Statements: Rules 17Ad-22(c)(1)-(2)
    1. Rule 17Ad-22(c)(1): Record of Financial Resources for Central 
Counterparties
    2. Rule 17Ad-22(c)(2): Clearing Agency Annual Audited Financial 
Statements
    F. Minimum Standards for Clearing Agencies: Rules 17Ad-22(d)(1)-
(15)
    1. Rule 17Ad-22(d)(1): Transparent and Enforceable Rules and 
Procedures
    2. Rule 17Ad-22(d)(2): Participation Requirements
    3. Rule 17Ad-22(d)(3): Custody of Assets and Investment Risk
    4. Rule 17Ad-22(d)(4): Identification and Mitigation of 
Operational Risk
    5. Rule 17Ad-22(d)(5): Money Settlement Risks
    6. Rule 17Ad-22(d)(6): Cost-Effectiveness
    7. Rule 17Ad-22(d)(7): Links
    8. Rule 17Ad-22(d)(8): Governance
    9. Rule 17Ad-22(d)(9): Information on Services
    10. Rule 17Ad-22(d)(10): Immobilization and Dematerialization of 
Securities Certificates
    11. Rule 17Ad-22(d)(11): Default Procedures
    12. Rule 17Ad-22(d)(12): Timing of Settlement Finality
    13. Rule 17Ad-22(d)(13): Delivery Versus Payment
    14. Rule 17Ad-22(d)(14): Risk Controls To Address Participants' 
Failure To Settle
    15. Rule 17Ad-22(d)(15): Physical Delivery Risks
IV. Paperwork Reduction Act
    A. Overview and Burden Estimate Comparison To Proposing Release
    B. Summary of Collection of Information, Use of Information and 
Comments Received
    C. Total Initial and Annual Reporting and Recordkeeping Burdens
    D. Collection of Information Is Mandatory
    E. Confidentiality
V. Economic Analysis
    A. Overview
    B. Baseline
    C. Consideration of Costs, Benefits, and the Effect on 
Efficiency, Competition and Capital Formation
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority and Text of Rule 17Ad-22

I. Background

A. Statutory Framework for the Regulation of Clearing Agencies

1. Introduction
    Congress directed the Commission to facilitate the establishment of 
a national system for the prompt and accurate clearance and settlement 
of securities transactions when it added Section 17A to the Exchange 
Act as part of the Securities Acts Amendments of 1975.\1\ The 
Commission's ability to achieve this goal and its supervision of 
securities clearance and settlement systems is based upon the 
regulation of registered clearing agencies. Over the years, clearing 
agencies registered with the Commission have become an essential part 
of the infrastructure of the U.S. securities markets. Clearing agencies 
help reduce the costs of securities trading and are required to be 
carefully structured to manage and reduce counterparty risk.
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    \1\ See 15 U.S.C. 78q-1 and S. Rep. No. 94-75, at 4 (1975) (the 
Senate Committee on Banking, Housing and Urban Affairs urging that 
``[t]he Committee believes the banking and security industries must 
move quickly toward the establishment of a fully integrated national 
system for the prompt and accurate processing and settlement of 
securities transactions'').
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    The Commission used this experience with regulating clearing 
agencies to help address developments recently in the over-the-counter 
(``OTC'') derivatives markets. In December 2008, the Commission acted 
to facilitate the central clearing of credit default swaps (hereinafter 
referred to as ``credit default swaps'' or ``CDS''), the largest 
category of OTC security-based swaps, by permitting certain entities 
that performed central counterparty (``CCP'') services to clear and 
settle credit default swaps on a temporary, conditional basis.\2\ 
Consequently, some credit

[[Page 66221]]

default swaps transactions were centrally cleared prior to the 
enactment of the Dodd-Frank Act.
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    \2\ 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 (Apr. 23, 2010), 75 FR 22656 
(Apr. 29, 2010) and 63389 (Nov. 29, 2010), 75 FR 75520 (Dec. 3, 
2010) (CDS clearing by ICE Clear Europe Limited); 60373 (July 23, 
2009), 74 FR 37740 (July 29, 2009), 61975 (Apr. 23, 2010), 75 FR 
22641 (Apr. 29, 2010) and 63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 
3, 2010) (CDS clearing by Eurex Clearing AG); 59578 (Mar. 13, 2009), 
74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 
(Dec. 18, 2009), 61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010) 
and 63388 (Nov. 29, 2010), 75 FR 75522 (Dec. 3, 2010) (CDS clearing 
by Chicago Mercantile Exchange, Inc.); 59527 (Mar. 6, 2009), 74 FR 
10791 (Mar. 12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 
2009), 61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010) and 63387 
(Nov. 29, 2010), 75 FR 75502 (Dec. 3, 2010) (CDS clearing by ICE 
Trust US LLC); 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) 
(temporary CDS clearing by LIFFE A&M and LCH.Clearnet Ltd.) 
(collectively, ``CDS Clearing Exemption Orders''). LIFFE A&M and 
LCH.Clearnet Ltd. allowed their order to lapse without seeking 
renewal.
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2. Section 17A of the Exchange Act
    Section 17A of the Exchange Act \3\ and Rule 17Ab2-1 \4\ require 
entities to register with the Commission prior to performing the 
functions of a clearing agency. Under the statute, the Commission is 
not permitted to grant registration unless it determines that the rules 
and operations of the clearing agency meet the standards set forth in 
Section 17A.\5\ If the Commission registers a clearing agency, the 
Commission oversees the clearing agency to facilitate compliance with 
the Exchange Act using various tools that include, among other things, 
the rule filing process for self-regulatory organizations (``SROs'') 
and on-site examinations by Commission staff. Section 17A(d) 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.\6\ Pursuant 
to Section 21(a) of the Exchange Act, the Commission can invoke its 
enforcement powers to initiate and conduct investigations to determine 
violations of the federal securities laws, including those specifically 
applicable to clearing agencies.\7\ In so doing, the Commission may 
institute civil actions seeking injunctive and other equitable remedies 
and/or administrative proceedings to, among other things, suspend or 
revoke registration, impose limitations upon a clearing agency's 
activities, functions, or operations, or impose other sanctions.\8\
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    \3\ 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).
    \4\ See 17 CFR 240.17Ab2-1.
    \5\ 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).
    \6\ See 15 U.S.C. 78q-1(d).
    \7\ See 15 U.S.C. 78u.
    \8\ See id.; see also 15 U.S.C. 78s(h).
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3. The Dodd-Frank Act
    On July 21, 2010, President Barack Obama signed the Dodd-Frank Act 
into law.\9\ 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.\10\
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    \9\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \10\ See id.
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a. Title VII of the Dodd-Frank Act
    Title VII of the Dodd-Frank Act (``Title VII'') provides the 
Commission and the Commodity Futures Trading Commission (``CFTC'') with 
enhanced authority to regulate certain OTC derivatives in response to 
the recent financial crisis.\11\ The Dodd-Frank Act is intended to 
bolster the existing regulatory structure and provide 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. Title VII 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.'' \12\
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    \11\ See id. secs. 701-774.
    \12\ Section 712(d) of the Dodd-Frank Act provides that the 
Commission and the CFTC, in consultation with the Board of Governors 
of the Federal Reserve System, shall further define the terms 
``swap,'' ``security-based swap,'' ``swap dealer,'' ``security-based 
swap dealer,'' ``major swap participant,'' ``major security-based 
swap participant,'' ``eligible contract participant'' and 
``security-based swap agreement.'' The Commission and the CFTC 
jointly adopted rules to further define the terms ``swap dealer,'' 
``security-based swap dealer,'' ``major swap participant,'' ``major 
security-based swap participant'' and eligible contract 
participant.'' Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 
Securities Exchange Act Release No. 34-66868 (Apr. 27, 2012).
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    Title VII was designed to provide greater certainty that, wherever 
possible and appropriate, swap and security-based swap contracts 
formerly traded exclusively in the OTC market are centrally 
cleared.\13\ The swap and security-based swap markets traditionally 
have been characterized by privately negotiated transactions entered 
into by two counterparties, in which each assumes the credit risk of 
the other counterparty.\14\ Clearing of swaps and security-based swaps 
was at the heart of Congressional reform of the derivatives markets in 
Title VII.\15\ Clearing agencies are broadly defined under the Exchange 
Act and undertake a variety of functions.\16\ One such function is to 
act as a CCP, which is an entity that interposes itself between the 
counterparties to a trade.\17\ For example, when a security-based swap 
contract between two counterparties that are members of a CCP is 
executed and submitted for clearing, it is typically replaced by two 
new contracts--separate contracts between the CCP and each of the two 
original counterparties. At that point, the original parties to the 
transaction are no longer counterparties to each other. Instead, each 
acquires the CCP as its counterparty, and the CCP assumes the 
counterparty credit risk of each of the original counterparties that 
are members of the CCP.\18\ Structured and operated appropriately, CCPs 
may improve the management of counterparty risk and may provide 
additional benefits such as multilateral netting of trades.\19\ The 
Dodd-Frank Act

[[Page 66222]]

amended the Exchange Act to require, among other things, that 
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.\20\ Title 
VII of the Dodd-Frank Act also added new provisions to the Exchange Act 
that require entities that act as a clearing agency with respect to 
security-based swaps (``security-based swap clearing agencies'') to 
register with the Commission \21\ and require the Commission to adopt 
rules with respect to security-based swap clearing agencies.\22\ 
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 its continued registration.\23\ Finally, Title VII 
provided that some of the entities that the Commission permitted to 
clear and settle credit default swaps on a temporary, conditional basis 
prior to the July 21, 2010, enactment of the Dodd-Frank Act were deemed 
to be registered clearing agencies (the ``Deemed Registered 
Provision'').\24\
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    \13\ See, e.g., Report of the Senate Committee, supra note 11, 
at 34 (stating that ``[s]ome parts of the OTC market may not be 
suitable for clearing and exchange trading due to individual 
business needs of certain users. Those users should retain the 
ability to engage in customized, uncleared contracts while bringing 
in as much of the OTC market under the centrally cleared and 
exchange-traded framework as possible.'').
    \14\ See, e.g., Financial Stability Board, Implementing OTC 
Derivatives Market Reforms (Oct. 25, 2010), available at http://www.financialstabilityboard.org/publications/r_101025.pdf.
    \15\ As previously noted, the Dodd-Frank Act seeks to ensure 
that, wherever possible and appropriate, derivatives contracts 
formerly traded exclusively in the OTC market be cleared. See supra 
note 11.
    \16\ Section 3(a)(23)(A) of the Exchange Act defines the term 
``clearing agency'' to mean any person who acts as an intermediary 
in making payments or deliveries or both in connection with 
transactions in securities or who provides facilities for the 
comparison of data regarding the terms of settlement of securities 
transactions to reduce the number of settlements of securities 
transactions or the allocation of securities settlement 
responsibilities. Such term 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)(A).
    \17\ See id. An entity that acts as a CCP for securities 
transactions is a clearing agency as defined in the Exchange Act and 
is required to register with the Commission.
    \18\ See Cecchetti, Gyntelberg and Hollanders, Central 
Counterparties for Over-the-Counter Derivatives, Bank for 
International Settlement Quarterly Review (Sept. 2009), available at 
http://www.bis.org/publ/qtrpdf/r_qt0909f.pdf.
    \19\ See id. at 46; see also Bank for International Settlements' 
Committee on Payment and Settlement Systems and Technical Committee 
of the International Organization of Securities Commissions, 
Guidance on the Application of the 2004 CPSS-IOSCO Recommendations 
for Central Counterparties to OTC Derivatives CCPs: Consultative 
Report (May 2010), available at http://www.bis.org/publ/cpss89.pdf.
    \20\ See 15 U.S.C. 78c-3; Exchange Act Release No. 34-63557 
(Dec. 15, 2010), 75 FR 82490 (Dec. 30, 2010); Exchange Act Release 
No. 34-67286 (June 28, 2012); 34-63556 (Dec. 15, 2010), 75 FR 79992 
(Dec. 21, 2010).
    \21\ 15 U.S.C. 78q-1(g) (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 security-
based swap clearing agencies to be registered with the Commission 
took effect on July 16, 2011.
    \22\ 15 U.S.C. 78q-1(i) and (j). Public Law 111-203 sec. 763(b) 
(adding subparagraphs (i) and (j) to Section 17A of the Exchange 
Act).
    \23\ 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. 
15 U.S.C. 78q-1(b)(3).
    \24\ See 15 U.S.C. 78q-1(l). The Deemed Registered Provision 
applies to certain depository institutions that cleared swaps as 
multilateral clearing organizations and certain derivatives clearing 
organizations (``DCOs'') that cleared swaps pursuant to an exemption 
from registration as a clearing agency. As a result, ICE Clear 
Credit LLC, ICE Clear Europe Limited and the Chicago Mercantile 
Exchange, Inc. were deemed registered clearing agencies with the 
Commission on July 16, 2011, solely for the purpose of clearing 
security-based swaps. Under this Deemed Registered Provision, an 
eligible clearing agency is deemed registered for the purpose of 
clearing security-based swaps and is therefore required to comply 
with all requirements of the Exchange Act, and the rules thereunder, 
applicable to registered clearing agencies, including, for example, 
the obligation to file proposed rule changes under Section 19(b) of 
the Exchange Act.
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b. Title VIII of the Dodd-Frank Act
    In addition to the provisions from Title VII that expand the 
Commission's authority under the Exchange Act to include activities 
related to security-based swaps, 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'').\25\ In part, the Clearing 
Supervision Act provides that the Commission, considering relevant 
international standards and existing prudential requirements, may 
prescribe regulations that contain risk management standards for the 
operations related to payment, clearing, and settlement activities 
(``PCS Activities'') \26\ of a Designated Clearing Entity or the 
conduct of designated activities by a Financial Institution.\27\ In 
prescribing such standards, the Commission must consult the Board of 
Governors of the Federal Reserve System (``Federal Reserve'' or ``the 
Board'') and the Financial Stability Oversight Council (``Council''). 
On July 11, 2011, the Council published a final rule concerning its 
authority to designate FMUs as systemically important,\28\ and on July 
18, 2012, the Council designated The Depository Trust Company 
(``DTC''), Fixed Income Clearing Corporation (``FICC''), National 
Securities Clearing Corporation (``NSCC'') and The Options Clearing 
Corporation (``OCC'') as systemically important.\29\
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    \25\ See infra note 29. 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 
Entity'') 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.
    \26\ Certain post-trade processing activities that are not 
captured by the Clearing Supervision Act may nevertheless be subject 
to regulation by the Commission under the Exchange Act. See infra 
note 100 and accompanying text.
    \27\ 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). PCS Activities 
are defined in Section 803(7) of the Clearing Supervision Act. 12 
U.S.C 5462(7).
    The definition of ``financial institution,'' which is contained 
in Section 803(5) of the Clearing Supervision Act, outlines numerous 
exclusions but defines financial institution as a branch or agency 
of a foreign bank, an organization operating under Section 25 or 25A 
of the Federal Reserve Act, a credit union, a broker or dealer, an 
investment company, an insurance company, an investment adviser, a 
futures commission merchant, commodity trading advisor or commodity 
pool operator and any company engaged in activities that are 
financial in nature or incidental to a financial activity. 12 U.S.C. 
5462(5)(A).
    \28\ See 76 FR 44763 (July 27, 2011) (the Council also expects 
to address the designation of payment, clearing, or settlement 
activities as systemically important in a separate rulemaking).
    \29\ See 12 U.S.C. 5321 (establishing the Council and 
designating its voting and nonvoting members); see also 12 U.S.C. 
5463 (designation of systemic importance). 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, 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 Board and the relevant Supervisory 
Agency as determined in accordance with Section 803(8) of the 
Clearing Supervision Act. Section 804 also sets forth procedures 
that give entities 30 days advance notice and an opportunity for a 
hearing prior to being designated as systemically important.
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B. International Considerations

    Section 17A(i) of the Exchange Act provides that the Commission, in 
establishing clearing agency standards and in its oversight of clearing 
agencies, may conform such standards and such oversight to reflect 
evolving international standards.\30\ Section 805(a) of the Clearing 
Supervision Act directs the Commission to take into consideration 
relevant international standards and existing prudential requirements 
for clearing agencies that are designated as FMUs.\31\ The current 
international standards most relevant to risk management of clearing 
agencies

[[Page 66223]]

are the standards developed by the International Organization of 
Securities Commissions (``IOSCO'') and the Committee on Payment and 
Settlement Systems (``CPSS'') that are contained in the report entitled 
Principles for Financial Market Infrastructures (``FMI Report'').\32\ 
The final FMI Report was published on April 16, 2012, and replaces CPSS 
and IOSCO's previous standards applicable to clearing agencies that 
were contained in the following reports: Recommendations for Securities 
Settlement Systems (2001) (``RSSS'') and Recommendations for Central 
Counterparties (2004) (``RCCP'') (collectively, ``CPSS-IOSCO 
Recommendations'').\33\ 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 FMI Report 
harmonizes and, where appropriate, strengthens the previous 
international standards; it also incorporates additional guidance for 
OTC derivatives CCPs.\34\
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    \30\ 15 U.S.C. 78q-1(i).
    \31\ 12 U.S.C. 5464(a)(1).
    \32\ CPSS-IOSCO, Principles for Financial Market Infrastructures 
(Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
    \33\ The complete RSSS and RCCP Reports are available on the Web 
site of the Bank for International Settlements at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD123.pdf and http://www.iosco.org/library/pubdocs/pdf/IOSCPD176.pdf respectively.
     The Board applies these standards in its supervisory process 
and expects systemically important systems, as determined by the 
Board and subject to its authority, to complete a self-assessment 
against the standards set forth in the policy. See Policy on Payment 
System Risk, 72 FR 2518 (Jan. 12, 2007).
    \34\ See FMI Report, supra note 32.
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II. Overview of Proposal and General Comments Received on the Proposing 
Release and Commission Response

A. Summary of the Clearing Agency Standards Proposing Release

    On March 3, 2011, the Commission proposed for comment a series of 
rules related to standards for the operation and governance of clearing 
agencies (``Proposing Release'').\35\ The Proposing Release contained 
the following proposals:
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    \35\ See Exchange Act Release No. 34-64017 (Mar. 3, 2011), 76 FR 
14472 (Mar. 16, 2011) (``Proposing Release''), available at http://www.sec.gov/rules/proposed/2011/34-64017fr.pdf.
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    (1) Proposed Rule 17Ad-22, which would require certain minimum 
standards for all clearing agencies registered with the Commission;
    (2) Proposed Rule 17Aj-1, which would require dissemination of 
pricing and valuation information by security-based swap CCPs;
    (3) Proposed Rule 17Ad-23, which would require all clearing 
agencies to have adequate safeguards and procedures to protect the 
confidentiality of trading information of clearing agency participants;
    (4) Proposed Rule 17Ad-24, which would exempt certain security-
based swap dealers and security-based swap execution facilities from 
the definition of clearing agency;
    (5) Proposed Rule 17Ab2-1, which would amend an existing Commission 
rule concerning registration of clearing agencies to account for 
security-based swap clearing agencies and to make other technical 
changes;
    (6) Proposed Rule 17Ad-25, which would require all clearing 
agencies to have procedures that identify and address conflicts of 
interest;
    (7) Proposed Rule 17Ad-26, which would require clearing agencies to 
set standards for all members of their boards of directors or 
committees; and
    (8) Proposed Rule 3Cj-1, which is modeled on Section 3C(j) of the 
Exchange Act and would require all clearing agencies to designate a 
chief compliance officer.
    The Commission also noted in the Proposing Release that the 
definition of clearing agency under Section 3(a)(23)(A) of Exchange Act 
includes 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).\36\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78c(a)(23)(A).

Based on the Exchange Act definition, the Commission stated its 
preliminary view that certain post-trade processing services may fall 
within the clearing agency definition and asked for comments regarding 
the Commission's preliminary interpretation.
    Since the publication of the Proposing Release, the Commission has 
received 25 comment letters on the Proposing Release from a broad range 
of market participants, and the Commission and staff also had 
discussions with representatives of clearing agencies, trade 
associations, public interest groups and other interested parties.\37\ 
The Commission has taken into consideration international initiatives 
and consulted with other U.S. financial regulators as appropriate, 
including the

[[Page 66224]]

CFTC and the Federal Reserve, to inform the Commission's final actions. 
Commenters generally supported the goals of the proposal. As further 
discussed below, however, several commenters recommended that the 
proposal be amended or clarified in certain respects.
---------------------------------------------------------------------------

    \37\ The comment file is published on the Commission's Web site, 
available at http://www.sec.gov/comments/s7-08-11/s70811.shtml. See 
Letter from American Benefits Council, dated May 6, 2011 (``ABC 
Letter''); letter from Chris Barnard, dated March 21, 2011 
(``Barnard Letter''); letter from Dennis M. Kelleher, President & 
CEO and Steven W. Hall, Securities Specialist, Better Markets, Inc., 
dated April 29, 2011 (``Better Markets Letter''); letter from Joanne 
Medero, Richard Prager and Supurna VedBrat, BlackRock, dated April 
29, 2011 (``BlackRock Letter''); letter from Craig S. Donohue, CME 
Group, dated April 29, 2011 (``CME Letter''); letter from Glenn 
Davis, Senior Research Associate, Council of Institutional 
Investors, dated April 14, 2011 (``CII Letter''); letter from Ernst 
& Young, dated April 29, 2011 (``ENY Letter''); letter from Mark 
Beeston, Chief Executive Officer of Portfolio Risk Services, 
ICAP[supreg], dated July 7, 2011 (``ICAP Letter''); letter from R. 
Trabue Bland, Intercontinental Exchange, Inc., dated April 29, 2011 
(``ICE Letter''); letter from Robert Pickel, Executive Vice 
Chairman, International Swaps and Derivatives Association, dated 
April 29, 2011 (``ISDA Letter''); letter from Ian Axe, CEO, 
LCH.Clearnet Group Limited, dated April 28, 2010 (``LCH Letter''); 
letter from Stuart J. Kaswell and Carlotta King, Managed Funds 
Association, dated March 24, 2011 (``MFA (Kaswell/King) Letter''); 
letter from Stuart J. Kaswell, Executive Vice President & Managing 
Director, General Counsel, Managed Funds Association, dated April 
29, 2011 (``MFA (Kaswell) Letter''); letter from Kevin Gould, 
President, MarkitTM, dated April 29, 2011 
(``MarkitTM (April) Letter''); letter from Kevin Gould, 
President, MarkitTM, dated July 26, 2011 
(``MarkitTM (July) Letter''); letter from Jeff Gooch, 
CEO, MarkitSERVTM, dated April 29, 2011 
(``MarkitSERVTM (April) Letter''); letter from Jeff 
Gooch, CEO, MarkitSERVTM, dated July 18, 2011 
(``MarkitSERVTM (July) Letter''); letter from Norman 
Reed, General Counsel, Omgeo, dated May 5, 2011 (``Omgeo Letter''); 
letter from Larry E. Thompson, General Counsel, The Depository Trust 
& Clearing Corporation, dated April 29, 2011 (``The DTCC (April) 
Letter''); letter from Larry E. Thompson, General Counsel, The 
Depository Trust & Clearing Corporation, dated July 21, 2011 (``The 
DTCC (July) Letter''); letter from William H. Navin, Executive Vice 
President, General Counsel and Secretary, The Options Clearing 
Corporation, dated April 29, 2011 (``The OCC Letter''); letter from 
James Cawley, Co-Founder, Swaps and Derivatives Market Association, 
dated June 3, 2011 (``SDMA (June) Letter''); letter from Christoffer 
Mohammar, General Counsel, TriOptima Group, dated April 29, 2011 
(``TriOptima Letter''); letter from Richard H. Baker, President & 
Chief Executive Officer, Managed Funds Association, dated March 24, 
2011 (``MFA (Baker) Letter''); letter from James Cawley, Co-Founder, 
Swaps and Derivatives Market Association, dated April 19, 2011 
(``SDMA (April) Letter'').
---------------------------------------------------------------------------

    After careful review and consideration of the comments, the 
Commission is today adopting Rule 17Ad-22, with certain modifications 
discussed below, to address comments received. As adopted, Rule 17Ad-22 
is meant to establish minimum requirements for registered clearing 
agency risk management practices and operations with due consideration 
given to equivalent standards of other regulators in the United States 
\38\ and to international standards, as discussed above in Section I.B. 
We expect to address separately the other proposed rules and matters 
contained in the Proposing Release as explained in more detail in 
Section II.B below.
---------------------------------------------------------------------------

    \38\ See Derivatives Clearing Organization General Provisions 
and Core Principles 76 FR 69334 (Nov. 8, 2011) (CFTC adopting final 
regulations to implement certain provisions of Title VII and Title 
VIII of the Dodd-Frank Act governing DCO activities) (``DCO 
Release''); Financial Market Utilities 76 FR 18445 (Apr. 4, 2011) 
(notice of proposed rulemaking to promulgate risk-management 
standards governing the operations related to the payment, clearance 
and settlement activities of certain financial market utilities that 
are designated systemically important by the Council).
---------------------------------------------------------------------------

B. General Comments Received on the Proposing Release and the 
Commission Response

    The Proposing Release was published in the Federal Register on 
March 16, 2011, and the comment period closed on April 29, 2011.\39\ 
The Proposing Release contained proposed rules that cover various 
aspects of a clearing agency's operations and risk management that are 
listed in full in Section II.A. In addition to specific comments 
regarding the substance of the rules in the Proposing Release, a number 
of the comments the Commission received concern the larger framework 
for our rulemaking efforts involving clearing agencies and the manner 
in which the rules may be implemented. These comments focus on issues 
such as ensuring that: (1) Sufficient time be given to clearing 
agencies to implement all new standards appropriately; (2) the 
Commission's regulations relating to risk management standards in 
particular be given careful consideration and recognize the complexity 
of the issues involved; (3) the Commission's regulations are consistent 
with those of other U.S. regulatory agencies and CPSS and IOSCO 
initiatives; and (4) appropriate distinctions between clearing agencies 
that provide CCP and central securities depository (``CSD'') services 
from those that provide post-trade processing services are recognized 
in the Commission's regulations.
---------------------------------------------------------------------------

    \39\ See supra note 35.
---------------------------------------------------------------------------

    Set forth below is a description of the comments received by the 
Commission that express concerns about the general approach to clearing 
agency reform reflected in the Proposing Release. The Commission has 
carefully considered these general comments that were provided 
concerning the larger framework for our rule making efforts involving 
clearing agencies.\40\ To address the concerns they raise, we have 
determined to take the actions described below.
---------------------------------------------------------------------------

    \40\ See supra note 9, at Preamble.
---------------------------------------------------------------------------

1. Timing of Implementation
a. Comments Received
    Three commenters asked for the implementation of the proposed rules 
to be subject to appropriate phase-in periods.\41\ One commenter 
suggested that the appropriate phases should be determined by the 
Commission in consultation with the affected clearing agencies.\42\ 
Another commenter requested that if the rules are adopted as proposed 
then they should not become effective for at least two years.\43\ Two 
commenters stated that they believe that implementing all of the 
proposed rules in the Proposing Release at the same time would require 
extensive new policies and procedures, drafting, proposing and approval 
of rules and rule changes, raising additional financial resources, 
hiring and training of personnel, operational changes and many other 
tasks that would require clearing agencies to simultaneously respond to 
separate requirements promulgated under the Dodd-Frank Act.\44\ 
Accordingly, these commenters requested that the Commission provide 
adequate time to implement necessary changes and expressed that phase-
in periods would be appropriate.
---------------------------------------------------------------------------

    \41\ See The DTCC (April) Letter at 5; The OCC Letter at 17; MFA 
(Kaswell/King) Letter at 2.
    \42\ See The DTCC (April) Letter at 5.
    \43\ See The OCC Letter at 17 (adding that if the Commission 
adopts a financial resources standard in Rule 17Ad-22(b)(3) to 
require a security-based swaps clearing agency that performs CCP 
services to have enough financial resources to be able to withstand 
the default of its two largest participants in extreme but plausible 
market conditions then that requirement should be subject to delayed 
implementation of at least two years).
    \44\ See id.; The DTCC (April) Letter at 6.
---------------------------------------------------------------------------

    One commenter asked the Commission to publish any modifications it 
may make to the proposed rules for an additional comment period.\45\ 
Others stressed that if the Commission makes significant changes to its 
proposed rules, then the rules should be republished for further 
comment.\46\
---------------------------------------------------------------------------

    \45\ See The DTCC (April) Letter at 2.
    \46\ See The OCC Letter at 17.
---------------------------------------------------------------------------

    One commenter stated that clearing agency rules such as those 
related to governance, conflicts of interest, registration, and 
financial resources should be adopted early in the implementation of 
rules for the security-based swap market.\47\ The commenter also stated 
that barriers to effective ``buy-side'' participation in CCPs must be 
eliminated early in the phase-in process to enable ``buy-side'' 
participants to clear voluntarily at the same time as dealers.\48\
---------------------------------------------------------------------------

    \47\ See MFA (Kaswell/King) Letter at Annex A.
    \48\ See id.
---------------------------------------------------------------------------

b. Commission Response
    In light of the request by commenters for a phased approach to 
implementation of the clearing agency standards set forth in the 
Proposing Release,\49\ the Commission has decided to address the 
standards in stages.
---------------------------------------------------------------------------

    \49\ See supra notes 41-44 and accompanying text.
---------------------------------------------------------------------------

     In the first stage, the Commission is adopting only Rule 
17Ad-22. The compliance date for Rule 17Ad-22 will be sixty days from 
publication in the Federal Register.
     The second planned stage in the implementation of 
standards for clearing agencies is the consideration by the Commission 
of rules that correspond to proposed Rules 17Aj-1; 17Ad-23; 17Ad-24; 
17Ab2-1 and 3Cj-1 as well as the clearing agency governance and 
conflict of interest concerns that its previous proposal addressed 
through its proposal of Rule 17Ad-25, Rule 17Ad-26 and Regulation 
MC.\50\
---------------------------------------------------------------------------

    \50\ 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, Exchange Act Release No. 
344-63107 (Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (``Regulation 
MC'').
---------------------------------------------------------------------------

     The third planned stage is for the Commission to consider 
rules tailored to clearing agencies that perform certain post-trade 
processing services. The Commission sought comment concerning these 
types of clearing agencies in the Proposing Release and preliminarily 
intends to propose rules addressed to them as described in more detail 
in Sections II.B.4 and III.A below. As appropriate, the Commission may

[[Page 66225]]

also propose rules that will incorporate principles set forth in the 
FMI Report.
    The Commission believes the phased approach to implementation 
provides clearing agencies with the benefit of additional time with 
respect to some of the requirements contemplated in the Proposing 
Release, while putting into place minimum standards for operational and 
risk management practices of registered clearing agencies. This 
approach will allow the Commission to consider further the comments 
received on the Proposing Release and evolution of clearance and 
settlement activity in light of the requirements of Title VII and Title 
VIII of the Dodd-Frank Act, including the implementation of the 
mandatory clearing requirements with respect to security-based swaps 
mandated by the Dodd-Frank Act. Because the Commission is adopting 
17Ad-22 largely as proposed, the Commission is not republishing Rule 
17Ad-22 for additional comments.
    We believe that the implementation of these standards is an 
important first step in crafting regulatory changes contemplated by 
Title VII and Title VIII of the Dodd-Frank Act as intended by Congress. 
The adoption of Rule 17Ad-22 will also allow the Commission to 
coordinate its activities as the supervisory agency for clearing 
agencies designated as systemically important financial market 
utilities under Title VIII of the Dodd-Frank Act with the complementary 
responsibilities of the Federal Reserve.\51\ In addition, the 
Commission believes that the adoption of standards for registered 
clearing agencies at this time will help facilitate the development of 
the security-based swap market. Rule 17Ad-22 establishes minimum 
standards for a wide range of issues, including governance, financial 
resources and membership. For example, Rules 17Ad-22(b)(5), (6) and (7) 
are designed to prohibit membership practices that may limit 
competition among market participants. In particular, Rule 17Ad-
22(b)(6) is designed to facilitate correspondent clearing, which will 
allow buy-side participants to obtain access to CCP services without 
having to become direct members of a clearing agency.
---------------------------------------------------------------------------

    \51\ Section 805 of the Clearing Supervision Act provides that 
(i) the Commission may prescribe standards for designated clearing 
entities in consultation with the Council and the Board and (ii) the 
Board may determine that the Commission's existing prudential 
requirements with respect to designated clearing entities are 
insufficient to prevent or mitigate significant credit, liquidity, 
operational or other risks to the financial markets or the financial 
stability of the United States.
---------------------------------------------------------------------------

2. Special Attention to Risk Management Standards
a. Comments Received
    Generally, commenters supported the requirements of proposed Rules 
17Ad-22(b)(1)-(4) that would govern the risk management standards and 
practices of registered clearing agencies that perform CCP services or 
CCPs.\52\ However, in several respects, commenters asked the Commission 
to pay special attention to the technical nature of CCP risk management 
practices that are addressed by these rules. The comments received by 
the Commission span a range of views on these matters. But 
thematically, many of them coalesce around a question of whether the 
Commission should prescribe detailed specifications within these rules 
to define compliance standards more clearly or take a less prescriptive 
approach that affords clearing agencies greater discretion to 
establish, implement, maintain and enforce policies and procedures 
based on the facts and circumstances of the individual clearing agency.
---------------------------------------------------------------------------

    \52\ See discussion infra Section III.C.
---------------------------------------------------------------------------

    For instance, proposed Rule 17Ad-22(b)(1) would require a CCP to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to measure credit exposures to 
participants at least once a day and limit 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. Of those commenters who asked the 
Commission to consider modifications to the proposed rule, two 
suggested that public disclosure requirements should accompany any 
choice made by a CCP to reduce margin requirements on the basis of an 
inverse or offsetting correlation between participants' positions.\53\ 
Several others focused on what role the Commission should take in 
defining ``normal market conditions'' for purposes of the rule \54\ as 
well as how frequently a CCP should be required to measure its credit 
exposures \55\ and whether such measurements should be required to 
include the customers of participants.\56\
---------------------------------------------------------------------------

    \53\ See ISDA Letter at 7; Better Markets Letter at 3-4.
    \54\ See The OCC Letter at 7; Better Markets Letter at 3-4.
    \55\ See LCH Letter at 2; Better Markets Letter at 5.
    \56\ See LCH Letter at 2.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-22(b)(2) would require a CCP to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to use margin requirements to limit its credit 
exposures to participants under normal market conditions and use risk-
based models \57\ to set margin requirements and review them at least 
monthly. One commenter argued that CCPs should be required to make 
their margin-setting methodology available to customers to help them 
understand the responsibilities that are commensurate with CCP 
participation.\58\ Another commenter suggested clearing agencies should 
have discretion when complying with the rule to decide which aspects of 
a margin methodology are appropriate for monthly review.\59\ Still 
other commenters concentrated on the extent to which the Commission 
should prescribe the parameters of a CCP's margin model, such as the 
confidence level, amount of data used to inform the standard of 
``normal market conditions,'' and the use of factors such as liquidity 
and concentration.\60\
---------------------------------------------------------------------------

    \57\ The term ``risk-based models'' is meant to encompass any 
models, systems and associated parameters used by clearing agencies 
to mitigate risks.
    \58\ See MFA (Kaswell) Letter at 2.
    \59\ See The OCC Letter at 7.
    \60\ See, e.g., ISDA Letter at 7; Better Markets Letter at 3-4; 
The OCC Letter at 7.
---------------------------------------------------------------------------

    With respect to proposed Rule 17Ad-22(b)(3), commenters asked the 
Commission to give further consideration to whether it is appropriate 
to create different financial resources standards for a security-based 
swap CCP. As proposed, the rule would require a CCP 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 would be required 
to 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. One commenter argued that 
characteristics of the instruments traded in the security-based swap 
market support differentiating the requirements of the rule \61\ while 
other commenters advanced reasons for why it may be appropriate for the 
rule to employ only a single standard.\62\ Commenters also highlighted 
that it is important for the Commission to account for the

[[Page 66226]]

international standards in this area \63\ and they expressed 
contrasting views about how standardized and prescriptive the 
Commission should be in specifying the meaning of ``extreme but 
plausible market conditions.'' \64\
---------------------------------------------------------------------------

    \61\ See Better Markets Letter at 5.
    \62\ See LCH Letter at 2; The OCC Letter at 8; The DTCC (April) 
Letter at 12.
    \63\ See The OCC Letter at 9; LCH Letter at 2-3.
    \64\ See Better Markets Letter at 5-6; The DTCC (April) Letter 
at 10; The OCC Letter at 10.
---------------------------------------------------------------------------

    Similarly, some commenters asked the Commission to reconsider how 
prescriptive it should be in its approach to the requirements of Rule 
17Ad-22(b)(4).\65\ The proposed rule would require a CCP to establish, 
implement, maintain and enforce policies and procedures reasonably 
designed to provide for an annual model validation consisting of the 
evaluation of 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 those 
functions. In this area, commenters expressed contrasting views about 
the appropriate level of detail that should be embedded within the rule 
to guide clearing agency practices. The comments addressed matters 
including how frequently a model validation should be performed \66\ 
and, when a model validation is performed, how a CCP should be required 
to ensure that the process represents a candid, independent and 
objective assessment.\67\
---------------------------------------------------------------------------

    \65\ See, e.g., The DTCC (April) Letter at 13; The OCC Letter at 
11; Better Markets Letter at 6.
    \66\ See The DTCC (April) Letter at 13; Better Markets Letter at 
6.
    \67\ See The DTCC (April) Letter at 13-15; The OCC Letter at 11; 
Better Markets Letter at 6.
---------------------------------------------------------------------------

    A more complete discussion of these comments and others that 
pertain to Rules 17Ad-22(b)(1)-(4) is contained in Section III.C below.
b. Commission Response
    The Commission acknowledges the many thoughtful comments we 
received regarding the risk management standards and practices 
reflected in the Proposing Release and agrees that the topic deserves 
particular care and attention.\68\ We also agree with the commenters 
who pointed out that:
---------------------------------------------------------------------------

    \68\ See discussion supra Section II.B.
---------------------------------------------------------------------------

     Many of the risk management standards and practices 
underlying proposed Rule 17Ad-22 require relatively significant 
judgments to be made and at times there are no established or 
definitive sources of guidance to aid decision-making. Therefore, for a 
CCP's risk management practices to be most effective, the CCP must have 
some degree of flexibility to tailor the practices appropriately to 
meet the demands of the specific financial markets it serves, and the 
Commission's interpretation of Rule 17Ad-22 should not be rigidly 
applied as uniform standards without variation.\69\
---------------------------------------------------------------------------

    \69\ See infra notes 82-84 and accompanying text.
---------------------------------------------------------------------------

     The specific risk management practices most appropriate 
for any individual CCP and for registered clearing agencies generally 
are unlikely to remain static.\70\ Rather, risk management practices 
can be expected to evolve to keep pace with changes in technology, 
market practices and financial professionals' understanding of the 
characteristics of the markets.\71\
---------------------------------------------------------------------------

    \70\ See infra note 79 and accompanying text.
    \71\ See The DTCC (April) Letter at 6 (``As markets continue to 
globalize and standards continue to evolve, the Commission should 
consider additional modifications to its rules, as necessary and 
appropriate, to meet the important objective that the Commission's 
rules remain in alignment with global standards.'').
---------------------------------------------------------------------------

    For example, the Commission recognizes that a less prescriptive 
approach can help promote efficient practices and encourage regulated 
entities to consider how to manage their regulatory obligations and 
risk management practices in a way that complies with Commission rules 
while accounting for the particular characteristics of their business 
and believes the approach reflected in proposed Rule 17Ad-22 is 
consistent with this perspective.
    The Commission believes that one outgrowth of this less 
prescriptive approach is that there may be additional questions from 
the clearing agencies regarding how various regulatory requirements 
apply with regard to clearance and settlement services for particular 
instruments or products having different market characteristics. 
Commenters were particularly concerned with the application of Rules 
17Ad-22(b)(1)-(4) and with particular risk management standards, 
including, but not limited to, the proper amount of financial 
resources, measurement and management of credit exposures, back 
testing, model validation, use of concentration, liquidity and other 
factors to determine margin requirements, and the appropriate meaning 
of ``extreme but plausible market conditions.''
    We note that the Commission or its staff may from time to time 
issue additional guidance to the extent necessary to address questions 
arising from the dynamic nature of clearing agency risk management 
practices, changing market practices, and technological advances.
    To date, the Exchange Act and the related regulations promulgated 
by the Commission have not established particularized requirements 
regarding clearing agencies' risk management practices.\72\ 
Nevertheless, CCPs registered as clearing agencies generally adopt 
margin requirements designed to cover potential losses under normal 
market conditions to help ensure the financial safety of the 
enterprise, protect the interests of clearing members, and meet or 
exceed standards of risk management best practices recognized in the 
financial services industry generally.\73\ Additional charges, 
including, but not limited to, those contained in separately 
constituted default or guaranty funds are also used to cover losses 
beyond that (i.e., tail events associated with extreme but plausible 
market conditions).\74\
---------------------------------------------------------------------------

    \72\ See generally Section 17A of the Exchange Act (15 U.S.C. 
78q-1) and Standards for Clearing Agency Regulation (Exchange Act 
Release No. 16900 (June 17, 1980), 45 FR 41920 (June 23, 1980)).
    \73\ See, e.g., NSCC's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Nov. 14, 2011), 
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf.
    \74\ See CME Group letter to CPSS-IOSCO regarding the 
Consultation Report: Principles for Financial Market Infrastructures 
(July 28, 2011), available at http://www.bis.org/publ/cpss94/cacomments/cmegroup.pdf.
---------------------------------------------------------------------------

    To meet this standard, the current practice of registered CCPs is 
to calculate daily margin requirements using risk-based models to 
ensure coverage at a 99% confidence interval over a designated time 
horizon.\75\ Given the history of usage of this standard in CCP 
practices and international standards,\76\ the Commission believes it 
is appropriate to codify this commonly accepted practice as the minimum 
benchmark for measuring credit exposures and setting margin 
requirements. However, the Commission also recognizes that this minimum 
standard may not be sufficient for all CCPs and believes the rules 
allow flexibility for CCPs to adopt more conservative approaches when 
appropriate given the nature of the financial product being cleared, 
the preferences of their members, or other factors consistent with the 
general responsibilities of clearing agencies under the Exchange Act to 
perfect the national clearance and settlement system.
---------------------------------------------------------------------------

    \75\ See infra Section V.B.2 (discussion on current industry 
baselines).
    \76\ See infra note 571 and accompanying text.
---------------------------------------------------------------------------

    Furthermore, the Commission notes that a CCP can develop rules and

[[Page 66227]]

procedures that are tailored to its practices and operations in order 
to meet the demands of the specific financial markets it serves. When a 
CCP proposes to make rule changes, rule changes are required to be 
submitted to the Commission under Section 19(b) of the Exchange Act and 
are subject to review, public comment and approval, as applicable. In 
addition to the SRO rule filing process, the Commission works closely 
with each clearing agency it oversees from the point of its application 
for registration with the Commission and thereafter through 
examinations and periodic monitoring of the clearing agency's risk 
management framework and operations.\77\
---------------------------------------------------------------------------

    \77\ See Risk Management Supervision of Designated Clearing 
Entities (July 2011), Report by the Commission, Board and CFTC to 
the Senate Committees on Banking, Housing, and Urban Affairs and 
Agriculture in fulfillment of Section 813 of Title VIII of the Dodd-
Frank Act, at 25.
---------------------------------------------------------------------------

3. Coordinated U.S. Domestic and International Standards
a. Comments Received
    Three commenters strongly encouraged the Commission and the CFTC to 
coordinate and cooperate in the development of their parallel 
regulation of clearing agencies and derivatives clearing organizations 
(``DCOs'') to build a harmonized U.S. framework for OTC derivatives and 
to bring appropriate consistency to the two agencies' regulation of 
similar products, practices and markets.\78\
---------------------------------------------------------------------------

    \78\ See ICE Letter at 2; MFA (Kaswell) Letter at 8-9; CME 
Letter at 4.
---------------------------------------------------------------------------

    One commenter stressed that rules applicable to clearance and 
settlement of single name credit default swaps should be comparable to 
the final requirements applicable to clearance and settlement of index-
based credit default swaps because clearinghouses will undoubtedly 
service both and therefore different sets of compliance standards could 
lead to unnecessary operational inefficiencies and may have the 
unintended consequence of tilting the market in favor of one class of 
instruments.\79\
---------------------------------------------------------------------------

    \79\ See CME Letter at 4.
---------------------------------------------------------------------------

    Three commenters urged the Commission to incorporate specific 
requirements for processing, clearing and transfer of customer 
positions.\80\ Two of the commenters urged the Commission to adopt 
specific rules in these areas that are similar to what the CFTC has 
proposed for DCOs--specifically with respect to proposed Rule 
39.12(b)(7).\81\
---------------------------------------------------------------------------

    \80\ See MFA (Kaswell) Letter at 8-9; SDMA (June) Letter at 19; 
Barnard Letter at 2.
    \81\ See MFA (Kaswell) Letter at 8-9; SDMA (June) Letter at 19 
(citing proposed rule 39.12(b)(7) from the CFTC's Requirements for 
Processing, Clearing and Transfer of Customer Positions, 76 FR 13101 
(Mar. 10, 2011) which would require ``each derivatives clearing 
organization to coordinate with each swap execution facility and 
designated contract market that lists for trading a product that is 
cleared by the derivatives clearing organization, in developing 
rules and procedures to facilitate prompt and efficient processing 
of all contracts, agreements, and transactions submitted to the 
derivatives clearing organization for clearing.''). The CFTC 
reserved this rule section in its DCO Release but has not yet 
adopted the proposed rule as a final requirement.
---------------------------------------------------------------------------

    Three commenters expressed a preference for principles-based rather 
than prescriptive rules.\82\ One commenter expressed its belief that 
the CFTC's proposals for DCOs are overly prescriptive and should be 
eschewed in favor of case-by-case review of a clearing organizations' 
proposed rule changes.\83\ The commenter added that less prescriptive 
rules will be easier to reconcile between the two regulatory 
agencies.\84\
---------------------------------------------------------------------------

    \82\ See CME Letter at 3; The DTCC (April) Letter at 6; The OCC 
Letter at 2.
    \83\ See The OCC Letter at 2.
    \84\ See id.
---------------------------------------------------------------------------

    One commenter strongly encouraged the Commission to avoid final 
action on its proposed rules before it has clarity on what 
clearinghouse regulations are ultimately adopted by European and United 
Kingdom regulators and what approaches to regulation are embraced by 
the final FMI Report.\85\ The commenter argued that this approach would 
allow the Commission to adopt rules that would not unknowingly force 
market activity into other jurisdictions by virtue of associated 
regulatory costs.\86\
---------------------------------------------------------------------------

    \85\ See The OCC Letter at 3.
    \86\ See id.
---------------------------------------------------------------------------

b. Commission Response
    We recognize that both domestic and foreign regulators may be 
undertaking similar regulatory initiatives with respect to risk 
management and operation of clearing agencies. We believe that adopting 
Rule 17Ad-22 now, largely in the form proposed, and the phased 
implementation schedule set forth above \87\ will ensure that the 
Commission's rulemaking for clearing agencies will be coordinated with 
equivalent processes being undertaken by the CFTC and the Federal 
Reserve in the United States and foreign regulators. As discussed 
above, the CPSS-IOSCO Recommendations served as the benchmark for the 
operations of the CCPs and CSDs around the world since the publication 
of the RSSS in 2001 and the RCCP in 2004, respectively. In addition, 
the CFTC and Federal Reserve have also considered the CPSS-IOSCO 
Recommendations in their rulemaking efforts with respect to the 
clearance and settlement process. Consequently, the final rules that 
the CFTC recently adopted to govern the activities of a DCO \88\ and 
the rules proposed by the Federal Reserve for certain CCPs and CSDs 
\89\ each borrow from the principles in the CPSS-IOSCO Recommendations 
and reflect requirements that we believe are consistent with the 
minimum requirements for registered clearing agencies that the 
Commission is adopting in Rule 17Ad-22. Because Rule 17Ad-22 will 
generally codify existing practices that similarly reflect the CPSS-
IOSCO Recommendations, the Commission does not believe it will conflict 
with regulatory requirements that are being implemented by other 
regulators or in other jurisdictions.
---------------------------------------------------------------------------

    \87\ See supra Section II.B.
    \88\ See Derivatives Clearing Organization General Provisions 
and Core Principles, supra note 38.
    \89\ See Financial Market Utilities, supra note 25.
---------------------------------------------------------------------------

4. Appropriate Distinctions Between Clearing Agencies
a. Comments Received
    In the Proposing Release, the Commission identified certain 
services in the area of post-trade securities processing that may be 
captured by the definition of a clearing agency in the Exchange Act. 
Two commenters generally supported the distinctions the Commission 
proposed for rules that should apply to all types of clearing agencies 
versus those that should apply only to CCPs.\90\ Several commenters 
argued that entities that perform certain post-trade processing 
services (i.e., comparison of trade data, collateral management and 
tear-up/compression) are not performing services that fall within the 
definition of a clearing agency under the Exchange Act and consequently 
entities that perform these services should not be required to register 
as a clearing agency or comply with Rule 17Ad-22.\91\
---------------------------------------------------------------------------

    \90\ See TriOptima Letter at 5; ICE Letter at 2.
    \91\ See generally TriOptima Letter; Markit (April) Letter; 
Markit (July) Letter; MarkitSERV (April) Letter; MarkitSERV (July) 
Letter; Omgeo Letter.
---------------------------------------------------------------------------

b. Commission Response
    We are not persuaded by commenters who suggested that post-trade 
processing services should be automatically excluded from the 
definition of a clearing agency in the Exchange Act.\92\ We believe 
that view is inconsistent with the plain meaning of the clearing agency 
definition because the definition of clearing agency in

[[Page 66228]]

Section 3(a)(23)(A) of the Exchange Act covers any person who acts as 
an intermediary in making payments or deliveries or both in connection 
with transactions in securities and 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.\93\ That view also is inconsistent with prior 
interpretive guidance from the Commission addressing the broader 
spectrum of activities that are associated with that term.\94\ The 
determination of whether particular activities meet the definition of a 
clearing agency depends on the totality of the facts and circumstances 
involved.\95\
---------------------------------------------------------------------------

    \92\ See supra note 91 and accompanying text.
    \93\ See supra note 36.
    \94\ See Confirmation and Affirmation of Securities Trades; 
Matching, Exchange Act Release No. 34-39829 (Apr. 6, 1998), 63 FR 
17943 (Apr. 13, 1998) (noting that ``[t]he Commission is of the view 
that matching constitutes a clearing agency function within the 
meaning of the clearing agency definition under Section 3(a)(23) of 
the Exchange Act. Specifically, matching constitutes `comparison of 
data respecting the terms of settlement of securities 
transactions.''').
    \95\ See, e.g., supra note 1, at 91 (the Senate Committee on 
Banking, Housing and Urban affairs acknowledging that through the 
intended breadth of the clearing agency definition the Commission 
even retains authority ``to negate, by rule, exclusions in this 
category in order to assure the prompt and accurate clearance and 
settlement of securities transactions or to prevent evasions of the 
Exchange Act'').
---------------------------------------------------------------------------

    On July 1, 2011, the Commission published a conditional, temporary 
exemption from clearing agency registration for entities that perform 
certain post-trade processing services for security-based swap 
transactions.\96\ The order facilitated the Commission's identification 
of entities that operate in that area and that accordingly may fall 
within the clearing agency definition. Several entities complied with 
the conditions of that order and remain exempt from clearing agency 
registration under its terms.\97\ By allowing potential clearing agency 
registrants to elect temporary, conditional exemption from 
registration, the order has given the Commission more time to consider 
whether these entities meet the clearing agency definition and, if 
registration is required, to consider what form of regulation may be 
most appropriate for those services.
---------------------------------------------------------------------------

    \96\ See, e.g., Exchange Act Release No. 34-64796 (July 1, 
2011), 76 FR 39963 (July 7, 2011) (providing an exemption from 
registration under Section 17A(b) of the Exchange Act, and stating 
that ``[t]he Commission is using its authority under section 36 of 
the Exchange Act to provide a conditional temporary exemption [from 
clearing agency registration], until the compliance date for the 
final rules relating to registration of clearing agencies that clear 
security-based swaps pursuant to sections 71A(i) and (j) of the 
Exchange Act, from the registration requirement in Section 17A(b)(1) 
of the Exchange Act to any clearing agency that may be required to 
register with the Commission solely as a result of providing 
Collateral Management Services, Trade Matching Services, Tear Up and 
Compression Services, and/or substantially similar services for 
security-based swaps'').
    \97\ The Commission notes further that its adoption of Rule 
17Ad-22 does not have any effect on the Commission's order granting 
a conditional temporary exemption from clearing agency registration 
for entities that perform certain post-trade processing services for 
security-based swap transactions. See supra note 96 and accompanying 
text. The temporary exemption is conditioned on these entities 
providing the Commission with identifying information and a detailed 
description of the types of services they provide. Section 17A(g) of 
the Exchange Act contains a registration requirement for security-
based swaps clearing agencies. Section 17A(j) of the Exchange Act 
requires the Commission to adopt rules governing persons that are 
registered as clearing agencies for security-based swaps under the 
Exchange Act, and Section 17A(i) requires security-based swaps 
clearing agencies to comply with such standards as the Commission 
may establish by rule as a condition to being registered or 
maintaining registration. As the Commission previously indicated 
with respect to the effective date for Section 17A(g), if a Title 
VII provision requires a rulemaking, such provision will not go into 
effect ``not less than'' 60 days after publication of the final 
related rule. 76 FR 36287, 36302 (June 22, 2011). The Commission has 
not adopted any rules applicable to clearing agencies that perform 
services; therefore, the registration requirement of Section 17A(g) 
will not be applicable to such clearing agencies until the date when 
rules with respect to such clearing agencies are adopted pursuant to 
Section 17A(i).
---------------------------------------------------------------------------

    The Commission preliminarily agrees with commenters that it is 
appropriate to consider a tailored framework of regulation for clearing 
agencies that perform certain post-trade processing services because 
such activities do not involve the same credit, market and operational 
risk concerns that are presented by clearing agencies that perform CCP 
or CSD services.\98\ Accordingly, the Commission intends to separately 
address clearing agencies that perform only post-trade processing 
services. The Commission has previously distinguished entities that 
provide certain post-trade services and fall within the definition of 
clearing agency from those entities that provide services more commonly 
associated with the functions of a clearing agency (e.g., CCP and CSD 
services).\99\ As part of its future rulemaking regarding these types 
of clearing agencies, the Commission may consider whether to apply the 
future rules to clearing agencies engaged in activities that were 
separately identified by Congress as PCS Activities in the Clearing 
Supervision Act. In particular, the Clearing Supervision Act identifies 
the following as PCS Activities:
---------------------------------------------------------------------------

    \98\ See supra notes 90-91 and accompanying text.
    \99\ See, e.g., Exchange Act Order No. 34-44188 (Apr. 17, 2001) 
(providing an exemption from registration as a clearing agency to a 
subsidiary of Omgeo conducting electronic trade confirmation and 
matching services).
---------------------------------------------------------------------------

    (1) Calculation and communication of unsettled financial 
transactions between counterparties;
    (2) netting of transactions;
    (3) provision and maintenance of trade, contract, or instrument 
information;
    (4) management of risks and activities associated with continuing 
financial transactions;
    (5) transmittal and storage of payment instructions;
    (6) movement of funds;
    (7) final settlement of financial transactions; and
    (8) other similar functions that the Council may determine.\100\
---------------------------------------------------------------------------

    \100\ 12 U.S.C. 5462(7).
---------------------------------------------------------------------------

    Accordingly, at this time, the Commission does not intend for Rule 
17Ad-22 to apply to clearing agencies that perform post-trade 
processing services. The scope of Rule 17Ad-22 will be limited to 
clearing agencies that are registered with the Commission and the rule 
will not apply to any clearing agencies operating pursuant to an 
exemption from registration as a clearing agency granted by the 
Commission, unless the terms of future exemptions specifically 
contemplate its application, in whole or in part. The Commission has 
clarified this as part of the final Rule 17Ad-22 adopted today by 
adding the word ``registered'' before the term ``clearing agency'' 
appearing in the first instance in paragraphs (b), (c)(1), (c)(2), and 
(d). For this reason, references to the term ``clearing agency'' in 
this release are generally intended to capture only registered clearing 
agencies, unless the context suggests otherwise. The Commission may 
consider at a later time whether rules tailored to clearing agencies 
that provide post-trade processing services would be appropriate.

III. Description of Rule 17Ad-22

A. Overview and Scope

    The Commission is adopting Rule 17Ad-22 with minor modifications 
from the proposal to implement the statutory provisions for clearing 
agencies under the Exchange Act. Rule 17Ad-22 requires registered 
clearing agencies to establish, implement, maintain and enforce written 
policies and procedures that are reasonably designed to meet certain 
minimum requirements for their operations and risk management practices 
on an ongoing basis. These minimum requirements will work in tandem 
with the requirements in

[[Page 66229]]

Section 17A that the Commission must make certain determinations 
regarding a clearing agency's rules.
    The Commission anticipates that the clearing agency's rules and 
procedures will likely continue to evolve so that the clearing agency 
can adequately respond to changes in technology, legal requirements, 
trading volume, trading practices, linkages between financial markets 
and the financial instruments traded in the markets that a clearing 
agency serves. Accordingly, registered clearing agencies must evaluate 
continually and make appropriate updates and improvements to their 
operations and risk management practices to facilitate the prompt and 
accurate clearance and settlement of securities transactions and to 
safeguard securities and funds in their custody or control.
    Rule 17Ad-22 consists of the following parts: (1) Rule 17Ad-22(a) 
provides definitions for certain terms; (2) Rule 17Ad-22(b) contains 
risk management and participation requirements for registered CCPs; (3) 
Rule 17Ad-22(c) establishes a reporting requirement for registered 
clearing agencies with respect to certain matters including financial 
resources and methodologies used to calculate financial requirements; 
and (4) Rule 17Ad-22(d) requires registered clearing agencies, as 
applicable, to meet certain minimum standards.
    As noted above, at this time, the Commission intends for Rule 17Ad-
22 to apply only to registered clearing agencies. The Commission may 
consider at a later time whether any additional rules tailored to 
clearing agencies that perform post-trade processing services would be 
appropriate. In addition, Rule 17Ad-22 will not apply to any clearing 
agencies operating pursuant to an exemption from registration as a 
clearing agency granted by the Commission unless the terms of future 
exemptions specifically contemplate its application, in whole or in 
part.

B. Definitions--Rule 17Ad-22(a)

1. Proposed Rule
    Proposed Rule 17Ad-22(a) contains five definitions. Proposed Rule 
17Ad-22(a)(1) would define ``central counterparty'' 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.\101\ Proposed Rule 17Ad-22(a)(3) would 
define ``participant,'' for the limited purposes of 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 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.\102\ Proposed Rule 17Ad-22(a)(5) would define ``net capital,'' 
for the limited purpose of 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.\103\
---------------------------------------------------------------------------

    \101\ See supra note 36 and accompanying text.
    \102\ The definition of normal market conditions in Rule 17Ad-
22(a)(4) is consistent with the corresponding explanation 
established in the CPSS-IOSCO Recommendations. See RCCP, supra note 
33, at 21 (explanatory note number 1).
    \103\ As appropriate, the clearing agency may develop risk-
adjusted capital calculations for prospective clearing members that 
are not broker-dealers.
---------------------------------------------------------------------------

2. Comments Received
    Commenters generally supported proposed Rule 17Ad-22(a)(3) because 
it would require a clearing agency to take account of an entire group 
of affiliated entities when complying with the financial resources 
requirements of proposed Rule 17Ad-22(b)(3), as well as the 
requirements in proposed Rule 17Ad-22(d)(14) for risk controls to 
address participants' failures to settle.\104\ However, one commenter 
recommended that the rule employ the phrase ``participant family'' 
because ``participant'' on its own may be easily confused with other 
uses of that term in the Exchange Act and in the rules and regulations 
thereunder.\105\ Accordingly, the commenter suggested that 
``participant family'' should be defined to mean each participant that 
controls, is controlled by or is under common control with another 
participant.\106\ The commenter recommended that the standard of 
control for this purpose should be defined as the disclosed ownership 
of 50% or more of the voting securities or other interests in a 
participant and that it should be based on information available to the 
clearing agency.\107\
---------------------------------------------------------------------------

    \104\ See The DTCC (April) Letter at 9-10.
    \105\ See id.
    \106\ See The DTCC (April) Letter at 10.
    \107\ See id.
---------------------------------------------------------------------------

    One commenter expressed concern about the definition of ``normal 
market conditions'' as 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.\108\ The commenter argued that it would be unusual to 
define normal market conditions this way (i.e., using margin 
requirements as a standard of measure) because margin models are 
designed to adjust during periods of market turbulence.\109\
---------------------------------------------------------------------------

    \108\ See The OCC Letter at 7.
    \109\ See id.
---------------------------------------------------------------------------

    The Commission received no comments on proposed Rules 17Ad-
22(a)(1), (2) and (5).
3. Final Rule
    As described more fully below, the Commission is adopting Rules 
17Ad-22(a)(1), (2), (4) and (5) as proposed. We are also adopting Rule 
17Ad-22(a)(3) with certain modifications to address concerns of 
commenters.
    We agree with commenters who suggested that in the interest of 
clarity and to avoid confusion with use of the term ``participant'' 
elsewhere in Exchange Act regulations, Rule 17Ad-22(a)(3) should be 
modified so that the term defined by the rule is ``participant family'' 
instead of ``participant.'' We are also modifying Rule 17Ad-22(a)(3) 
with respect to the language that describes the test for determining 
when a sufficient relationship of control exists between participants 
to qualify them as a ``participant family.'' The definition has been 
expanded to include entities controlled by a participant and to cover 
direct and indirect relationships. Accordingly, Rule 17Ad-22(a)(3) now 
provides that participants will be deemed to be a ``participant 
family'' for purposes of Rules 17Ad-22(b)(3) and 17Ad-22(d)(14) when 
``a participant directly, or indirectly through one or more 
intermediaries, controls, is controlled by, or is under common control 
with, another participant.'' This modification is intended to respond 
to the recommendation of commenters and more closely conform the text 
of Rule 17Ad-22(a)(3) to the language in which this standard appears in 
other contexts within the U.S. federal securities

[[Page 66230]]

laws.\110\ At the same time, we are not narrowing the definition of 
control in this context to mean ownership of 50% or more of the voting 
securities or other interests in a participant.\111\ We believe the 
more appropriate evaluation of control is based on the relationship 
between the entities and the power, directly or indirectly, to direct 
the management or policies of a company, whether through ownership of 
securities, by contract, or otherwise. In conducting this evaluation, 
clearing agencies should also be guided by the definition of 
``control'' set forth in Rule 405 under the Securities Act of 1933, 
using the information available to them.
---------------------------------------------------------------------------

    \110\ See, e.g., 17 CFR 230.405 (using ``controls or is 
controlled by, or is under common control with'' in the definition 
of affiliate found in Rule 405 under the Securities Act of 1933).
    \111\ See supra note 107 and accompanying text.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that well-designed margin 
models include factors that adjust to periods of market turbulence. The 
Commission, however, is not persuaded by the argument that the 
definition of normal market conditions in Rule 17Ad-22(a)(4) is at odds 
with the concept of certain periods of market turbulence.\112\ The rule 
defines ``normal market conditions'' as those that prevail 99 trading 
days out of 100. Margin models and other risk control mechanisms 
designed to adjust during periods of market turbulence are consistent 
with the definitional standard to the extent they help to reduce the 
number of trading days during which a clearing agency's exposure to 
participants are not fully covered by such measures.
---------------------------------------------------------------------------

    \112\ The Commission notes that the definition of normal market 
conditions found in Rule 17Ad-22(a) is modeled on the current 
international standard for determining normal market conditions in 
the CPSS-IOSCO Recommendations.
---------------------------------------------------------------------------

    The definition of ``normal market conditions'' in Rule 17Ad-
22(a)(4) is also modeled on relevant and analogous international 
standards. The RCCP stipulates that a CCP should limit its exposures to 
potential losses from defaults by its participants in normal market 
conditions and defines ``normal market conditions'' as price movements 
that produce changes in exposures that are expected to breach margin 
requirements or other risk controls only 1% of the time.\113\ The 
standard also comports with the international standard for bank capital 
requirements established by the Bank for International Settlements, 
which requires banks to measure market risks at a 99% confidence 
interval when determining regulatory capital requirements.\114\
---------------------------------------------------------------------------

    \113\ See Bank for International Settlements' Committee on 
Payment and Settlement Systems and Technical Committee of the 
International Organization of Securities Commissions, 
Recommendations for Central Counterparties (Nov. 2004), at 18-21, 
available at http://www.bis.org/publ/cpss64.pdf.
    \114\ See infra Section V.B.2 (discussion on current industry 
practices).
---------------------------------------------------------------------------

C. Risk Management Requirements for Central Counterparties: Rules 17Ad-
22(b)(1)-(4)

    Rules 17Ad-22(b)(1)-(4) contain several requirements that address 
risk management practices by registered CCPs. Specifically, the 
proposed rules would create standards with respect to: (1) Measurement 
and management of credit exposures; (2) margin requirements; (3) 
financial resources; and (4) annual evaluations of the performance of 
the clearing agency's margin models.
    During the comment period, commenters pointed out that to properly 
frame these requirements requires a great deal of technical expertise 
and that a failure to properly allow that expertise to influence final 
rules adopted by the Commission could result in inefficient 
requirements that lack the proper degree of flexibility to achieve 
prudent risk management practices without being overly burdensome. In 
some cases, commenters argued that personnel at the clearing agencies 
possess the requisite levels of experience and expertise to help the 
Commission shape CCP risk management standards.\115\
---------------------------------------------------------------------------

    \115\ See The DTCC (April) Letter at 18-20; The OCC Letter at 
12; LCH Letter at 3-4.
---------------------------------------------------------------------------

    As an initial matter, the Commission believes that Rules 17Ad-
22(b)(1)-(4) are appropriate minimum standards for registered CCPs and 
that they are consistent with existing international standards of 
practice. However, we agree that the process of evaluating, testing and 
refining CCP risk management standards will be ongoing and necessarily 
include an open dialogue among the CCPs, investors, the Commission and 
various other interested parties. In particular, the Commission will 
carefully consider further input from interested parties obtained 
through outreach to various constituencies and in response to any rules 
or rule amendments that may be proposed by the Commission upon 
considering the international standards developed by CPSS-IOSCO in the 
FMI Report.
    Further, Rules 17Ad-22(b)(1), (2), and (3) establish targets for 
clearing agencies to meet without prescribing a particular method. 
Accordingly, the rules provide clearing agencies with the flexibility 
to establish risk management procedures (e.g., back testing, stress 
testing, model validation procedures and the composition of financial 
resources) that are appropriately tailored to current market conditions 
and can be revised over time to address changes in market conditions. 
Given the existing use and general understanding by U.S. CCPs and CCPs 
and regulatory authorities around the world of the RCCP and the 
principles that form the basis of Rules 17Ad-22(b)(1), (2) and (3), the 
Commission is adopting these rules largely as proposed.
1. Rule 17Ad-22(b)(1): Measurement and Management of Credit Exposures
a. Proposed Rule
    Proposed Rule 17Ad-22(b)(1), as proposed, would require a CCP 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 under normal market 
conditions \116\ so that the operations of the CCP will not be 
disrupted and non-defaulting participants will not be exposed to losses 
that they cannot anticipate or control.
---------------------------------------------------------------------------

    \116\ See supra note 102 and accompanying text.
---------------------------------------------------------------------------

b. Comments Received
    Three commenters urged the Commission to consider adopting a more 
prescriptive version of the rule.\117\ Of this group, one suggested 
that the rule should permit a CCP to use correlated positions to reduce 
initial margin requirements only if the CCP can demonstrate a robust 
correlation between those positions under stressed market conditions 
and the CCP publicly discloses its methodology periodically for 
determining the correlation and the CCP's resulting margin 
requirements.\118\ Another commenter suggested that a CCP should be 
required to measure credit exposures several times each business day 
and to recalculate initial and variation margin for each clearing 
member and the clearing member's clients more than once each day.\119\ 
The third commenter stated that Rule 17Ad-22(b)(1) should also require 
the CCP to perform intraday calculations of credit risk exposure when 
circumstances warrant, including situations where the security-based 
swap is illiquid, difficult to price, or highly volatile.\120\
---------------------------------------------------------------------------

    \117\ See ISDA Letter at 7; LCH Letter at 2; Better Markets 
Letter at 5.
    \118\ See ISDA Letter at 7.
    \119\ See LCH Letter at 2.
    \120\ See Better Markets Letter at 5.

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

[[Page 66231]]

c. Final Rule
    The Commission is adopting Rule 17Ad-22(b)(1) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. We 
agree with commenters that the risks CCPs face are subject to change 
over time due to the potential for significant changes in the risk 
profiles of participants and if those risks are not appropriately 
measured and managed by the CCP, they can result in the accrual of 
significant liabilities.\121\ The Commission believes that measuring 
credit exposures once each day is the minimum frequency of measurement 
that will permit a clearing agency to consider effectively the credit 
exposures it faces.
---------------------------------------------------------------------------

    \121\ See supra notes 119-120 (citing the Better Markets Letter 
and LCH Letter).
---------------------------------------------------------------------------

    The Commission agrees with commenters that clearing agencies may 
need to measure credit exposures more frequently than once each day in 
order to ensure that the CCP can facilitate the prompt and accurate 
clearance and settlement of securities transactions and ensure that 
they operate safely and efficiently. That point of view is reflected in 
the rule requirement that the measurement must be performed at least 
once each day. However, the Commission believes that a less 
prescriptive and more flexible rule sets a more appropriate baseline 
standard. Each CCP is exposed to participants in different markets 
characterized by different trading patterns, volumes, liquidity, 
transparency and other unique market characteristics. Rather than 
prescribing a specific frequency for risk exposure measurements (other 
than the once daily minimum), the Commission believes that CCPs should 
monitor exposure and margin coverage on an intraday basis depending on 
the individual risk characteristics of their members and businesses, 
and adjust their risk management processes as needed. This stance is 
also consistent with our understanding that the practice at many CCPs 
is to measure credit exposures more than once daily.\122\
---------------------------------------------------------------------------

    \122\ See id.
---------------------------------------------------------------------------

    While the Commission also agrees with commenters who expressed the 
view that a CCP should provide reductions in initial margin 
requirements based on offsetting or inversely correlated positions only 
if the CCP can demonstrate a robust correlation between those 
positions--including under stressed market conditions,\123\ the rule is 
being adopted as proposed. The Commission believes that the 
determination of whether positions are sufficiently correlated to 
warrant offsets or whether reductions should be provided at all, is a 
matter that should be determined by the CCP as it implements its risk 
management procedures, and submitted to the Commission for review and 
public comment, as part of the Section 19b-4 rule filing process. The 
Commission believes that the rule should allow each CCP the flexibility 
to set margin requirements based on the unique products and markets 
that it serves. Margin requirements will vary based on a number of 
factors, including, but not limited to, the type, volume, and 
volatility of the instruments cleared. It is difficult to make 
determinations at the rule level regarding the suitability of margin 
reductions based on adequate position correlations; therefore, the 
Commission believes it is more appropriate to conduct such 
methodological evaluations during the supervisory process.
---------------------------------------------------------------------------

    \123\ See supra note 118 and accompanying text.
---------------------------------------------------------------------------

    As adopted, Rule 17Ad-22(b)(1) does not require that a registered 
CCP publicly disclose its correlation methodology and related margin 
requirements.\124\ Correlation methodology is generally considered 
confidential by clearing agencies because it is a critical element in 
determining their margin requirements. While CCPs generally provide 
this type of information to their participants, it typically is not 
made public. In this connection, we are adopting Rule 17Ad-22(d)(9), 
discussed below, which requires each registered CCP to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide market participants with sufficient 
information to enable them to identify and evaluate the risks and costs 
associated with using its services. Rule 17Ad-22(d)(9) is intended in 
part to promote appropriate levels of transparency concerning a CCP's 
margin practices while allowing registered clearing agencies to tailor 
disclosure in a way that preserves incentives for business model 
innovations and responsible competition among clearing agencies.
---------------------------------------------------------------------------

    \124\ See The OCC Letter at 17; The DTCC (April) Letter at 7.
---------------------------------------------------------------------------

    We are also adopting Rule 17Ad-22(b)(1), as it was proposed, to 
require registered CCPs to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to limit their 
exposures to potential losses from participant defaults. By collecting 
sufficient margin and having other liquid resources at its disposal, 
the Commission expects that a clearing agency will be able to limit its 
exposures to potential losses from defaults by clearing members in 
normal market conditions.\125\
---------------------------------------------------------------------------

    \125\ See supra note 102 and accompanying text.
---------------------------------------------------------------------------

2. Rule 17Ad-22(b)(2): Margin Requirements
a. Proposed Rule
    Proposed Rule 17Ad-22(b)(2) would require a CCP to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to: (i) Use margin requirements to limit its credit 
exposures to participants under normal market conditions; \126\ (ii) 
use risk-based models to set margin requirements; and (iii) review the 
models at least monthly.
---------------------------------------------------------------------------

    \126\ See id.
---------------------------------------------------------------------------

b. Comments Received
    One commenter recommended that the rule be amended to require that 
the CCP's margin requirements must be sufficient to limit credit 
exposures to both the CCP's participants and the clients of the CCP's 
participants.\127\ Another commenter supported standardization of the 
way CCPs set margin requirements and stated that the final rule should 
require those clearing agencies to make their margin-setting 
methodology available to customers.\128\ The commenter argued that this 
disclosure would enable market participants to reasonably anticipate 
when additional margin may be required and would consequently promote 
stable liquidity in the marketplace.\129\
---------------------------------------------------------------------------

    \127\ See LCH Letter at 2.
    \128\ See MFA (Kaswell) Letter at 2.
    \129\ See id. (noting that if the Commission requires the 
creation of these transparent conditions with respect to margin in 
its final rules, then the commenter would fully support the ability 
of clearing agencies to have flexibility to modify margin 
requirements as necessary, including by imposing special margin 
requirements or requiring intraday posting of margin).
---------------------------------------------------------------------------

    In response to a question asked by the Commission in the Proposing 
Release, one commenter stated that adopting Rule 17Ad-22(b)(2) as 
proposed is unlikely to create the risk that CCPs will lower margin 
standards to compete for business.\130\ The commenter asserted that 
integrity in risk management is the primary focus of CCPs, and that a 
CCP would suffer severe reputational harm if it risked using guaranty 
fund resources to cover margin deficiencies of clearing members.\131\ 
In addition, according to the commenter, CCPs do not alter margin 
requirements based on the

[[Page 66232]]

identity of the individual counterparty.\132\
---------------------------------------------------------------------------

    \130\ See id.
    \131\ See id.
    \132\ See MFA (Kaswell) Letter at 2-3.
---------------------------------------------------------------------------

    One commenter contended that certain aspects of a CCP's margin 
methodology, such as choice of confidence levels (used to estimate 
expected shortfall), the number of days' data relied on, and the 
various weights used to determine stress test charges do not need to be 
reviewed on a monthly basis.\133\ If the final rule does require a 
monthly review, the commenter suggested that the Commission should make 
clear that CCPs have substantial discretion to determine which aspects 
of the model are appropriate for the monthly review.\134\ In contrast, 
another commenter asked the Commission to consider a more prescriptive 
approach to the rule. It suggested that Rule 17Ad-22(b)(2) should be 
modified to require a clearing agency to use two to three years of 
historical price data when establishing normal market conditions, 
consider liquidity and the amount of time necessary to replace a 
position once a default occurs, and make a showing of significant and 
reliable correlation of price risks before it is allowed to net initial 
margin using long and short positions.\135\
---------------------------------------------------------------------------

    \133\ See The OCC Letter at 7.
    \134\ See id.
    \135\ See Better Markets Letter at 3-4.
---------------------------------------------------------------------------

    One commenter focused more narrowly on the appropriate confidence 
level that should be applied to initial margin collected by a clearing 
agency.\136\ The commenter argued that setting the appropriate 
confidence level is directly tied to the degree of mutualization 
performed by a clearing agency (i.e., the lesser the degree of 
mutualization the higher the appropriate confidence level because the 
amount of funds available to manage a default will be reduced).\137\
---------------------------------------------------------------------------

    \136\ See ISDA Letter at 7.
    \137\ See id. (stating, for example, that if the clearing agency 
performs mutualization in its default fund and for clients in 
omnibus client accounts then a 99% confidence level is completely 
appropriate. By contrast, if the clearing agency imposes a 
requirement for individualized client accounts instead of an omnibus 
account, then the commenter believes that a confidence level greater 
than 99% is likely appropriate).
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(b)(2) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. This 
requirement recognizes that the collection of assets (e.g., cash or 
securities) from participants provides the clearing agency with assets 
to limit its exposure to a participant in the event of a participant 
default. By limiting its credit exposure in this manner, a CCP is less 
likely to be subject to disruptions in its operations as a result of a 
participant default, thereby facilitating the prompt and accurate 
clearance and settlement of securities transactions.
    The Commission does not believe it is necessary to amend the rule 
to state that a registered CCP's margin requirements must limit credit 
exposures to customers of participants as well as participants.\138\ 
Margin requirements applicable to a customer's securities positions are 
established in accordance with regulations specifically governing 
customer margin practices \139\ and in some cases through additional 
margin requirements imposed by the participant to address its credit 
risk to the customer. As a result, even when a participant is 
transacting on the behalf of a customer, the CCP enters into a 
transaction only with the participant, and therefore it is the 
participant's creditworthiness that the clearing agency's margin 
requirements must adequately address.
---------------------------------------------------------------------------

    \138\ See supra note 127 and accompanying text.
    \139\ See, e.g., 17 CFR 240.15c3-3 (Customer protection--
reserves and custody of securities and Regulation T, 12 CFR 220).
---------------------------------------------------------------------------

    The Commission is aware that some CCPs may already have the ability 
to measure credit exposures to customers of participants as well as to 
participants. To the extent that such margin practices are already in 
place or develop over time to help ensure prompt and accurate clearance 
and settlement in the market the clearing agency serves, we believe 
those practices can be effective in limiting aggregate credit exposures 
of clearing agencies. We agree that the ability to limit credit 
exposures to customers of participants using margin may help inform and 
shape appropriate credit risk management practices in certain cases--
for example, where (i) direct access to a clearing agency by some 
participants may be relatively more constrained by the operational or 
financial demands commensurate with participation; (ii) open interest 
periods associated with the instruments cleared by the clearing agency 
are relatively significant; or (iii) customer margin requirements are 
established independently from the CCP (e.g., pursuant to regulation or 
by agreement with a participant). However, we believe that, at this 
time, individual CCPs should develop rules and procedures to address 
these specific circumstances consistent with their general 
responsibilities as clearing agencies under the Exchange Act and that 
rules of this kind would be subject to the rule filing procedures of 
Section 19b-4.
    The Commission is not amending Rule 17Ad-22(b)(2) to specify which 
aspects or components of the CCP's risk-based models must be reviewed 
in the context of the CCP's monthly review.\140\ The Commission 
recognizes that some assumptions that underlie model parameters may be 
widely accepted by current convention, and those components therefore 
may be less likely to become outdated from month to month. On the other 
hand, the Commission notes that market conditions and risks are 
constantly changing and CCPs will need to exercise discretion in how 
they administer their review of those components.
---------------------------------------------------------------------------

    \140\ See supra note 134 and accompanying text.
---------------------------------------------------------------------------

    The Commission notes that, to the extent a CCP believes that an 
assumption in a model or parameter does not lend itself to empirical 
testing, a review of that assumption can in some cases be accomplished 
by the CCP performing a theoretical assessment of that assumption 
compared to alternative assumptions. For example, a CCP may evaluate 
the appropriateness of the number of days of market data used in its 
margin model or the expected amount of time needed to liquidate a 
security in an event of default by comparing the performance of the 
margin model when a range of representative values is input.
    Also consistent with the intent of preserving appropriate 
flexibility for clearing agencies to tailor their methods of achieving 
compliance, the Commission is not prescribing a particular confidence 
level for initial margin in Rule 17Ad-22(b)(2).\141\ Rather, subject to 
Commission oversight, Rule 17Ad-22(b)(2) allows a confidence level 
determination to be made by the clearing agency as part of the 
development of its margin parameters and risk-based models. In arriving 
at an appropriate confidence level, we agree with commenters that the 
extent of mutualization of financial resources performed by a CCP in 
its risk management practices and the particular use of individualized 
client accounts or an omnibus account structure are appropriate factors 
to consider.\142\ The Commission also chose not to stipulate specific 
requirements pertaining to the scope of historical price data, 
liquidity and replacement considerations, and the correlation of price 
risks used in calculating margin requirements, again opting for a more 
flexible standard. While a clearing

[[Page 66233]]

agency may take such factors into consideration when determining margin 
requirements, each registered CCP should be free to develop the best 
margin methodology to accommodate its unique products and markets. 
Accordingly, the Commission believes that it should not attempt to 
prescribe the appropriate margin methodologies for each CCP or 
financial instrument.\143\
---------------------------------------------------------------------------

    \141\ See supra note 136 and accompanying text.
    \142\ See supra note 137 and accompanying text.
    \143\ See Section 17A discussion supra Section I.A.2 and 
accompanying text.
---------------------------------------------------------------------------

    We agree with commenters who asserted that a CCP's disclosure of 
its margin-setting methodology to customers facilitates prompt and 
accurate clearance and settlement by enabling market participants to 
better plan for margin costs associated with the use of the clearing 
agency.\144\ As noted above, registered CCPs must submit their risk 
management procedures, including margin methodology, to the Commission 
for review and public comment as a proposed rule change under Rule 19b-
4. The Rule 19b-4 process provides for public disclosure, as well as an 
opportunity for interested parties to comment on the proposed rule 
change. In addition, the Commission believes that any reasonable 
process for implementing risk management practices will involve 
further, more detailed communication with clearing members and their 
customers regarding the particular expected results of the practices in 
identified circumstances. Such communication may involve both direct 
contacts with members and their customers or indirect contacts through 
general information published by the CCP on its Web site or in other 
generally available resources.
---------------------------------------------------------------------------

    \144\ See supra note 59.
---------------------------------------------------------------------------

3. Rule 17Ad-22(b)(3): Financial Resources
a. Proposed Rule
    Proposed Rule 17Ad-22(b)(3) would require a CCP 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 would be required 
to maintain sufficient financial resources to withstand, at a minimum, 
a default by the two participants (also referred to as the ``cover 
two'' standard) to which it has the largest exposures in extreme but 
plausible market conditions.\145\
---------------------------------------------------------------------------

    \145\ See proposed Rule 17Ad-22(a)(3), supra Section III.B.1 
(defining ``participant'' for purposes of proposed Rule 17Ad-
22(b)(3)).
---------------------------------------------------------------------------

b. Comments Received
    Commenters expressed a wide range of views concerning proposed Rule 
17Ad-22(b)(3). Some commenters generally supported the proposed 
rule.\146\ Others expressed concern that the introduction of two 
different financial resources standards may discourage CCPs from 
extending their services to security-based swaps or may discourage 
prospective participants from seeking membership in CCPs for security-
based swaps, which would disrupt the goal of the Dodd-Frank Act to 
promote central clearing.\147\ One commenter stated its opinion that no 
historical or empirical case has been made for changing the way that 
CCPs currently measure the sufficiency of their financial resources and 
that no cost-benefit analysis has been done on the impact of any such 
change on the operations and economics of CCPs.\148\
---------------------------------------------------------------------------

    \146\ See Better Markets Letter at 5 (supporting the rule and 
stating that it appropriately differentiates between security-based 
swap and non security-based swap clearing agencies due to unique 
features of the security-based swap markets, such as jump-to-default 
risk); see also Barnard Letter at 1 (supporting generally the thrust 
of the Commission's proposals in the Proposing Release, particularly 
proposed Rule 17Ad-22 concerning standards for clearing agencies); 
BlackRock Letter at 2 (supporting Rules 17Ad-22(b)(1)-(7) because 
these rules will benefit the markets by reducing concentration risk, 
increasing the diversity of market participants involved in 
governance, enhancing competition and lowering costs for customers 
of clearing members); MFA (Kaswell) Letter at 2 (generally 
supporting the rules proposed under 17Ad-22(b) because they would 
establish reasonable, objective, risk-based criteria for fair and 
open access).
    \147\ See LCH Letter at 2; The OCC Letter at 9.
    \148\ See The DTCC (April) Letter at 12.
---------------------------------------------------------------------------

    A commenter also suggested that CCPs should consider the 
simultaneous default of multiple clearing members when sizing their 
financial resources but that a simultaneous default of the two largest 
clearing members is an extremely implausible occurrence, and 
accordingly it is not a scenario that should be embedded as a fixed 
requirement in the Commission's rules.\149\ That commenter stated that 
it is reasonable to assume a default by the two largest participants 
would take place in conditions of heightened market volatility, which 
would cause a CCP to collect more financial resources because of the 
risk-based nature of margin requirements.\150\
---------------------------------------------------------------------------

    \149\ See The OCC Letter at 8.
    \150\ See The OCC Letter at 9.
---------------------------------------------------------------------------

    One commenter disagreed with assertions in the Proposing Release 
that the performance of CCP services for security-based swaps entails 
risks that are unique to those products and that those unique risks 
support the proposed ``cover two'' requirement.\151\ The commenter also 
stated that accounting for the jump-to-default risk of certain 
security-based swap instruments (i.e., credit-default swaps) should be 
addressed through calculation of financial resource requirements using 
more extreme market scenarios instead of adjusting the number of 
participant defaults.\152\ The commenter urged the Commission to 
consider how changes taking place to the infrastructure and risk 
management practices in the securities markets due to the Dodd-Frank 
Act may render irrelevant certain risks that are associated with 
security-based swaps today.\153\
---------------------------------------------------------------------------

    \151\ See The OCC Letter at 8 (expressing by way of example that 
a total return security-based swap on a single underlying security 
of a company that has a large market capitalization is a lower risk 
management challenge for a clearing agency that performs CCP 
services than a put or a call option on the same underlying 
security. It expressed a belief that the risk is much the same as a 
security future on the same underlying).
    \152\ See id.
    \153\ See id.
---------------------------------------------------------------------------

    Commenters supported the position that the Commission's regulatory 
standards for CCPs should be modified where appropriate to account for 
the relevant work of international standard setters such as the CPSS 
and IOSCO.\154\ However, commenters pointed out that a ``cover two'' 
standard would be inconsistent with the existing CPSS-IOSCO 
Recommendations for financial resources.\155\ They also urged the 
Commission not to require any CCP to increase its liquidity resources 
or otherwise re-engineer its risk management controls unless and until 
there is industry and regulatory consensus on the changes that should 
be made.\156\ These commenters encouraged the Commission to ensure that 
its final rulemakings are aligned with the existing CPSS-IOSCO 
Recommendations to the closest extent possible.\157\
---------------------------------------------------------------------------

    \154\ See The OCC Letter at 9 (citing CPSS-IOSCO Recommendation 
for Central Counterparties, Recommendation 3).
    \155\ See id.
    \156\ See The DTCC (April) Letter at 12.
    \157\ See LCH Letter at 2-3; The OCC Letter at 9.
---------------------------------------------------------------------------

    Commenters disagreed over what role the Commission should play in 
defining the term ``extreme but plausible market conditions'' as that 
term appears in proposed Rule 17Ad-22(b)(3).\158\ One commenter favored 
a significant role for

[[Page 66234]]

the Commission.\159\ Other commenters agreed that CCPs should be 
primarily responsible for determining the parameters of the standard 
because of their unique access to market data and understanding of the 
range of applicable market conditions.\160\ Those commenters stated 
that Rule 17Ad-22(b)(3) should clarify that a CCP is responsible for 
determining what constitutes ``extreme but plausible market 
conditions.''
---------------------------------------------------------------------------

    \158\ See Better Markets Letter at 5-6; The DTCC (April) Letter 
at 10.
    \159\ See Better Markets Letter at 5-6 (stressing that the 
Commission should provide concrete guidance on the meaning of 
``extreme but plausible market conditions'' to prevent lax or self-
serving interpretation of that standard and to promote consistent 
practices among clearing agencies that will prevent the adoption of 
lower standards designed to reduce costs and attract business volume 
at the expense of stability and risk mitigation. The commenter also 
expressed that the Commission's definition of the standard should 
focus on unprecedented periods of illiquidity, volatility and 
interconnectedness that lead to multiple defaults).
    \160\ See The DTCC (April) Letter at 10; The OCC Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(b)(3) with certain 
modifications to address concerns raised by commenters, including but 
not limited to the clarification discussed in Sections II.B.4 and III.A 
regarding the application of the rule only to registered clearing 
agencies and clarifications relating to the term ``participant family'' 
as discussed above.\161\ The Commission believes that requiring a 
registered CCP, other than a security-based swap CCP, to maintain 
sufficient financial resources to withstand, at a minimum, a default by 
the participant family to which it has the largest exposure in extreme 
but plausible market conditions, reduces the likelihood that a default 
would create losses that disrupt the operations of the CCP and 
adversely affect the clearing agency's non-defaulting participants.
---------------------------------------------------------------------------

    \161\ See supra note 146 (supporting the rule as proposed); see 
also supra section III.B.3 (discussing the term ``participant 
family'').
---------------------------------------------------------------------------

    While the Commission is sensitive to the consequences of 
establishing a different standard for CCPs that clear security-based 
swaps, the Commission believes that the financial resources of the 
entity must be robust enough to accommodate the risks that are 
particular to each market served--irrespective of whether such analysis 
results in different standards. The Commission believes that requiring 
a security-based swap CCP to cover its two largest potential exposures 
is the appropriate standard due to the nature of these products. 
Security-based swaps pose unique risk management issues. In particular, 
credit default swaps, a subset of security-based swaps, are non-linear 
financial instruments subject to additional risk factors such as jump-
to-default risk \162\ and asymmetrical risk allocation between short 
and long counterparties. Unlike other products that also exhibit these 
characteristics (e.g., Long-Term Equity Anticipation Securities 
(LEAPS)), credit default swaps are unique in their size relative to 
their underlying markets. Recent research shows that notional 
outstandings in credit default swaps are often close to or greater than 
the outstanding value of the underlying instruments.\163\ The 
traditional procedures for a clearing agency to handle a default may 
not be effective and may entail significant risk to a CCP clearing 
security-based swaps.\164\ To address this concern, CCPs have 
implemented procedures that provide for the management and oversight of 
the liquidation or transfer of the defaulting member's positions by a 
default management committee comprising senior CCP staff and 
representatives from member institutions.\165\
---------------------------------------------------------------------------

    \162\ Jump-to-default risk refers to the expected change in the 
value of a CDS contract if a credit event were to occur with respect 
to a reference entity under the terms of the CDS contract, 
triggering an obligation for the seller of protection under the 
contract to make a lump sum payment to the protection buyer. Jump-
to-default only refers to the incremental information in the 
determination that a credit event has occurred because the market 
already prices the probability of a credit event. In practice, 
credit events are largely anticipated such that jump-to-default 
results in small changes in value as opposed to a first order 
pricing effect. Jump-to-default risk exists for all CDS, not merely 
those on reference entities perceived as risk credits. While the 
decline in contract value from a credit event is usually bigger for 
creditworthy reference entities (because the initial contract value 
is higher and thus has farther to fall), jump-to-default risk can 
also be measured for distressed reference entities that are expected 
to suffer a credit event in the near future. As a hypothetical 
example, market participants might have measured the jump-to-default 
risk in ``Hypothetical Risky Corporation'' five-year CDS when the 
CDS was trading at 70% upfront (that is, a seller would need to 
receive an up-front payment of 70% of notional value to write the 
contract) and the expected value in default was 80% upfront 
(implying a 20% recovery rate) as being equal to 10% of notional 
value; equally, they might have measured the jump-to-default risk of 
``Hypothetical Safe Corporation'' five-year CDS when it was trading 
at 0.30% per annum and no up-front payment (roughly equivalent to an 
up-front payment of 1.5%) with an expected value in default of 60% 
upfront (implying a 40% recovery rate) as being equal to 
approximately 58.5% of notional value. 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.
    \163\ See, e.g., Stavros Peristiani, Vanessa Savino, ``Are 
Credit Default Swaps Associated with Higher Corporate Defaults?'', 
Federal Reserve Bank of New York Staff Report No. 494 (May 2011); 
Alessandro Fontana and Martin Scheicher, ``An analysis of euro area 
sovereign CDS and their relation with government bonds,'' European 
Central Bank Working Paper Series, No. 1271 (Dec. 2010).
    \164\ For example, when a participant defaults, the CCP 
terminates all of its contracts with the defaulting participant. The 
traditional procedures for handling a default, which are used by 
CCPs for most exchange-traded derivatives, call for the CCP to 
promptly enter the market and replace the contracts, so as to hedge 
against further losses on the open positions created by termination 
of the defaulter's contracts. However, if the markets for the 
contracts cleared by the CCP are illiquid, entering the market may 
induce adverse price movements, especially if the defaulting 
participant's positions are large relative to the overall market for 
the contracts. See Bank for International Settlement's Committee on 
Payment and Settlement Systems, New Developments in Clearing and 
Settlement Arrangements for OTC Derivatives (Mar. 2007).
    \165\ See id.
---------------------------------------------------------------------------

    The Commission does not believe that changes in the security-based 
swap market resulting from the Dodd-Frank Act (e.g., mandatory clearing 
requirements, the establishment of the Council, etc.) have eliminated 
or will eliminate the additional risk management challenges of 
security-based swaps noted above. Therefore, the Commission believes 
that it should codify the existing standard for maintenance of 
financial resources established by CCPs currently clearing security-
based swaps.
    The Commission notes that current industry participants recognize 
the need for more stringent financial resource requirements for CCPs 
that clear credit default swaps.\166\ This point is evidenced by the 
fact that the ``cover two'' standard has been employed since before the 
enactment of the Dodd-Frank Act and prior to the adoption of the 
European Market Infrastructure Regulation (``EMIR'') \167\ by the major 
CCPs clearing credit default swaps, both in the United States and 
internationally. For example, both of the registered CCPs providing 
clearing services for credit default swap transactions to customers in 
the United States, ICE Clear Credit and ICE Clear Europe, already meet 
a ``cover two'' standard as does CME Group (``CME'') with respect to 
its clearing service for index credit default swaps, which is 
registered with the Commission but does not yet provide CCP services 
for security-based swaps.\168\ LCH.Clearnet, a leading CCP

[[Page 66235]]

for OTC derivatives in Europe, maintains a ``cover two'' standard for 
its credit default swap CCP activities.\169\ These practices are 
consistent with the ``cover two'' financial resources requirement for 
European CCPs contained in EMIR.\170\
---------------------------------------------------------------------------

    \166\ See, e.g., ISDA Letter at 1; see also Letter to William C. 
Dudley from the OTC Derivatives Supervisors Group, dated March 31, 
2011, available at http://www.newyorkfed.org/newsevents/news/markets/2011/SCL0331/pdf (generally supporting enhancing the 
framework for OTC derivatives risk management).
    \167\ Regulation No. 648/2012 of the European Parliament and of 
the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade repositories, 2012 O.J. (L 201).
    \168\ See CFTC-SEC Staff Roundtable on Clearing of Credit 
Default Swaps (Oct. 2010), at 123, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission7_102210-transcrip.pdf (Stan Ivanov, ICE Clear Credit stating ``at ICE 
we look at two simultaneous defaults of the two biggest losers upon 
extreme conditions * * *.''). See also CDS Clearing Solution ICE 
Clear Europe (June 2012), at 6, available at https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_CDS_Clearing_Overview.pdf (``Guaranty Fund covers simultaneous default of 2 
largest Clearing Members''); CME Rulebook, Chapter 8H, Rule 8H07, 
available at http://www.cmegroup.com/rulebook/CME/I/8H/07.html.
    \169\ See LCH.Clearnet CDS Clearing Rulebook, Chapter 4, Article 
4.4.1.2 (May 5, 2012), available at http://www.lchclearnet.com/Images/CDSClear%20Rulebook_tcm6-61343.pdf.
    \170\ See supra note 167, at 43.
---------------------------------------------------------------------------

    Given that both of the registered CCPs providing clearing services 
for security-based swap transactions already meet the proposed 
standard, and that CME, which proposes to provide such services, is 
currently following a ``cover two'' standard in index credit default 
swap clearing, the Commission believes that Rule 17Ad-22(b)(3) does not 
represent a change in existing market practices and would not hinder 
the growth of existing security-based swap CCPs.\171\ Furthermore, the 
Commission does not believe the rule poses an overly burdensome barrier 
to entry for future CCPs wishing to clear security-based swaps, as we 
do not intend the rule to require a registered CCP clearing security-
based swaps to cover its two largest participant exposures in the event 
of default for all of its products. A CCP can choose to maintain a 
separate default fund for security-based swaps, limiting the overall 
financial burden.\172\
---------------------------------------------------------------------------

    \171\ See supra note 168.
    \172\ See CME Rulebook, Chapter 8, Rule 802, available at http://www.cmegroup.com/rulebook/CME/I/8/02.html (``The Clearing House 
shall establish a guaranty fund (the ``Base Guaranty Fund'') for 
products other than CDS Products * * *''); see also CME Rulebook, 
Chapter 8H, Rule 8H07, available at http://www.cmegroup.com/rulebook/CME/I/8H/07.html (``The Clearing House shall establish a 
financial safeguards package to support CDS clearing, and each CDS 
Clearing Member shall make a CDS Guaranty Fund deposit with the 
Clearing House.''); see generally discussion infra Section 
V.B.1.iii.c.
---------------------------------------------------------------------------

    We are adopting Rule 17Ad-22(b)(3) with modifications intended to 
recognize different types of structures currently employed by CCPs 
clearing security-based swaps and similar structures that may be 
developed in the future. The final rule allows that the policies and 
procedures may provide that the additional financial resources required 
to be held under the ``cover two'' standard may be maintained for the 
entire CCP or in separately maintained funds. This modification from 
the proposal recognizes that clearing agencies' practices may be 
structured as (i) conducting security-based swap clearing activities in 
a separate legal entity or (ii) maintaining within one legal entity 
separate rules, membership requirements, risk management practices, and 
financial resources specifically designed to cover the CCP's exposures 
to a separate pool of instruments that includes security-based swaps. 
The Commission also believes that as security-based swap CCPs introduce 
new products for clearing on an incremental basis in the future, the 
adopted rule will provide them with appropriate flexibility to organize 
their operations to obtain additional financial resources to cover 
exposures for each new security-based swap product in the manner most 
appropriate for their organization.\173\
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    \173\ The Commission is also aware that clearing agencies that 
provide CCP services for security-based swap transactions generally 
do not separate their operations and risk management practices 
between swap and security-based swap instruments. For example, we 
understand that some registered clearing agencies may wish to accept 
customer assets used to margin customer positions consisting of 
swaps and security-based swaps in commingled customer omnibus 
accounts and are already offering clearing services for swaps and 
security-based swaps in commingled proprietary accounts. 
Accordingly, where a clearing agency's operations and risk 
management practices are commingled, the clearing agency will be 
subject to the ``cover two'' requirement applicable to security-
based swap CCPs under Rule 17Ad-22(b)(3). See Letter from Winston & 
Strawn LLP, dated Nov. 7, 2011 (requesting exemptive relief for ICE 
Clear Credit LLC in connection with a program to commingle customer 
funds and implement portfolio CDS).
---------------------------------------------------------------------------

    Some commenters argued that the Commission should not adopt a 
standard for the level of financial resources that may be inconsistent 
with the FMI Report and that there should be industry and regulatory 
consensus on the level of financial resources that must be 
maintained.\174\ The FMI Report states that CCPs should maintain 
financial resources to cover the default of the largest two 
participants when the CCP is involved in activities with a more-complex 
risk profile.\175\ The FMI Report describes a more-complex risk profile 
as ``clearing financial instruments that are characterized by discreet 
jump-to-default price changes or that are highly correlated with 
potential participant defaults.'' \176\ The vast majority of security-
based swaps by notional value and other measures are credit default 
swaps products with such characteristics, and, accordingly, the 
Commission believes that the standard being adopted today with regard 
to security-based swaps is substantially similar to that in the FMI 
Report.\177\ As security-based swap products with different 
characteristics are proposed for clearing over time, the Commission 
would evaluate risk profiles of such products to consider how they 
would be treated under the ``cover two'' standard.
---------------------------------------------------------------------------

    \174\ See supra note 156.
    \175\ See FMI Report, supra note 32, at 36 (Principle 4: Credit 
risk ``In addition, a CCP that is involved in activities with a 
more-complex risk profile or that is systemically important in 
multiple jurisdictions should maintain additional financial 
resources sufficient to cover a wide range of potential stress 
scenarios that should include, but not be limited to, the default of 
the two participants and their affiliates that would potentially 
cause the largest aggregate credit exposure to the CCP in extreme 
but plausible market conditions. All other CCPs should maintain 
additional financial resources sufficient to cover a wide range of 
potential stress scenarios that should include, but not be limited 
to, the default of the participant and its affiliates that would 
potentially cause the largest aggregate credit exposure to the CCP 
in extreme but plausible market conditions.'').
    \176\ See id.
    \177\ The Commission has previously estimated that single-name 
CDS will constitute roughly 95% of the market, as measured on a 
notional basis, for instruments that fall within the definition of 
security-based swap. See Securities Exchange Act Release No. 34-
66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012), at 30636, n.476.
---------------------------------------------------------------------------

    The Commission also is not persuaded that the ``cover two'' 
standard reflects an implausible occurrence that therefore should not 
be embedded into the Commission's rules. The financial crisis of 2008 
demonstrated the plausibility of the default of two large participants 
in a clearing agency over a brief period. One large investment bank was 
saved from the brink of default in March 2008.\178\ In September 2008, 
two large financial institutions failed and another large financial 
institution was rescued from insolvency by the Federal Reserve.\179\ 
Throughout the course of these events, the U.S. and world financial 
markets were affected by a systemic crisis of confidence that stifled 
the ability of market participants to obtain financing and avoid 
default.\180\ The Commission believes therefore that it is plausible to

[[Page 66236]]

assume that a systemic market disruption like that which was 
experienced in 2008 could affect the two largest participants of a 
security-based swap CCP.
---------------------------------------------------------------------------

    \178\ See Board of Governors of the Federal Reserve System, Bear 
Stearns, JPMorgan Chase, and Maiden Lane LLC, http://www.federalreserve.gov/newsevents/reform_bearstearns.htm (last 
visited June 25, 2012).
    \179\ LaBonte and Norden Berg, Dodd-Frank Act, Congressional 
Research Services, Title VIII: Supervision of Payment, Clearing and 
Settlement Activities (Dec. 10, 2010), at 1, available at http://www.llsdc.org/attachments/files/279/CRS-R41529.pdf (noting the 
failures of Lehman Brothers Holdings, Inc. and Washington Mutual, 
Inc. in 2008 and the subsequent rescue of American International 
Group, Inc.).
    \180\ See, e.g., Trustee's Preliminary Investigation Report and 
Recommendations of the Attorneys for James W. Giddens for the SIPA 
Liquidation of Lehman Brothers, Inc. (Aug. 25, 2010), available at 
http://dm.epiq11.com/LBI/Project/default.aspx.
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    One clearing agency commented that since its modeling assumptions 
for simultaneous default of two participants assume significant market 
volatility but its modeling assumptions for the default of the largest 
participant assume low volatility, it is possible that a requirement 
for financial resources to cover the default of the largest two 
participants may result in only a slightly higher or even a lower 
requirement than one for financial resources to cover the default of 
the largest participant.\181\ However, the Commission is not persuaded 
by this comment and the assumption regarding low volatility. All 
registered clearing agencies are expected to ensure that the 
assumptions underlying their models are reasonably designed to meet the 
requirements of the Exchange Act and related regulations at all times, 
and the Commission staff reviews the practices of clearing agencies in 
this area through its established supervisory process. To the extent 
Commission staff identifies shortcomings in an individual registered 
clearing agency's practices relevant to its maintenance of the ``cover 
one'' or ``cover two'' requirements, further action may be taken to 
address such concerns, as may be necessary or appropriate. For example, 
in connection with an examination, the Commission can request 
corrective action as part of its examination findings. Where there are 
shortcomings that violate the clearing agency's rules or Rule 17Ad-
22(b)(3), the Commission may take enforcement action.\182\
---------------------------------------------------------------------------

    \181\ See supra note 150.
    \182\ See Section 17A discussion supra Section I.A.2 and 
accompanying text.
---------------------------------------------------------------------------

    Finally, the Commission does not believe that Rule 17Ad-22(b)(3) 
will require major changes to the practices that have been developed to 
measure the sufficiency of financial resources at registered CCPs. The 
Commission understands that all CCPs currently registered with the 
Commission maintain enough financial resources to withstand the default 
of their largest participant under extreme but plausible market 
conditions.\183\ All of the security-based swap transactions that are 
centrally cleared in the United States are handled by a security-based 
swap CCP that maintains enough financial resources to be able to 
withstand the default of its two largest participants.\184\
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    \183\ 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 (2010), at 10, available at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf (assessing NSCC's 
observance of Recommendation 5 from the RCCP that a CCP should 
maintain sufficient financial resources to withstand, at a minimum, 
the default of a participant to which it has the largest exposure in 
extreme but plausible market conditions 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% of the time); 
International Monetary Fund, Publication of Financial Sector 
Assessment Program Documentation--Detailed Assessment of Observance 
of the Fixed Income Clearing Corporation--Government Securities 
Division's Observance of the CPSS-IOSCO Recommendations for Central 
Counterparties (2010), at 9-10, available at http://www.imf.org/external/pubs/ft/scr/2010/cr10130.pdf (finding that Fixed Income 
Clearing Corporation's Government Securities Division ``observed'' 
the requirement to maintain enough financial resources to meet the 
default of its largest participant in extreme but plausible market 
conditions).
    \184\ See supra note 168 (reflecting that ICE Clear Credit 
``looks at two simultaneous defaults of the two biggest losers upon 
extreme conditions * * *.''). Most centrally cleared CDS 
transactions have cleared at ICE Clear Credit or ICE Clear Europe 
Limited. As of April 19, 2012, ICE Clear Credit had cleared 
approximately $15.6 trillion notional amount of CDS contracts based 
on indices of securities and approximately $1.5 trillion notional 
amount of CDS contracts based on individual reference entities or 
securities. As of April 19, 2012, ICE Clear Europe had cleared 
approximately [euro]7.2 trillion notional amount of CDS contracts 
based on indices of securities and approximately [euro]1.2 trillion 
notional amount of CDS contracts based on individual reference 
entities or securities. See https://www.theice.com/marketdata/reports/ReportCenter.shtml. As of April 19, 2012, CME had cleared 
approximately $522 billion notional amount of CDS contracts based on 
indices of securities.
---------------------------------------------------------------------------

    The Commission agrees with the commenter who suggested that it is 
important for the Commission to provide concrete guidance regarding the 
meaning of ``extreme but plausible market conditions'' to assure 
consistent treatment of that term across clearing CCPs. In general, 
``extreme but plausible market conditions'' are tail event conditions 
in which the price movement of a cleared security results in losses 
exceeding expectations at a 99% confidence interval, causing a clearing 
agency's exposures to its participants to breach margin requirements or 
other risk controls (i.e., a one out of 100 days scenario). For 
example, ``extreme but plausible market conditions'' may include or 
exceed the worst historical price movement for a particular financial 
instrument over a specified time horizon. However, the Commission also 
agrees with commenters that argued that industry professionals, 
including but not limited to personnel at the clearing agencies 
themselves, are likely to be equipped with the relevant expertise that 
can contribute to developing a well-informed standard of ``extreme but 
plausible market conditions.'' To ensure that the standard is 
consistently applied across CCPs and that it accurately captures the 
market understanding of the terminology, the Commission expects to 
review and publish for public comment rule proposals from clearing 
agencies adopting a definition for ``extreme but plausible market 
conditions'' that is appropriate for the market they serve.
4. Rule 17Ad-22(b)(4): Model Validation
a. Proposed Rule
    Rule 17Ad-22(b)(4), as proposed, would require a CCP 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 CCP'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.\185\ The Commission is adopting Rule 17Ad-22(b)(4) to ensure 
that a registered CCP's models are validated by qualified persons free 
from influence from the persons responsible for development or 
operation of the systems and models being validated, with sufficient 
frequency to assure that the models perform in a manner that 
facilitates prompt and accurate clearance and settlement of 
transactions.
---------------------------------------------------------------------------

    \185\ 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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b. Comments Received
    Commenters generally supported proposed Rule 17Ad-22(b)(4) \186\ 
but

[[Page 66237]]

they also provided several suggested modifications regarding the 
required frequency of the model validation and how best to achieve the 
proper level of scrutiny and testing of the model's adequacy. One 
commenter stated that the rule should not require the model to be 
validated on an annual basis. Instead, the commenter suggested that the 
frequency should be left to the discretion of the clearing agency 
because it is in the best position to determine the appropriate 
timing,\187\ and in the absence of a material change (either to the 
model itself or in the market environment that affects the model), 
requiring an annual validation may be unnecessary and overly 
burdensome.\188\
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    \186\ See The DTCC (April) Letter at 13 (supporting Rule 17Ad-
22(b)(4) and recommending certain clarifications); see also Barnard 
Letter at 1 (supporting generally the thrust of the Commission's 
proposals in the Proposing Release, particularly proposed Rule 17Ad-
22 concerning standards for clearing agencies); BlackRock Letter at 
2 (supporting Rules 17Ad-22(b)(1)-(7) because these rules will 
benefit the markets by reducing concentration risk, increasing the 
diversity of market participants involved in governance, enhancing 
competition and lowering costs for customers of clearing members); 
LCH Letter at 3 (generally supporting the Commission's proposed 
rules under 17Ad-22(b)); MFA (Kaswell) Letter at 2 (generally 
supporting the Commission's proposed rules under 17Ad-22(b)).
    \187\ See The DTCC (April) Letter at 13.
    \188\ See id.
---------------------------------------------------------------------------

    Commenters also argued that the CCP is in the best position to 
determine how to conduct a candid assessment free from outside 
influence concerning its margin models and that qualified internal 
personnel at the CCP are capable of validating the models if reasonable 
steps are taken to ensure objectivity (i.e., the reviewers are not the 
same individuals who are or who were involved in designing the models 
or who are otherwise biased due to their involvement in implementation 
of the models).\189\ Commenters argued that Rule 17Ad-22(b)(4) should 
not prescribe a particular method for a clearing agency to achieve that 
outcome.\190\
---------------------------------------------------------------------------

    \189\ See The DTCC (April) Letter at 13; The OCC Letter at 11.
    \190\ See The DTCC (April) Letter at 13.
---------------------------------------------------------------------------

    One commenter recommended that the Commission should replace the 
text in proposed Rule 17Ad-22(b)(4) that addresses independence with 
language from the Proposing Release that ``the person validating the 
clearing agency's model should be sufficiently free from outside 
influences so that he or she can be completely candid in their [sic] 
assessment of the model.'' \191\ The commenter stated that this 
construction is more consistent with RCCP 4: Financial Resources \192\ 
and with Principle 6: Margin from the Consultative version of the FMI 
Report \193\ because it does not prescribe a model validation frequency 
or a specific way to achieve integrity in the validation process.\194\ 
Another commenter stated that proposed Rule 17Ad-22(b)(4) should be 
strengthened to require the model validation to be performed by an 
outside, independent expert and that the CCP must adjust and revalidate 
the model at any time it has reason to believe the model is no longer 
adequate.\195\
---------------------------------------------------------------------------

    \191\ See The DTCC (April) Letter at 14.
    \192\ See RCCP, supra note 33, at 19.
    \193\ See Principles for Financial Market Infrastructures 
Consultative Report (Mar. 2011), at 40, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD350.pdf; but see supra note 32, at 56 
(stating in the finalized FMI Report that a CCP should have its 
margin model validated at least annually).
    \194\ See The DTCC (April) Letter at 15.
    \195\ See Better Markets Letter at 6.
---------------------------------------------------------------------------

    Another commenter stated that requiring a CCP to bring independence 
to the model review process by detaching it from the model development 
process would effectively require maintenance of two quantitative 
teams.\196\ According to this commenter, that result would impose costs 
on the CCP to staff both teams as well as create potential staffing 
problems because talented personnel with the requisite quantitative 
skills often view the review process as non-creative.\197\ That 
structure, the commenter argued, may create adversarial relationships 
within the CCP and could require senior management to resolve highly-
technical disputes between the model development team and model review 
team.\198\
---------------------------------------------------------------------------

    \196\ See The OCC Letter at 11.
    \197\ See id.
    \198\ See id.
---------------------------------------------------------------------------

    The same commenter suggested that proposed Rule 17Ad-22(b)(4) 
should be revised to require a CCP to do the following: (1) Maintain a 
culture of commitment to quality where correcting and improving models 
is career-enhancing; (2) adopt sound policies and procedures that 
create a transparent and auditable model review process; and (3) 
require that reporting lines must come together at a person who is 
well-versed in technical quantitative matters.\199\ Commenters also 
cited to the recently released Supervisory Guidance on Model Risk 
Management, in which the Federal Reserve and the Office of the 
Comptroller of the Currency stated that ``corporate culture plays a 
role [in providing appropriate incentives for proper model review] if 
it establishes support for objective thinking and encourages 
questioning and challenging of decisions'' and that ``independence may 
be supported by separation of reporting lines, [but] it should be 
judged by actions and outcomes because there may be additional ways to 
ensure objectivity and prevent bias.'' \200\
---------------------------------------------------------------------------

    \199\ See id.
    \200\ See id.; see also The DTCC (April) Letter at 14 (citing 
Supervisory Guidance on Model Risk Management (Apr. 4, 2011)), 
available at http://www.occ.treas.gov/news-issuances/bulletins/2011/bulletin-2011-12a.pdf.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(b)(4) with certain 
modifications to address concerns raised by commenters, including the 
clarification discussed in Sections II.B.4 and III.A regarding the 
application of the rule only to registered clearing agencies. In light 
of comments asking the Commission to clarify the standard of 
independence of the qualified person who performs the model validation, 
the Commission is revising the text of Rule 17Ad-22(b)(4) so that the 
annual model validation must be performed by a qualified person who is 
free from influence from the persons responsible for development or 
operation of the systems and models being validated. Generally, the 
Commission would consider that a person was free from influence when 
that person does not, including but not limited to, 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 believes that the change from 
the proposal addresses the concerns raised by commenters.\201\ 
Specifically, the Commission agrees that who will be the reviewer of 
the model is best left to the discretion of the CCP, so long as the 
goals of the model validation process are achieved.\202\
---------------------------------------------------------------------------

    \201\ See, e.g., The OCC Letter at 11-12 (stating that ``[w]e 
think that a clearing agency is capable of validating its own models 
through the use of qualified internal personnel, provided that 
appropriate steps are taken to ensure objectivity, such as ensuring 
that the reviewers are not the same individuals as those who are or 
were involved in designing such models or are otherwise biased due 
to their involvement in implementation of the models. Many employees 
who perform functions associated with margin models may have no 
particular conflict or bias that would prevent them from conducting 
objective model validations and, in fact, many such employees may 
have a strong interest in ensuring that margin models are as well-
designed as possible.'').
    \202\ See The DTCC (April) Letter at 14 (``The DTCC model risk 
policy provides that all models must be certified as valid by a 
qualified independent reviewer, defined as `a qualified reviewer 
that did not develop and does not currently own the model.' The 
reviewer may be an individual or unit within the organization or an 
outside consultant.'').
---------------------------------------------------------------------------

    As proposed, Rule 17Ad-22(b)(4) would not have permitted the model 
validation to be performed by a person performing functions associated 
with the CCP's margin models (except as part of the annual model 
validation), or who reports to a person who performs those 
functions.\203\ The Commission reasoned in the Proposing Release that a 
person involved with the functions related to the model's operation, or 
someone who reports to such a person, may be less

[[Page 66238]]

likely to evaluate critically the margin models.\204\ After considering 
the comments, the Commission agrees that instead of requiring a 
particular method or reporting structure, the less-prescriptive 
language from the Proposing Release, namely, that a person may perform 
the model validation as long as that person is free from influence from 
the persons responsible for development or operation of the systems and 
models being validated so that he or she can be candid in his or her 
assessment of the model, would be appropriate to achieve the intended 
purpose.
---------------------------------------------------------------------------

    \203\ See supra note 185 and accompanying text.
    \204\ See supra note 35.
---------------------------------------------------------------------------

    The Commission also notes that the ``sufficiently free from 
influence'' standard is consistent with the FMI Report, which does not 
prescribe a specific method to assure the effectiveness of the 
validation process,\205\ and is consistent with the recent guidance 
from the Federal Reserve and the Office of the Comptroller of the 
Currency in Supervisory Guidance on Model Risk Management.\206\ The 
revised standard adopted by the Commission herein would not require the 
clearing agency to detach model review from model development or to 
maintain two separate quantitative teams and thus would not lead to 
potential increased costs.
---------------------------------------------------------------------------

    \205\ See FMI Report, supra note 32.
    \206\ Board of Governors of the Federal Reserve System and the 
Office of the Comptroller of the Currency, Supervisory Guidance on 
Model Risk Management (Apr. 4, 2011), at 9, available at http://occ.gov/news-issuances/bulletins/2011/bulletin-2011-12a.pdf (stating 
that independence for model review ``should be judged by actions and 
outcomes, since there may be [many] ways to ensure objectivity and 
prevent bias'').
---------------------------------------------------------------------------

    The Commission is not persuaded that the model validation must be 
performed by an outside independent expert.\207\ As noted above, the 
Commission believes that objectivity can be preserved where the person 
performing the model validation is an employee of the CCP as long as 
the clearing agency strictly adheres to the standard the Commission is 
adopting herein. Because the Commission has not previously required 
CCPs to perform an annual model validation, we understand that the 
implementation of this requirement may require the exercise of 
substantial judgment by such clearing agencies in the adoption and 
implementation of written policies and procedures. The Commission 
intends to review the development of compliance practices and to issue 
interpretive guidance as appropriate.
---------------------------------------------------------------------------

    \207\ See supra note 195.
---------------------------------------------------------------------------

    The Commission is not persuaded that the frequency of the model 
validation should be left to the discretion of the CCP. Current model 
validation practices vary among CCPs. Some CCPs conduct annual 
validations, while other conduct them on an ad hoc basis. Because of 
the role margin plays in a default, a CCP needs assurance of its value 
in the event of liquidation, as well as the capacity to draw upon its 
margin promptly. The Commission believes, especially considering its 
statutory responsibilities and the importance of model validation in 
limiting systemic risk, that it is important to create a consistent and 
uniformly applied minimum standard across all clearing CCPs. The 
Commission believes that requiring model validation at least annually 
is appropriate because model performance is not ordinarily expected to 
vary significantly over short periods but should be reevaluated as 
market conditions change. Furthermore, the Commission does not think 
the standard of an annual model validation is too burdensome, 
particularly given the fact that the Commission is not prescribing any 
specific qualifications or credentials of the person performing the 
model validation and is not requiring the person performing the model 
validation to be independent of the clearing agency and given how 
important understanding of the margin methodology is to the risk 
management framework.
    The requirement for an annual model validation does not preclude 
the CCP from adjusting its model any time it has reason to believe that 
the model is no longer adequate. In fact, as noted above, Rule 17Ad-
22(b)(2) requires a CCP to review its risk-based models to set margin 
requirements at least monthly.
    The Commission continues to believe that clearing agencies that 
provide CCP services must have a qualified person conduct a review of 
models that are used to set margin levels, along with related 
parameters and assumptions, 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, registered CCPs may consider several factors, 
including the person's experience in validating margin models, 
expertise in risk management generally, and understanding of the 
clearing agency's particular operations and procedures.
    While the Commission agrees with the commenter who suggested that 
CCPs should strive to create a culture of commitment to quality where 
improving models is career-enhancing and to adopt sound policies and 
procedures to create a transparent and auditable model review 
process,\208\ the Commission believes that this result can be achieved 
by requiring that a model validation review occur annually and that the 
reviewer be qualified and free from influence from the persons 
responsible for development or operation of the systems and models 
being validated.
---------------------------------------------------------------------------

    \208\ See supra note 199 and accompanying text.
---------------------------------------------------------------------------

D. Participant Access Standards for Central Counterparties: Rules 17Ad-
22(b)(5)-(7)

    Section 17A of the Exchange Act requires that a clearing agency 
shall not be registered unless the Commission determines, among other 
things, that the clearing agency's rules do not impose burdens on 
competition that are unnecessary or inappropriate to promote the 
purposes of the Exchange Act \209\ and that the rules are not designed 
to permit unfair discrimination in the admission of participants or 
among participants in the use of the CCP.\210\ Therefore, when 
evaluating the participation standards at a CCP, the Commission must 
strike an appropriate balance between affording CCPs the necessary 
discretion to select clearing members that do not jeopardize the CCP's 
ability to facilitate prompt and accurate clearance and settlement 
while also not impeding access to central clearing among a range of 
market participants.
---------------------------------------------------------------------------

    \209\ 15 U.S.C. 78q-1(b)(3)(F).
    \210\ 15 U.S.C. 78q-1(b)(3)(G).
---------------------------------------------------------------------------

    Rules 17Ad-22(b)(5), (6) and (7) introduce certain requirements 
regarding access to registered CCPs. Respectively, the rules would 
require a registered CCP to do the following: (1) Provide the 
opportunity for a person who does not perform any dealer or security-
based swap Dealer services to obtain membership; (2) refrain from using 
minimum portfolio size and minimum volume transaction thresholds as 
conditions to membership; and (3) provide the ability to obtain 
membership to persons who maintain net capital equal to or greater than 
$50 million.
    Rules 17Ad-22(b)(5), (6) and (7) each address the common topic of 
access to and participation in CCPs. Several commenters provided 
general comments on that shared focus. Those comments represent a wide 
range of views and are reflected immediately below.
    Some commenters expressed their general support for the ways that 
Rules 17Ad-22(b)(5), (6), and (7) would promote fair and open access to 
CCP services through CCP participation

[[Page 66239]]

requirements that are risk appropriate without being unnecessarily 
restrictive.\211\ One of these commenters expressed support for the 
design of the rules but also made a request for the rules to offer more 
flexibility and latitude for CCPs to establish participation 
requirements that ensure integrity of operation and risk management.'' 
\212\
---------------------------------------------------------------------------

    \211\ See LCH Letter at 3 (upholding the Commission's intent of 
``ensuring broad participation in and open access to clearing 
agencies''); MFA (Kaswell) Letter at 2, 3 (generally supporting the 
Commission's proposed rules under 17Ad-22(b)); CME Letter at 3 
(generally supporting ``the regulatory objective of participation 
requirements that are risk appropriate without being unnecessarily 
restrictive, in order to promote fair and open access to clearing 
services.'').
    \212\ See LCH Letter at 3.
---------------------------------------------------------------------------

    Two commenters urged the Commission not to adopt proposed Rules 
17Ad-22(b)(5), (6) and (7).\213\ The first commenter concluded that the 
proposed rules, while well-intentioned, ``are unnecessary and 
counterproductive to the goal of fair and open access within a 
framework of the safe and sound operation of clearing agencies.'' \214\ 
In particular, this commenter stated its belief that proposed Rules 
17Ad-22(b)(5), (6) and (7) are overly prescriptive and that the 
Commission already has ample and alternative authority under which to 
monitor membership practices.\215\ Specifically, the commenter pointed 
to the existing requirement in Section 17A(b)(3)(F) of the Exchange Act 
that a clearing agency shall not be registered unless the Commission 
determines that the clearing agency's rules are not designed to permit 
unfair discrimination in the admission of participants or among 
participants in the use of the clearing agency. The commenter also 
stated that if proposed Rule 17Ad-22(d)(2) is adopted, that rule would 
already require clearing agencies to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to have 
participation requirements that are objective, publicly disclosed, and 
that permit fair and open access.\216\ Finally, this commenter argued 
that proposed Rules 17Ad-22(b)(5), (6) and (7) do not conform to 
current or proposed global standards related to participation in CCPs. 
In contrast, the commenter stated its belief that Section 17A(b)(3) of 
the Exchange Act and proposed Rule 17Ad-22(d)(2) are consistent with 
RCCP Recommendation 2: Participation requirements \217\ as well as FMI 
Principle 18: Access and participation requirements.\218\
---------------------------------------------------------------------------

    \213\ See The DTCC (April) Letter at 9; The OCC Letter at 12.
    \214\ See The DTCC (April) Letter at 18.
    \215\ See id.
    \216\ See id.
    \217\ RCCP Recommendation 2 provides that ``[a] CCP's 
participation requirements should be objective, publicly disclosed, 
and permit fair and open access.''
    \218\ Principle 18 from the FMI Report provides that ``[a]n FMI 
should have objective, risk-based, and publicly disclosed criteria 
for participation, which permit fair and open access.''
---------------------------------------------------------------------------

    The second commenter, while not opposed to the substance of 
proposed Rules 17Ad-22(b)(5), (6) and (7), generally questioned the 
need to hard wire these requirements into the Commission's rules.\219\ 
Specifically, this commenter argued that the Commission already has 
authority under Section 17A(b)(3)(F) of the Securities Exchange Act to 
deny registration to a clearing agency if the clearing agency's rules 
are designed to permit unfair discrimination in the admission of 
participants or among participants in the use of the clearing 
agency.\220\ In addition, this commenter stated that under proposed 
Rule 17Ad-22(d)(2) the Commission would gain less prescriptive but 
broader and coextensive rule-based authority without imposing ``one 
size fits all'' access requirements.\221\
---------------------------------------------------------------------------

    \219\ See The OCC Letter at 12.
    \220\ See id.
    \221\ See id.
---------------------------------------------------------------------------

    In the ``Final Rule and Guidance'' sections for Rules 17Ad-
22(b)(5), (6) and (7) below, we address these more general comments in 
the context of a discussion of the more specific comments the 
Commission received on the proposed rules.
1. Rule 17Ad-22(b)(5): Non-Dealer Member Access
a. Proposed Rule
    Rule 17Ad-22(b)(5), as proposed, would require a registered CCP 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 \222\ or security-based swap dealer 
\223\ services to obtain membership on fair and reasonable terms at the 
CCP in order to clear securities for itself or on behalf of other 
persons.
---------------------------------------------------------------------------

    \222\ 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.
    \223\ 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. The Commission and the CFTC jointly adopted 
rules to further define the terms ``swap dealer,'' ``security-based 
swap dealer,'' ``major swap participant,'' ``major security-based 
swap participant,'' and eligible contract participant.'' See supra 
note 12 (Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant'', Securities 
Exchange Act Release No. 34-66868 (Apr. 27, 2012), 77 FR 30596 (May 
23, 2012)).
---------------------------------------------------------------------------

b. Comments Received
    Some commenters generally supported the goals of Rule 17Ad-
22(b)(5),\224\ while other commenters expressed several concerns.\225\ 
Specifically, one commenter stated that ``any regulatory mandate to 
admit specific entities as members of a CCP could undermine the 
impartial development and application of risk-based standards for 
membership.'' \226\ This commenter acknowledged the discussion in the 
Proposing Release explaining that proposed Rule 17Ad-22(b)(5) would not 
prohibit a clearing agency from using factors aside from a potential 
clearing member's dealer or security-based swap dealer status to make 
an admissions decision, but nevertheless urged the Commission to forgo 
adoption of the rule altogether because it believes clearing agencies 
should be permitted, under Commission oversight, to determine how best 
to promote correspondent clearing \227\ and to design membership 
standards.\228\ The

[[Page 66240]]

commenter suggested that if the rule is adopted, it should be modified 
to reflect the more permissive process for evaluation described in the 
body of the Proposing Release, namely by clarifying that the clearing 
agency may take other factors into account in making membership 
decisions.\229\
---------------------------------------------------------------------------

    \224\ See supra note 211 (citing LCH Letter, MFA (Kaswell) 
Letter, and CME Letter); see also Barnard Letter at 1 (supporting 
generally the thrust of the Commission's proposals in the Proposing 
Release, particularly proposed Rule 17Ad-22 concerning standards for 
clearing agencies); BlackRock Letter at 2 (supporting Rules 17Ad-
22(b)(1)-(7) because these rules will benefit the markets by 
reducing concentration risk, increasing the diversity of market 
participants involved in governance, enhancing competition and 
lowering costs for customers of clearing members).
    \225\ See The DTCC (April) Letter at 18-19; The OCC Letter at 
12.
    \226\ See The DTCC (April) Letter at 18.
    \227\ 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.
    \228\ See The DTCC (April) Letter at 18-19. The commenter also 
stated its belief that ``financial resources'' and 
``creditworthiness'' should be expressly added to the factors that 
may be considered. Moreover, the commenter suggested that the term 
``otherwise qualified'' be clarified as it was not precise enough 
standard to meaningfully inform clearing agencies of what criteria 
may be considered when evaluating potential members.
    \229\ See The DTCC (April) Letter at 19.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(b)(5) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies.
    While the Commission understands concerns raised by commenters, the 
Commission ultimately believes that the benefits of Rule 17Ad-22(b)(5) 
are critical to maintaining fairness and open access to central 
clearing for all market participants, including security-based swaps 
participants. The Commission believes that no registered CCP should 
deny membership solely because a person does not perform any dealer or 
security-based swap dealer services and that such a requirement 
unfairly discriminates against certain market participants and should 
be prohibited. The Commission does not believe that performing dealer 
or security-based swap dealer services is, by itself, a sufficient 
indicator of whether an applicant should be admitted to a clearing 
agency.
    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.\230\ The Commission 
continues to believe that requiring registered CCPs to allow persons 
who are not dealers or security-based swap dealers to become members of 
the clearing agency will promote more competition by allowing more 
firms to clear, thereby increasing competition among clearing members 
on both price and service which should, in turn, reduce costs to market 
participants. The enhanced access to central clearing should engender 
more correspondent clearing in the security-based swap market. Because 
of the relationship between security-based swaps and traditional 
securities (e.g., market participants using security-based swaps to 
hedge positions in traditional securities), the Commission believes 
that applying these rules to all CCPs will help ensure that market 
participants have access to central clearing in all instruments that 
are centrally cleared.
---------------------------------------------------------------------------

    \230\ See supra note 222.
---------------------------------------------------------------------------

    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.\231\ Such 
a process involves the non-participant entering 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 such arrangements with non-participant firms that 
may act as direct competitors to the participants in the participants' 
capacity as dealers or security-based swap dealers in the market for 
the relevant securities. Given that the existing CCP participants that 
are dealers or security-based swap dealers may therefore have 
incentives to restrict competitors in the securities execution markets 
from accessing a CCP, correspondent clearing arrangements may be 
inhibited unless participants that do not provide dealer or security-
based swap dealer services are provided with the ability to become 
direct members of a clearing agency.
---------------------------------------------------------------------------

    \231\ See Exchange Act Release Nos. 63107 (Oct. 14, 2010), 75 FR 
65882 (Oct. 26, 2010) and 64018 (Mar. 3, 2011), 76 FR 12645 (Mar. 8, 
2011) (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).
---------------------------------------------------------------------------

    Also, the Commission is not persuaded by the comment that Rule 
17Ad-22(b)(5) is likely to undermine the impartial development and 
application of risk-based standards for membership.\232\ Simply stated, 
Rule 17Ad-22(b)(5) is designed to prohibit registered CCPs 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.\233\ The Commission fully 
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. While non-dealer status cannot serve as the sole reason 
for denying membership, Rule 17Ad-22(b)(5) does not prohibit a 
registered CCP from taking other standards of membership into account 
when establishing membership criteria for non-dealers.
---------------------------------------------------------------------------

    \232\ See supra note 228.
    \233\ See Proposing Release, supra note 35, at Section II.A.
---------------------------------------------------------------------------

    Because the factors that each CCP considers when establishing 
membership criteria differ based on the particular characteristics of 
the relevant clearing agency and the markets it serves, the Commission 
believes that it would be counterproductive to modify Rule 17Ad-
22(b)(5) to make it more specific and therefore more constraining. One 
commenter, however, requested that the Commission provide additional 
clarity in terms of what is required to be considered ``otherwise 
qualified'' for membership at a CCP.\234\ In response to this comment, 
the Commission notes that, for purposes of Rule 17Ad-22(b)(5), the term 
``otherwise qualified'' means that the clearing agency's sole reason 
for denying membership to a prospective participant would be the 
prospective participant's status as a non-dealer or non security-based 
swap dealer and that it otherwise maintains the financial resources, 
creditworthiness, operational capacity, and any other additional 
characteristics necessary to meet the obligations of participation. As 
CCPs shape practices to come into compliance with Rule 17Ad-22(b)(3), 
the Commission will consider whether further guidance is appropriate.
---------------------------------------------------------------------------

    \234\ See supra note 229.
---------------------------------------------------------------------------

    The Commission believes that the incentives of persons who do not 
perform dealer or security-based swap dealer services to promote access 
at a CCP in general would tend to be consistent with increased 
competition in the market for the relevant securities. These persons do 
not execute securities trades for their own account. Instead, they 
provide correspondent clearing services for market participants.\235\ 
As a result, their ability to provide correspondent clearing services 
would tend to increase as competition and transaction volumes 
increased. Accordingly, the Commission believes that Rule 17Ad-22(b)(5) 
will foster the development of correspondent clearing arrangements that 
will allow market participants who are not dealers or security-based 
swap dealers to obtain access to a registered CCP and that such access 
will have the beneficial result of greater competition in and access to 
central clearing. Moreover, because entities must meet all of the 
standards for membership, the Commission does not believe that it will 
undermine the

[[Page 66241]]

development or application of risk management standards.
---------------------------------------------------------------------------

    \235\ For a description of correspondent clearing activity, see 
generally The Role and Regulation of Clearing Brokers, 48 Bus. Law 
841 (May 1993).
---------------------------------------------------------------------------

2. Rule 17Ad-22(b)(6): Portfolio Size and Transaction Volume Thresholds 
Restrictions
a. Proposed Rule
    Rule 17Ad-22(b)(6), as proposed, would prohibit a CCP from having 
membership standards that require participants to maintain a portfolio 
of any minimum size or to maintain a minimum transaction volume.
b. Comments Received
    Some commenters expressed general support for the goals of proposed 
Rule 17Ad-22(b)(6).\236\ At the same time, one commenter opposed 
adoption of the rule because of concern that ``any regulatory mandate 
on portfolio size and transaction volume thresholds could undermine the 
impartial development and application of risk-based standards for 
membership'' in a CCP.\237\ This commenter also questioned why certain 
language in the discussion section of the Proposing Release (explaining 
that the proposed rule ``would not prohibit a central counterparty from 
considering portfolio size and transaction volume as one of several 
factors when reviewing a potential participant's operations'') was not 
included in the text of the proposed rule.\238\ In addition, the 
commenter stated that even if a CCP has the discretion to consider 
portfolio size and transaction volume when making a membership 
decision, it is unclear how much weight the clearing agency actually 
may give to this factor without running afoul of Rule 17Ad-
22(b)(6).\239\ Finally, this commenter noted that it ultimately would 
prefer to see the Commission not adopt Rule 17Ad-22(b)(6) and instead 
continue to oversee determinations made by clearing agencies concerning 
membership standards and the weight, if any, to be given to portfolio 
size and transaction volume.\240\
---------------------------------------------------------------------------

    \236\ See supra note 211 (citing LCH Letter, MFA (Kaswell) 
Letter, and CME Letter); see also Barnard Letter at 1 (supporting 
generally the thrust of the Commission's proposals in the Proposing 
Release, particularly proposed Rule 17Ad-22 concerning standards for 
clearing agencies); BlackRock Letter at 2 (supporting Rules 17Ad-
22(b)(1)-(7) because these rules will benefit the markets by 
reducing concentration risk, increasing the diversity of market 
participants involved in governance, enhancing competition and 
lowering costs for customers of clearing members).
    \237\ See The DTCC (April) Letter at 19.
    \238\ See id.
    \239\ See The DTCC (April) Letter at 19-20.
    \240\ See The DTCC (April) Letter at 20.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(b)(6) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies.
    We believe that imposing minimum thresholds on the size or 
transaction volume of a participant's portfolio would not function as a 
good indicator of whether the participant is able to meet its 
obligations to a CCP.\241\ The Commission believes that trading volume 
and portfolio size alone are poor grounds for limiting participant 
access to central clearing, and that sole use of these criteria could 
indicate unfair discrimination against certain market participants and 
thus should be prohibited as the sole basis for determining membership.
---------------------------------------------------------------------------

    \241\ Rule 17Ad-22(b)(6) would not prohibit a clearing agency 
from imposing maximum portfolio sizes or transaction volume amounts.
---------------------------------------------------------------------------

    New participants to a CCP that do not, at least 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 believes 
that Rule 17Ad-22(b)(6) will help facilitate compliance with the 
requirement in Section 17A of the Exchange Act that the rules of a CCP 
must permit fair and open access.\242\
---------------------------------------------------------------------------

    \242\ See supra note 210.
---------------------------------------------------------------------------

    For the same reasons discussed in connection with Rule 17Ad-
22(b)(5), the Commission is not persuaded by the comment that Rule 
17Ad-22(b)(6) is likely to undermine the impartial development and 
application of risk-based standards for membership.\243\ Specifically, 
the rule does not prohibit a CCP from considering portfolio size and 
transaction volume as one of several factors when reviewing a potential 
participant's operations. Rather, the rule prohibits the establishment 
of minimum portfolio sizes or transaction volumes that by themselves 
would act as barriers to participation by new participants in clearing. 
Rule 17Ad-22(b)(6) is an absolute bar to the sole use of these criteria 
for determining membership. The Commission also does not believe that 
it would be prudent to modify the rule text to make it more specific 
and potentially more constraining because the factors that each CCP 
considers when establishing appropriate membership criteria differ to 
some degree based on the particular characteristics of the relevant 
clearing agency and the markets it serves. As noted more generally in 
Section II.B above, the Commission will consider whether to issue 
further guidance to facilitate compliance as clearing agencies 
establish, implement, maintain and enforce policies and procedures 
responsive to Rule 17Ad-22(b)(6).
---------------------------------------------------------------------------

    \243\ See supra note 237.
---------------------------------------------------------------------------

3. Rule 17Ad-22(b)(7): Net Capital Restrictions
a. Proposed Rule
    Proposed Rule 17Ad-22(b)(7) would require a CCP to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide a person that maintains net capital 
\244\ equal to or greater than $50 million with the opportunity to 
obtain membership at the CCP, with any net capital requirements being 
scalable so that they are proportional to the risks posed by the 
participant's activities to the CCP.
---------------------------------------------------------------------------

    \244\ 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.
---------------------------------------------------------------------------

b. Comments Received
    Some commenters supported proposed Rule 17Ad-22(b)(7).\245\ Several 
commenters expressed support for the rule because it would require 
access to a CCP to be scaled in a risk-based way.\246\ One of these 
commenters expressed the hope that the CFTC would adopt a similar 
requirement and urged the Commission to work together with the CFTC to 
harmonize their respective rules in this area.\247\
---------------------------------------------------------------------------

    \245\ See MFA (Kaswell) Letter at 3; ISDA Letter at 4; BlackRock 
Letter at 1.
    \246\ See ISDA Letter at 4; MFA (Kaswell) Letter at 3; BlackRock 
Letter at 1.
    \247\ See ISDA Letter at 4. See also Derivatives Clearing 
Organization General Provisions and Core Principles, supra note 38 
(in which the CFTC adopted Rule 39.12(a)(2)(iii) to require that a 
DCO shall not set a minimum capital requirement of more than $50 
million for any person that seeks to become a clearing member in 
order to clear swaps).
---------------------------------------------------------------------------

    Another commenter supportive of Rule 17Ad-22(b)(7) urged the 
Commission to modify the rule to eliminate the ability of a CCP to 
raise its minimum net capital threshold above $50 million.\248\ This 
commenter stressed that if the Commission declined to take such action 
when adopting a final rule, then the Commission should (i) Require the 
clearing agency's rationale to meet a higher burden of proof than 
currently proposed; (ii) require the clearing agency to demonstrate not 
only that it

[[Page 66242]]

could not effectively manage the risk using other measures but also 
that raising the minimum capital requirement is the least restrictive 
means by which to address the risk posed to the clearing agency; and 
(iii) review the clearing agency's showing and make an express 
determination that no other, less- competitively-restrictive measures 
are available to the clearing agency to manage the risk 
effectively.\249\
---------------------------------------------------------------------------

    \248\ See MFA (Kaswell) Letter at 4-5 (noting that the CFTC in 
the DCO Release adopted rule 39.12(a)(2)(iii) in a form that does 
not permit adjustment of the $50 million net capital requirement for 
membership).
    \249\ See MFA (Kaswell) Letter at 4-5.
---------------------------------------------------------------------------

    One commenter stated that net capital, without regard to other risk 
factors, does not conclusively establish creditworthiness or any of the 
other generally accepted qualifications for becoming a member of a 
CCP.\250\ Another commenter agreed with this assertion, but cited it as 
support for Rule 17Ad-22(b)(7) on the basis that clearing members with 
net capital closer to $50 million may have other characteristics that 
make their risk profile less risky than clearing members with greater 
amounts of net capital.\251\
---------------------------------------------------------------------------

    \250\ See The DTCC (April) Letter at 20.
    \251\ See MFA (Kaswell) Letter at 3.
---------------------------------------------------------------------------

    Several commenters expressed concern over proposed Rule 17Ad-
22(b)(7).\252\ One commenter stated that the proposed $50 million net 
capital standard could create conditions where a clearing member at 
that net capital level might use its $50 million of net capital to 
access multiple clearing agencies.\253\ Commenters suggested that this 
standard would increase the likelihood that the clearing member would 
not be able to meet capital calls close in time from multiple clearing 
agencies.\254\ To address this concern about margin call risk, the 
commenter suggested that the rule should be modified to require: (i) 
Daily reporting from each clearing member of its capital cover for the 
potentially numerous assessments that it could be subject to from each 
clearing agency where it is a member; (ii) the clearing member to 
conduct regular stress tests at an ``extreme but plausible'' market 
level in relation to the potentially numerous clearing agency 
assessments that it could be subject to, and to provide the results to 
each clearing agency where it is a member; and (iii) each clearing 
agency to monitor and assess, on a daily basis, the ability of a 
clearing member and its related affiliates to meet these potential 
assessment exposures and share this daily analysis with other CCPs and 
any relevant prudential regulator.\255\ The commenter stated that 
unless regulators and clearing agencies are able and willing to commit 
to these actions, then it believes that a far larger minimum net 
capital requirement, such as $1 billion, is appropriate.\256\
---------------------------------------------------------------------------

    \252\ See The OCC Letter at 12; The DTCC (April) Letter at 9.
    \253\ See ISDA Letter at 3.
    \254\ See id.
    \255\ See id.
    \256\ See id.
---------------------------------------------------------------------------

    Another commenter expressed concern that because not all market 
participants use a net capital computation, the proposed rule could 
give unfair advantages to some market participants over others in terms 
of gaining and retaining membership at a CCP.\257\ The commenter 
concluded that proposed Rule 17Ad-22(b)(7) should not be adopted, and 
instead CCPs should continue to determine membership standards subject 
to Commission oversight (including capital requirements and other 
measures of creditworthiness) as well as how best to ensure that access 
to the clearing agency is fair and open.\258\
---------------------------------------------------------------------------

    \257\ See The DTCC (April) Letter at 20.
    \258\ See id.
---------------------------------------------------------------------------

    One commenter noted the Commission's reference in the Proposing 
Release to the tiered membership standards of the FICC as an example of 
capital-related requirements that differentiate between types of 
participants.\259\ The commenter stated its opposition to ``tiers'' in 
the membership structure of CCPs on the basis that they can have 
discriminatory or anti-competitive effects.\260\ Finally, another 
commenter stated it generally does not see the need for the approach 
proposed in Rule 17Ad-22(b)(7) because it believes the Commission has 
other tools at its disposal to review membership standards on a case-
by-case basis that account for the nature of a particular clearing 
agency's activities and the risks associated with those 
activities.\261\
---------------------------------------------------------------------------

    \259\ See MFA (Kaswell) Letter at 4.
    \260\ See id.
    \261\ See The OCC Letter at 12.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(b)(7) with certain 
modifications, including the clarification discussed in Sections II.B.4 
and III.A regarding the application of the rule only to registered 
clearing agencies. As noted by the commenters expressing support for 
the rule,\262\ we believe that persons that maintain a net capital 
level of equal to or greater than $50 million, as well as an 
appropriate level of financial expertise, should not be denied 
participation in a CCP based solely on their net capital levels, 
provided that such persons are able to comply with other reasonable 
membership standards. In the Proposing Release, we cited recent broker-
dealer reporting data available to the Commission reflecting that the 
$50 million threshold for net capital is a standard that provides the 
potential for approximately 4% of the total number of broker-dealers or 
approximately 201 firms could be eligible to gain clearing membership 
at one of the registered clearing agencies.\263\ According to this 
data, raising the net capital requirement to $100 million would have 
reduced the community of eligible broker-dealers by 73 firms or 35% to 
128 eligible firms, while reducing the net capital threshold to as low 
as $25 million would increase the number of broker-dealer potentially 
eligible for membership by 86 firms or 43% to 287 firms (approximately 
6% of broker-dealers). The Commission believes that firms that maintain 
a net capital level of equal to or greater than $50 million have 
sufficient financial resources to participate at some level in a CCP 
provided that they are able to comply with other reasonable membership 
standards and is concerned that some firms with less than $50 million 
of net capital may not have sufficient financial resources to fulfill 
membership obligations. The rule also ensures that each clearing agency 
will have the flexibility to develop scalable policies and procedures 
to limit the activities of participants based on their level of net 
capital.\264\ For example, a CCP can 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. Accordingly, the 
Commission believes the $50 million minimum standard strikes the proper 
balance between promoting open access to central clearing among 
participants that have the capacity to participate without posing undue 
risk to CCPs. The Commission also believes that Rule 17Ad-22(b)(7) 
would facilitate sound

[[Page 66243]]

risk management practices by the clearing agencies. The CCPs that seek 
Commission permission to employ a higher net capital requirement as a 
condition for membership at the clearing agency must demonstrate to the 
Commission that such a requirement is necessary to mitigate risks that 
could not otherwise be effectively managed by other measures. The CCPs 
seeking to implement such requirements should examine and articulate 
the benefits of higher net capital requirements and link the nature and 
degree of participation with the potential risks posed by the 
participant.
---------------------------------------------------------------------------

    \262\ See supra note 245.
    \263\ Even if proposed Rule 17Ad-22(b)(7) is successful in 
encouraging the broadening of membership in CCPs that clear CDS, the 
Commission believes the number of broker-dealers newly eligible for 
clearing membership that become clearing members as a result of this 
change is likely to be substantially less than 201.
    \264\ The Commission notes that some clearing agencies currently 
utilize capital-related requirements that differentiate among types 
of participants. For instance, the FICC 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. This type of arrangement 
would continue to be acceptable under Rule 17Ad-22(b)(7).
---------------------------------------------------------------------------

    The Commission also does not believe that $50 million net capital 
standard contained in Rule 17Ad-22(b)(7) would give an advantage to 
some prospective members at a CCP over others. Further, the rule 
explicitly is not intended in any way to create an ``entitlement'' to 
membership for firms with more than $50 million in capital. Upon 
adoption of Rule 17Ad-22, a registered CCP cannot restrict access 
because a participant does not have a net capital level of $50 million 
or more; however, the CCP's policies and procedures can prescribe other 
reasonable membership standards and can be reasonably designed to limit 
the activities of the participant in comparison to the activities of 
other participants that maintain a higher net capital level. For 
example, as a way to help make its requirements scalable, a registered 
CCP 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 CCP.
    Rule 17Ad-22(b)(7) also permits a registered CCP 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 CCP, and the Commission approves the 
higher net capital requirement as part of a rule filing or clearing 
agency registration application. While the Commission is sympathetic to 
commenters who asked the Commission to eliminate the ability in Rule 
17Ad-22(b)(7) of a clearing agency to impose a higher net capital 
requirement and argued for a heightened burden of proof in such 
cases,\265\ the Commission has decided not to modify this part of the 
rule. Specifically, the Commission recognizes the benefit of 
maintaining flexibility to allow a CCP to impose higher net capital 
requirements in circumstances where that is necessary to mitigate risks 
that could not otherwise be effectively managed by other measures. For 
the same reason, the Commission is declining to modify the rule to 
prohibit a CCP from having tiered membership standards. The Commission 
is not persuaded by commenters who stated that use of tiered membership 
standards by clearing agencies is by itself anti-competitive because 
the Commission believes the approach taken by the rule permits well 
capitalized mid-tier firms to compete directly with large dealers and 
notes that Section 17A of the Exchange Act expressly requires that the 
rules of a clearing agency not be designed in a way that the rules 
discriminate among participants in their use of clearing agency 
services.\266\ It is the Commission's view that tailoring participant 
membership standards based on participant risk profile is neither 
discriminatory nor anti-competitive. In addition, the use of scalable 
limitations on the transactions that the participants may clear and 
settle through the clearing agency is likely to be a key tool for 
allowing a clearing agency to comply with Rule 17Ad-22(b)(7) without 
encountering the delay and operational difficulties of having to 
request Commission approval to impose a net capital requirement that 
exceeds $50 million and without compromising the clearing agency's risk 
management standards.\267\
---------------------------------------------------------------------------

    \265\ See supra notes 248-249 and accompanying text.
    \266\ See id.
    \267\ Compare with note 258 and accompanying text (the 
Commission is not persuaded by the position that Rule 17Ad-22(b)(7) 
should not be adopted, but agrees with the commenters premise that 
clearing agencies should retain some discretion to allow their 
expertise to inform participation standards within the requirements 
of the rule).
---------------------------------------------------------------------------

    Finally, the Commission did not make any changes to Rule 17Ad-
22(b)(7) in response to suggestions that the rule could create margin 
call risk because a participant with the minimum net capital level 
might access multiple clearing agencies.\268\ The Commission does not 
believe that the rule will increase margin call risk. While the 
Commission understands the concerns raised by this commenter, the 
Commission believes that the clearing agencies themselves are best 
positioned to address this issue due to their expertise in this area, 
as well as their other regulatory obligations related to their risk 
management and financial well-being. Rule 17Ad-22(d)(2) requires 
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 CCP and have 
procedures in place to monitor that participation requirements are met 
on an ongoing basis. Accordingly, a small clearing member should not be 
able to expose a clearing agency to significant risk even if it is able 
to clear at multiple CCPs.\269\ The Commission also will be able to 
monitor the financial strength of clearing members that are registrants 
pursuant to other financial reporting requirements. Accordingly, we 
believe that it is important to allow CCPs enough flexibility to 
determine the most effective approach for mitigating any potential call 
risk. In addition, the Commission will continue to monitor this issue 
and will consider whether any regulatory changes are necessary based on 
experience with the $50 million capital standard. The Commission will 
also consider any further action responsive to this issue after 
receiving input from interested parties through the outreach described 
in Section II.B.
---------------------------------------------------------------------------

    \268\ See supra notes 253-256 and accompanying text.
    \269\ For example, CCPs that participate in the Shared Market 
Information System (SHAMIS) will be able to see a clearing member's 
risk and financial information across participating CCPs, and a CCP 
also could on its own initiative require clearing members to 
directly report their clearing activity at other clearing agencies. 
Other similar systems may develop in the future.
---------------------------------------------------------------------------

E. Record of Financial Resources and Annual Audited Financial 
Statements: Rules 17Ad-22(c)(1)-(2)

1. Rule 17Ad-22(c)(1): Record of Financial Resources for Central 
Counterparties
a. Proposed Rule
    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 CCP 
shall calculate and maintain a record \270\ 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.
---------------------------------------------------------------------------

    \270\ 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).

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

[[Page 66244]]

b. Comments Received
    Commenters generally supported proposed rule 17Ad-22(c)(1).\271\
---------------------------------------------------------------------------

    \271\ See The DTCC (April) Letter at 7; see also Barnard Letter 
at 1 (supporting generally the thrust of the Commission's proposals 
in the Proposing Release, particularly proposed rule 17Ad-22 
concerning standards for clearing agencies); LCH Letter at 1 
(stating its general belief that the rules in the Proposing Release 
``will help establish a comprehensive regulatory framework to reduce 
risk, increase transparency and promote market integrity within the 
financial system.'').
---------------------------------------------------------------------------

c. Final Rule
    We are adopting Rule 17Ad-22(c)(1) as proposed, except for the 
clarification discussed in Sections II.B.4 and III.A regarding the 
application of the rule only to registered clearing agencies. The 
Commission believes that it is appropriate to require registered 
clearing agencies to make these calculations quarterly or at any time 
based on the request of the Commission because it provides a periodic 
update of the financial resources that are needed by the clearing 
agencies as market conditions change. The structure of Rule 17Ad-
22(c)(1) also provides flexibility for the Commission to request such 
calculations on a real-time basis, which we believe to be useful during 
periods of market stress or other circumstances where more timely 
information is desired. The Commission believes that these calculations 
and related documentation will also help our oversight of compliance by 
clearing agencies with Rule 17Ad-22(b)(3) by providing a clear record 
of the method used by the clearing agency to maintain sufficient 
financial resources.
2. Rule 17Ad-22(c)(2): Clearing Agency Annual Audited Financial 
Statements
a. Proposed Rule
    Rule 17Ad-22(c)(2), as proposed, 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).
b. Comments Received
    Commenters generally supported proposed Rule 17Ad-22(c)(2).\272\ In 
response to a question asked by the Commission in the Proposing 
Release, one commenter stated that it does not believe the Commission 
should require a reconciliation to U.S. GAAP for reports prepared using 
IFRS because it believes that IFRS is a high-quality set of accounting 
standards that is widely recognized, understood and used by investors 
when evaluating investment opportunities.\273\ The commenter also asked 
the Commission to consider allowing non-U.S. based clearing agencies to 
prepare their financial statements in accordance with accounting 
standards generally accepted in the clearing agency's particular 
jurisdiction so long as the financial statements are accompanied by a 
reconciliation to U.S. GAAP.\274\ The commenter suggested that not 
allowing this flexibility could force non-U.S. based clearing agencies 
to post financial statements on their Web site that do not conform to 
the clearing agency's local accounting and financial reporting 
requirements.\275\
---------------------------------------------------------------------------

    \272\ See The DTCC (April) Letter at 7; ENY Letter at 2.
    \273\ See ENY Letter at 1.
    \274\ See id. at 2.
    \275\ See id.
---------------------------------------------------------------------------

c. Final Rule
    We are adopting Rule 17Ad-22(c)(2) as proposed, except for the 
clarification discussed in Sections II.B.4 and III.A regarding the 
application of the rule only to registered clearing agencies. We have 
also changed references to ``annual audited financial report'' to 
``annual audited financial statements'' to be consistent with the term 
used in Regulation S-X. Furthermore, we have clarified that a 
registered clearing agency will be required to post its financial 
statements of income, changes in stockholders' equity and other 
comprehensive income and cash flows \276\ within 60 days after the end 
of its fiscal year, which is consistent with the staff guidance on 
meeting the requirements of Section 17A in its Announcement of 
Standards for the Registration of Clearing Agencies.\277\ The 
Commission believes that requiring the disclosure of the clearing 
agency's annual audited financial statements to be 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.\278\
---------------------------------------------------------------------------

    \276\ The added language, ``changes in stockholders' equity and 
other comprehensive income,'' does not change the substance of the 
rule as provided in the Proposing Release. This language has been 
added in the final rule to clarify the scope of what is meant by a 
complete set of financial statements consistent with customary 
industry accounting practices.
    \277\ See Exchange Act Release No. 16900 (June 17, 1980), 45 FR 
41920 (June 23, 1980) (``Accordingly, a clearing agency should 
undertake in its rules to furnish to participants, within 60 days 
following the close of the clearing agency's fiscal year, 
unconsolidated audited comparative financial statements which are 
prepared in accordance with generally accepted accounting principles 
and are covered by a report prepared by its independent public 
accountant.'').
    \278\ The requirements of proposed Rule 17Ad-22(c)(2) concerning 
the audited annual financial statements would apply individually to 
each respective clearing agency.
---------------------------------------------------------------------------

    Consistent with recommendations from commenters, we are adopting 
Rule 17Ad-22(c)(2) in a form that does not require a reconciliation to 
U.S. GAAP for clearing agency reports that are prepared using 
IFRS.\279\ We appreciate the request made by commenters for the 
Commission to consider allowing non-U.S. based clearing agencies to 
prepare their financial statements in accordance with accounting 
standards generally accepted in their home jurisdiction so long as the 
financial statements are accompanied by a reconciliation to U.S. 
GAAP.\280\ However, we also recognize the advantages of financial 
statement disclosure that are limited to more widely applied bases of 
accounting and may offer more utility to market participants, 
regulators and other stakeholders of clearing agencies. Therefore, we 
have limited the different bases of accounting upon which the annual 
audited financial statements may be prepared to IFRS and U.S. GAAP.
---------------------------------------------------------------------------

    \279\ See supra note 273.
    \280\ See supra notes 274-275 and accompanying text.
---------------------------------------------------------------------------

F. Minimum Standards for Registered Clearing Agencies: Rules 17Ad-
22(d)(1)-(15)

    Rule 17Ad-22(d) sets forth certain minimum standards regarding the 
operations of registered clearing agencies providing CCP or CSD 
services. The standards established in Rule 17Ad-22 address areas 
including: (1) Transparent and enforceable rules and procedures; (2) 
participation requirements; (3) custody of assets and

[[Page 66245]]

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 securities 
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.
    Like Rules 17Ad-22(b) and (c), Rule 17Ad-22(d) is designed to work 
in tandem with the Commission's existing mandate under Section 17A of 
the Exchange Act by establishing minimum standards for clearing agency 
operations. In particular, Congress directed the Commission to 
facilitate the establishment of (1) a national system for the prompt 
and accurate clearance and settlement of transactions in securities 
(other than exempt securities) and (2) linked or coordinated facilities 
for clearance and settlement of transactions in securities, securities 
options, contracts of sale for future delivery and options thereon, and 
commodity options. \281\ In using its authority, the Commission must 
consider the public interest, the protection of investors, the 
safeguarding of securities and funds, and the maintenance of fair 
competition among brokers and dealers, clearing agencies, and transfer 
agents.\282\ When Congress established this system for the regulation 
of clearing agencies in 1975, Congress found that:
---------------------------------------------------------------------------

    \281\ See 15 U.S.C. 78q-1(a)(2)(A).
    \282\ See 15 U.S.C. 78q-1(b)(3)(A)-(I).
---------------------------------------------------------------------------

     The prompt and accurate clearance and settlement of 
securities transactions, including the transfer of record ownership and 
the safeguarding of securities and funds related thereto, are necessary 
for the protection of investors and persons facilitating transactions 
by and acting on behalf of investors.
     Inefficient procedures for clearance and settlement impose 
unnecessary costs on investors and persons facilitating transactions by 
and acting on behalf of investors.
     New data processing and communications techniques create 
the opportunity for more efficient, effective, and safe procedures for 
clearance and settlement.
     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. \283\
---------------------------------------------------------------------------

    \283\ See 15 U.S.C. 78q-1(a)(1).
---------------------------------------------------------------------------

    These findings serve as objectives in the Commission's ongoing 
efforts to enhance efficiency and reduce risk in the operation of the 
U.S. clearance and settlement system. Over the years, the Commission's 
view of the actions by a clearing agency that are necessary to meet 
these objectives as well as the other requirements in Section 17A has 
changed with prevailing market conditions and as new technologies are 
developed. For example, in the years after the October 1987 market 
break, the Commission worked to implement a number of changes in the 
securities markets, including the reduction of the standard settlement 
time frame for a securities transaction to the third day after the 
securities trade date (i.e., T+3) and the conversion to a same-day 
funds settlement system.\284\ In 2004, in a concept release titled 
Securities Transaction Settlement, the Commission noted at that time 
that (1) size and growth of the securities markets; (2) tighter 
linkages among markets and market participants; and (3) a possible 
wide-scale regional disruption prompted the Commission to consider 
shortening the standard T+3 securities settlement cycle even further to 
mitigate the possibility of systemic disruptions and to facilitate a 
more efficient clearance and settlement system.\285\
---------------------------------------------------------------------------

    \284\ See 17 CFR 240.15c6-1; Exchange Act Release No. 34-26051 
(Aug. 31, 1988), 53 FR 34852 (Sept. 8, 1988).
    \285\ See Concept Release: Securities Transaction Settlement, 
Release No. 34-49405 (Mar. 11, 2004).
---------------------------------------------------------------------------

    Over time, changes to the U.S. legal framework have also led to 
enhancements in the operation of the U.S. clearance and settlement 
system. For example, the adoption of Revised Article 8 of the Uniform 
Commercial Code in 1995 strengthened the laws governing the holding and 
transfer of securities.\286\ In response, clearing agencies changed 
their rules to provide greater legal certainty to their direct 
investors and provide greater protection to investors.\287\ Amendments 
to the U.S. bankruptcy code in 2005 similarly provided an opportunity 
for enhanced legal protections for clearing agencies and clearing 
agency participants.\288\
---------------------------------------------------------------------------

    \286\ See generally James S. Rogers, Policy Perspectives on 
Revised U.C.C. Article 8 (1996), Boston College Law School Faculty 
Papers, Paper 343, available at http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=1346&context=lsfp.
    \287\ Securities and Exchange Act Release Nos. 39924 (Apr. 27, 
1998), 63 FR 24584 (May 4, 1998) and 36781 (Jan. 26, 1996), 61 FR 
3958 (Feb. 2, 1996).
    \288\ Bankruptcy Abuse Prevention and Protection Act of 2005, 
Public Law 109-8, 119 Stat. 23.
---------------------------------------------------------------------------

    Consistent with these examples of how the Commission's approach to 
administrative oversight and practices by clearing agencies have 
changed over time to meet the objectives of Section 17A, the Commission 
believes that Rule 17Ad-22(d) creates standards for various aspects of 
the payment, clearance and settlement process and that to meet these 
standards clearing agencies will likely need to update their rules and 
procedures as market conditions evolve (e.g., through new products and 
trading strategies), to keep pace with relevant changes in technology, 
and appropriately respond to other conditions.\289\ The discussion 
below provides greater detail regarding each respective standard 
covered in Rules 17Ad-22(d)(1)-(15). As indicated in Section II.B the 
Commission intends to observe clearing agency practices as they are 
developed to establish, implement, maintain and enforce policies and 
procedures that are intended to achieve compliance with Rules 17Ad-
22(d)(1)-(15). Monitoring those practices and through cognizance of 
changes in other relevant areas that affect a clearing agency's 
operation and governance, such as market conditions, technology, or 
international standards, the Commission may modify Rules 17Ad-22(d)(1)-
(15) over time or adopt additional rules as appropriate. The Commission 
may also choose to issue further guidance concerning its rules for 
clearing agencies.
---------------------------------------------------------------------------

    \289\ See supra note 71.
---------------------------------------------------------------------------

1. Rule 17Ad-22(d)(1): Transparent and Enforceable Rules and Procedures
a. Proposed Rule
    Rule 17Ad-22(d)(1), as proposed, 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 structure for each aspect of their 
activities in all relevant jurisdictions.\290\
---------------------------------------------------------------------------

    \290\ A relevant jurisdiction would include, among others, 
activities (1) In the United States, (2) involving any means of 
interstate commerce, or (3) 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.
---------------------------------------------------------------------------

b. Comments Received
    Commenters generally supported Rule 17Ad-22(d)(1).\291\
---------------------------------------------------------------------------

    \291\ See The DTCC (April) Letter at 7 (noting its support for 
proposed Rule 17Ad-22(d)(1) as drafted); see also Better Markets 
Letter at 2 (stating generally that ``[i]n fashioning the rules, and 
in accordance with the Dodd-Frank Act, the Commission has 
appropriately taken into account international standards governing 
clearance and settlement''); Barnard Letter at 1 (supporting 
generally the thrust of the Commission's proposals in the Proposing 
Release, particularly proposed Rule 17Ad-22 concerning standards for 
clearing agencies); The OCC Letter at 7 (applauding the Commission 
generally for choosing to incorporate many aspects of the current 
CPSS-IOSCO Recommendations in the Proposing Release); LCH Letter at 
1 (stating its general belief that the rules in the Proposing 
Release ``will help establish a comprehensive regulatory framework 
to reduce risk, increase transparency and promote market integrity 
within the financial system'').

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

[[Page 66246]]

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(1) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. We 
believe that well-founded, transparent and enforceable policies and 
procedures established to underpin a clearing agency's operational and 
business activities are essential to reduce legal risks and enhance 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.\292\
---------------------------------------------------------------------------

    \292\ 15 U.S.C. 78q-1(a)(1)(A).
---------------------------------------------------------------------------

    To achieve compliance with Rule 17Ad-22(d)(1), a clearing agency 
must have written policies and procedures \293\ in place that, at a 
minimum, address the significant aspects of a clearing agency's 
operations and risk management 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.\294\ Examples of 
legal risk in the operation of a clearing agency 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.\295\ The 
Commission believes that it is helpful for a clearing agency to bear 
these risk factors in mind and that it should also consider the extent 
to which changes in the legal framework affecting the clearing agency 
may require changes to its organization and practices to ensure that 
the establishment, implementation, maintenance and enforcement of its 
policies and procedures continues to provide for a well-founded, 
transparent and enforceable structure that protects the interests of 
the clearing agency and its participants.
---------------------------------------------------------------------------

    \293\ 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, unless (1) 
it is reasonably and fairly implied by an existing rule of the self-
regulatory organization or (2) it is concerned solely with the 
administration of the self-regulatory organization and is not a 
stated policy, practice, or interpretation with respect to the 
meaning, administration, or enforcement of a SRO's existing rule. 
See 17 CFR 240.19b-4.
    \294\ The Commission believes that 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).
    \295\ See generally RSSS Recommendation 1, Legal Framework and 
RCCP Recommendation 1, Legal Risk, supra note 33.
---------------------------------------------------------------------------

2. Rule 17Ad-22(d)(2): Participation Requirements
a. Proposed Rule
    Rule 17Ad-2(d)(2), as proposed, 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; 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.
b. Comments Received
    Some commenters supported proposed Rule 17Ad-22(d)(2).\296\
---------------------------------------------------------------------------

    \296\ See The DTCC (April) Letter at 7; see also Better Markets 
Letter at 2; Barnard Letter at 1; The OCC Letter at 7; LCH Letter at 
1.
---------------------------------------------------------------------------

    One commenter stated its specific preference for proposed Rule 
17Ad-22(d)(2) to facilitate the Commission's regulation of access at 
clearing agencies compared to Rules 17Ad-22(b)(5), (6) and (7) for 
CCPs.\297\ The commenter suggested that adoption of Rule 17Ad-22(d)(2), 
though not a prescriptive rule, would give the Commission a broad level 
of plenary authority over participant access to clearing agencies.\298\
---------------------------------------------------------------------------

    \297\ See The OCC Letter at 12.
    \298\ See id.
---------------------------------------------------------------------------

    One commenter recommended that the Commission should take an 
expansive, prescriptive approach to its rule requirements for clearing 
agency participation and participant monitoring.\299\ The commenter 
asked that the Commission be more detailed in the requirements of its 
proposed rules that address participation standards, like Rule 17Ad-
22(d)(2).\300\ The commenter suggested that the Commission should apply 
this approach within several categories of clearing agency operation 
that it believes comprise risk management.\301\
---------------------------------------------------------------------------

    \299\ See Barnard Letter at 1; ISDA Letter at 3-4.
    \300\ See ISDA Letter at 3-4.
    \301\ See id. (citing the following areas as components of a 
clearing agency's risk management framework: (1) Board and senior 
management oversight; (2) an organizational structure that conforms 
to the overall strategy and risk policy set by the board; (3) that 
individuals permitted to take risk on behalf of the clearing member 
have a strong understanding of the organization's risk profile, the 
products it trades, and approved trading limits; (4) risk management 
that is independent and reports directly to senior management or the 
board; and (5) strong systems and procedures for controlling, 
monitoring, and reporting risk (including for transactions with 
affiliates)).
---------------------------------------------------------------------------

    One commenter supported the requirement in Rule 17Ad-22(d)(2) for 
clearing members to have written policies and procedures for risk 
management but also emphasized the importance of placing emphasis on 
practical experience in risk management.\302\ The commenter urged the 
Commission to require that participants in a clearing agency must be 
able to participate in its default management process, which includes 
the ability to bid for the portfolios of other clearing members.\303\ 
The commenter also stated that if a clearing agency admitted a clearing 
member that was unable to participate in default management, it would 
reduce available resources and liquidity, place heightened burdens on 
other clearing members, and reduce the likelihood that the clearing 
agency's risk management process would operate effectively.\304\
---------------------------------------------------------------------------

    \302\ See ISDA Letter at 4.
    \303\ See ISDA Letter at 5.
    \304\ See id.
---------------------------------------------------------------------------

    One commenter encouraged the Commission to prohibit clearing 
agencies from imposing rules or engaging in conduct that is prejudicial 
to indirect clearing participants compared to direct clearing 
participants (e.g., with respect to eligibility or the timing of 
clearing or processing of trades), and stated that if a transaction 
satisfies a clearing agency's rules then the clearing process for that 
trade should be the same regardless of whether it involves direct or 
indirect clearing participants.\305\
---------------------------------------------------------------------------

    \305\ See MFA (Kaswell) Letter at 7 (further stating that this 
includes ``barriers to competitive price provision by a liquidity 
provider that is an indirect clearing participant versus a direct 
clearing participant'' because ``when an indirect clearing 
participant trades with another indirect clearing participant, the 
clearing process should be identical and as prompt as when one of 
the parties is a direct clearing participant so long as the 
transaction satisfies the relevant clearing agency's rules, 
requirements and standards otherwise applicable to such trades.''); 
MFA (Baker) Letter Attachment 1, at 1.

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

[[Page 66247]]

    Some commenters expressed concern that clearing agency participants 
may rely on the resources and services of a third party to meet the 
requirements developed by clearing agencies pursuant to Rule 17Ad-
22(d)(2).\306\ One commenter expressed that it does not believe that a 
clearing member should be able to use a credit facility funding 
arrangement from an unaffiliated entity to satisfy financial resource 
requirements developed by a clearing agency pursuant to Rule 17Ad-
22(d)(2).\307\ The commenter noted that in this case the clearing 
member receives only a contractual right to funds, may need to attempt 
to enforce that right at a time of stressed liquidity, and does not 
have rights to monitor the financial resources of the liquidity 
facility.\308\ The same commenter stated that participants should not 
be permitted to outsource default management.\309\ It argued that 
preventing the outsourcing of default management arrangements is 
critical to mitigate risks associated with outsourcing.\310\
---------------------------------------------------------------------------

    \306\ See ISDA Letter at 4-5.
    \307\ See ISDA Letter at 4.
    \308\ See id.
    \309\ See ISDA Letter at 5.
    \310\ See id. (noting (1) the fact that the third party does not 
``have skin in the game'' and (2) the third party service provider 
could inappropriately bind a clearing member to accept positions 
from a defaulting clearing member that it is not equipped to handle. 
The commenter also pointed out that conflicts of interest could 
exacerbate these risks if the third party service provider is 
operated by a competing clearing member).
---------------------------------------------------------------------------

    Several commenters argued that Rule 17Ad-22(d)(2) is only 
appropriate for CCPs.\311\ As noted below, Rule 17Ad-22(d)(2) only 
applies to these entities.
---------------------------------------------------------------------------

    \311\ See Omgeo Letter at 10; TriOptima Letter at 6-7.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(2) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies.
    Rule 17Ad-22(d)(2) is intended to reduce the likelihood of defaults 
by participants, while also providing flexibility for clearing agencies 
to tailor standards that are linked to the obligations of the 
participant. The Commission believes the rule fosters 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.\312\
---------------------------------------------------------------------------

    \312\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    We agree with those commenters who supported Rule 17Ad-22(d)(2) as 
a mechanism to help ensure that clearing agencies meet the Exchange Act 
requirements in their participation standard practices.\313\ However, 
we are not persuaded by the position that Rule 17Ad-22(d)(2) is so 
coextensive with the requirements of Rules 17Ad-22(b)(5), (6) and (7) 
that it renders the adoption of those rules unnecessary.\314\ As 
discussed above, Rules 17Ad-22(b)(5), (6) and (7) are responsive to 
specific concerns about access to CCPs that have been brought to the 
attention of the Commission in connection with efforts to promote 
central clearing of security-based swaps by the financial services 
industry, government regulators and legislators in response to the 
recent financial crisis.\315\ We believe that Rule 17Ad-22 promotes the 
compliance of all clearing agencies with the requirement in Section 17A 
of the Exchange Act that a clearing agency's rules may not be designed 
to permit unfair discrimination in the admission of participants or 
among participants in the use of the clearing agency. We also believe 
this complements the design of Rules 17Ad-22(b)(5), (6) and (7) to 
specifically promote compliance with the fair access requirement by 
CCPs.
---------------------------------------------------------------------------

    \313\ See supra note 296.
    \314\ See supra note 297.
    \315\ See discussion supra Section II.B.
---------------------------------------------------------------------------

    We agree with commenters that comprehensive and explicit 
requirements are an appropriate part of a clearing agency's risk 
management framework, including participation standards.\316\ We also 
agree with commenters who stated that it is important for the 
Commission to promote clearing agencies' use of practical experience in 
establishing, implementing, maintaining and enforcing their policies 
and procedures concerning participation standards and that the 
inability of a clearing member to participate in the default management 
process during a default would be problematic.\317\ Accordingly, we 
believe that it is important to allow clearing agencies enough 
flexibility to use their market experience to shape the rules, policies 
and procedures addressing participation standards and for the 
Commission to oversee the suitability of those standards through its 
oversight, including the SRO rule filing process, periodic inspections 
and examinations, and day-to-day monitoring of the activities of 
clearing agencies. Because of the importance of clearing agency 
flexibility and the existing oversight mechanisms, the Commission 
declines to adopt more prescriptive requirements under Rule 17Ad-
22(d)(2) at this time.
---------------------------------------------------------------------------

    \316\ See supra notes 299-300.
    \317\ See supra note 302 and accompanying text.
---------------------------------------------------------------------------

    We agree with commenters that credit facility arrangements 
represent a contractual right to funds and that enforcement of that 
contractual right may become more difficult during stressed market 
conditions.\318\ However, we do not believe that the rule should 
completely prohibit participants from using credit facility 
arrangements with an unaffiliated entity to satisfy financial resource 
requirements to a clearing agency because such credit facility 
arrangements can be an important tool that allows clearing agencies to 
access liquidity quickly in times of stress avoiding an immediate need 
to liquidate assets. Instead, we expect clearing agencies to use their 
expertise to establish rules, policies and procedures that properly 
reflect the extent to which credit facility arrangements are 
appropriate for participants at the particular clearing agency based on 
the particular clearance and settlement services it provides.
---------------------------------------------------------------------------

    \318\ See supra notes 306-308 and accompanying text.
---------------------------------------------------------------------------

    We agree with commenters who stated that clearing agencies should 
not process trades differently on the sole basis of whether the trade 
is between direct clearing members or involves participants that access 
the clearing agency through those clearing members, and so the 
Commission does not find it necessary to create disparate standards for 
the treatment of direct and indirect participants.\319\
---------------------------------------------------------------------------

    \319\ See supra note 305 and accompanying text.
---------------------------------------------------------------------------

3. Rule 17Ad-22(d)(3): Custody of Assets and Investment Risk
a. Proposed Rule
    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, and invest in 
instruments with minimal credit, market and liquidity risks. Compliance 
with the requirement is intended to improve the ability of the clearing 
agency to meet its settlement

[[Page 66248]]

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.
b. Comments Received
    Some commenters expressed concerns about the application and scope 
of proposed Rule 17Ad-22(d)(3). One commenter stated that proposed Rule 
17Ad-22(d)(3) is not sufficiently clear in its scope.\320\ The 
commenter urged the Commission to make clear that Rule 17Ad-22(d)(3) 
applies only to the assets of the clearing agency that are available to 
facilitate settlement in the event of a participant default and not 
those assets that are held in custody by the clearing agency.\321\
---------------------------------------------------------------------------

    \320\ See The DTCC (April) Letter at 21.
    \321\ See The DTCC (April) Letter at 21-22 (remarking that it 
believes this ambiguity is also contained in RCCP 7: Custody and 
investment risks on which Rule 17Ad-22(d)(3) is modeled but noting 
that proposed language for FMI Principle 16: Custody and investment 
risk would resolve that ambiguity and asking the Commission to 
revise Rule 17Ad-22(d)(3) as follows to make clear that the 
requirements of the rule do not apply to assets of participants held 
in custody: ``(d) Each clearing agency shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable: (3) Hold its assets in a manner whereby 
risk of loss or of delay in its access to them is minimized; and 
invest such assets in instruments with minimal credit, market and 
liquidity risks'').
---------------------------------------------------------------------------

    However, another commenter asked the Commission to clarify that 
proposed Rule 17Ad-22(d)(3) applies to customer assets only and not to 
the assets of the clearing agency (or its sponsor).\322\ The commenter 
noted that by defining the scope of Rule 17Ad-22(d)(3) that way the 
rule would not apply to clearing agencies that perform post-trade 
processing services (e.g., compression or collateral management) and do 
not take in or retain any assets of their users.\323\ An additional 
commenter agreed that Rule 17Ad-22(d)(3) should not apply to clearing 
agencies that do not hold assets on behalf of participants.\324\
---------------------------------------------------------------------------

    \322\ See TriOptima Letter at 7.
    \323\ See id.
    \324\ See Omgeo Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(3) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. The 
Commission believes that Rule 17Ad-22(d)(3) strengthens 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.\325\ Because the 
purpose of Rule 17Ad-22(d)(3) is to help ensure assets are available in 
the event of a participant default, Rule 17Ad-22(d)(3) would apply to 
all assets held by a clearing agency that may be used for that purpose. 
However, the Commission notes that Rule 17Ad-22(d)(3) may not apply to 
the assets of a participant's customer depending on how a clearing 
agency's operations are structured. The Commission does not expect that 
registered clearing agencies would need to rely on their physical 
assets, such as computers, furniture and buildings, to cover a 
participant default under the rule.
---------------------------------------------------------------------------

    \325\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    We appreciate the concerns expressed by commenters who asked the 
Commission to clarify how Rule 17Ad-22(d)(3) applies in the context of 
the different services that a clearing agency may perform, and note 
that Rule 17Ad-22 only applies to registered clearing agencies and does 
not apply to entities that are exempt from registration as a clearing 
agency.
4. Rule 17Ad-22(d)(4): Identification and Mitigation of Operational 
Risk
a. Proposed Rule
    Rule 17Ad-22(d)(4), as proposed, 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; 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 ensure the fulfillment of a clearing agency's obligations.
    Rule 17Ad-22(d)(4) 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 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.
b. Comments Received
    Several commenters recommended that the rule should not apply to 
the activities of clearing agencies that perform post trade processing 
services. For example, one commenter reasoned that the application of 
proposed Rule 17Ad-22(d)(4) to a clearing agency that performs post-
trade comparison services is unnecessary if that clearing agency is 
operating pursuant to a conditional exemptive order from the 
Commission.\326\ The commenter stated that the conditions of an 
exemptive order can be tailored to provide the Commission with 
sufficient regulatory oversight of a clearing agency's operational 
risks.\327\
---------------------------------------------------------------------------

    \326\ See Omgeo Letter at 10.
    \327\ See id. (identifying such measures as making the clearing 
agency subject to: (1) The Commission's Automation Review Program, 
(2) regular audits by Commission staff, (3) annual reports to the 
Commission, (4) a duty to report systems outages to the Commission, 
and (5) on-site inspections by Commission staff of the clearing 
agency's facilities).
---------------------------------------------------------------------------

    Another commenter expressed its view that operational risk 
management and disaster recovery systems are critical to any well-
founded compression service or collateral management service.\328\ 
However, the commenter argued that a clearing agency that performs 
those services should be free to implement and amend such procedures as 
it considers necessary to operate its business without undue regulatory 
delay or oversight.\329\
---------------------------------------------------------------------------

    \328\ See TriOptima Letter at 7-8.
    \329\ See id. (supporting its position through assertions that: 
(1) The robustness of a compression service's systems will be a 
competitive issue that will be determinant of the commercial 
viability of the compression service; (2) compression services do 
not represent a systemic risk to the viability of the market because 
collateral management providers merely run a set of calculations for 
collateral management purposes; (3) systems integrity is a central 
feature of the provider's contractual framework and system design 
and, ultimately, its ability to attract users; and (4) the risk of 
data loss is, in practice, very small).
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(4) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. We 
believe that Rule 17Ad-22(d)(4) complements the existing guidance 
provided by the Commission in its Automation Review Policy Statements 
\330\ and the Interagency

[[Page 66249]]

White Paper on Sound Practices to Strengthen the Resilience of the U.S. 
Financial System.\331\ We also believe that Rule 17Ad-22(d)(4) helps to 
address risks posed by potential operational deficiencies to a clearing 
agency and its participants and therefore supports the requirement in 
Section 17A of the Exchange Act that a clearing agency must be so 
organized and have the capacity to be able to facilitate prompt and 
accurate clearance and settlement. Finally, Rule 17Ad-22(d)(4) does not 
require clearing agencies to eliminate all operational risks. Instead, 
the rule provides registered clearing agencies with the ability to 
consider the relevant trade-offs between cost and risk reduction. The 
rule provides this ability by allowing registered clearing agencies, 
subject to Commission oversight, to develop systems, controls, and 
procedures that are ``appropriate'' in response to the identified 
risks.\332\
---------------------------------------------------------------------------

    \330\ See Automated Systems of Self-Regulatory Organizations, 
Exchange Act Release No. 34-27445 (Nov. 16, 1989), 54 FR 48703 (Nov. 
24, 1989); Automated Systems of Self-Regulatory Organizations (II), 
Release No. 34-29815 (May 9, 1991), 56 FR 22489 (May 15, 1991) 
(``Automation Review Policy Statements''). Generally, the guidance 
in the Automation Review Policy Statements 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.
    \331\ See Exchange Act Release No. 47638 (Apr. 7, 2003), 68 FR 
17809 (Apr. 11, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.
    \332\ See discussion supra Section I.A.2.
---------------------------------------------------------------------------

    As discussed above, Rule 17Ad-22 applies only to registered 
clearing agencies. It does not apply to entities that perform post-
trade processing services or that are exempt from registration as a 
clearing agency. As discussed above, entities that perform certain post 
trade processing services, and that fall within the definition of 
clearing agency, may be subject to different rulemaking by the 
Commission at a later time.\333\
---------------------------------------------------------------------------

    \333\ See discussion supra Section II.B.4 and Section III.A.
---------------------------------------------------------------------------

5. Rule 17Ad-22(d)(5): Money Settlement Risks
a. Proposed Rule
    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. Money 
settlement arrangements, among other things, are meant to reduce the 
risk that financial obligations related to the activities of the 
clearing agency are not timely settled or discharged with finality. 
Generally, money settlement by a clearing agency and its participants 
involves the use of a settlement bank \334\ as an intermediary. Failure 
by the settlement bank to effectuate timely and final settlement 
adversely affects the clearing agency by exposing it to credit and 
liquidity pressures that in turn can destabilize the clearing agency's 
ability to facilitate prompt and accurate clearance and settlement.
---------------------------------------------------------------------------

    \334\ A settlement bank is a bank that is used to effect money 
settlements between a central counterparty and its participants.
---------------------------------------------------------------------------

    The Commission is providing clearing agencies with flexibility to 
implement arrangements in a manner fit for them to meet the requirement 
of the rule. The Commission notes that there are a number of 
arrangements that clearing agencies could establish to comply with the 
rule, including criteria for use of settlement banks that address the 
banks' creditworthiness, access to liquidity, and operational 
reliability, and legal agreements with settlement banks to ensure that 
funds transfers to the clearing agency are final when affected.
b. Comments Received
    One commenter stressed that if the Commission adopts Rule 17Ad-
22(d)(5) as proposed then the Commission should clarify that a clearing 
agency cannot eliminate all exposure to settlement bank risk.\335\ The 
commenter pointed out that even if a clearing agency uses an account at 
a U.S. Federal Reserve bank to make settlement with participants, the 
clearing agency is still exposed to the settlement risk of the 
commercial banks that are used by clearing agency participants.\336\
---------------------------------------------------------------------------

    \335\ See The OCC Letter at 14.
    \336\ See id.
---------------------------------------------------------------------------

    The same commenter stressed that the Commission should not mandate 
a minimum number of settlement banks and that the requirements of Rule 
17Ad-22(d)(5) should focus on providing clearing agencies with 
discretion to select settlement banks with care, diversifying risk 
among those settlement banks to the extent practicable, and monitoring 
their financial status.\337\
---------------------------------------------------------------------------

    \337\ See id.
---------------------------------------------------------------------------

    Two commenters argued that proposed Rule 17Ad-22(d)(5) should be 
applicable only to clearing agencies that take in or process securities 
or funds from users.\338\
---------------------------------------------------------------------------

    \338\ See Omgeo Letter at 11; TriOptima Letter at 8 (stating 
that the proposed rule should not apply to compression services and 
collateral management providers that do not hold or process any of 
their users' assets).
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(5) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. We 
believe Rule 17Ad-22(d)(5) limits the potential that a clearing 
agency's money settlement arrangements will cause the clearing agency 
to face higher levels of credit and liquidity risks. In addition, the 
Commission believes that the rule is consistent with 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 that are in the custody or control of the clearing agency or 
for which it is responsible.\339\
---------------------------------------------------------------------------

    \339\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As noted, some commenters pointed out that a clearing agency may 
not be positioned to eliminate all exposure to credit and liquidity 
risks from the use of banks to effect money settlements.\340\ For 
example, we agree that even if a clearing agency elects to use an 
account at a U.S. Federal Reserve bank to make settlement with 
participants, the clearing agency is still exposed to the settlement 
risk of the banks chosen by clearing agency participants. The 
Commission notes however that Rule 17Ad-22(d)(5) does not require a 
clearing agency to completely eliminate settlement bank risks. Instead, 
the clearing agency must 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. We believe clearing agencies have the 
authority

[[Page 66250]]

through their rules to shape the settlement bank practices in order to 
achieve that outcome. We also agree with commenters that clearing 
agencies should retain discretion, subject to Commission oversight, to 
establish rules governing settlement bank practices with participants 
that are tailored to the operations of the clearing agency.\341\
---------------------------------------------------------------------------

    \340\ See supra notes 335-336 and accompanying text.
    \341\ See supra note 337 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, Rule 17Ad-22 only applies to registered 
clearing agencies and does not apply to entities that are exempt from 
registration as a clearing agency except to the extent specifically 
contemplated by the terms of a future exemption.
6. Rule 17Ad-22(d)(6): Cost-Effectiveness
a. Proposed Rule
    Rule 17Ad-22(d)(6), as proposed, 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.
    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 point 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 believes the rule should potentially help 
reduce the costs incurred for clearing agency services while also 
maintaining appropriate standards for a clearing agency's operations.
b. Comments Received
    Two commenters expressed reservations about the rule.\342\ One 
commenter stated that it is unnecessary to apply proposed Rule 17Ad-
22(d)(6) to a clearing agency if the Commission already regulates the 
cost-effectiveness of that clearing agency through conditions in an 
exemptive order.\343\
---------------------------------------------------------------------------

    \342\ See Omgeo Letter at 11; TriOptima Letter at 8.
    \343\ See Omgeo Letter at 11 (``[P]ursuant to Omgeo's Exemptive 
Order, Omgeo may not charge its customers more for use of its 
central matching services than Omgeo charges its customers when all 
counterparties are customers of Omgeo. Moreover, because DTCC, which 
is industry-owned, is the majority owner of Omgeo's Class A 
Interests, which controls the U.S. regulated aspects of Omgeo's 
business, DTCC can influence the prices Omgeo charges for its U.S. 
regulated services. This system has worked well, and therefore 
application of Proposed Rule 17Ad-22(d)(6) to Omgeo is 
unnecessary'').
---------------------------------------------------------------------------

    Another commenter stressed that unless a provider of compression or 
collateral management services is systemically important, or market 
participants are obliged to purchase its services, then it should be 
free to set fees in a fair and commercial manner that encourages broad 
participation while permitting sufficient flexibility to offer 
favorable rates to high-volume users, early adopters, magnet clients 
and other key participants.\344\ The commenter added that portfolio 
compression and collateral management are service areas in which cost 
effectiveness is a dominant part of commercial viability and that those 
services today do not represent a systemic risk to the viability of the 
markets.\345\
---------------------------------------------------------------------------

    \344\ See TriOptima Letter at 8.
    \345\ See id.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(6) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. As 
discussed above, the Commission believes Rule 17Ad-22(d)(6) is 
appropriate and serves to advance the statutory goals of prompt and 
accurate clearance and settlement.\346\ Specifically, the rule should 
help reduce the costs incurred for clearing agency services by 
requiring registered clearing agencies to be mindful of costs incurred 
by their participants, which may include keeping fees lower for 
participants, while also requiring that registered clearing agencies 
maintain safe and secure operations.
---------------------------------------------------------------------------

    \346\ See supra note 1.
---------------------------------------------------------------------------

    With regard to suggestions that Rule 17Ad-22(d)(6) should not apply 
to entities that perform certain post-trade services (i.e., comparison 
of trade data, collateral management and compression/tear-up 
services),\347\ or a clearing agency through the conditions of an 
exemptive order rather than the requirements of Rule 17Ad-
22(d)(6),\348\ we note that Rule 17Ad-22 only applies to CCPs and CSDs 
and does not apply to entities exempt from registration as clearing 
agency except to the extent specifically contemplated by the terms of a 
future exemption.
---------------------------------------------------------------------------

    \347\ See supra notes 344-345 and accompanying text.
    \348\ See supra note 343 and accompanying text.
---------------------------------------------------------------------------

7. Rule 17Ad-22(d)(7): Links
a. Proposed Rule
    Rule 17Ad-22(d)(7), as proposed, 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 or settle trades, and to ensure 
that these risks are managed prudently on an ongoing basis. Tying the 
operations of different clearing agencies together by link arrangements 
potentially exposes a clearing agency and its members to the risk that 
the other entity may experience a financial loss or is otherwise unable 
to meet its settlement obligations that causes the clearing agency or 
its members to fail to meet their obligations.\349\ 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 
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.
---------------------------------------------------------------------------

    \349\ 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 33.
---------------------------------------------------------------------------

b. Comments Received
    Three commenters expressed concerns about the rule.\350\ One 
commenter expressed concern that proposed Rule 17Ad-22(d)(7) is not 
sufficiently clear in scope.\351\ Specifically, the commenter stated 
that it is not entirely clear whether the rule applies only to links 
between clearing agencies or may also apply to other ``links'' and any 
other entities that may be involved in the process of clearing and 
settling trades.\352\ Accordingly, the

[[Page 66251]]

commenter asked the Commission to revise the proposed rule text for 
17Ad-22(d)(7).\353\ An additional commenter suggested that proposed 
Rule 17Ad-22(d)(7) should be modified to encourage prudent portfolio 
compression and collateral management services globally.\354\ One 
commenter argued that it should not be subject to Rule 17Ad-22(d)(7) 
because it is already subject to the conditions of an exemptive order 
from clearing agency registration by the Commission.\355\
---------------------------------------------------------------------------

    \350\ See The DTCC (April) Letter at 22; TriOptima Letter at 9; 
Omgeo Letter at 12.
    \351\ See The DTCC (April) Letter at 22.
    \352\ See id. (providing examples of these other types of links 
such as those that a clearing agency may establish with a data 
processor, pricing service, custodian bank, transfer agent or 
liquidity provider).
    \353\ See The DTCC (April) Letter at 23 (requesting that Rule 
17Ad-22(d)(7) be revised as follows: ``Each clearing agency shall 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, evaluate the 
potential sources of risks that can arise when the clearing agency 
establishes links with other central counterparties or central 
securities depositories either cross-border or domestically to clear 
trades, and ensure that the risks are managed prudently on an 
ongoing basis.'').
    \354\ See TriOptima Letter at 9 (noting its belief that 
regulations that restrict the global availability of compression 
services and collateral management services will necessarily reduce 
the effectiveness of the risk-management service, by reducing the 
geographic scope of counterparties to which domestic users can 
connect). The commenter expressed its views on modifying Rule 17Ad-
22(d)(7) in the larger context of its belief ``that the registration 
requirement with respect to [portfolio compression services and] * * 
* collateral management services is inappropriate and would place 
unnecessary burdens on entities providing swap market participants 
useful back-office tools that are intended to improve the efficiency 
of collateral management systems in a manner that reduces systemic 
risk.'' See TriOptima Letter at 1.
    \355\ See Omgeo Letter at 12 (suggesting that its exemptive 
order is the oversight mechanism that strikes the appropriate 
balance to govern its link arrangements because its link 
arrangements (1) do not involve the handling of securities or funds; 
(2) provide for standardization and processing of information in a 
uniform and efficient manner; and (3) disruptions to its link 
arrangements are of a different type and are far less significant 
than disruptions in the linkages of registered clearing agencies).
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(7) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. We 
believe the rule is consistent with and furthers the purposes of the 
Exchange Act. 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.\356\ 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.\357\
---------------------------------------------------------------------------

    \356\ 15 U.S.C. 78q-1(a)(1)(D).
    \357\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission agrees with the suggestion from some commenters that 
the specific type of link arrangements contemplated by Rule 17Ad-
22(d)(7) is link arrangements between clearing agencies.\358\ The 
Commission notes however that under Section 17A(b)(3)(F) of the 
Exchange Act, a clearing agency is charged with responsibility to 
coordinate with persons engaged in the clearance and settlement of 
securities transactions, not just other clearing agencies.\359\ 
Accordingly, we have not amended the text of Rule 17Ad-22(d)(7) from 
the proposal. Further, the Commission notes that during the clearance 
and settlement process, a registered clearing agency is confronted with 
a variety of risks that must be identified and understood if they are 
to be effectively controlled.\360\ To the extent that these risks arise 
as a result of a registered clearing agency's links with another entity 
involved in the clearance and settlement process, Rule 17Ad-22(d)(7) 
should help ensure that clearing agencies have policies and procedures 
designed to identify those risks.
---------------------------------------------------------------------------

    \358\ See supra note 352.
    \359\ 15 U.S.C. 78q-1(b)(3)(F).
    \360\ See RCCP, supra note 33, at 39.
---------------------------------------------------------------------------

    Rule 17Ad-22 only applies to registered clearing agencies and does 
not apply to entities that are exempt from registration as a clearing 
agency, unless the terms of future exemptions specifically contemplate 
its application, in whole or in part.
8. Rule 17Ad-22(d)(8): Governance
a. Proposed Rule
    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,\361\ 
to support the objectives of owners and participants, and to promote 
the effectiveness of the clearing agency's risk management 
procedures.\362\
---------------------------------------------------------------------------

    \361\ 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).
    \362\ 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 (stating 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 (Oct. 14, 2010), 75 FR 65882 
(Oct. 26, 2010), supra note 231.
---------------------------------------------------------------------------

b. Comments Received
    Two commenters registered their preference for what they regard as 
the principles-based approach in proposed Rule 17Ad-22(d)(8) to 
regulation of clearing agency governance rather than the prescriptive 
rules set forth in the Commission's proposed Regulation MC applicable 
to the security-based swap clearing agencies.\363\ One commenter urged 
the Commission not to adopt hard and fast standards that will be costly 
to implement and maintain and yield little or no apparent corresponding 
regulatory benefits.\364\
---------------------------------------------------------------------------

    \363\ See CME Letter at 3; The OCC Letter at 14 (referencing the 
Commission's proposed requirements for clearing agencies in 
Regulation MC).
    \364\ See CME Letter at 4.
---------------------------------------------------------------------------

    One commenter urged the Commission to ensure that Rule 17Ad-
22(d)(8) as well as any requirements adopted from the Commission's 
proposed Regulation MC pertaining to the mitigation of conflicts of 
interest are designed to ensure that buy-side market participants have 
a meaningful voice in the operating committees of clearing agencies 
because that representation is critical to promoting robust governance 
arrangements at clearing agencies and serving the best interests of the 
U.S. financial system.\365\ Another commenter stated that proposed 
Rules 17Ad-22(d)(8), 17Ad-25, and 17Ad-26 reflect a better approach to 
governance, conflicts of interest, and board and committee composition 
than the Commission's proposed requirements for clearing agencies under 
Regulation MC.\366\
---------------------------------------------------------------------------

    \365\ See BlackRock Letter at 2.
    \366\ See The DTCC (April) Letter at 8.
---------------------------------------------------------------------------

    One commenter urged the Commission to consider complementing 
proposed Rule 17Ad-22(d)(8) with a minimum board independence 
requirement so that at least two-thirds of all board directors would be 
required to be independent.\367\
---------------------------------------------------------------------------

    \367\ See CII Letter at 1.
---------------------------------------------------------------------------

    Several commenters made recommendations to the Commission 
concerning the application of Rule 17Ad-22(d)(8) to clearing agencies 
that perform post-trade processing services.\368\ One commenter stated 
that if the Commission interprets proposed Rule 17Ad-22(d)(8) to be 
applicable to

[[Page 66252]]

clearing agencies that perform post-trade processing services for 
security-based swaps (e.g., comparison of data, portfolio compression 
and collateral management) then the governance requirements should be 
commensurate with the low risk presented by those service providers 
because requirements that are unduly onerous would impose unnecessary 
burdens and costs.\369\ Another commenter argued that application of 
proposed Rule 17Ad-22(b)(8) to a clearing agency is unnecessary in 
cases when an industry utility has such a significant influence over a 
clearing agency's management and operation that the clearing agency's 
governance is already appropriately transparent to fulfill the public 
interest.\370\
---------------------------------------------------------------------------

    \368\ See TriOptima Letter at 9; Omgeo Letter at 12.
    \369\ See TriOptima Letter at 9.
    \370\ See Omgeo Letter at 12.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(8) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. Rule 
17Ad-22(d)(8) is designed to promote these types of arrangements and 
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.
    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.\371\
---------------------------------------------------------------------------

    \371\ 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 (Oct. 14, 
2010), 75 FR 65882 (Oct. 26, 2010).
---------------------------------------------------------------------------

    We appreciate the perspective of commenters who prefer the more 
general policies and procedures design of Rule 17Ad-22(d)(8) to any 
more prescriptive rulemaking by the Commission in the area of clearing 
agency governance.\372\ We agree that Rule 17Ad-22(d)(8) provides an 
important element of discretion to a clearing agency to be able to use 
its experience and expertise to hone policies and procedures for 
governance arrangements that support the clearing agency's particular 
operations. Even so, we are not persuaded by the assertions that more 
prescriptive Commission rules to address clearing agency governance 
practices would necessarily be disproportionately costly to implement 
and maintain when compared to potential countervailing benefits.\373\ 
We continue to perform a careful review and evaluation of the comments 
that the Commission received on proposed Rules 17Ad-25, 17Ad-26 and 
Regulation MC, which commenters rightly observed represent separate, 
and in some cases more prescriptive, proposed requirements related to 
clearing agency governance and mitigation of conflicts of interest.
---------------------------------------------------------------------------

    \372\ See supra note 364.
    \373\ See id.
---------------------------------------------------------------------------

    At this time, the Commission also is not acting on the 
recommendation of some commenters to structure Rule 17Ad-22(d)(8) so 
that it would require at least two-thirds of a clearing agency's board 
of directors to be independent.\374\ Proposed Rule 17Ad-26 and 
Regulation MC address whether and how to require some degree of 
independent representation on the board of a clearing agency. We 
believe it is more appropriate to consider those issues in connection 
with the Commission's ongoing consideration of those rules.
---------------------------------------------------------------------------

    \374\ See supra note 367.
---------------------------------------------------------------------------

    With regard to suggestions that Rule 17Ad-22(d)(8) should not apply 
to entities that perform certain post-trade services (i.e., comparison 
of trade data, collateral management and compression/tear-up 
services),\375\ we note that Rule 17Ad-22 only applies to registered 
clearing agencies and does not apply to entities exempt from 
registration as a clearing agency, unless the terms of future 
exemptions specifically contemplate its application, in whole or in 
part.
---------------------------------------------------------------------------

    \375\ See supra notes 368-370.
---------------------------------------------------------------------------

    We are not persuaded by the argument that the operation of a 
clearing agency through a utility model negates the need for Rule 17Ad-
22(d)(8) because regardless of the business model adopted, the board 
should reflect the interests of the full range of stakeholders in order 
to effective. \376\ In response to comments that the rule should apply 
to a clearing agency in a way that is commensurate with the risk of its 
services,\377\ the Commission expects that not all policies and 
procedures established by clearing agencies to satisfy Rule 17Ad-
22(d)(8) will be the same. Instead, to be useful to a clearing agency 
and its interested parties, the policies and procedures should 
necessarily reflect the unique relationships at that clearing agency 
between the scope of its operations and its governance and risk 
management needs.
---------------------------------------------------------------------------

    \376\ See supra note 370 and accompanying text.
    \377\ See supra note 369 and accompanying text.
---------------------------------------------------------------------------

9. Rule 17Ad-22(d)(9): Information on Services
a. Proposed Rule
    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 the clearing agency's services.
    The Commission believes that 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.
b. Comments Received
    One commenter stated that it does not believe that the proposed 
rule is necessary because among other things a clearing agency's fees, 
collateral deposits, and operational requirements are already included 
in the clearing agency's rules and its published procedures and are 
already required to be sufficiently available to market participants 
and the public at large.\378\
---------------------------------------------------------------------------

    \378\ See The OCC Letter at 15.
---------------------------------------------------------------------------

    Two commenters expressed that application of proposed Rule 17Ad-
22(d)(9) to clearing agencies that do not handle securities or funds is 
unnecessary.\379\
---------------------------------------------------------------------------

    \379\ See Omgeo Letter at 12; see also TriOptima Letter at 9 
(noting that compression services and collateral management services 
operate on the basis of clear, standardized documentation and 
present few risks to users. If a compression cycle or collateral 
management service fails, the users' pre-existing transactions 
remain in effect and the risks can be disclosed in user 
documentation).
---------------------------------------------------------------------------

c. Final Rule
    We are adopting Rule 17Ad-22(d)(9) as proposed, except for the 
clarification discussed in Sections II.B.4 and III.A regarding the 
application of the rule only to registered clearing agencies We believe 
that requiring a clearing agency to have policies and procedures that 
require a clearing agency to disclose

[[Page 66253]]

sufficient information so that participants can 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. While the rule provides clearing 
agencies flexibility to determine how to adequately disclose 
information so participants can identify and evaluate risks and costs 
associated with participation, the Commission believes that disclosure 
of the clearing agency rulebook, the costs of its services, a 
description of netting and settlement activities it provides, 
participants' rights and obligations, information regarding its margin 
methodology, and information regarding the extreme but plausible 
scenarios that the clearing agency uses to stress test its margin 
requirements are among the categories of information that participants 
could use to identify and evaluate risks and costs associated with use 
of the clearing agency. The Commission also believes that it is 
reasonable to expect that the type of information and level of detail 
that market participants will consider to be sufficient will evolve 
over time and therefore clearing agencies should seek to establish 
regular channels of communication with market participants and 
processes for continuously improving their disclosure practices as the 
marketplace changes over time.
    Because clearing agencies are SROs, their rules are published by 
Commission and are generally available on each clearing agency's Web 
site. Nevertheless, discrete rule proposals do not necessarily provide 
a complete picture of a clearing agency's operations and the risk 
mitigation procedures. Accordingly, the rule is intended to promote a 
better understanding among market participants of a clearing agency's 
operations. A better understanding should foster confidence in the 
clearing agency's ability to manage those risks and costs, including, 
but not limited to, any margin requirements, restrictions or 
limitations of the clearing agency's obligations, and conditions used 
by the clearing agency to test the adequacy of its financial resources.
    We acknowledge that existing requirements address the need for 
clearing agencies to incorporate matters such as the clearing agency's 
fees, collateral deposits, and operational requirements in its rules 
and procedures, which are already made available to market participants 
and the public.\380\ The Commission is also aware that under Rule 17Ad-
22(d)(9), the nature of the information that clearing agencies must 
provide, how frequently it must be provided, and who is entitled to 
receive it are all aspects of compliance with Rule 17Ad-22(d)(9) that 
implicate concerns by clearing agencies about protection of their 
proprietary information.\381\ We believe that the nature and extent of 
information that is required to be provided under Rule 17Ad-22(d)(9) 
should be tailored to the needs of market participants based on the 
risks and costs to which they are exposed. Clearing agencies are 
expected to establish such tailored approaches in their policies and 
procedures designed to achieve compliance with Rule 17Ad-22(d)(9).
---------------------------------------------------------------------------

    \380\ See supra note 378.
    \381\ See id.
---------------------------------------------------------------------------

    We agree with commenters who recommended that Rule 17Ad-22(d)(9) 
should only apply categorically to clearing agencies that take in or 
process securities or funds. Rule 17Ad-22 only applies to registered 
clearing agencies and does not apply to entities exempt from 
registration as a clearing agency except to the extent specifically 
contemplated by a future exemption.
10. Rule 17Ad-22(d)(10): Immobilization and Dematerialization of 
Securities Certificates
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(10) would require clearing agencies to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to immobilize \382\ or dematerialize 
\383\ securities certificates and transfer them by book entry to the 
greatest extent possible when the clearing agency provides CSD 
services.\384\
---------------------------------------------------------------------------

    \382\ Immobilization refers to any circumstance where an 
investor does not receive a physical certificate upon the purchase 
of securities or is required to physically deliver a certificate 
upon the sale of securities.
    \383\ Dematerialization is the process of eliminating physical 
certificates as a record of security ownership.
    \384\ See proposed Rule 17Ad-22(a)(2) for definition of 
``central securities depository services.'' DTC is currently the 
only registered clearing agency that provides central securities 
depository services.
---------------------------------------------------------------------------

    The Commission believes that the immobilization and 
dematerialization of securities and their transfer by book entry 
results 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.\385\ The Commission also believes 
that the proposed rule strengthens the requirement in Section 
17A(b)(3)(F) of the Exchange Act for 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.\386\
---------------------------------------------------------------------------

    \385\ 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 United States are dematerialized and most of the equity and 
corporate bonds in the U.S. market are either immobilized or 
dematerialized. While the U.S. markets have made great strides in 
achieving immobilization and dematerialization for institutional and 
broker-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 (Mar. 11, 2004), 69 FR 
12921 (Mar. 18, 2004).
    \386\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

b. Comments Received
    One commenter expressed concern that proposed Rule 17Ad-22(d)(10) 
places responsibilities on clearing agencies that perform CSD services 
to immobilize or dematerialize securities that are beyond the clearing 
agency's control. Therefore, the commenter requested that the rule be 
revised to reflect the need for cooperation from market participants 
and regulators.\387\
---------------------------------------------------------------------------

    \387\ See The DTCC (April) Letter at 23-24 (asking the 
Commission to reformulate Rule 17Ad-22(d)(10) as follows: ``Each 
clearing agency shall establish, implement, maintain and enforce 
written policies and procedures reasonably designed to, as 
applicable, promote the immobilization or dematerialization of 
securities certificates and transfer them by book entry to the 
greatest extent possible when the clearing agency provides central 
securities depository services.'').
---------------------------------------------------------------------------

    Another commenter stated its belief that the proposed Rule 17Ad-
22(d)(10) should not apply to portfolio compression and collateral 
management services for security-based swaps.\388\
---------------------------------------------------------------------------

    \388\ See TriOptima Letter at 11.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(10) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. Rule 
17Ad-22(d)(10) does not require a clearing agency to take any actions 
that are beyond the scope of its rules, procedures and operations. We 
agree that collaboration between regulators, market participants, and 
clearing agencies is necessary to achieve total immobilization or 
dematerialization of securities

[[Page 66254]]

certificates; but this result is not required by Rule 17Ad-22(d)(10). 
The Commission also understands that some clearing agencies already 
have taken steps in furtherance of full dematerialization in the U.S. 
financial markets and that such efforts are ongoing.\389\
---------------------------------------------------------------------------

    \389\ See DTCC White Paper, Strengthening the U.S. Financial 
Markets: A Proposal to Fully Dematerialize Physical Securities, 
Eliminating the Costs and Risks They Incur (July 2012).
---------------------------------------------------------------------------

    In response to comments about the application of the rule to 
portfolio compression and collateral management services, the 
Commission notes that Rule 17Ad-22 only applies to registered clearing 
agencies and does not apply to entities exempt from registration as a 
clearing agency, unless the terms of future exemptions specifically 
contemplate its application, in whole or in part.
11. Rule 17Ad-22(d)(11): Default Procedures
a. Proposed Rule
    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 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 Commission believes that the rule would provide certainty and 
predictability to market participants about the measures a clearing 
agency will take in the event of a participant default because 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.
    The Commission also believes that the requirements in Rule 17Ad-
22(d)(11) would increase the possibility that defaults by participants, 
should they occur, would proceed in an orderly and transparent manner. 
In particular, the 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.
b. Comments Received
    One commenter urged the Commission to place additional requirements 
on clearing agencies to conduct and document a test of their default 
management plans.\390\ The commenter stated its belief that default 
management tests should be undertaken at least on a semi-annual 
basis.\391\
---------------------------------------------------------------------------

    \390\ See ISDA Letter at 5.
    \391\ See id.
---------------------------------------------------------------------------

    One commenter responded to a question asked by the Commission in 
the Proposing Release about how much flexibility clearing agencies 
should have in the amount of time they are permitted to manage a 
default and perform a liquidation of positions. The commenter 
recommended that in the context of security-based swaps the time 
permitted should be the time necessary for the clearing agency to 
actually liquidate a security-based swap portfolio rather than 
establishing a predetermined period by rule.\392\ The commenter noted 
that the time necessary depends on facts and circumstances and is 
likely to be tied to the characteristics of the security-based swaps 
involved and the particular markets it in which they trade--as well as 
the liquidation times derived from the default management plan and 
practice testing by the clearing agency.\393\ The commenter stated that 
the Commission should have a view of and sign-off authority over the 
clearing agency's default management plan.\394\ The commenter also 
noted that clearing agencies should continually monitor the risk 
associated with concentration in participants' positions, and if that 
concentration could not be liquidated within the time required by the 
default management plan, the clearing agency should have discretion to 
include extra charges in initial margin to reflect that risk.\395\
---------------------------------------------------------------------------

    \392\ See ISDA Letter at 6.
    \393\ See id.
    \394\ See id.
    \395\ See id.
---------------------------------------------------------------------------

    Two commenters argued that proposed Rule 17Ad-22(d)(11) should not 
apply to entities that perform post-trade processing services such as 
comparison of data,\396\ collateral management and portfolio 
compression.\397\
---------------------------------------------------------------------------

    \396\ See Omgeo Letter at 13.
    \397\ See TriOptima Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(11) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. The 
Commission believes that the requirements in Rule 17Ad-22(d)(11) 
increase the possibility that defaults by participants, should they 
occur, will proceed in an orderly and transparent manner because Rule 
17Ad-22(d)(11) helps to ensure that all participants are able to plan 
for the default process and that clearing agencies will have sufficient 
time to take corrective action to mitigate potential losses.
    As an initial matter, we believe that how frequently a clearing 
agency conducts default management tests should be determined by each 
individual clearing agency, in consultation with, and subject to 
oversight by, the Commission.\398\ We agree that it is important for 
clearing agencies to conduct default management tests, but clearing 
agencies overseen by the Commission already largely perform these types 
of exercises as part of their compliance with the requirements of 
Section 17A of the Exchange Act. Unless additional circumstances 
clarify that a prescriptive course of action by the Commission is 
appropriate to bring more standardized scope and frequency to these 
exercises, we believe that it is appropriate, subject to Commission 
oversight, to continue to allow clearing agencies discretion to design 
and perform default management tests that are suited to their 
particular clearance and settlement activities.
---------------------------------------------------------------------------

    \398\ See supra notes 390-391 and accompanying text.
---------------------------------------------------------------------------

    With respect to the commenter who advised the Commission not to 
establish a particular period in Rule 17Ad-22(d)(11) during which a 
clearing agency would be required to manage and complete a default 
liquidation process for security-based swaps, we are not adopting 
specifically bounded timing requirements in Rule 17Ad-22(d)(11) for a 
clearing agency to achieve compliance with the rule. Instead, our 
current belief is that the more general approach we are adopting in 
Rule 17Ad-22(d)(11) allows clearing agencies to establish, implement, 
maintain and enforce policies and procedures that comply with Rule 
17Ad-22(d)(11) and take into account the particular characteristics of 
the financial instruments and market dynamics involved in a default at 
a particular clearing agency. We believe this is the best approach to 
allow clearing agencies to contain losses and the liquidity pressures 
that they face while continuing to meet their obligations.

[[Page 66255]]

    We also agree with commenters who suggested that it is appropriate 
for clearing agencies to consider concentration risk in margin 
practices and that if certain concentrations indicate that liquidation 
of the concentrated positions could not be performed within the 
parameters of the clearing agency's default management plan, then the 
clearing agency should consider extra initial margin charges to account 
for that occurrence.\399\ We believe that these issues are 
appropriately addressed by individual clearing agencies through the 
submission of proposed rule changes to the Commission for review and 
public comment.
---------------------------------------------------------------------------

    \399\ See supra note 395 and accompanying text.
---------------------------------------------------------------------------

    With regard to suggestions that Rule 17Ad-22(d)(11) categorically 
should not apply to entities that perform certain post-trade services 
(i.e., comparison of trade data, collateral management and compression/
tear-up services),\400\ we note that Rule 17Ad-22 only applies to 
registered clearing agencies and does not apply to entities exempt from 
registration as a clearing agency, unless the terms of future 
exemptions specifically contemplate its application, in whole or in 
part.
---------------------------------------------------------------------------

    \400\ See supra notes 396-397 and accompanying text.
---------------------------------------------------------------------------

12. Rule 17Ad-22(d)(12): Timing of Settlement Finality
a. Proposed Rule
    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. The 
Commission believes that settlement finality should occur not later 
than the end of the settlement day because it will help 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.
b. Comments Received
    One commenter that operates several clearing agencies expressed 
concern that the second clause of proposed Rule 17Ad-22(d)(12), which 
reads ``and require that intraday or real-time finality be provided 
where necessary to reduce risks'' could be interpreted to require 
intraday or real-time settlement finality beyond what its clearing 
agencies currently provide and are capable of providing without 
significant systems and process changes.\401\ The commenter asked the 
Commission to clarify that the rule is not intended to impose an 
obligation on the clearing agencies it operates to provide intraday or 
real-time finality beyond their current practices or any obligation to 
build additional capability unless and until there is industry and 
regulatory consensus on whether and what additional capability to build 
and how to allocate the cost.\402\
---------------------------------------------------------------------------

    \401\ See The DTCC (April) Letter at 25.
    \402\ See id.
---------------------------------------------------------------------------

    One commenter expressed general support for proposed Rule 17Ad-
22(d)(12) but requested that the Commission provide clarification 
regarding how the rule is compatible with correction of errors and also 
clarify that ``title transfer'' of initial margin may not occur when it 
is posted to a clearing agency.\403\ Another commenter stated that 
although it generally supports the proposed requirement to ensure that 
final settlement occurs no later than the end of the settlement day, it 
also believes that this requirement must be interpreted 
reasonably.\404\ The commenter asked the Commission to expressly state 
in the adopting release that circumstances may arise that make same-
date settlement impossible, such as natural disasters, terrorist acts, 
and major communications breakdowns.\405\ The commenter added that it 
currently has the ability to make margin calls on an intraday basis as 
necessary and its agreements with settlement banks expressly provide 
when payments in satisfaction of such calls become irrevocable. \406\ 
The commenter asked the Commission to specifically state whether this 
structure satisfies the requirements of proposed Rule 17Ad-
22(d)(12).\407\
---------------------------------------------------------------------------

    \403\ See ISDA Letter at 7.
    \404\ See The OCC Letter at 15.
    \405\ See id.
    \406\ See id.
    \407\ See id.
---------------------------------------------------------------------------

    One commenter expressed concern that proposed Rule 17Ad-22(d)(12) 
fails to provide clear standards for real-time trade processing and 
therefore does not provide a workable framework for trade processing 
and clearing of security-based swaps.\408\ To address its concern, the 
commenter requested that the Commission adopt rules equivalent to CFTC 
Rules 37.6(b) and 39.12(B)(7) to require swaps to be immediately 
confirmed and accepted for clearing upon execution.\409\
---------------------------------------------------------------------------

    \408\ See SDMA Letter at 6.
    \409\ See id.
---------------------------------------------------------------------------

    Two commenters argued that proposed Rule 17Ad-22(d)(11) should not 
apply to entities that perform post-trade processing services such as 
comparison of data,\410\ collateral management and portfolio 
compression,\411\ because those services do not involve settlement of 
transactions.
---------------------------------------------------------------------------

    \410\ See Omgeo Letter at 13.
    \411\ See TriOptima Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(12) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. Rule 
17Ad-22(d)(12) does not require a clearing agency that has policies and 
procedures in place to facilitate final settlement by the end of the 
settlement day to alter its rules and procedures. As stated in the 
Proposing Release, ``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.'' \412\ The Commission agrees 
with the commenter that a decision to revise the settlement process to 
implement intraday settlement should involve consultation with all 
stakeholders.\413\ The Commission is not proposing a rule at this time, 
but plans to study the issue further. Furthermore, the need to correct 
errors would not be a violation of Rule 17Ad-22(d)(12). We agree that 
Rule 17Ad-22(d)(12) must be reasonably construed to provide that in 
extreme circumstances same-date settlement may be impossible to achieve 
(i.e., due to natural disasters, terrorist acts, and major 
communications breakdowns).\414\ The Commission however notes that the 
duty of a clearing agency to address these situations is governed by 
Rule 17Ad-22(d)(4), which requires a clearing agency 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; implement systems that are reliable, 
resilient and secure and have adequate scalable

[[Page 66256]]

capacity; and have business continuity plans that allow for timely 
recovery of operations and ensure the fulfillment of a clearing 
agency's obligations.
---------------------------------------------------------------------------

    \412\ See Proposing Release, supra note 35, at 14490.
    \413\ We note that one clearing agency has made efforts to 
create a dialogue with the industry on the issue of shortening the 
settlement cycle. See DTCC White Paper, Proposal to Launch a New 
Cost-Benefit Analysis on Shortening the Settlement Cycle (Dec. 
2011).
    \414\ See supra note 404 and accompanying text.
---------------------------------------------------------------------------

    We agree with commenters that the timing of the effective transfer 
of initial margin is an important consideration related to achieving 
settlement finality in an event of default.\415\ In general, the 
validity of the clearing agency's liens and interest in collateral, 
including initial margin posted by participants, likely could be 
ascertained by referring to the clearing agency membership agreements, 
its rules and procedures and Articles 8 and 9 of the Uniform Commercial 
Code.
---------------------------------------------------------------------------

    \415\ See supra note 403 and accompanying text.
---------------------------------------------------------------------------

    With respect to the commenter who said that the rules in 17Ad-
22(d)(12): ``Fail to provide clear standards for real time trade 
processing,'' the Commission does not intend for the rule to provide 
standards for security-based swaps that are centrally cleared to be 
confirmed, accepted for clearing and guaranteed by a clearing agency at 
the point of trade execution.\416\ Instead, Rule 17Ad-22(d)(12) focuses 
on achieving settlement on the particular settlement date associated 
with the securities transaction or on an intraday or real-time basis 
(i.e., delivery versus payment) where those additional steps are 
necessary to reduce risks. The Commission continues to consider the 
appropriateness of proposing more specific rules that would require 
transactions to be immediately confirmed and accepted for clearing upon 
execution.
---------------------------------------------------------------------------

    \416\ See supra notes 408-409 and accompanying text.
---------------------------------------------------------------------------

    We agree with commenters that Rule 17Ad-22(d)(12) should not apply 
if a clearing agency's services do not involve the handling of 
securities or funds to facilitate settlement of obligations. As 
discussed above, Rule 17Ad-22 applies only to registered clearing 
agencies and does not apply to entities exempt from registration as a 
clearing agency, unless the terms of future exemptions specifically 
contemplate its application, in whole or in part.
13. Rule 17Ad-22(d)(13): Delivery Versus Payment
a. Proposed Rule
    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 eliminates the risk that a party would lose some or its entire 
principal because payment is made only if securities are delivered. The 
Commission believes that clearing agencies should be required to use 
this payment method 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.
b. Comments Received
    One commenter pointed out that the Commission previously approved 
an SRO rule change which eliminated the commenter's right to reject 
matched trades that are reported to it by an exchange even if the 
purchasing clearing member eventually fails to pay the purchase price 
of the option.\417\ This approach was adopted because of a preference 
by the clearing agency and its participants to mutualize the risk of 
such defaults rather than bear the risk that a completed trade would be 
rejected on the following day because of the default of the 
counterparty.\418\ The commenter asked the Commission to confirm that 
it would not consider this policy to violate Rule 17Ad-22(d)(13).\419\
---------------------------------------------------------------------------

    \417\ See The OCC Letter at 15.
    \418\ See id.
    \419\ See id.
---------------------------------------------------------------------------

    Two commenters argued that proposed Rule 17Ad-22(d)(13) should not 
apply to entities that perform post-trade processing services such as 
comparison of data,\420\ collateral management and tear-up/
compression,\421\ because those services do not involve settlement of 
transactions.
---------------------------------------------------------------------------

    \420\ See Omgeo Letter at 13.
    \421\ See TriOptima Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(13) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. As 
described in the Proposing Release, DVP is achieved in the settlement 
process when the mechanisms facilitating settlement ensure that 
delivery occurs if and only if payment occurs.\422\ The Commission 
believes that clearing agencies should be required to link securities 
transfers to funds transfers in a way that achieves DVP 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.
---------------------------------------------------------------------------

    \422\ 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.
---------------------------------------------------------------------------

    The elimination by a clearing agency of its right to reject matched 
trades and subsequently relying on mutualization of resources to make 
settlement if necessary does not violate Rule 17Ad-22(d)(13), as 
mutualization of risk by participants is an acceptable means of 
eliminating principal risk that would otherwise exist for a clearing 
agency. The rule requires a clearing agency to establish policies and 
procedures to link the transfer of securities and funds in a manner 
that mitigates principal risk in the event of a participant default. 
The rule does not govern when a clearing agency guarantees a 
transaction or the clearing agency's loss allocation procedures in the 
event of a default.
    We agree with commenters who suggested that Rule 17Ad-22(d)(13) is 
not applicable to clearing agencies that do not handle securities or 
funds to perform settlement. As discussed above, Rule 17Ad-22 only 
applies to registered clearing agencies and does not apply to entities 
exempt from registration as a clearing agency, unless the terms of 
future exemptions specifically contemplate its application, in whole or 
in part.
14. Rule 17Ad-22(d)(14): Risk Controls To Address Participants' Failure 
To Settle
a. Proposed Rule
    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 CSD 
services \423\ and extends intraday credit to participants.
---------------------------------------------------------------------------

    \423\ See proposed Rule 17Ad-22(a)(2) for definition of 
``central securities depository services.''
---------------------------------------------------------------------------

    The Commission believes it is important for clearing agencies that 
provide CSD services to institute risk controls, including collateral 
requirements and limits, to cover the clearing agency's credit exposure 
to each participant exposure fully, that

[[Page 66257]]

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 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.
b. Comments Received
    One commenter asked the Commission to revise Rule 17Ad-22(d)(14) to 
expressly state that the rule applies to a clearing agency that 
provides CSD services and extends intraday credit through the operation 
of a net settlement system.\424\ The commenter emphasized that it is 
important to acknowledge a distinction in the rule between central 
securities depositories that operate gross settlement systems and those 
that operate net settlement systems because gross settlement systems 
amount to a direct intraday extension of credit while a net settlement 
system places the clearing agency in the position of being a legal 
agent that extends intraday credits on behalf of other participants 
that are then settled only at one or more discrete, prescribed times 
during the process day.\425\
---------------------------------------------------------------------------

    \424\ See The DTCC (April) Letter at 25-26 (noting that the 
standard in RSSS 9, on which Rule 17Ad-22(d)(14) is modeled, 
specifically identifies central securities depositories that operate 
net settlement systems).
    \425\ See The DTCC (April) Letter at 26 (suggesting the 
following language to revise the proposed rule: ``Each clearing 
agency shall establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable, 
institute risk controls, including collateral requirements and 
limits to cover the clearing agency's credit exposure to each 
participant family fully, that ensure timely settlement in the event 
that the participant family with the largest payment obligation is 
unable to settle when the clearing agency provides central 
securities depository services and operates a net settlement system 
or extends intraday credit to participants'').
---------------------------------------------------------------------------

    Responding to a question posed by the Commission in the Proposing 
Release, the same commenter stated its belief that clearing agencies 
that provide CSD services should not be required to maintain enough 
financial resources to be able to withstand a settlement failure by the 
two participant families with the largest settlement obligations to the 
clearing agency that performs central depository services.\426\ The 
commenter argued that no empirical or historical case has been made to 
support such a change in how clearing agencies that perform CSD 
services currently operate their risk management controls.\427\
---------------------------------------------------------------------------

    \426\ See The DTCC (April) Letter at 26-27.
    \427\ See id.
---------------------------------------------------------------------------

    One commenter stated that the requirements of proposed Rule 17Ad-
22(d)(14) should not apply to portfolio compression or collateral 
management service providers for security-based swaps.\428\
---------------------------------------------------------------------------

    \428\ See TriOptima Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    We are adopting Rule 17Ad-22(d)(14) as proposed, except for the 
clarification discussed in Sections II.B.4 and III.A regarding the 
application of the rule only to registered clearing agencies. The 
Commission believes it is important for clearing agencies that provide 
CSD 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 believes 
that requiring the controls that ensure timely settlement in the event 
that the participant with the largest payment obligation is unable to 
settle, in such circumstances, reduces the likelihood of disruptions at 
the clearing agency.
    The Commission considered the concerns of commenters who asked the 
Commission to abstain from any action that would modify Rule 17Ad-
22(d)(14) to require a clearing agency that performs CSD services and 
extends intraday credit to participants to maintain enough financial 
resources to be able to withstand a settlement failure by the two 
participant families with the largest settlement obligations to the 
clearing agency.\429\ Rule 17Ad-22(d)(14) does not apply to clearing 
agencies that provide CCP services.
---------------------------------------------------------------------------

    \429\ See supra notes 426-427 and accompanying text.
---------------------------------------------------------------------------

    We understand the request for clarification from some commenters 
who asked the Commission to revise Rule 17Ad-22(d)(14) to apply solely 
to a clearing agency that performs CSD services and extends intraday 
credit to participants through a net settlement system.\430\ We agree 
that the requirements of Rule 17Ad-22(d)(14) apply in full in the 
context of the operation of a net settlement system. Nevertheless, a 
clearing agency providing CSD services may choose to organize its 
operations so that it settles transactions on a trade-for-trade or 
gross basis and may extend credit in the form of intraday loans or 
repurchase agreements to facilitate settlement. Accordingly, we are not 
changing the text of Rule 17Ad-22(d)(14), as suggested, in order to 
continue to address that situation if it occurs.
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    \430\ See supra notes 424-425 and accompanying text.
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    We agree with commenters who argued that Rule 17Ad-22(d)(14) does 
not apply to clearing agencies that do not perform CSD services and do 
not extend intraday credit to participants.\431\ As discussed above, 
Rule 17Ad-22 only applies to entities that perform CCP or CSD services 
and does not apply to entities exempt from registration as a clearing 
agency, unless the terms of future exemptions specifically contemplate 
its application, in whole or in part.
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    \431\ See supra note 428 and accompanying text.
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15. Rule 17Ad-22(d)(15): Physical Delivery Risks
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(15) would require clearing agencies to 
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.\432\
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    \432\ 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 Commission believes that such policies and procedures will 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 also believes that providing such 
information to participants would promote a shared understanding 
regarding physical delivery practices between the clearing agency and 
its participants that could help reduce the potential for fails and 
thereby facilitate prompt and accurate clearance and settlement.
    The rule also would 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.

[[Page 66258]]

The Commission 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 believes this requirement would help a clearing agency to 
facilitate prompt and accurate clearance and settlement consistent with 
Section 17A of the Exchange Act.\433\
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    \433\ 15 U.S.C. 78q-1(b)(3)(F).
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b. Comments Received
    One commenter stated that the requirements of proposed Rule 17Ad-
22(d)(15) should not apply to portfolio compression or collateral 
management service providers for security-based swaps.\434\
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    \434\ See TriOptima Letter at 11.
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c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(15) as proposed, except 
for the clarification discussed in Sections II.B.4 and III.A regarding 
the application of the rule only to registered clearing agencies. The 
Commission believes that Rule 17Ad-22(d)(15) helps ensure that 
participants will have information that enhances their understanding of 
their rights and responsibilities with respect to using the physical 
delivery services of a clearing agency which will help reduce the 
potential for fails. Accordingly, the Commission believes this 
requirement should help facilitate prompt and accurate clearance and 
settlement consistent with Section 17A of the Exchange Act.\435\
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    \435\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, Rule 17Ad-22 only applies to registered 
clearing agencies and does not apply to entities exempt from 
registration as a clearing agency, unless the terms of future 
exemptions specifically contemplate its application, in whole or in 
part.

IV. Paperwork Reduction Act

A. Overview and Burden Estimate Comparison to Proposing Release

    Certain provisions of the final rules contain new ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\436\ In accordance with 44 U.S.C. 3507 
and 5 CFR 1320.11, the Commission has submitted the information to the 
Office of Management and Budget (``OMB'') for review. The title of the 
new collection of information is ``Clearing Agency Standards.'' 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. The control number for Rule 17Ad-22 is OMB 
Control No. 3235-0695.
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    \436\ 44 U.S.C. 3501 et seq.
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1. Changes in Estimates
    As an initial matter, we note that the PRA burden estimates in this 
adopting release are significantly lower than the PRA burden estimates 
in the Proposing Release.\437\ Several reasons account for the change. 
The Proposing Release contained five proposed rules with PRA collection 
of information requirements in addition to Rule 17Ad-22--proposed Rules 
17Aj-1, 17Ad-23, 17Ad-25, 17Ad-26 and 3Cj-1. As described above, these 
other proposed rules are not being adopted at this time.
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    \437\ See Proposing Release, supra note 35, at 14521 (``The 
Commission preliminarily believes that for all respondent clearing 
agencies the aggregate paperwork burdens contained in 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) would impose a one-time burden of 83,343 hours and an 
ongoing annual burden of 39,658 hours.''). In the adopting release, 
the Commission estimates the total initial burden for Rule 17Ad-22 
to be 11,880 hours, with the total ongoing annual burden for Rule 
17Ad-22 to be 4,888 hours. See infra Section IV.C.7.
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    Additionally, the Proposing Release estimated that the proposed 
rules would have applied to seventeen entities. A number of these 
entities--in particular those providing post-trade processing services 
for security-based swap transactions--would have been completely 
unfamiliar with the Commission's registration process for clearing 
agencies. Further, these entities typically do not have written rule 
books to govern their relationship with their users. As a result, they 
would have experienced significant initial burdens associated with the 
proposed rules.
    In contrast, the final rules being adopted today apply only to the 
seven clearing agencies currently registered with the Commission that 
provide CCP or CSD services, as discussed above in Section II.B.4.\438\ 
These registered clearing agencies already have written rules, policies 
and procedures addressing significant aspects of Rule 17Ad-22. For 
purposes of the PRA analysis, the Commission also estimates that three 
entities may potentially register with the Commission as clearing 
agencies acting as CCPs, bringing the total number of respondents to 
ten--nine of which are CCPs and one of which is a CSD.\439\ The 
Commission believes that some of the entities seeking to register with 
the Commission as clearing agencies may already be providing similar 
services in other jurisdictions and therefore may already have written 
rules and procedures similar to those contemplated by Rule 17Ad-22. 
Accordingly, the Commission believes that the potential PRA burden on 
this smaller and more established group of respondents will be 
significantly lower than the estimates provided in the Proposing 
Release. Further, the Proposing Release treated each subsection of the 
rule--and therefore each required policy and procedure--as a separate 
PRA burden. However, the Commission believes that registered clearing 
agencies are more likely to be able to address the changes required by 
Rule 17Ad-22 in an integrated, not piecemeal, review and drafting 
process. That is, respondents are likely to group aspects of Rule 17Ad-
22 together as they implement policies and procedures responsive to 
Rule 17Ad-22. Therefore, the revised PRA burden estimates no longer 
account for each requirement as a separate burden.
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    \438\ The Commission also notes that the Boston Stock Exchange 
Clearing Corporation (``BSECC'') and Stock Clearing Corporation of 
Philadelphia (``SCCP'') are currently registered with the Commission 
as clearing agencies but conduct no clearance or settlement 
operations. See Securities Exchange Act Release Nos. 63629 (Jan. 3, 
2011), 76 FR 1473 (Jan. 10, 2011), and 63268 (Nov. 8, 2010), 75 FR 
69730 (Nov. 15, 2010), respectively.
    \439\ The burden estimates include the possibility that either 
BSECC or SCCP, or both, resume operations in the future.
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    Finally, the Commission has revised the PRA burden estimates in 
recognition that many parts of Rule 17Ad-22--specifically Rules 17Ad-
22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15)--reflect usual and customary 
practices of registered clearing agencies. Since registered clearing 
agencies already comply with significant aspects of Rule 17Ad-22 in the 
normal course of their activities, many aspects of Rule 17Ad-22 impose 
minimal PRA burdens on registered clearing agencies limited to the 
review of the rule and their existing policies and procedures. As 
discussed below, because certain rules would involve adjustments to a 
registered clearing agency's rule book and its policies and procedures 
rather than the creation of entirely separate policies and procedures 
to support entirely new operations and practices, the Commission 
recognizes that some aspects of Rule 17Ad-22 will impose incremental 
new PRA burdens on registered clearing agencies.
    Accordingly, the estimated PRA burdens discussed below reflect 
these updated assessments of the likely PRA burdens.

[[Page 66259]]

2. Organization of PRA Review
    The discussion of the PRA burdens and costs associated with Rule 
17Ad-22 is organized in the following manner:

1. Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15)
2. Rule 17Ad-22(b)(4)
3. Rules 17Ad-22(b)(5)-(7)
4. Rule 17Ad-22(c)
5. Rule 17Ad-22(c)(1)
6. Rule 17Ad-22(c)(2)

    Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15) are discussed 
together because these rules represent usual and customary practices 
already being implemented by registered clearing agencies. Because 
Rules 17Ad-22(b)(4), (b)(5)-(7) and (c), respectively establish new 
minimum practices for registered clearing agencies with regard to model 
validation, membership practices and certain financial information, the 
adopting release discusses these rules separately. The burden 
discussion for Rules 17Ad-22(c)(1) and (2) has been split into sections 
to account for the different information collection requirements for 
varying numbers of respondents.

B. Summary of Collection of Information, Use of Information and 
Comments Received

    As noted earlier, the Commission received 25 comment letters 
concerning the proposed rules.\440\ While the Commission received 
general comments in support of its approach that is both consistent 
with current global standards \441\ and principles-based,\442\ thereby 
making compliance less burdensome for registered clearing agencies, a 
few commenters discussed the paperwork and compliance burden concerns 
for some of the rules associated with this adopting release. Some 
commenters expressed general concerns about the burden of regulation, 
but such comments focused on rules in the Proposing Release not being 
adopted today and on areas that go beyond the scope of the adopting 
release.\443\ Commenters expressed concerns about the burdens 
associated with parts of Rule 17Ad-22(b), and those comments are 
addressed below. Commenters did not specifically comment on the burdens 
associated with Rule 17Ad-22(c)-(d).
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    \440\ See supra note 37.
    \441\ See The DTCC (April) Letter at 4 (stating that ``[t]he 
application of global standards to clearing agencies will also 
prevent clearing agencies and their participants from incurring 
unnecessary expense associated with complying with different, and 
potentially conflicting regulatory standards.''); see also The OCC 
Letter at 3 (encouraging the Commission ``to avoid taking final 
action on the Proposed Rules prior to receiving greater clarity on 
what clearinghouse regulations are ultimately adopted by European 
and U.K. legislators and regulators and what approaches to 
regulation are ultimately embraced by CPSS/IOSCO. Many potential 
market participants will be able to choose the jurisdiction in which 
they conduct their clearing activity, and imposing more prescriptive 
and costly regulatory burdens on U.S. clearing agencies will have a 
predictably adverse competitive impact on those clearing 
agencies.'').
    \442\ See The DTCC (April) Letter at 6 (stating that ``[i]f the 
Proposed Rules are overly prescriptive, organizations such as DTCC 
may be subject to conflicting requirements and may be forced to 
fragment certain enterprise-wide programs in order to comply with 
such conflicting requirements, which could substantially increase 
costs and compliance risks within such organizations.''); The OCC 
Letter at 2 (stating that it ``support[s] the Commission's approach. 
* * *''); CME Letter at 3 (stating that ``CME Group favors a 
principles-based approach in these areas, and we urge the Commission 
not to adopt hard and fast standards that will be costly to 
implement and maintain and that yield little or no apparent 
corresponding regulatory benefits.'').
    \443\ See, e.g., ICE Letter at 1-2 (stating that ``[p]ost-trade 
processing service providers would be unable to distribute end-of-
day settlement prices, as required by the Proposal, and the record 
keeping requirements of the Proposal would prove so burdensome to 
such providers that the efficiency and alacrity that they provide to 
the CDS industry would be adversely affected.'').
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1. Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15)
    The rules in the adopting release contain requirements subject to 
the PRA. Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) contain ``collection 
of information requirements'' within the meaning of the PRA. These 
rules would require a registered clearing agency to have policies and 
procedures to adequately document all material aspects of its liquidity 
risk management processes and its compliance with their requirements. 
The information collected by virtue of written policies and procedures 
requirements contained in Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-
22(d)(1)-(15) generally codify usual and customary practices at CCPs 
and registered clearing agencies, and thus the PRA burden would be 
expected to be minimal. Rules 17Ad-22(b)(1)-(3) require written 
policies and procedures that address risk management practices by CCPs. 
Specifically, the rules would create standards with respect to: (1) 
Measurement and management of credit exposures; (2) margin 
requirements; and (3) financial resources. The Commission did not 
receive comments on the burdens associated with Rules 17Ad-22(b)(1)-
(3).
    Rule 17Ad-22(d) sets forth certain minimum standards regarding the 
operations of registered clearing agencies. The standards established 
in 17Ad-22(d) address areas including: (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 
securities 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. Commenters did not comment on the burdens associated with Rule 
17Ad-22(d).
2. Rule 17Ad-22(b)(4)
    Rule 17Ad-22(b)(4) contains ``collection of information 
requirements'' within the meaning of the PRA. Rule 17Ad-22(b)(4) will 
require a CCP to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for an annual 
model validation consisting of evaluating the performance of the 
clearing agency's margin models and the related parameters and 
assumptions associated with such models by a qualified person who is 
free from influence so that he can be candid in his assessment of the 
model.
    One commenter stated that ``a regulatory requirement of model 
validation on an annual basis is unnecessary (and may be overly 
burdensome) * * *. [and] can be achieved in a less directive manner.'' 
\444\ The commenter did not provide an estimate of the proposed 
burdens. The commenter suggested that model validation should be 
conducted on a ``periodic'' basis by a qualified person who ``is 
sufficiently free from outside influences to perform a candid 
evaluation.'' \445\ The commenter did not explain how the suggested 
alternative requirements would achieve the purposes of the rule with a 
lesser burden.
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    \444\ See The DTCC (April) Letter at 13.
    \445\ See The DTCC (April) Letter at 15.
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    The Commission is not persuaded by the position that the frequency 
of the model validation should be left to the discretion of the 
CCP.\446\ The rule requiring that CCPs have policies and procedures in 
place for model validation at least annually is appropriate because 
model performance is not ordinarily expected to vary significantly over 
short periods but should be reevaluated as market conditions change. 
Overall, the Commission believes the collection of information related 
to Rule 17Ad-22(b)(4) is necessary to achieve its purpose, particularly 
in light of the

[[Page 66260]]

Congressional mandate under the Dodd-Frank Act.
---------------------------------------------------------------------------

    \446\ See id.
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3. Rules 17Ad-22(b)(5)-(7)
    Rules 17Ad-22(b)(5)-(7) contain ``collection of information 
requirements'' within the meaning of the PRA. The information 
collection under the written policies and procedures requirements 
contained in Rules 17Ad-22(b)(5)-(7) would establish requirements 
regarding access to CCPs.
    One commenter expressed that proposed Rules 17Ad-22(b)(5)-(7) 
providing for mandatory access to CCPs in certain circumstances goes 
``beyond anything in current or proposed global standards * * *. [and 
is, therefore,] unnecessary and counterproductive to the goal of fair 
and open access within a framework of safe and sound operation.'' \447\ 
But the commenter did not provide an estimate of these burdens. Nor did 
the commenter suggest alternative requirements that would achieve the 
purposes of the rule with a lesser burden.
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    \447\ See The DTCC (April) Letter at 5; see also The DTCC 
(April) Letter at 4 (stating that ``[t]he application of global 
standards to clearing agencies will also prevent clearing agencies 
and their participants from incurring unnecessary expense associated 
with complying with different, and potentially conflicting 
regulatory standards.'').
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    While the Commission understands the concerns raised, the 
Commission ultimately believes that the benefits of Rules 17Ad-
22(b)(5)-(7) are critical to maintaining fairness and open access to 
central clearing for all market participants, including security-based 
swaps participants.\448\ In this regard, the Commission believes the 
collection of information related to the rule is necessary to achieve 
its purpose, particularly in light of the Congressional mandate under 
the Dodd-Frank Act.
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    \448\ See supra Section III.D.1.
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4. Rules 17Ad-22(c)(1)-(2)
    Rule 17Ad-22(c)(1)-(2) contains ``collection of information 
requirements'' within the meaning of the PRA. The information 
collection under the written policies and procedures requirements 
contained in Rule 17Ad-22(c) establishes a recordkeeping requirement 
for CCPs regarding their responsibilities under Rule 17Ad-22(b)(3) and 
for registered clearing agencies with respect to posting on their 
respective Web sites annual audited financial statements.
    Commenters did not specifically comment on the burdens associated 
with Rule 17Ad-22(c)(1)-(2).

C. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Standards in Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15) 
That Impose a PRA Burden
    The requirements to develop written policies and procedures in 
Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15) impose a PRA 
burden. The requirements in Rules 17Ad-22(b)(1)-(3) will apply to CCPs 
that are registered clearing agencies. The Commission estimates that a 
total of nine CCPs \449\ will be subject to the burdens under Rules 
17Ad-22(b)(1)-(3). Currently, six clearing agencies are registered to 
provide CCP services, and the Commission estimates that three more 
entities could register as clearing agencies to provide CCP services. 
The requirements in Rules 17Ad-22(d)(1)-(15) (with the exception of 
Rules 17Ad-22(d)(10) and (13)-(15), which are applicable only to CSDs), 
on the other hand, apply to all registered clearing agencies, of which 
there could potentially be a total of ten entities, including the one 
registered clearing agency that is a CSD.
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    \449\ The Commission 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.
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    As noted above, registered clearing agencies already have written 
policies and procedures that meet the standards set forth in Rules 
17Ad-22(b)(1)-(3) and (d)(1)-(15) as part of their usual and customary 
business practice. Accordingly, the Commission believes that the 
registered clearing agencies would not need to build new infrastructure 
or modify operations to continue to meet Rule 17Ad-22(b)(1)-(3) and 
(d)(1)-(15). The Commission believes that registered clearing agencies 
will incur the incremental burdens of reviewing existing policies and 
procedures for compliance and updating existing policies and procedures 
where appropriate. The requirements would impose an aggregate one-time 
burden of approximately 1,750 hours for all registered clearing 
agencies.\450\ The standards contained in Rule 17Ad-22(d) would also 
impose ongoing burdens on registered clearing agencies. For example, 
Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) would require registered 
clearing agencies to perform certain ongoing monitoring and enforcement 
activities with respect to the written policies and procedures the 
registered clearing agency creates in response to the standard. 
Accordingly, the Commission believes that those ongoing activities 
would impose an aggregate annual burden of approximately 600 hours for 
all respondent clearing agencies.\451\ Because 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 Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15),\452\ the Commission 
believes that the burden estimate for the aggregate one-time burden 
should be revised down from the burden estimated in the Proposing 
Release. The Commission estimates that because these initial compliance 
efforts will largely comprise a review of existing policies and 
procedures, the aggregate one-time burden on respondent clearing 
agencies will be incremental to their current compliance processes. The 
expected review of current policies and procedures will likely not 
involve much involvement by the information technology staff at the 
clearing agency or much involvement by the clearing agency's assistant 
general counsel because the requirements of these rules have already 
been written into and have been implemented as part of the policies and 
procedures of registered clearing agencies. Accordingly, those burden 
estimates have been reduced and the burden estimate for the compliance 
attorney, who will most likely perform most of the review of current 
policies and procedures, has been increased. In order to estimate the 
one-time burden and annual burden for ongoing activities, we looked to 
the burdens imposed by similar policies and procedures requirements in 
Regulation NMS as a guide and adapted those figures for the purposes of 
this release.\453\
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    \450\ This figure was calculated as follows: ((Assistant General 
Counsel at 60 hours) + (Compliance Attorney at 85 hours) + (Computer 
Operations Manager at 15 hours) + (Senior Business Analyst at 15 
hours)) = 175 hours x 10 respondent clearing agencies = 1,750 hours.
    \451\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 10 respondent clearing agencies = 600 hours.
    For each respondent clearing agency, the estimated annualized 
burden for Rules 17Ad-22(b)(1)--(3) and (d)(1)--(15) is 98 hours 
(figure calculated as follows: 175 hours (Year 1 burden) + 60 hours 
(Year 2 burden) + 60 hours (Year 3 burden) = 295 hours (estimated 
total burden over 3 years) / 3 years = 98 hours).
    \452\ See Proposing Release, supra note 35, at 14509.
    \453\ See Exchange Act Release No. 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).

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[[Page 66261]]

2. Standards in Rule 17Ad-22(b)(4) That Impose a PRA Burden
    The requirement to develop written policies and procedures in Rule 
17Ad-22(b)(4) imposes a PRA burden. The requirement in Rule 17Ad-
22(b)(4) will apply to all CCPs. As discussed above, the Commission 
estimates that nine CCPs will be subject to the burdens under Rule 
17Ad-22(b)(4).
    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS, the Commission has 
preserved the burden estimates from the Proposing Release. The 
Commission estimates that Rule 17Ad-22(b)(4) would impose a one-time 
burden on each respondent CCP of 210 hours, corresponding to an 
aggregate one-time burden on all respondent CCPs of 1,890 hours.\454\
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    \454\ 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 CCPs = 1,890 hours.
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    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 an aggregate one-time burden of 
approximately 900 hours.\455\
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    \455\ This figure was calculated as follows: ((Chief Compliance 
Officer for 40 hours) + (Computer Department Operations Manager for 
40 hours) + (Senior Programmer for 20 hours)) = 100 hours x 9 
respondent CCPs = 900 hours.
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    CCPs would be required to collect information relating to their 
model validation standards required by 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 CCP may need to update its procedures. Based on the 
analogous policies and procedures requirements and the corresponding 
burden estimates in Regulation NMS, the Commission estimates that the 
ongoing requirements of this rule would impose an annual burden of 60 
hours on each respondent CCP, corresponding to an aggregate annual 
burden for all respondent CCPs of 540 hours.\456\
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    \456\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent CCPs = 540 hours for all respondent CCPs.
     For each respondent CCP, the estimated annualized burden for 
Rule 17Ad-22(b)(4) is 143 hours (figure calculated as follows: 210 
hours + 100 hours (Year 1 burden) + 60 hours (Year 2 burden) + 60 
hours (Year 3 burden) = 430 hours (estimated total burden over 3 
years) / 3 years = 143 hours).
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    Based on its oversight of clearing agencies, the Commission 
estimates that Rule 17Ad-22(b)(4) would impose an annual cost on all 
respondent CCPs for work on model validation. The Commission believes 
clearing agencies would hire a consulting firm that dedicates two 
consultants to the project. Consistent with the Proposing Release,\457\ 
the Commission estimates that should respondent CCPs decide to hire 
external consultants to develop and implement Rule 17Ad-22(b)(4) 
through written policies and procedures, the ongoing cost associated 
with hiring such consultants would be approximately $3.9 million per 
year.\458\
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    \457\ See Proposing Release, supra note 35, at 14529.
    \458\ 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 respondent CCPs = $3,888,000. The 
$600 per hour figure for a consultant was calculated using 
www.payscale.com, modified by Commission staff to account for an 
1800 hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits and overhead.
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3. Standards in Rules 17Ad-22(b)(5)-(7) That Impose a PRA Burden
    The requirements to develop written policies and procedures in 
Rules 17Ad-22(b)(5)-(7) impose a PRA burden. These PRA burdens will 
apply to all CCPs. As discussed above, the Commission estimates that 
nine CCPs will be subject to the burdens under Rules 17Ad-22(b)(5)-(7). 
The Commission believes that CCPs are more likely to be able to address 
the changes required by Rules 17Ad-22(b)(5)-(7) in an integrated, not 
piecemeal, review and drafting process to implement policies and 
procedures responsive to these rules. Therefore, the revised PRA burden 
estimates no longer account for each requirement as a separate burden.
    Based on the analogous policies and procedures requirements and the 
corresponding burden estimates in Regulation NMS, the Commission has 
preserved the burden estimates from the Proposing Release. The 
Commission estimates that Rules 17Ad-22(b)(5)-(7) would impose a one-
time burden on each respondent CCP of 210 hours, corresponding to an 
aggregate one-time burden on all respondent CCPs of 1,890 hours.\459\
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    \459\ 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 CCPs = 1,890 hours.
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    CCPs would be required to collect information relating to standards 
of Rules 17Ad-22(b)(5)-(7) on an ongoing basis. Based on the analogous 
policies and procedures requirements and the corresponding burden 
estimates in Regulation NMS, the Commission estimates that the ongoing 
requirements of this rule would impose an annual burden of 60 hours on 
each respondent CCP, corresponding to an aggregate annual burden for 
all respondent CCPs of 540 hours.\460\
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    \460\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 9 respondent CCPs = 540 hours for all respondent CCPs.
     For each respondent CCP, the estimated annualized burden for 
Rules 17Ad-22(b)(5)-(7) is 110 hours (figure calculated as follows: 
210 hours (Year 1 burden) + 60 hours (Year 2 burden) + 60 hours 
(Year 3 burden) = 330 hours (estimated total burden over 3 years) / 
3 years = 110 hours).
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 4. Standards in Rule 17Ad-22(c) That Impose a PRA Burden
    The standards in Rule 17Ad-22(c) impose a PRA burden.\461\ The 
requirements of Rule 17Ad-22(c) will apply to all registered clearing 
agencies. Based on the analogous policies and procedures requirements 
and the corresponding burden estimates in Regulation NMS, the 
Commission has preserved the burden estimates from the Proposing 
Release. In contrast to the Proposing Release's burden estimates for 
proposed Rule 17Ad-22(c)(2), which accounted for 17 clearing agencies, 
the burden estimate in the adopting release for Rule 17Ad-22(c) 
reflects a smaller number of clearing agencies. The Commission 
estimates that Rule 17Ad-22(c) would impose a one-time burden on each 
respondent clearing agency of 191 hours, corresponding to an aggregate 
one-time burden on all respondent clearing agencies of 1,910 
hours.\462\
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    \461\ The burden discussion for the different information 
collection requirements of Rule 17Ad-22(c)(1)-(2) has been split 
into sections to account for the different requirements for varying 
numbers of respondents. Rule 17Ad-22(c) imposes an overall burden 
relating to policies and procedures and system adjustments on all 
registered clearing agencies, while Rule 17Ad-22(c)(1), as discussed 
below, imposes on CCPs an ongoing burden to generate the required 
reports concerning their financial resources and Rule 17Ad-22(c)(2), 
as discussed below, imposes initial and ongoing burdens related to 
annual audited financial statements to all registered clearing 
agencies, some of which are already implementing this requirement as 
part of their usual and customary practices.
    \462\ This figure was calculated as follows: ((Assistant General 
Counsel at 60 hours) + (Compliance Attorney at 85 hours) + (Computer 
Operations Manager at 23 hours) + (Senior Business Analyst at 23 
hours)) = 191 hours x 10 respondent clearing agencies = 1,910 hours.
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    The Commission 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 Rule 17Ad-22(c). The Commission believes 
these adjustments would impose a one-time burden of 100 hours on each 
clearing agency, corresponding to an aggregate one-time

[[Page 66262]]

burden imposed on all clearing agencies of 1,000 hours.\463\
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    \463\ 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 10 
respondent clearing agencies = 1,000 hours.
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    Clearing agencies would be required to collect information relating 
to standards of Rule 17Ad-22(c) on an ongoing basis. Based on the 
analogous policies and procedures requirements and the corresponding 
burden estimates in Regulation NMS, the Commission estimates that the 
ongoing requirements of this rule would impose an annual burden of 60 
hours on each respondent clearing agency, corresponding to an aggregate 
annual burden for all respondent clearing agencies of 600 hours.\464\
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    \464\ This figure was calculated as follows: Compliance Attorney 
at 60 hours x 10 respondent clearing agencies = 600 hours for all 
respondent clearing agencies.
     For each respondent clearing agency, the estimated annualized 
burden for Rule 17Ad-22(c) is 137 hours (figure calculated as 
follows: 191 hours + 100 hours (Year 1 burden) + 60 hours (Year 2 
burden) + 60 hours (Year 3 burden) = 411 hours (estimated total 
burden over 3 years) / 3 years = 137 hours).
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5. Standards in Rule 17Ad-22(c)(1) That Impose a PRA Burden
    The standards in Rule 17Ad-22(c)(1) impose a PRA burden. In 
contrast to the Proposing Release's burden estimates for proposed Rule 
17Ad-22(c)(2), which accounted for 17 clearing agencies, the burden 
estimate in the adopting release for Rule 17Ad-22(c)(1) reflects a 
smaller number of clearing agencies. The requirements of Rule 17Ad-
22(c)(1) will apply to nine CCPs.
    On an ongoing basis, the Commission estimates that for a CCP to 
generate the required reports concerning its financial resources would 
impose a burden of three hours per respondent CCP per quarter. This 
amounts to an annual burden of 12 hours for each CCP and corresponds to 
an aggregate annual burden of 108 hours for all respondent CCP. \465\
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    \465\ 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 CCPs = 108 hours.
    For each respondent CCP, the estimated annualized burden for 
Rule 17Ad-22(c)(1) is 8 hours (figure calculated as follows: 0 hours 
(Year 1 burden) + 12 hours (Year 2 burden) + 12 hours (Year 3 
burden) = 24 hours (estimated total burden over 3 years) / 3 years = 
8 hours).
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6. Standards in Rule 17Ad-22(c)(2) That Impose a PRA Burden
    The standards in Rule 17Ad-22(c)(2) impose a PRA burden. In 
contrast to the Proposing Release's burden estimates for proposed Rule 
17Ad-22(c)(2), which accounted for 17 clearing agencies, the burden 
estimate in the adopting release for Rule 17Ad-22(c)(2) reflects a 
smaller number of clearing agencies. The requirements of Rule 17Ad-
22(c)(2) will apply to all registered clearing agencies, a total of ten 
respondents.
    The Commission expects that the exact burden of collecting 
information relating to the procedures for facilitating an annual 
audited financial statement of the clearing agency and posting that 
annual audited financial statement to the clearing agency's Web site 
would vary depending on how frequently each clearing agency may need to 
update its procedures. Also, the Commission estimates based on its 
experience with entities of similar size to the respondents to this 
collection, that the initial burden of generating annual audited 
financial statements would generally require on average 500 hours per 
respondent clearing agency.\466\ However, as most registered clearing 
agencies are already implementing this requirement as part of their 
usual and customary practices, the rule, as an initial burden, would 
largely affect a total of four entities--three potential new entrants 
and one clearing agency that currently does not have two years of 
annual audited financial statements prepared in accordance with U.S. 
GAAP or IFRS posted on its Web site and therefore, would be required to 
incur the costs of paying for an independent audit for two years of 
financial statements.\467\ The Commission estimates that Rule 17Ad-
22(c)(2) would impose a one-time burden on each of these four clearing 
agencies of 500 hours to prepare and review internal financial 
statements, corresponding to an aggregate one-time burden on the four 
respondent clearing agencies of 2,000 hours.\468\ 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.
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    \466\ An example of the Commission's experience with entities of 
a similar size to the respondents is that the Commission required 
entities to post their annual financial statements on their 
respective Web sites as conditions to the Commission's authorizing 
them to provide CCP services for credit default swaps. See supra 
note 2.
    \467\ BSECC and SCCP currently do not post audited financial 
statements on their Web sites and are considered new entrants.
    \468\ This figure was calculated as follows: Senior Accountant 
at 500 hours x 4 respondent clearing agencies = 2,000 hours.
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    Clearing agencies also would be required to collect information 
relating to any procedures used to support compliance with Rule 17Ad-
22(c)(2) on an ongoing basis. Based on the analogous policies and 
procedures requirements and the corresponding burden estimates in 
Regulation NMS, the Commission estimates that the ongoing requirements 
of this rule would impose an annual burden of 250 hours on each 
respondent clearing agency for collecting information relating to 
administering policies and procedures for facilitating an annual 
audited financial statement of the clearing agency and posting that 
annual audited financial statement to the clearing agency's Web site 
for an aggregate burden of 2,500 hours.\469\
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    \469\ This figure was calculated as follows: Senior Accountant 
at 250 hours x 10 respondent clearing agencies = 2,500 hours.
     Annualized, the estimated burden for Rule 17Ad-22(c)(2) is 333 
hours (figure calculated as follows: 500 hours (Year 1 burden) + 250 
hours (Year 2 burden) + 250 hours (Year 3 burden) = 1,000 hours 
(estimated total burden over 3 years) / 3 years = 333 hours). This 
figure represents a weighted average for 10 respondent clearing 
agencies. The burden will be higher for clearing agencies that have 
not yet implemented Rule 17Ad-22(c)(2). The burden will be less for 
clearing agencies that have already implemented the requirement as 
part of their usual and customary practices.
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    The requirement also would require the services of a registered 
public accounting firm. The Commission estimates those services would 
on average cost approximately $500,000 annually.\470\ Therefore, to 
meet the ongoing requirements of Rule 17Ad-22(c)(2) the Commission 
estimates a total annual cost of approximately $5,000,000 in the 
aggregate for all respondent clearing agencies.\471\
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    \470\ A precise estimate of audit costs for clearing agencies 
cannot be made, and therefore, we examined a number of existing 
surveys, (see, e.g., surveys by CFO.com studying large and small 
public companies). While the costs may vary depending on the 
circumstances, we are using an estimate of $500,000, which is on the 
upper range for an average cost.
    \471\ This figure was calculated as follows: $500,000 estimated 
cost of registered public accounting firm x 10 respondent clearing 
agencies = $5,000,000.
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7. Total Burden for Rule 17Ad-22
    The total initial burden for Rule 17Ad-22 is 11,340 hours.\472\ The 
total ongoing annual burden for Rule 17Ad-22 is 4,888 hours.\473\ The 
ongoing

[[Page 66263]]

external cost for Rule 17Ad-22 is $8.9 million.\474\
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    \472\ This figure was calculated as follows: 1,750 hours for 
initial burdens associated with 17Ad-22(b)(1)-(3) and (d)(1)-(15) + 
2,790 hours for initial burdens associated with 17Ad-22(b)(4) + 
1,890 hours for initial burdens associated with 17Ad-22(b)(5)-(7) + 
4,910 hours for initial burdens associated with 17Ad-22(c) = 11,340 
hours.
    \473\ This figure was calculated as follows: 600 hours for 
annual burdens associated with 17Ad-22(b)(1)-(3) and (d)(1)-(15) + 
540 hours for annual burdens associated with 17Ad-22(b)(4) + 540 
hours for initial burdens associated with 17Ad-22(b)(5)-(7) + 3,208 
hours for annual burdens associated with 17Ad-22(c) = 4,888 hours.
    \474\ This figure was calculated as follows: $3,888,000 (for 
Rule 17Ad-22(b)(4)) + $5,000,000 (for Rule 17Ad-22(c)(2)).
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D. Collection of Information Is Mandatory

    The collection of information relating to Rule 17Ad-22(b) and Rule 
17Ad-22(c)(1) will be mandatory for all CCPs. The collection of 
information relating to Rule 17Ad-22(c)(2) and Rule 17Ad-22(d) will be 
mandatory for all registered clearing agencies.

E. Confidentiality

    The Commission expects that the written policies and procedures 
that will be generated pursuant to Rules 17Ad-22(b)(1)-(7), Rule 17Ad-
22(c)(2), and Rules 17Ad-22(d)(1)-(15) will be communicated to the 
members, subscribers, and employees (as applicable) of all entities 
covered by the Rule. To the extent that this information is made 
available to the Commission, it will not be kept confidential. Any 
records generated in connection with the requirement of Rules 17Ad-
22(b)(1)-(3), Rules 17Ad-22(b)(5)-(7), Rule 17Ad-22(c)(2), and Rules 
17Ad-22(d)(1)-(15) to establish written policies and procedures will be 
required to be preserved in accordance with, and for the periods 
specified in, Exchange Act Rules 17a-1 \475\ and 17a-4(e)(7).\476\
---------------------------------------------------------------------------

    \475\ 17 CFR 240.17a-1.
    \476\ 17 CFR 240.17a-4(e)(7).
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    The information collected pursuant to Rule 17Ad-22(c)(1) relating 
to the calculation and maintenance of a record of the financial 
resources necessary to meet the requirements of Rule 17Ad-22(b)(3) will 
be retained by the registered clearing agencies that perform CCP 
services and will be available to the Commission. To the extent that 
the Commission receives confidential information pursuant to this 
collection of information, such information would be kept confidential, 
subject to the provisions of applicable law.\477\
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    \477\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of 
Information Act provides an exemption for ``trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the 
Freedom of Information Act provides an exemption for matters that 
are ``contained in or related to examination, operating, or 
condition reports prepared by, on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions.'' 5 U.S.C. 552(b)(8)).
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V. Economic Analysis

A. Overview

    The rules that we are adopting today are designed to enhance the 
substantive regulation of securities clearing agencies. The Commission 
is sensitive to the economic effects of the rules it is adopting today, 
including their costs and benefits. Some of these costs and benefits 
stem from statutory mandates, while others are affected by the 
discretion we exercise in implementing the mandates. We requested 
comment on all aspects of the costs and benefits of the proposal, 
including any effect our proposed rules may have on efficiency, 
competition, and capital formation.
    As required by Title VII and Title VIII of the Dodd Frank Act, Rule 
17Ad-22 will establish a regulatory framework for CCPs for security-
based swap transactions and clearing agencies that are designated as 
systemically important by the Council. In so doing, Rule 17Ad-22 will 
help ensure that clearing agencies maintain effective operational and 
risk management procedures as well as meet the statutory requirements 
under the Exchange Act on an ongoing basis. Rule 17Ad-22 is consistent 
with the Dodd-Frank Act and the Congressional findings in the adoption 
of Section 17A. Specifically, Congress found that:
    (A) The prompt and accurate clearance and settlement of securities 
transactions, including the transfer of record ownership and the 
safeguarding of securities and funds related thereto, are necessary for 
the protection of investors and persons facilitating transactions by 
and acting on behalf of investors.
    (B) Inefficient procedures for clearance and settlement impose 
unnecessary costs on investors and persons facilitating transactions by 
and acting on behalf of investors.
    (C) New data processing and communications techniques create the 
opportunity for more efficient, effective, and safe procedures for 
clearance and settlement.
    (D) 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.\478\
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    \478\ See 15 U.S.C. 78q-1(a)(1).
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    Section 17A of the Exchange Act was adopted in direct response to 
the paperwork crisis of the late 1960's that nearly brought the 
securities industry to a standstill and directly or indirectly resulted 
in the failure of large numbers of broker-dealers \479\ because the 
industry's clearance and settlement procedures were inefficient and 
lacked automation.
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    \479\ This crisis resulted from sharply increased trading 
volumes and historic industry inattention to securities processing, 
as demonstrated by inefficient, duplicative and highly manual 
clearance and settlement system, poor records, insufficient controls 
over funds and securities, and use of untrained personnel to perform 
processing functions. See, e.g., Securities and Exchange Commission, 
Study of Unsafe and Unsound Practices of Brokers and Dealers, H.R. 
Doc. No. 231, 92d Cong., 1st Sess. 13 (1971).
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    Economic characteristics of FMIs,\480\ such as clearing agencies, 
including economies of scale, barriers to entry, and the particulars of 
their legal mandates may limit competition and confer market power on 
FMIs, which could lead to lower levels of service, higher prices, or 
under-investment in risk-management systems.\481\ In addition, the 
institutional structure of entities that provide clearance and 
settlement services may not provide strong incentives or mechanisms for 
safe and efficient design and operation, fair and open access, or the 
protection of participant and customer assets in some 
circumstances.\482\ Moreover, the participants in a clearing agency may 
not consider the full impact of their actions on other participants, 
such as the potential costs of delaying payments or settlements.\483\ 
Overall, a clearing agency and its participants may generate 
significant negative externalities for the entire securities market if 
they do not adequately manage their risks.\484\
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    \480\ A ``financial market infrastructure'' is a multilateral 
system among participating institutions, including the operator of 
the system, used for the purposes of clearing, settling, or 
recording payments, securities, derivatives, or other financial 
transactions. See id. at 7.
    \481\ See FMI Report, supra note 32, at 11.
    \482\ See id.
    \483\ See id.
    \484\ See id.
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    While the Commission believes that the U.S. clearance and 
settlement system currently works well, it is important that the 
operations of clearing agencies evolve with the securities markets, 
especially as clearing agencies affect a wider array of market 
participants. A clearing agency's direct participants, such as broker-
dealers, banks and other types of financial intermediaries, use 
clearing agencies to clear and settle proprietary trading activity. 
They also use clearing agencies as intermediaries for institutional 
investors, retail investors, and proprietary trading firms,\485\ 
because clearing and settling a high volume of financial transactions 
multilaterally through a clearing agency may in many

[[Page 66264]]

cases allow for greater efficiency and lower costs than settling 
bilaterally.\486\ In addition, clearing agencies are often able to 
manage risks related to the clearing and settling of financial 
transactions more effectively for their participants, and, in some 
cases, reduce certain risks, such as the risk that a purchaser of a 
security will not receive the security or the risk that a seller of a 
security will not receive payment for the security.\487\
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    \485\ Some clearing agencies permit proprietary trading firms, 
including high-frequency traders, that meet the clearing agency's 
participation requirements, to clear trades without intermediation 
by a broker-dealer or futures commission merchant (``FCM'').
    \486\ See Risk Management Supervision of Designated Clearing 
Entities (July 2011), Report by the Commission, Board and CFTC to 
the Senate Committees on Banking, Housing, and Urban Affairs and 
Agriculture in fulfillment of Section 813 of Title VIII of the Dodd-
Frank Act.
    \487\ See id.
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    Because clearing agencies concentrate risk, a disruption in a 
clearing agency's operations or the failure of a clearing agency to 
meet its obligations could cause a systemic disruption that can be 
costly for more than just the clearing agency and its members. For 
example, a significant dollar value of financial transactions pending 
for clearance or to be cleared in the future through the clearing 
agency could fail to settle on time or at the original contract terms. 
If the clearing agency acting as a CCP does not have the funds to cover 
the fail, members of the clearing agency would suffer losses and 
liquidity constraints due to their inability to access their clearing 
fund contributions and the clearing agency's inability to honor its 
obligations.\488\ In addition, the failure has the potential to harm 
the market as a whole in all financial instruments cleared by that 
clearing agency and its members, beyond the securities pending for 
clearance at the time of the original settlement failure.
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    \488\ See id. at 8. While no clearing agency has ever failed in 
the United States, such failure is not impossible. See, e.g., Donald 
MacKenzie, An Engine, Not A Camera: How Financial Models Shape 
Markets (2009); Ian Hay Davison, Securities Review Committee Report 
(1989) (discussing the events surrounding the failure of the Hong 
Kong Futures Exchange Clearing Corporation in 1987).
---------------------------------------------------------------------------

    The standards adopted today as part of Rule 17Ad-22 are intended to 
help mitigate these risks by requiring measures that would reinforce 
the safety of clearing agencies. Safe and reliable clearing agencies 
are essential not only to 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. Investors are more likely to participate in markets 
when they have confidence in the safety and reliability of clearing 
agencies; therefore the rule being adopted today should promote capital 
formation.
    In addition, the rule seeks to promote the efficiency of clearing 
agencies. As described below, the structure of the clearing agency 
market and the structure of the clearing agencies themselves may not 
provide the competitive incentives necessary to promote transparency, 
fair access, and efficient operations. Transparency helps to ensure 
that clearing members can make more informed decisions and that market 
participants in general have better information about the stability of 
the system. In turn, transparency promotes competition by facilitating 
comparisons across clearing agencies. Fair access ensures that a 
variety of market participants can gain access to clearing and 
settlement services and thus promotes competition by lowering barriers 
to entry for clearing agency participants.\489\ Efficient operations 
can result in higher quality services or lower fees (or both) to 
clearing agency members and their customers.
---------------------------------------------------------------------------

    \489\ See infra discussion of Rules 17Ad-22(b)(5), (6) and (7) 
in Section V.C.5.
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    The analysis below examines the projected economic effects of the 
adopted rules. The analysis starts with a baseline discussion of the 
current regulatory landscape and existing industry practices of 
clearing agencies relating to their operations and risk management 
procedures and membership policies. This discussion provides a point of 
comparison for the second half of the economic analysis, which is a 
discussion of the benefits and costs of the rules, as well as 
alternative approaches to the rules that were considered by the 
Commission.\490\
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    \490\ In discussing the current practices of the registered 
clearing agencies below, we have omitted descriptions of the 
variations in the practices, policies, and procedures among 
registered clearing agencies that are, nevertheless, consistent with 
the requirements of the final rules. However, while these variations 
are not discussed, notable distinctions in practices, policies, and 
procedures that significantly impact the economic analysis are 
addressed, as applicable.
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B. Baseline

    Rule 17Ad-22 impacts the market for clearing agency services in 
securities, with an emphasis on CCP services. There are currently seven 
clearing agencies registered with the Commission that provide CCP or 
CSD services. Six of these clearing agencies offer CCP services, and 
one is a CSD. Together, they processed over $1 quadrillion in financial 
market transactions in 2011.\491\ Some of these clearing agencies also 
are regulated by the CFTC, the Federal Reserve, and the New York State 
Department of Banking.
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    \491\ This figure was calculated from the following sources: 
DTCC 2011 Annual Report, available at http://dtcc.com/about/annuals/2011/report.php; OCC 2011 Annual Report, available at http://www.optionsclearing.com/components/docs/about/annual-reports/occ_2011_annual_report.pdf; CME Group 2011 Annual Report, available at 
http://cmegroup.com/investor-relations/annual-review/2011/downloads/CME_Group_2011_Annual_Report.pdf; InterContinental Exchange 2011 
Annual Report, available at http://files.shareholder.com/downloads/ICE/1860307941x0x556734/44EA48C5-CBCB-4468-BF54-048BFEEC8264/ICE_2011AR.pdf.
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    Central clearing facilitates the management of counterparty credit 
risk among dealers and other institutions by shifting that risk from 
individual counterparties to CCPs, thereby helping protect 
counterparties from each other's potential failures and preventing the 
buildup of risk in such entities, which could be systemically 
important. Central clearing generally reduces the counterparty risk of 
market participants, including market makers and dealers. If market 
makers and dealers cannot diversify this counterparty risk, they 
generally pass the costs on to their clients in the form of higher 
transaction costs. In order for central clearing to reduce risk, mark-
to-market pricing and margin requirements need to be applied in a 
consistent manner.\492\ CCPs generally use liquid margin collateral to 
manage the risk of a CCP member's failure, and rely on the accuracy of 
their margin calculations and their access to liquid collateral to 
protect against sudden movements in market prices. A CCP can also 
reduce systemic risk through netting, by reducing the amount of funds 
or other assets that must be exchanged at settlement.\493\ 
Nevertheless, a CCP also concentrates risks and responsibility for risk

[[Page 66265]]

management in the CCP.\494\ Consequently the effectiveness of a CCP's 
risk controls and the adequacy of its financial resources are critical 
aspects of the infrastructure of the market it serves.\495\
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    \492\ See Christopher Culp, OTC-Cleared Derivatives: Benefits, 
Costs, and Implications of the ``Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Journal of Applied Finance, No. 2, 2010), 
available at http://www.rmcsinc.com/articles/OTCCleared.pdf.
    \493\ See, e.g., Darrell Duffie and Haoxiang Zhu, Does a Central 
Clearing Counterparty Reduce Counterparty Risk?, (Stanford 
University, Working Paper, 2010), available at http://
www.stanford.edu/~duffie/DuffieZhu.pdf; Nout Wellink, Mitigating 
System Risk in OTC Derivatives Markets, (Banque de France, Financial 
Stability Review, No. 14--Derivatives--Financial innovation and 
stability, July 2010), available at http://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etude15_rsf_1007.pdf; and Manmohan 
Singh, Collateral, Netting and System Risk in the OTC Derivatives 
Market,'' (International Monetary Fund, Working Paper, 2009), 
available at http://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf.
    \494\ See RCCP, supra note 33, at 1.
    \495\ See id.
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    The market for CCP services in the United States tends to be 
segmented by financial instrument, with clearing agencies often 
specializing in particular instruments. As such, some market segments 
may have characteristics of natural monopolies capable of being 
sustained despite the presence of competitors with the potential to 
enter the market segment in question.\496\ For example, in the United 
States, following a period of consolidation facilitated by the 
introduction of Section 17A of the Exchange Act, only one CCP currently 
processes transactions in U.S.-listed equities and only one CCP 
processes transactions in exchange-traded options. However, three 
clearing agencies currently serve as CCPs for swaps and security-based 
swaps. Although two of the CCPs for security-based swaps are affiliated 
entities, these affiliated CCPs do not compete with each other; one 
primarily serves the U.S. market for security-based swaps, and the 
other primarily serves the European market. Further, the affiliated CCP 
serving the U.S. market has a dominant market share in the United 
States, though the Commission believes this may be subject to change 
over time as a result of competition from the other registered CCPs 
offering security-based swap services, the entry of new competitors 
into the U.S. market or other factors.
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    \496\ A natural monopoly is one in which the economies of scale 
make having a single provider more efficient (lower average cost) 
than having multiple competitors.
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    The following sections set the baseline for comparison in our 
analysis of the economic effects. In particular, they describe the 
legal framework under which registered clearing agencies operate and 
the current practices of clearing agencies as they relate to the rules 
being adopted today.
1. Legal Framework
a. Overview of Statutory Framework and the Dodd-Frank Act
    In recognition of the risks posed by the concentration of clearance 
and settlement activity at clearing agencies, the Exchange Act and 
Titles VII and VIII of the Dodd-Frank Act provide a framework for 
enhanced regulation and supervision of clearing agencies by the 
Commission.
i. Exchange Act
    Section 17A of the Exchange Act \497\ and Rule 17Ab2-1 \498\ 
require entities to register with the Commission prior to performing 
the functions of a clearing agency. Under the statute, the Commission 
is not permitted to grant registration unless it determines that the 
rules and operations of the clearing agency meet the standards set 
forth in Section 17A.\499\ If the Commission registers a clearing 
agency, the Commission oversees the clearing agency to facilitate 
compliance with the Exchange Act using various tools that include, 
among other things, the rule filing process for SROs and on-site 
examinations by Commission staff. Section 17A(d) 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.\500\ In 1980, the staff 
of the Commission provided guidance on meeting the requirements of 
Section 17A in its Standards for Clearing Agency Regulation.\501\
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    \497\ 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).
    \498\ See 17 CFR 240.17Ab2-1.
    \499\ See supra note 5.
    \500\ See 15 U.S.C. 78q-1(d).
    \501\ See supra note 5.
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ii. Title VII of the Dodd-Frank Act
    As described in Section I above, the Dodd-Frank Act was enacted to, 
among other things, mitigate systemic risk and promote the financial 
stability of the United States by improving accountability and 
transparency in the financial system and by providing for enhanced 
regulation and oversight of institutions designated as systemically 
important.\502\ Specifically, Title VII of the Dodd-Frank Act amended 
the Exchange Act to require that security-based swap transactions must 
be cleared through a clearing agency that is registered with the 
Commission (or exempt from registration) if they are of a type that the 
Commission determines be cleared, unless an exemption from mandatory 
clearing applies.\503\ 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.\504\ Compliance 
with any such rules is a prerequisite to the registration of a clearing 
agency with the Commission \505\ and is also a condition to the 
maintenance of its continued registration.\506\
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    \502\ See supra note 20.
    \503\ See 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of 
the Dodd-Frank Act).
    \504\ 15 U.S.C. 78q-1(i).
    \505\ 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. 15 U.S.C. 78q-1(b)(3).
    \506\ See supra Section I.A.3.
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iii. Title VIII of the Dodd-Frank Act
    In addition to the provisions in Title VII that expand the 
Commission's authority under the Exchange Act to include security-based 
swap activities, Title VIII of the Dodd-Frank Act, entitled the 
Clearing Supervision Act, establishes an enhanced supervisory and risk 
control system for systemically important clearing agencies and other 
FMUs.\507\ As previously noted, on July 18, 2012, the Council 
designated DTC, FICC, NSCC and OCC as systemically important, and 
Section 17A(i) of the Exchange Act provides that the Commission, in 
establishing clearing agency standards and in its oversight of clearing 
agencies, may conform such standards and such oversight to reflect 
evolving international standards.\508\ Section 805(a) of the Clearing 
Supervision Act supplements the Exchange Act requirements by mandating 
the Commission to take into consideration relevant international 
standards and existing prudential requirements for clearing agencies 
that are designated as systemically important FMUs.\509\
---------------------------------------------------------------------------

    \507\ See supra note 25.
    \508\ 15 U.S.C. 78q-1(i).
    \509\ 12 U.S.C. 5464(a)(1).
---------------------------------------------------------------------------

    In part, the Clearing Supervision Act provides that the Commission, 
considering relevant international standards and existing prudential 
requirements, may prescribe regulations that set risk management 
standards for the operations related to PCS Activities \510\ of a 
Designated Clearing Entity or the conduct of designated activities by a 
Financial Institution.\511\ Creation of any such risk management 
standards must be done in consultation with the Federal Reserve and the 
Council.
---------------------------------------------------------------------------

    \510\ Certain post-trade processing activities that are not 
captured by the Clearing Supervision Act may nevertheless be subject 
to regulation by the Commission under the Exchange Act. See supra 
note 100 and accompanying text.
    \511\ See supra note 27.
---------------------------------------------------------------------------

b. CPSS-IOSCO Standards
    As noted above, the final FMI Report was published on April 16, 
2012 to replace the earlier CPSS-IOSCO

[[Page 66266]]

Recommendations and therefore represents a new reference point of 
international standards contemplated by the Exchange Act and the 
Clearing Supervision Act relevant for actions taken by the 
Commission.\512\ The FMI Report recognizes that FMIs can differ 
significantly in design, organization and function and that certain 
principles are not applicable to certain types of FMIs. The principles 
are designed therefore to be applied holistically, and the Final Report 
expressly provides flexibility in terms of how FMIs will apply the 
principles. The clearing agencies registered with the Commission have 
generally implemented the CPSS-IOSCO Recommendations. The FMI Report 
states that financial market infrastructures (including CCPs and CSDs) 
are expected to observe the principles contained in the FMI Report 
through ``appropriate and swift action'' consistent with the national 
laws of their home jurisdictions.\513\
---------------------------------------------------------------------------

    \512\ See supra note 32.
    \513\ See RSSS and RCCP Reports, supra note 33.
---------------------------------------------------------------------------

c. Complementary Regulation by Other Regulators
    Rule 17Ad-22 and the rules for DCOs adopted by the CFTC \514\ are 
generally consistent. The CFTC also incorporates some of the CPSS-IOSCO 
Recommendations by rule to supplement the DCO core principles of the 
Commodity Exchange Act (``CEA''). Nevertheless, there are some 
differences between the rules the Commission is adopting today and 
those of the CFTC.
---------------------------------------------------------------------------

    \514\ See 76 FR 69334 (Nov. 8, 2011).
---------------------------------------------------------------------------

    First, Rule 17Ad-22(b)(1) requires a CCP to measure its credit 
exposures to its participants at least once a day while the CFTC's DCO 
rules require that DCOs perform that function periodically throughout 
the day. Second, consistent with the current practice at registered 
CCPs providing clearing of security-based swaps, Rule 17Ad-22(b)(3) 
requires CCPs for security-based swaps to maintain enough financial 
resources to withstand a default by the two largest participant 
families.\515\ All other CCPs would be required to be able to withstand 
a default by the single largest participant family, for the reasons 
discussed in Section V.C below.
---------------------------------------------------------------------------

    \515\ See supra Section III.C.3.
---------------------------------------------------------------------------

    The CFTC applies the latter standard to all DCOs. In its October 
2010 rule proposal, the CFTC proposed requiring that systemically 
important DCOs maintain sufficient financial resources to meet their 
financial obligations to their clearing members notwithstanding a 
default by the two clearing members creating the largest combined 
financial exposure for the systemically important DCO in extreme but 
plausible market conditions.\516\ The CFTC did not adopt this proposal 
as part of its final rules for DCOs. The CFTC stated that it was 
premature to adopt this rule for the following reasons: (1) The Council 
had not designated any DCOs as systemically important; (2) the final 
FMI Report had not been published; and (3) EMIR was not final.\517\ The 
CFTC stated that it would be closely monitoring developments and would 
be prepared to revisit the issue if the European Union or other foreign 
regulators move closer to implementation of their respective 
reforms.\518\
---------------------------------------------------------------------------

    \516\ See Financial Resources Requirements for Derivatives 
Clearing Organizations, 75 FR 63113 (Oct. 14, 2010).
    \517\ See id. at 69352.
    \518\ We note that EMIR requires all CCPs to maintain sufficient 
financial resources to withstand the default of the two participants 
with the largest exposures. See supra note 167 at 43. EMIR was 
adopted in July 2012. See supra note 167.
---------------------------------------------------------------------------

    Third, Rule 17Ad-22(b)(4) requires model validations to be 
performed ``annually'' by a person who is free from influence from the 
persons responsible for development or operation of the systems and 
models being validated so that he or she can be candid in his or her 
assessment of the model. The CFTC rule requires an ``independent'' 
validation on a ``regular basis.''
    Fourth, Rule 17Ad-22(b)(7) provides for scalability of net capital 
requirements in proportion to the riskiness of the participants' 
activities and permits CCPs to seek Commission approval to impose a net 
capital requirement on participants that is higher than $50 million. In 
contrast, the CFTC's DCO rules do not provide for scalability and do 
not allow DCOs the option to seek approval for a higher net capital 
requirement.
    Finally, a DCO is required to publicly disclose its margin-setting 
methodology and default procedures on its Web site. Rule 17Ad-22(d)(11) 
requires a clearing agency to make key aspects of its default 
procedures publicly available, but nothing in the rules the Commission 
is adopting today would require publication of the clearing agency's 
margin methodology.
2. Current Practices
    An overview of the risk management practices, operations, policies 
and procedures of registered clearing agencies is set forth below. The 
discussions under the headings ``Risk Management--Measurement of credit 
exposures,'' ``--Margin'' ``--Financial Resources'' and under the 
heading ``Other Clearing Services'' are based upon public 
representations \519\ made by registered clearing agencies regarding 
their compliance with the CPSS-IOSCO Recommendations and upon the 
Commission's observations with regard to registered clearing agencies 
developed in carrying out its supervisory role. The discussion under 
the heading ``Risk Management--Model Validation'' is based upon the 
Commission's observations with regard to registered clearing agencies 
in its supervisory role. The Commission notes that the practices 
observed at registered clearing agencies generally are performed 
pursuant to stated practices, policies and procedures as described 
below.\520\
---------------------------------------------------------------------------

    \519\ See, e.g., NSCC's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Nov. 14, 2011), 
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf; DTC's Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties (Dec. 12, 2011), 
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf; FICC/GSD's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Dec. 15, 2011), 
available at http://www.dtcc.com/legal/compliance/FICC_Self-Assessment.pdf.
    \520\ Registered 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. See supra note 293.
---------------------------------------------------------------------------

a. Risk Management Practices
i. CCP Practices as They Relate to Rules 17Ad-22(b)(1)-(4)
    CCPs have a range of tools that can be used to manage the financial 
risks to which they are exposed, and the tools that an individual CCP 
uses will depend upon the nature of its obligations. Nonetheless, there 
is a common set of procedures that are implemented by many CCPs to 
manage counterparty credit and liquidity risks. Broadly, these 
procedures enable CCPs to manage their risks by limiting the likelihood 
of defaults, by limiting the potential losses and liquidity pressures 
if a default should occur, and by ensuring that there are adequate 
resources to cover losses and meet payment obligations on schedule.
    To manage its counterparty credit exposures to its participants 
effectively, a clearing agency must be able to measure those exposures. 
A clearing agency can ascertain its current credit exposure to each 
participant by marking each participant's outstanding contracts to 
current market prices and (to the extent permitted by a clearing 
agency's rules and supported by law) netting any gains against any 
losses. A clearing agency faces the risk that its exposure to

[[Page 66267]]

a participant can change as a result of a change in prices, in 
positions, or both.
    The current practice of each CCP registered with the Commission 
includes these procedures: (1) Measuring credit exposures at least once 
a day; (2) setting margin coverage at a 99% confidence level over some 
set period; (3) using risk-based models; (4) establishing a fund that 
mutualizes losses of defaults by one or more participants that exceed 
margin coverage; and (5) maintaining sufficient financial resources to 
withstand the default of at least the largest participant,\521\ and in 
the case of security-based swap transactions, maintaining enough 
financial resources to be able to withstand the default of their two 
largest participants.\522\
---------------------------------------------------------------------------

    \521\ See supra note 183.
    \522\ See supra note 168.
---------------------------------------------------------------------------

1. Measurement of Credit Exposures
    Currently, registered clearing agencies measure credit exposures at 
least once per day. Clearing agencies that guarantee trades on the 
trade date, such as the FICC/GSD and OCC, measure credit exposures 
multiple times per day. NSCC does not guarantee trades until midnight 
of T+1, and it only measures credit exposures daily, though it is 
considering an accelerated trade guarantee proposal that would 
potentially revise these practices.\523\
---------------------------------------------------------------------------

    \523\ See NSCC's Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties (Nov. 14, 2011), at 24, 
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf.
---------------------------------------------------------------------------

2. Margin
    Clearing agencies use risk-based models to set initial and 
variation margin. Inputs to the margin calculation include, among other 
things, portfolio size, asset price volatility, current asset values, 
the likely liquidity of the asset should a particular market maker fail 
(market-maker domination charges), the likely time it would take to 
liquidate the assets, potential correlations between the value of 
assets posted as collateral and the assets being cleared, and the 
correlation of the prices in the portfolio of assets being cleared by 
the participant.
    The current practice of many CCPs registered as clearing agencies 
is to calculate daily margin requirements using risk-based models to 
ensure coverage at a 99% confidence interval over a designated time 
horizon. Losses beyond this level are typically covered by the CCP's 
guaranty fund. This standard is consistent with the RCCP, which has 
been the internationally accepted minimum standard for CCPs.\524\ The 
RCCP advises that CCPs use margin and other risk control mechanisms to 
limit exposures to potential losses from defaults by participants in 
normal market conditions. The generally recognized standard for normal 
market conditions, as defined in the RCCP, is price movements that 
produce changes in exposures that are expected to breach margin 
requirements or other risk controls only 1% of the time (i.e., at a 99% 
confidence interval).\525\
---------------------------------------------------------------------------

    \524\ See supra note 74.
    \525\ See Bank for International Settlements' Committee on 
Payment and Settlement Systems and Technical Committee of the 
International Organization of Securities Commissions, 
Recommendations for Central Counterparties, (Nov. 2004), at 21, 
available at http://www.bis.org/publ/cpss64.pdf; see also infra 
Section V.B.2 (discussion on current industry baselines and the use 
of the 99% confidence level).
---------------------------------------------------------------------------

    This standard comports with the international standard for bank 
capital requirements established by the Bank for International 
Settlements, which requires banks to measure market risks at a 99% 
confidence interval when determining regulatory capital 
requirements.\526\ At the time the Basel Committee on Banking 
Supervision (the ``Committee'') contemplated this standard, banks 
measured value-at-risk using a range of confidence intervals from 90-
99%.\527\ When determining the minimum quantitative standards for 
calculating risk measurements, the Committee noted the importance of 
specifying ``a common and relatively conservative confidence level,'' 
choosing the 99% confidence interval over the other, less conservative 
measures.\528\ Since adopted by the Committee in 1998, it has become a 
generally recognized practice of banks to quantify credit risk as the 
worst expected loss that a portfolio might incur over an appropriate 
time horizon at a 99% confidence interval.\529\
---------------------------------------------------------------------------

    \526\ See Bank for International Settlements' Basel Committee on 
Banking Supervision, International Convergence of Capital 
Measurement and Capital Standards: A Revised Framework (June 2004), 
available at http://www.bis.org/publ/bcbs107.pdf; see also Darryll 
Hendricks and Beverly Hirtle, New Capital Rule Signals Supervisory 
Shift (Sept. 1998), available at http://www.bis.org/bcbs/ca/alrequse98.pdf.
    \527\ See Bank for International Settlements' Basel Committee on 
Banking Supervision, An internal model-based approach to market risk 
capital requirements (Apr. 1995), at 12, available at http://www.bis.org/publ/bcbs17.pdf.
    \528\ See id.
    \529\ See Kenji Nishiguchi, Hiroshi Kawai, and Takanori Sazaki, 
Capital Allocation and Bank Management Based on the Quantification 
of Credit Risk, FRBNY Economic Policy Review (Oct. 1998), at 83, 
available at http://www.newyorkfed.org/research/epr/98v04n3/9810nish.pdf; see also Jeff Aziz and Narat Charupat, Calculating 
Credit Exposure and Credit Loss: A Case Study (Sept. 1998), at 34, 
available at http://www.bis.org/bcbs/ca/alrequse98.pdf.
---------------------------------------------------------------------------

3. Financial Resources
    All clearing agencies that act as CCPs in the United States collect 
contributions from their members to guaranty funds or clearing funds 
for the mutualization of losses under extreme but plausible market 
scenarios. The guaranty funds or clearing funds consist of liquid 
assets, the sizes of which vary depending on the products that the CCP 
clears. In particular, the guaranty funds for CCPs that clear security-
based swaps are relatively larger (as measured by the size of the fund 
as a percentage of the total and largest exposures) than the guaranty 
funds or clearing funds for other financial instruments. The guaranty 
funds for security-based swaps are sized to achieve protection against 
a default by two participant families to whom the clearing agency has 
the largest exposures and are designed to protect the clearing agency 
from the extreme jump-to-default risk associated with large protection 
sellers. Security-based swap CCPs have organized their security-based 
swap clearing operations either in a separate legal entity or by 
establishing a separate fund and separate procedures (rules, membership 
requirements and risk management practices) within a single legal 
entity. The registered clearing agencies clearing products other than 
security-based swaps maintain the financial resources to withstand the 
default of the single largest participant family.\530\
---------------------------------------------------------------------------

    \530\ See, e.g., DTC's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Dec. 12, 2011), 
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf.
---------------------------------------------------------------------------

4. Model Validation
    Clearing agencies registered with the Commission typically have a 
model validation process in place that evaluates the adequacy of margin 
models, parameters, and assumptions. Current model validation practices 
vary among clearing agencies. Some registered clearing agencies conduct 
annual validations, while others conduct them on an ad hoc basis or 
perform validations on new models or changes to existing models before 
implementing them. In addition to validating models, registered 
clearing agencies typically review models used to calculate margin on a 
regular basis and back-test them regularly to assess the reliability of 
the methodology in achieving the desired coverage. Based on our 
experience in supervising registered CCPs, we understand that 
registered CCPs' approaches to model validation include model 
validations

[[Page 66268]]

conducted by a qualified person who is either an outside third party or 
is employed by the clearing agency but is free from influence from the 
persons responsible for the development or operation of the models.
ii. Other Clearing Services (Practices as They Relate to Rule 17Ad-
22(d))
1. Legal Risk
    Because registered clearing agencies are SROs, they have written 
policies and procedures in place that, at a minimum, address the 
significant aspects of their operations and risk management 
practices.\531\ A large portion of these policies and procedures are 
available to members and participants of clearing agencies, but it is 
also ordinarily the practice of clearing agencies to limit members' 
access to certain of their policies and procedures to ensure their 
integrity, particularly those policies and procedures associated with 
the oversight of clearing participants. Registered clearing agencies 
also make their rule books and certain key procedures available to the 
public to provide a transparent legal framework.\532\
---------------------------------------------------------------------------

    \531\ See supra note 520.
    \532\ Generally, the rules and procedures of registered clearing 
agencies can be found on their respective Web sites.
---------------------------------------------------------------------------

    Registered clearing agencies must be able to enforce those policies 
and procedures and such enforcement powers are specifically 
contemplated by operative provisions of the Exchange Act, subject to 
oversight by the Commission.\533\ Clearing agency policies and 
procedures that purport to create remedial measures that a party other 
than the clearing agency (such as a clearing member) can use to seek 
redress or to promote compliance with applicable rules must also be 
enforceable in practice in order to be effective, and the Commission 
believes that 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.\534\
---------------------------------------------------------------------------

    \533\ See Sections 17A(b)(3)(A), (G), and (H) of the Exchange 
Act.
    \534\ See 15 U.S.C. 78q-1(b)(3)(G).
---------------------------------------------------------------------------

2. Participation Requirements
    Applicants for membership must provide a registered clearing agency 
with certain financial and operational information prior to being 
admitted as a member and on an ongoing basis as a condition of 
continuing membership. The registered clearing agency reviews this 
information to ensure that the applicant has the operational capability 
to meet the technical demands of interfacing with the clearing agency. 
In particular, registered clearing agencies require that an applicant 
demonstrate that it has adequate personnel capable of handling 
transactions with the clearing agency and adequate physical facilities, 
books and records and procedures to fulfill its anticipated commitments 
to, and to meet the operational requirements of, the clearing agency 
and other participants with necessary promptness and accuracy and to 
conform to any condition or requirement that the clearing agency 
reasonably deems necessary for its protection.
    Registered clearing agencies use the ongoing monitoring process to 
ensure they understand relevant changes in the financial condition of 
their participants and to mitigate credit risk exposure of the clearing 
agency to its participants. Financial statements filed with the 
regulatory agencies, information obtained from other SROs and 
information gathered from various financial publications are analyzed 
by risk management staff so that the clearing agency may evaluate 
whether the participant continues to be financially stable.
3. Custody of Assets and Investment Risk
    Registered clearing agencies currently seek to minimize the risk of 
loss or delay in access by holding assets that are highly-liquid (e.g., 
cash, U.S. Treasury securities or securities issued by a U.S. 
government agency) and engaging banks to custody the assets and 
facilitate settlement. Clearing agencies that are designated 
systemically important by the Council may be provided account services 
at the appropriate Federal Reserve Bank to the extent such services are 
not already available as the result of other laws and regulations.\535\ 
The use of account services at the Federal Reserve Bank would reduce 
custody risk in clearing agencies that are designated systemically 
important by the Council.
---------------------------------------------------------------------------

    \535\ See Section 806(a) of the Clearing Supervision Act. ``The 
Board of Governors may authorize a Federal Reserve Bank to establish 
and maintain an account for a designated financial market utility 
and provide the services listed in section 11A(b) of the Federal 
Reserve Act (12 U.S.C. 248a(b)) and deposit accounts under the first 
undesignated paragraph of section 13 of the Federal Reserve Act (12 
U.S.C. 342) to the designated financial market utility that the 
Federal Reserve Bank is authorized under the Federal Reserve Act to 
provide to a depository institution, subject to any applicable 
rules, orders, standards, or guidelines prescribed by the Board of 
Governors.'' 12 U.S.C. 5465(a).
---------------------------------------------------------------------------

4. Identification and Mitigation of Operational Risk
    Registered clearing agencies develop and maintain plans to assure 
the safeguarding of securities and funds, the integrity of the 
Automated Data Processing systems, and recovery of securities, funds, 
or data under a variety of loss or destruction scenarios.\536\ In 
addition, clearing agencies generally maintain an internal audit 
department to review the adequacy of the clearing agencies' internal 
controls, procedures, and records with respect to operational risks. 
Some clearing agencies also engage independent accountants to perform 
an annual study and evaluation of the internal controls relating to its 
operations.\537\
---------------------------------------------------------------------------

    \536\ These practices, among others, have been developed 
pursuant to Commission guidelines. See Automation Review Policy 
Statements, supra note 330.
    \537\ See NSCC's Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties (Nov. 14, 2011), 
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf.
---------------------------------------------------------------------------

5. Money Settlement Risks
    Registered clearing agencies use settlement banks to facilitate the 
cash portion of securities settlements. Because DTC is organized as a 
limited purpose trust company and is a member of the Federal Reserve 
System,\538\ it has an account at the Federal Reserve Bank of New York, 
and uses that account to facilitate end-of-day settlement. NSCC, as an 
affiliate of DTC, also uses that account.
---------------------------------------------------------------------------

    \538\ See Section 806(a) of the Dodd-Frank Act (``The Board of 
Governors may authorize a Federal Reserve Bank to establish and 
maintain an account for a designated financial market utility and 
provide the services listed in Section 11A(b) of the Federal Reserve 
Act (12 U.S.C. 248a(b)) and deposit accounts under the first 
undesignated paragraph of section 13 of the Federal Reserve Act (12 
U.S.C. 342) to the designated financial market utility that the 
Federal Reserve Bank is authorized under the Federal Reserve Act to 
provide to a depository institution, subject to any applicable 
rules, orders, standards, or guidelines prescribed by the Board of 
Governors.'').
---------------------------------------------------------------------------

6. Cost-Effectiveness
    Registered clearing agencies have procedures to control costs and 
to regularly review pricing levels against operating costs. These 
clearing agencies may use a formal budgeting process to control 
expenditures, and may review pricing levels against their costs of 
operation during the annual budget process. Clearing agencies also 
analyze workflows in order to make recommendations to improve the 
operating efficiency of the clearing agency.

[[Page 66269]]

7. Links
    Each registered clearing agency is linked to other clearing 
organizations, trading platforms, and service providers. An example of 
such a link is DTC Canadian Link Service, which 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.\539\
---------------------------------------------------------------------------

    \539\ See infra note 617.
---------------------------------------------------------------------------

8. Governance
    Each registered clearing agency has a board that governs the 
operations of the entity and supervises senior management. 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.
9. Information on Services
    Because registered clearing agencies are SROs, their rules are 
published by the Commission and are available on each clearing agency's 
Web site. In addition, information regarding the operations and 
services of each clearing agency can be found either on the clearing 
agency's Web site or a Web site maintained by an affiliated entity of 
the clearing agency.
10. Immobilization and Dematerialization of Securities Certificates
    Virtually all mutual fund securities, government securities, 
options, and municipal bonds in the United States are dematerialized, 
and most of the equity and corporate bonds in the U.S. market are 
either immobilized or dematerialized; some securities (e.g., mutual 
fund shares, U.S. Treasury bills) are issued on a completely 
dematerialized basis, while most securities issued to the public are 
issued in the form of one or more physical certificates. Through the 
end of 2010, over 99% of municipal and corporate debt by par value 
distributed through DTC was in book-entry-only form.\540\ DTC estimates 
that in excess of 90% of the corporate and municipal securities issued 
to the public in the United States are distributed through DTC and are 
represented by one or more physical certificates that are immobilized 
at the depository.\541\
---------------------------------------------------------------------------

    \540\ See DTCC White Paper, supra note 389.
    \541\ See id.
---------------------------------------------------------------------------

11. Default Procedures
    Each registered clearing agency makes publicly available rules, 
policies or procedures that set forth the actions the clearing agency 
may take in the event of a participant default, with the exception of 
certain of their policies and procedures that are kept non-public to 
ensure their integrity, such as those associated with the oversight of 
clearing participants. For example, clearing agency rules typically 
state what constitutes a default, identify whether the board or a 
committee of the board may make that determination and describe what 
steps the clearing agency may take to protect itself and its 
participants. In this regard, clearing agencies typically attempt, 
among other things, to close-out, to hedge or to liquidate a defaulting 
participant's positions.
12. Timing of Settlement Finality
    Each registered clearing agency has rules, policies or procedures 
that provide for the settlement of their respective securities 
transactions no later than the end of a pre-defined settlement day. For 
example, DTC provides for final settlement of securities transfers no 
later than the end of the day and the timing of finality is clearly 
defined. Final cash settlement occurs at the end of the processing day 
at DTC. Funds transfers through DTC's account at the Federal Reserve 
Bank of New York that occur between DTC and a settling bank that is 
acting on behalf of a DTC participant are final when made.
13. Delivery Versus Payment
    Rule 17Ad-22(d)(13) would apply to registered clearing agencies 
that provide CSD services. DTC currently is the only registered 
clearing agency that is a CSD. DTC operates a Model 2 DVP system that 
provides for gross settlements of securities transfers during the day 
followed by an end of day net funds settlement.\542\ Under DTC's rules, 
in a DVP transaction, the delivering party is assured that it will be 
paid for the securities once they are credited to the receiving party's 
securities account.\543\
---------------------------------------------------------------------------

    \542\ See DTC's Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties (Dec. 12, 2011), 
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf.
    \543\ See id.
---------------------------------------------------------------------------

14. Risk Controls To Address Participant's Failure To Settle
    The sole registered clearing agency providing CSD services, DTC, 
which also extends limited intraday credit to participants, has 
policies and procedures in place to ensure that timely settlement can 
be completed in the event of the default of the participant with the 
largest settlement obligation. DTC has policies and procedures to 
establish limits (called net debit caps) for each participant. The net 
debit cap ensures that the amount of cash that a participant owes the 
clearing agency at any one point in time does not exceed this pre-
defined limit or cap. The net debit cap is set in relation to a 
participant's normal activity with the maximum net debit cap for an 
individual participant currently set at $1.8 billion. DTC also has 
implemented other risk management controls to help ensure settlement. 
For example, DTC monitors the value of the collateral supporting each 
participant's net debit in its settlement system based on the 
security's prior business day's closing market price, less a haircut, 
which is based primarily upon the availability of prices, ratings, and 
the price volatility of the particular security.
15. Physical Delivery Risks
    Each registered clearing agency has rules and procedures that 
describe its obligations to its participants when it assumes deliveries 
of physical instruments. For example, under NSCC's rules governing its 
continuous net settlement (``CNS'') system, NSCC becomes the contra-
party for settlement purposes at the point NSCC's trade guarantee 
attaches, thereby assuming the obligation of its members that are 
receiving securities to receive and pay for those securities, and the 
obligation of members that are delivering securities to make the 
delivery. Unless NSCC has invoked its default rules, NSCC is not 
obligated to make those deliveries until it receives from members with 
delivery obligations deliveries of such securities; rather, deliveries 
that come into CNS ordinarily are promptly redelivered to parties that 
are entitled to receive them through an allocation algorithm. Members 
are obligated to take and pay for securities allocated to them in the 
CNS process. NSCC's rules also provide mechanisms allowing receiving 
members a right to receive high priority in the allocation of 
deliveries, and also permit a member to buy-in long positions that have 
not been delivered to it by the close of business on the scheduled 
settlement date.

[[Page 66270]]

b. Participant Access (Practices as They Relate to Rules 17Ad-22(b)(5)-
(7))
    To address credit risk management, clearing agencies establish 
requirements for participants' financial resources, creditworthiness, 
and operational capability, and maintain procedures to ensure ongoing 
compliance with their rules. In its regulatory capacity overseeing 
clearing agencies, Commission staff has observed that applicants for 
clearing agency membership must demonstrate standards of financial 
responsibility, operational capability and character. Specific criteria 
used by clearing agencies address the extent and nature of the business 
the applicant intends to conduct through the clearing agency and the 
applicant's capital resources and financial stability, including 
factors bearing on its financial capability to meet its projected 
clearing agency obligations.\544\
---------------------------------------------------------------------------

    \544\ See, e.g., International Monetary Fund, Publication of 
Financial Sector Assessment Program Documentation--Detailed 
Assessment of Observance of the NSCC's Observance of the CPSS-IOSCO 
Recommendations for Central Counterparties (2010), at 6-8, available 
at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf; IMF's 
Detailed Assessment of Observance of the Fixed Income Clearing 
Corporation--Government Securities Division's Observance with the 
CPSS-IOSCO Recommendations for Central Counterparties, performed in 
connection with the Financial Sector Assessment Program of the 
United States in 2010, at 6-8, available at www.imf.org/external/pubs/ft/scr/2010/cr10130.pdf.
---------------------------------------------------------------------------

    As of December 31, 2011, registered CCPs (including those clearing 
nontraditional securities such as credit default swaps) had the 
following numbers of members:

 FICC--302 members
 NSCC--187 full members; 647 limited members
 OCC--120 members
 CME--64 members
 ICE Clear Credit--27 members
 ICE Clear Europe--60 members

CCPs for traditional securities already have rules regarding access and 
membership. All CCPs for traditional securities allow non-dealer 
members, and none of them have minimum portfolio size or trading volume 
thresholds.\545\ In addition, the minimum capital requirements to 
access these CCPs range from $500,000 to $10,000,000.
---------------------------------------------------------------------------

    \545\ See infra discussion of Rules 17Ad-22(b)(5), (6) and (7) 
in Section V.C.5 (benefits and costs of broad access requirements 
and non-dealer membership).
---------------------------------------------------------------------------

    Certain clearing agencies that provide CCP services for security-
based swap transactions, however, have required members to have 
significant minimum portfolio sizes or trading volumes, meet 
significantly higher minimum capital requirements, and require members 
to operate a dealer business. Such requirements may present challenges 
to new liquidity providers in the relevant market. The CCPs argue that 
these requirements are necessary to mitigate the risk exposure of the 
CCP in the event of default by a clearing member.\546\ For example, 
because markets for credit default swaps are generally less liquid than 
markets for exchange-traded derivatives, traditional procedures for a 
CCP to handle a member default may not be effective. The traditional 
procedures for handling a default, which are used by CCPs for most 
exchange-traded derivatives, call for the CCP to terminate all of its 
contracts with the defaulting participant and promptly enter the market 
and replace the contracts, so as to hedge against further losses on the 
open positions created by termination of the defaulter's contracts. But 
if the markets for the contracts cleared by the CCP are illiquid, 
prompt replacement of the contracts may induce adverse price movements, 
especially if the defaulting participant's positions are large. 
Consequently, the application of traditional default procedures to 
illiquid credit default swaps contracts may entail significant risk to 
the CCP.
---------------------------------------------------------------------------

    \546\ See generally Bank for International Settlements, New 
Developments in Clearing and Settlement Arrangements for OTC 
Derivatives (Mar. 2007), at 27-29.
---------------------------------------------------------------------------

    To address this potential risk, these CCPs developed a default 
management process that requires traders from their clearing members to 
be seconded to the CCP to manage the defaulter's portfolio. They would 
be charged with neutralizing the market risk in the portfolio by 
entering into new OTC derivative contracts with non-defaulting clearing 
members. Once neutralized as much as possible, the portfolio would be 
divided and auctioned to non-defaulting members. The CCP would 
determine a reservation price for the auction, and if a non-defaulting 
clearing member's bid exceeds that reservation price, the auction would 
be deemed successful. If not, the auction would fail. In the event of a 
failed auction, the portfolio would be divided among the non-defaulting 
clearing members pro rata based on their volumes of business. Under 
this process, a non-defaulting CCP participant would bear the risk of 
entering the markets to hedge open positions created by a default only 
if it is a successful bidder or if one or more auctions fail and it is 
assigned positions because it has outstanding positions with the CCP.
    This process creates a tension between the need for effective 
default management procedures and the maintenance of fair and open 
access to a CCP's services. Because of the stringent capital and other 
requirements imposed by the CCP's membership standards, membership in a 
CCP clearing security-based swaps generally has been limited to very 
large dealers, those meeting the outstanding swap portfolio amount and 
capital requirements. Current members may also have an incentive to 
exclude new members, either to manage counterparty risk or to block 
competitors. Being a member of a CCP may provide a competitive boost to 
a new member that is a smaller dealer by allowing the CCP's 
creditworthiness to be substituted for that of the new member. 
Requirements that prevent smaller dealers from entering as new members 
may, therefore, undermine competition and the entry of new liquidity 
providers in the relevant market. Indeed, one committee argues that 
access criteria in credit default swaps have had the effect of 
excluding market participants such as mid-tier financial institutions 
and buy-side firms from direct access to CCPs.\547\ While such 
requirements have to date been adopted only by CCPs that engage in the 
clearance and settlement of credit default swaps, the Commission 
believes that preventing the introduction of such requirements also may 
be an important consideration for other types of instruments.
---------------------------------------------------------------------------

    \547\ See Committee on the Global Financial System, The 
Macrofinancial Implications of Alternative Configurations for Access 
to Central Counterparties in OTC Derivatives Markets (Nov. 2011), at 
9.
---------------------------------------------------------------------------

c. Disclosure of Financial Information (Practices as They Relate to 
Rule 17Ad-22(c))
    Currently, there is no rule requirement under the Exchange Act or 
Commission rule that mandates clearing agencies to record and maintain 
information about their financial resources. Nevertheless, as part of 
their ordinary risk management procedures developed in consultation 
with their members, clearing agencies produce at least quarterly 
internal reports regarding the ability of the CCP to withstand a 
default by the participant (or two participants) to which the clearing 
agency has the largest exposure in extreme but plausible market 
conditions. In addition, as part of the Commission's supervision, 
oversight and monitoring of clearing agencies, the Commission staff can 
obtain such information on request. However, clearing agencies do not 
all currently

[[Page 66271]]

record and maintain documentation that explains the methodology used to 
compute their financial resource requirements as required by Rule 17Ad-
22(b)(3).
    Commission staff guidance to clearing agencies provides that 
clearing agencies should provide, within 60 days following the close of 
the clearing agency's fiscal year, audited annual financial statements 
to those participants who have made clearing fund contributions and/or 
have money and/or securities in the clearing agency's systems.\548\ 
With one exception, the clearing agencies report their accounting 
information in U.S. GAAP.\549\ At present, clearing agencies publish 
annual audited financial statements on their respective Web sites and 
provide unaudited quarterly and annual audited financial statements to 
their members.\550\ All the clearing agencies currently have their 
financial statements audited in accordance with the standards of the 
PCAOB by a registered public accounting firm, and when the financial 
statements are posted on their Web sites, the clearing agencies include 
the report of the auditor.
---------------------------------------------------------------------------

    \548\ See Exchange Act Release No. 16900 (June 17, 1980). 
Because BSECC and SCCP do not conduct clearance and settlement 
operations they do not post audited financial statements. See supra 
note 438.
    \549\ ICE Clear Europe posts financial statements in UK GAAP.
    \550\ See DTC's Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties (Dec. 12, 2011), 
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf; NSCC's Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties (Nov. 14, 2011), 
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf; FICC/GSD's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Dec. 15, 2011), 
available at http://www.dtcc.com/legal/compliance/FICC_Self-Assessment.pdf.
---------------------------------------------------------------------------

d. Comparison of Current Practices and Rule to CPSS-IOSCO 
Recommendations as Related to Rules 17Ad-22(b)(1)-(3) and (d)
    In 2009, based upon an agreement reached with the U.S. Department 
of Treasury, the operations of several U.S. clearing agencies were 
assessed by independent assessors from the IMF against the CPSS-IOSCO 
Recommendations.\551\ The IMF's assessments supported a finding of full 
or broad observance of the CPSS-IOSCO Recommendations by each of the 
clearing agencies registered with the Commission at that time. Further, 
CME, ICE Clear Credit and ICE Clear Europe represented to the 
Commission that they met the standards set forth in the RCCP when they 
sought to obtain an exemption from the Commission to provide CCP 
services for credit default swaps transactions.\552\ Only one CCP, OCC, 
has not either been subject to an assessment using the RCCP or publicly 
stated its view on whether it complies with the RCCP.\553\ Rules 17Ad-
22(b)(1), (2), (3) and (d) are largely modeled on the CPSS-IOSCO 
Recommendations and therefore are largely consistent with observed 
practices.
---------------------------------------------------------------------------

    \551\ See supra note 183.
    \552\ See generally Securities Exchange Act Release No. 60372 
(July 23, 2009), 74 FR 37748 (July 29, 2009) (temporary exemptions 
in connection with CDS clearing by ICE Clear Europe); Securities 
Exchange Act Release No. 60373 (July 23, 2009), 74 FR 37740 (July 
29, 2009) (temporary exemptions in connection with CDS clearing by 
Eurex Clearing AG); Securities Exchange Act Release No. 59578 (Mar. 
13, 2009), 74 FR 11781 (Mar. 19, 2009) (``March 2009 CME order'') 
and Securities Exchange Act Release No. 61164 (Dec. 14, 2009), 74 FR 
67258 (Dec. 18, 2009) (``December 2009 CME order'') (temporary 
exemptions in connection with CDS clearing by CME); Securities 
Exchange Act Release No. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 
2009), Securities Exchange Act Release No. 61119 (Dec. 4, 2009), 74 
FR 65554 (Dec. 10, 2009), and Securities Exchange Act Release No. 
61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010) (temporary 
exemptions in connection with CDS clearing by ICE Trust U.S. LLC).
    \553\ Nevertheless, the Commission has approved a proposed rule 
change by OCC that revised its clearing fund formula so that it 
would be the larger of either of the following events: (1) The 
default of the largest single clearing member group; or (2) an event 
involving the near-simultaneous default of two randomly-selected 
clearing member groups. For a more complete description of the 
proposed rule change, see discussion of the costs of Rule 17Ad-
22(b)(3).
---------------------------------------------------------------------------

    The table below maps the requirements of Rules 17Ad-22(b)(1)-(3) 
and (d) to the corresponding CPSS-IOSCO Recommendations.
---------------------------------------------------------------------------

    \554\ RCCP Recommendation 5: Financial Resources states that 
``[a] CCP should 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.'' The explanatory note states that this should be viewed 
as a minimum standard and that planning by a CCP should consider the 
potential for two or more participants to default in a short time 
frame. Rule 17Ad-22(b)(3) requires that a clearing agency that 
provides CCP services maintain sufficient financial resources to 
withstand, at a minimum, a default by the participant family to 
which it has the largest exposure in extreme but plausible market 
conditions; provided that a security-based swap clearing agency 
shall maintain sufficient financial resources to withstand, at a 
minimum, a default by the two participant families to which it has 
the largest exposures in extreme but plausible market conditions.

                        COMPARISON OF RULE 17Ad-22 TO CPSS-IOSCO RCCP AND RSSS STANDARDS
----------------------------------------------------------------------------------------------------------------
           Rule 17Ad-22                                       CPSS-IOSCO RCCP and RSSS
----------------------------------------------------------------------------------------------------------------
17Ad-22 (b)(1): Measurement and     RCCP Recommendation 3.
 management of credit exposures.
17Ad-22 (b)(2):Margin requirements  RCCP Recommendation 4.
17Ad-22 (b)(3): Financial           RCCP Recommendation 5.\554\
 resources.
17Ad-22 (d)(1): Transparent and     RCCP Recommendation 1 and RSSS Recommendation 1.
 enforceable rules.
17Ad-22 (d)(2): Participation       RCCP Recommendation 2 and RSSS Recommendation 2.
 requirements.
17Ad-22 (d)(3): Custody of assets   RCCP Recommendation 7 and RSSS Recommendation 7.
 and investment risk.
17Ad-22 (d)(4): Identification and  RCCP Recommendation 8 and RSSS Recommendation 11.
 mitigation of operational risk.
17Ad-22 (d)(5): Money settlement    RCCP Recommendation 9 and RSSS Recommendation 10.
 risks.
17Ad-22 (d)(6): Cost-effectiveness  RCCP Recommendation 12 and RSSS Recommendation 15.
17Ad-22 (d)(7): Links.............  RCCP Recommendation 10 and RSSS Recommendation 19.
17Ad-22 (d)(8): Governance........  RCCP Recommendation 13 and RSSS Recommendation 13.
17Ad-22 (d)(9): Information on      RCCP Recommendation 14 and RSSS Recommendation 17.
 services.
17Ad-22 (d)(10): Immobilization     RSSS Recommendation 6.
 and dematerialization of
 securities certificates.
17Ad-22 (d)(11): Default            RCCP Recommendation 6.
 procedures.
17Ad-22 (d)(12): Timing of          RSSS Recommendation 8.
 settlement finality.
17Ad-22 (d)(13): Delivery versus    RSSS Recommendation 7.
 payment.
17Ad-22 (d)(14): Controls to        RSSS Recommendation 9.
 address participants' failure to
 settle.
17Ad-22 (d)(15): Physical delivery  RCCP Recommendation 10.
 risks.
----------------------------------------------------------------------------------------------------------------


[[Page 66272]]

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

1. Overview
    The purpose of each rule being adopted today is to enhance the 
regulatory framework for registered clearing agencies. This regulatory 
framework will facilitate ongoing compliance with the statutory 
requirements that clearing agencies have rules that facilitate the 
prompt and accurate clearance and settlement of securities transactions 
and derivative agreements, contracts and transactions for which they 
are responsible, and safeguard funds and securities. The rules do so by 
requiring certain minimum standards. The Commission believes that these 
requirements will help ensure resilient and cost-effective clearing 
agency operations as well as promote transparency that would 
consequently support confidence among market participants in clearing 
agencies' ability to serve as efficient and financially stable 
mechanisms for clearance and settlement and to facilitate capital 
formation.
    In addition, the rules relating to membership requirements will 
help facilitate broad participation and open access to clearing 
agencies. If the rules enhance market participation by investors, the 
rules may thereby increase price competition, discovery, and price 
efficiency in the securities cleared by the clearing agency.
    Taken together, the rules are largely consistent with existing 
industry practices. In particular, Rules 17Ad-22(b)(1)-(3) and (d) are 
modeled on the CPSS-IOSCO Recommendations, which have been in place 
since 2004 and are generally observed by all clearing agencies. Rule 
17Ad-22(c)(2) would codify the existing practice of most registered 
clearing agencies of maintaining certain financial information on their 
Web sites. Registered CCPs already disclose their annual audited 
financial statements on their Web sites, and all except for one 
registered CCP prepare such financial statements using U.S. GAAP or 
IFRS.\555\ By codifying existing practices, the rules ensure that these 
benefits are being achieved with minimal need for change or for 
disruption to the affected industry, while also providing new entrants 
with legal certainty and transparency in meeting regulatory standards. 
At the same time, the rules have been written to accommodate changes in 
technology and market developments. Lastly, Rules 17Ad-22(b)(4) and 
(b)(5)-(7) establish new minimum practices for clearing agencies with 
regard to model validation and membership practices respectively.
---------------------------------------------------------------------------

    \555\ ICE Clear Europe posts financial statements prepared in 
accordance with UK GAAP.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission identified potential costs 
and benefits resulting from Rule 17Ad-22, as proposed, and requested 
comment on all aspects of the cost-benefit analysis, including the 
identification and assessment of any costs and benefits that were 
discussed in the analysis.
    The Commission carefully considered all comments received on the 
Proposing Release. The comments are discussed above in Section III in 
relation to each part of Rule 17Ad-22. In particular, the Commission 
carefully considered comments setting forth alternatives to the 
requirements contained in Rule 17Ad-22. The discussion immediately 
below takes into account the alternatives proposed by commenters. 
Several commenters argued that Rule 17Ad-22(d) should not apply to 
entities that perform certain post-trade processing services (i.e., 
comparison of trade data, collateral management and tear-up/
compression).\556\ In response to those comments, the Commission has 
limited the scope of Rule 17Ad-22 to clearing agencies that are 
registered with the Commission.
---------------------------------------------------------------------------

    \556\ See generally TriOptima Letter; Markit (April) Letter; 
Markit (July) Letter; MarkitSERV (April) Letter; MarkitSERV (July) 
Letter; Omgeo Letter.
---------------------------------------------------------------------------

    As discussed above, many of the provisions in Rule 17Ad-22 are 
modeled on the CPSS-IOSCO Recommendations. As a general alternative to 
prescribing its own requirements under Rule 17Ad-22, the Commission 
considered requiring registered clearing agencies to perform self-
assessments using the CPSS-IOSCO Recommendations. This approach would 
have been similar to the Board's amendment to its Payment System Risk 
Policy Statement that directed certain systemically important entities 
to conduct self-assessment using the CPSS-IOSCO Recommendations.\557\ 
The Commission decided against this alternative because the Commission 
believes that it would be more appropriate for the Commission to 
require registered clearing agencies to conduct assessments against 
Commission rules because the Commission's regulatory approach relies on 
examining and inspecting for compliance with, and, if necessary, 
enforcing, a clear set of rules. Lastly, the Commission also considered 
alternatives to each of the individual provisions of Rule 17Ad-22, 
which are discussed in more detail below.
---------------------------------------------------------------------------

    \557\ See supra note 33.
---------------------------------------------------------------------------

    The Commission believes the resulting revised regulatory framework 
should enhance confidence in the market and better serve market 
participants. With the adoption of these rules, clearing agencies will 
be well-positioned to withstand market volatility and evolve with 
market developments and technological advancements. Establishing rules 
that are consistent with current practice minimizes up-front costs and 
provides a good starting point for promoting appropriate risk 
management practices. As clearing agency practices evolve over time in 
response changes in technology, legal requirements and other factors, 
clearing agencies may need to make appropriate updates and improvements 
to their operations and risk management practices, and as a result, 
actual costs of ongoing compliance with Rule 17Ad-22 may differ from 
the estimates discussed below.
    The following addresses the entire rule and each rule provision 
being adopted today, its purpose, benefits and costs, and the impact of 
the rule on efficiency, competition and capital formation.\558\

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

    \558\ Section 3(f) of the Exchange Act requires the SEC, 
whenever it engages in rulemaking pursuant to the Exchange Act and 
is required to consider or determine 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. In addition, Section 
23(a)(2) of the Exchange Act requires the SEC, when adopting rules 
under the Exchange Act, to consider the impact such rules would have 
on competition. Section 23(a)(2) of the Exchange Act also prohibits 
the SEC from adopting any such rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act.
---------------------------------------------------------------------------

2. Purpose of Rule 17Ad-22
    The adoption by the Commission of Rule 17Ad-22 should benefit the 
U.S. financial markets in several ways. Because market participants and 
regulatory authorities are familiar with the CPSS-IOSCO Recommendations 
upon which Rule 17Ad-22 is based, the provisions being adopted today 
will increase the consistency among regulatory frameworks worldwide and 
thus diminish the opportunities for regulatory arbitrage. Since their 
publication in 2001, and 2004, respectively, the RSSS and RCCP have 
been used by the World Bank and IMF in numerous technical assistance 
and FSAP missions.\559\ Regulators from

[[Page 66273]]

multiple jurisdictions also have assessed the operations of clearing 
organizations using the RSSS and RCCP and incorporated them into their 
regulatory frameworks.\560\ The CPSS-IOSCO Recommendations have been 
used as a recognized standard for market participants and regulators to 
compare the operations of CCPs and CSDs.
---------------------------------------------------------------------------

    \559\ Between 2000 and 2009, 35 securities settlement systems 
were assessed against the RSSS in 22 countries during FSAP and FSAP 
update missions. See Presentation by Massimo Cirasino, World Bank, 
and Christine Sampic, IMF, Financial Infrastructure Week, Rio de 
Janeiro, Brazil (Mar. 15, 2011).
    \560\ For example, the Board also has proposed a rule that is 
modeled on the CPSS-IOSCO Recommendations and substantially similar 
to Rule 17Ad-22. See 76 FR 18452 (Apr. 4, 2011).
---------------------------------------------------------------------------

    The establishment of consistent standards for CCP and CSD 
operations is an important goal that underpinned the enactment of 
Section 17A of the Exchange Act. When Congress adopted Section 17A, as 
part of the 1975 Amendments to the Securities Act (``1975 
Amendments''), it determined that the implementation of linked systems 
for clearance and settlement and uniform standards would reduce 
unnecessary costs and increase the protection of investors and persons 
facilitating transactions by and acting on behalf of investors. The 
legislative history noted that when broker-dealers must deal with a 
dozen or more different clearing and depository systems in their daily 
securities operations, the result is excessive cost and poorer service 
to investors.\561\ Rule 17Ad-22 establishes minimum standards for the 
operations and risk management practices for clearing agencies that are 
consistent with the standards for CCPs and CSDs operating domestically 
and in other jurisdictions.
---------------------------------------------------------------------------

    \561\ S. Rep. 94-75, 94th Cong., 1st Sess., at 184 (1975).
---------------------------------------------------------------------------

    Furthermore, Rule 17Ad-22 will have the benefit of serving as a 
minimum benchmark for the Commission in making its required 
determinations regarding the rules of registered clearing agencies. For 
example, for a clearing agency to be registered under Section 17A, the 
Commission must find that it has the ability to facilitate the prompt 
and accurate clearance and settlement of transactions, to safeguard 
investor funds and securities, to remove impediments to and to perfect 
the mechanism of a national clearance and settlement system, and in 
general to protect investors and the public interest. Also, the 
clearing agency's rules must provide adequate access to qualified 
participants, fair representation of shareholders and participants, 
equitable pricing, discipline of participants, and must not impose any 
undue burden on competition.
    Rule 17Ad-22 will also have the benefit of augmenting the 
Commission's ability to regulate clearing agencies. Because clearing 
agencies are SROs, after a clearing agency has been registered with the 
Commission, the clearing agency must submit proposed rule changes to 
the Commission for approval under Exchange Act Rule 19b-4. To approve a 
clearing agency's proposed rule change, the Commission must find that 
it complies with Section 17A. The minimum benchmark established by Rule 
17Ad-22 will help ensure and demonstrate that the existing operations 
of clearing agencies and their proposed rule changes meet or exceed 
international standards while remaining appropriate for the individual 
clearing agency. As a result, a clearing agency cannot use Rule 17Ad-22 
to reduce the strength of its operational standards or adopt a new 
policy or procedure that the Commission believes does not meet the 
requirements of Section 17A.
    Finally, the Commission believes Rule 17Ad-22 will help market 
participants be in a position to better compare the operations of U.S. 
clearing agencies with non-U.S. clearing organizations. In addition, 
the Commission's adoption of Rule 17Ad-22 will lead to greater 
confidence, both domestically and internationally, in the resiliency of 
clearing agencies and their ability to support the U.S. financial 
markets. The Commission's adoption of Rule 17Ad-22 may also reduce some 
of the potential regulatory burden for CCPs and CSDs that may be 
dually-regulated by the SEC and another domestic or foreign regulator 
because it is modeled on standards already employed by other regulatory 
authorities.
    Below we discuss a number of costs and benefits that are related to 
the rule being adopted today. Many of these costs and benefits are 
difficult to quantify with any degree of certainty, especially as 
practices at clearing agencies are anticipated to evolve and 
appropriately adapt to changes in technology and market developments. 
In addition, the extent to which the increased ability to enforce 
standards that are incorporated in the rule will help limit future 
risks is unknown. Moreover, this difficulty is aggravated by the fact 
that limited public data exists that is related to a clearing agency's 
risk management practices that could assist in quantifying certain 
costs. Therefore, much of the discussion is qualitative in nature but 
where possible, we quantify the costs.
    Many, but not all, of the costs of the rule involve a collection of 
information, and these costs and burdens were discussed in the 
Paperwork Reduction Act section. When monetized \562\ those estimated 
burdens and costs total $3.7 million \563\ in initial costs and $10.1 
million \564\ in annual ongoing costs. A detailed discussion of other 
economic

[[Page 66274]]

costs of the rulemaking is provided below.
---------------------------------------------------------------------------

    \562\ To monetize the internal costs the Commission staff used 
data from the SIFMA publications, Management and Professional 
Earnings in the Security Industry--2010, and Office Salaries in the 
Securities Industry--2010, modified by the Commission staff to 
account for an 1800 hour work-year and multiplied by 5.35 
(professionals) or 2.93 (office) to account for bonuses, firm size, 
employee benefits and overhead.
    \563\ The total initial cost was calculated as follows: [for 
Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) (Assistant General Counsel 
for 60 hours at $430 per hour) + (Compliance Attorney for 85 hours 
at $320 per hour) + (Computer Operations Department Manager for 15 
hours at $367 per hour) + (Senior Business Analyst for 15 hours at 
$232 per hour) = $61,985 x 10 respondents = $619,850]; + [for Rule 
17Ad-22(b)(4) ((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 9 respondents = $682,443) + ((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 9 respondents = $339,120) = $1,021,563]; 
+ [for Rules 17Ad-22(b)(5)-(7) (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 9 respondents = $682,443]; + [for Rule 17Ad-22(c) 
((Assistant General Counsel for 60 hours at $430 per hour) + 
(Compliance Attorney for 85 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) = $66,777 x 
10 respondents = $667,770) + ((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 10 respondents = $376,800) = $1,044,570] + 
[for Rule 17Ad-22(c)(2) (Senior Accountant for 500 hours at $198 per 
hour) x 4 respondents = $396,000] = $3,764,426.
    \564\ The total ongoing cost was calculated as follows: [for 
Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) (Compliance Attorney for 60 
hours at $320 per hour = $19,200 x 10 respondents = $192,000)]; + 
[for Rule 17Ad-22(b)(4) ((Compliance Attorney for 60 hours at $320 
per hour = $19,200 x 9 respondents = $172,800) + (2 Independent 
Consultants for 30 hours per week at $600 per hour = $36,000 per 
week x 12 weeks = $432,000 x 9 respondents = $3,888,000) = 
$4,060,800]; + [for Rules 17Ad-22(b)(5)-(7) (Compliance Attorney for 
60 hours at $320 per hour = $19,200 x 9 respondents = $172,800]; + 
[for Rule 17Ad-22(c) (Compliance Attorney for 60 hours at $320 per 
hour = $19,200 x 10 respondents = $192,000)]; [for Rule 17Ad-
22(c)(1) (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 = $4,216 per year x 9 
respondents = $37,944]; [for Rule 17Ad-22(c)(2) (Senior Accountant 
for 250 hours at $198 per hour) x 10 respondents = $495,000) + 
(Independent Audit Fee = $500,000 per year x 10 respondents = 
$5,000,000)] = $10,150,544.
---------------------------------------------------------------------------

    Many parts of Rule 17Ad-22 are consistent with current practice and 
therefore should not impose significant costs on registered clearing 
agencies to comply with those provisions. As noted above, Rule 17Ad-22 
also will have the benefit of augmenting the Commission's ability to 
regulate clearing agencies. Rule 17Ad-22 should improve access to 
security-based swap clearing agencies. The extent to which security-
based swap participants that will be eligible under new access 
requirements choose to become members is unknown and we are unaware of 
empirical data on the potential impact that this will have on 
competition in the security-based swap market. Therefore, the 
quantification of this benefit is not feasible.
3. Definitions (Rules 17Ad-22(a)(1)-(5))
a. Rule 17Ad-22(a)(1)
    Rule 17Ad-22(a)(1) would define ``central counterparty'' 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. The definition contained in 
this rule is generally consistent with the common usage and 
understanding of that term.\565\ The costs and benefits associated with 
the impacts of the definition are incorporated in the discussion below 
related to the costs and benefits of the provisions where the 
definition is used.
---------------------------------------------------------------------------

    \565\ See RCCP, supra note 33, Annex 5: Glossary.
---------------------------------------------------------------------------

b. Rules 17Ad-22(a)(2) and (5)
    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.\566\ 
Rule 17Ad-22(a)(5) would define ``net capital,'' for the limited 
purpose of 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.\567\ The costs and benefits associated with the impacts of the 
definition are incorporated in the discussion below related to the 
costs and benefits of the provisions where the definition is used.
---------------------------------------------------------------------------

    \566\ ``[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).
    \567\ As appropriate, the clearing agency may develop risk 
adjusted capital calculations for prospective clearing members that 
are not broker-dealers.
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c. Rule 17Ad-22(a)(3)
    Rule 17Ad-22(a)(3) would define ``participant family,'' for the 
limited purposes of 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. The Commission 
is not narrowing the definition of control in this context to mean 
ownership of 50% or more of the voting securities or other interests in 
a participant, as requested by one commenter.\568\ We believe the more 
appropriate evaluation of control is based on the relation between the 
entities and the power, directly or indirectly, to direct the 
management or policies of a company, whether through ownership of 
securities, by contract, or otherwise. In conducting this evaluation, 
clearing agencies should also be guided by the definition of 
``control'' set forth in Rule 405 under the Exchange Act, using the 
information available to them. The costs and benefits associated with 
the impacts of the definition are incorporated in the discussion below 
related to the costs and benefits of the provisions where the 
definition is used.
---------------------------------------------------------------------------

    \568\ See supra note 107 and accompanying text.
---------------------------------------------------------------------------

d. Rule 17Ad-22(a)(4)
    Rule 17Ad-22(a)(4) would define ``normal market conditions'' for 
the limited purposes of 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.\569\
---------------------------------------------------------------------------

    \569\ The definition of normal market conditions in Rule 17Ad-
22(a)(4) is consistent with the corresponding explanation 
established in the CPSS-IOSCO Recommendations. See RCCP, supra note 
33, at 21 (explanatory note number 1).
---------------------------------------------------------------------------

    The rule conforms to the generally recognized standard of ``normal 
market conditions'' as defined in the RCCP and is the benchmark for 
most CCPs' margin methodologies, many of which use risk-based models to 
ensure coverage at a 99% confidence interval, at minimum, over a 
designated time horizon.\570\ The standard also comports with the 
international standard for bank capital requirements established by the 
Bank for International Settlements, which requires banks to measure 
market risks at a 99% confidence interval when determining regulatory 
capital requirements.\571\ The costs and benefits associated with the 
impacts of the definition are incorporated in the discussion below 
related to the costs and benefits of the provisions where the 
definition is used.
---------------------------------------------------------------------------

    \570\ See RCCP, supra note 33, Annex 5: Glossary. See also supra 
discussion on 99% confidence interval as an accepted standard for 
measuring market risk in Section II.B.2.b and discussion of current 
industry baselines in Section V.B.
    \571\ See Bank for International Settlements' Basel Committee on 
Banking Supervision, International Convergence of Capital 
Measurement and Capital Standards: A Revised Framework (June 2004), 
available at http://www.bis.org/publ/bcbs107.pdf; see also Darryll 
Hendricks and Beverly Hirtle, New Capital Rule Signals Supervisory 
Shift, available at http://www.bis.org/bcbs/ca/alrequse98.pdf. See 
also supra notes 526-529 and accompanying text.
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4. Risk Management Requirements for CCPs (Rules 17Ad-22(b)(1)-(4))
    Rules 17Ad-22(b)(1)-(4) concern risk management requirements for 
clearing agencies that perform CCP services. In particular, these rules 
will require a clearing agency that provides CCP services to have 
written policies and procedures reasonably designed to: measure its 
credit exposures at least once a day, use margin requirements to limit 
its exposures to potential losses from defaults by its participants, 
use risk-based models and parameters to set margin requirements and to 
review such requirements at least monthly, maintain sufficient 
financial resources to withstand a default by the two participant 
families, if clearing security-based swaps, or one participant family 
otherwise, to which it has the largest exposure,\572\ and provide for 
an annual model validation process.
---------------------------------------------------------------------------

    \572\ See Rule 17Ad-22(a)(3), supra Section III.B.3 (defining 
``participant family'' for purposes of proposed Rule 17Ad-22(b)(3)).
---------------------------------------------------------------------------

    As described above, these rules are consistent with current 
practice. Registered clearing agencies already have written policies 
and procedures designed to meet these risk management requirements, 
particularly Rules 17Ad-22(b)(1)-(3). While Rules 17Ad-22(b)(1)-(3) 
reflect the CPSS-IOSCO Recommendations, which are observed by all 
clearing agencies, Rule 17Ad-22(b)(4) would establish certain new 
minimum practices for clearing agencies.
     First, Rule 17Ad-22(b)(1) requires that each CCP measure 
its credit exposures at least once per day. This rule codifies the 
current minimum baseline adhered to by the two clearing

[[Page 66275]]

agencies presently registered with the Commission that provide CCP 
services.
     Second, Rule 17Ad-22(b)(2) requires that each CCP collect 
margin from its participants to limit exposures resulting from changes 
in prices or participant positions in current market conditions. This 
margin can also be used to minimize the CCPs losses in the event of a 
participant default. This rule is consistent with the current practice 
of each CCP to calculate daily margin requirements using risk-based 
models to ensure coverage at a 99% confidence interval (i.e., under 
``normal market conditions''), at minimum, over a designated time-
horizon.
     Third, and consistent with Rule 17Ad-22(b)(3), each CCP 
currently maintains 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.\573\ In addition, 
both registered CCPs clearing security-based swap transactions maintain 
additional financial resources sufficient to withstand the simultaneous 
default by the two participant families to which the CCPs have the 
largest exposures.
---------------------------------------------------------------------------

    \573\ See, e.g., supra notes 168 and 183.
---------------------------------------------------------------------------

     Fourth, Rule 17Ad-22(b)(4) would ensure that all CCPs have 
annual model validations performed by a qualified person who is free 
from influence from the persons responsible for development or 
operation of the models being validated.
    While not requiring major changes to existing operational practices 
and policies and procedures currently in place at most registered 
clearing agencies, Rules 17Ad-22(b)(1)-(4) provide enforceability to 
minimum standards regarding how clearing agencies manage counterparty 
credit and default risks. One of the primary roles of a CCP is to 
mitigate counterparty credit and default risk. Because of the role 
margin plays in a default, a CCP must have confidence that the 
liquidation value of available margin will be sufficient to cover 
amounts owed by a defaulting participant to the clearing agency, and 
that the margin will be available for liquidation without delay. As 
described in the baseline discussion,\574\ CCPs have mechanisms and 
procedures in place to measure credit exposure. To effectively mitigate 
counterparty credit risk, a CCP must have accurate and timely 
measurements of its credit exposures to each of its counterparties, and 
must impose adequate margin requirements determined by risk-based 
models and parameters. CCPs may be faced with significant and rapid 
changes in counterparty credit exposures.
---------------------------------------------------------------------------

    \574\ See supra Section V.B.2.a.
---------------------------------------------------------------------------

    Frequent measurement of counterparty credit exposures and the use 
of validated risk-based modeling are essential to setting adequate 
margin requirements. A good margin setting methodology will help avoid 
both under- and over-collateralization. Under-collateralization exposes 
a CCP to increased credit risk in the event of a participant default, 
as the CCP may be unable to recover amounts owed to it from the 
participant on an unsecured basis. Incurring losses on a counterparty 
default could disrupt the operations of the clearing agency as well as 
its non-defaulting participants by exposing them to unanticipated 
liabilities. These disruptions could negatively impact price efficiency 
and capital formation if distressed liquidations result in prices away 
from fundamental values for significant periods of time. Over-
collateralization imposes unnecessary costs on trading by tying up 
clearing member assets that could otherwise be used more efficiently, 
harming allocative efficiency and capital formation. The Commission 
believes that Rules 17Ad-22(b)(1)-(4) creates standards to mitigate a 
CCP's risks associated with counterparty credit exposures and defaults.
    Rules 17Ad-22(b)(1)-(4) acknowledge that appropriate risk 
management will vary based on a number of factors relating to the 
markets and products a CCP serves. Subject to minimum standards, the 
rules permit each clearing agency the flexibility to develop the most 
effective and economically efficient risk measurement and risk-based 
modeling approaches for each of its unique markets and products to 
achieve an optimal level of risk mitigation. By setting only a minimum 
standard, the rules also allow each CCP to adapt its risk management 
strategies as needed in response to dynamic market conditions rather 
than locking the CCP into a fixed set of risk mitigation rules. The 
minimum standards also prevent a CCP from establishing risk monitoring 
procedures below a baseline in an effort to reduce costs and gain a 
competitive advantage.
    The Commission believes that credit exposures should be measured at 
least once a day because a clearing agency that did not do so would not 
be able to effectively manage its risk. However, the Commission 
believes that it cannot reasonably determine the most appropriate 
frequency for CCPs to monitor their risk exposures in all 
circumstances. The minimum standards in Rules 17Ad-22(b)(1)-(4) are 
intentionally written to comply with CPSS-IOSCO Recommendations and 
limit systemic risk while not precluding entry to potential new entrant 
CCPs. Each CCP is exposed to participants in different markets 
characterized by different trading patterns, volumes, liquidity, 
transparency and other unique market characteristics. Rules 17Ad-
22(b)(1)-(4) provide each CCP the flexibility to tailor its risk 
management practices to each of its unique markets and products, 
allowing it to develop the most economically efficient and effective 
risk mitigation strategies possible.
    The Commission considered the range of practices at registered 
clearing agencies with respect to monitoring risk exposures and 
recognizes that there is a risk that by setting the minimum standards 
according to the highest level of current market practice, the 
standards could be too high for some potential market conditions or 
future security types. This could result in sub-optimal risk management 
practices for a period in the future to the extent such factors are not 
appropriately recognized by the Commission.
    The Commission believes it is appropriate that CCPs clearing 
security-based swaps are held to the higher minimum standard in Rule 
17Ad-22(b)(3) than CCPs that do not clear security-based swaps. In 
particular, the Commission believes that the requirement to maintain at 
a minimum financial resources capable of withstanding the default of 
its two largest participant families as opposed to only its largest 
participant family is at this time appropriate for clearing security-
based swaps but not for other securities because of the unique and 
heightened risks posed by credit default swaps relative to traditional 
securities. Credit default swaps pose additional risk management 
challenges in that their value can change by a large amount in an 
extremely short time interval (i.e., they are subject to significant 
jump-to-default risk).\575\ Unlike many equity and fixed income 
securities, but similar to other derivative contracts, a CCP's 
obligation when clearing credit default swaps does not end when the 
transaction settles, but at its expiration. In addition, unlike other 
products that also exhibit these characteristics, credit default swaps 
are unique in their size relative to their underlying markets. Recent 
research shows that notional outstanding in credit default swaps are 
often close to or greater than the

[[Page 66276]]

outstanding value of the underlying instruments.\576\
---------------------------------------------------------------------------

    \575\ See supra note 162.
    \576\ See supra note 163.
---------------------------------------------------------------------------

    Several other factors also complicate risk modeling for credit 
default swaps. CCPs have only recently introduced clearing for 
security-based swaps, so the risk models used by CCPs have not yet been 
stressed by a substantial range of market conditions. In addition, many 
security-based swaps are relatively illiquid, which complicates the 
default management process. For example, more than 98% of single-name 
credit default swap reference entities trade less than 10 times per 
day.\577\ Low liquidity typically leads to wider bid-ask spreads, 
greater price impact of trades, and potentially higher costs when 
finding replacements for defaulted positions.
---------------------------------------------------------------------------

    \577\ See Memorandum by the Commission's Division of Risk, 
Strategy, and Financial Innovation, Security-Based Swap Block Trade 
Definition Analysis (Jan. 13, 2011), available at http://www.sec.gov/comments/s7-34-10/s73410-12.pdf. See also Che Sidanius 
and Anne Wetherilt, Thoughts on Determining Central Clearing 
Eligibility of OTC Derivatives, (Bank of England, Financial 
Stability Paper, No. 14, Mar. 2012), available at http://www.bankofengland.co.uk/publications/Documents/fsr/fs_paper14.pdf. 
The authors report that in the six months ending February 2012, 90% 
of their sample of 1,000 single name CDS contracts trade an average 
of less than 50 times per week.
---------------------------------------------------------------------------

    The Commission recognizes that requiring a different standard for 
CCPs for security-based swaps could discourage new entrants from 
entering into the market for these instruments because of higher 
financial resource requirements relative to other types of instruments. 
In particular, the higher the financial resource requirements, the 
higher the costs to establish a new clearing agency, potentially 
resulting in fewer clearing agencies.
    While the Commission is sensitive to the consequences of 
establishing a different standard for CCPs for security-based swaps, 
the Commission believes that the financial resources of a CCP must be 
robust enough to accommodate the risks that are particular to each 
market served--irrespective of whether such analysis results in 
different standards. As described above, the Commission believes that 
Rule 17Ad-22(b)(3) does not represent a change in practice for any CCP 
that currently clears credit default swaps, and to the extent that it 
represents an increased financial resources requirement for potential 
competitors, this increased burden is justified by the greater 
difficulty of risk-management in credit default swaps as opposed to 
traditional securities.\578\ Furthermore, the Commission believes that 
the burdens associated with this provision are minimized as the rule 
permits registered CCPs to comply with the ``cover two'' requirement by 
establishing a separate fund and related procedures for their security-
based swap operations if they prefer this structure to the application 
of the ``cover two'' requirement to the entire legal entity. As 
security-based swap products with different characteristics are 
proposed for clearing over time, the Commission would evaluate risk 
profiles of such products to consider how they would be treated under 
the ``cover two'' standard.
---------------------------------------------------------------------------

    \578\ See CFTC-SEC Staff Roundtable on Clearing of Credit 
Default Swaps (Oct. 2010), at 123, available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission7_102210-transcrip.pdf (Stan Ivanov, ICE Clear Credit stating ``at ICE 
we look at two simultaneous defaults of the two biggest losers upon 
extreme conditions * * *'').
---------------------------------------------------------------------------

    The Commission further recognizes the benefits associated with 
establishing financial resource requirements that are consistent with 
the international standards, such as the benefit of reduced incentives 
for regulatory arbitrage. The Commission notes that the ``cover two'' 
requirement for security-based swaps CCPs is consistent with the 
financial resource requirements for CCPs contained in the FMI Report 
\579\ and in EMIR.
---------------------------------------------------------------------------

    \579\ See FMI Report, Principles 4 and 7, supra note 32.
---------------------------------------------------------------------------

    The Commission believes it is important to codify the practice of 
obtaining an annual model validation to ensure that a CCP can evaluate 
the continued appropriateness of its margin models. Rule 17Ad-22(b)(4) 
also should help CCPs better evaluate their margin models, which should 
promote greater confidence in clearing agencies' risk management 
practices.
    The Commission is also mindful of the costs associated with the 
final rule. In particular, the Commission recognizes that though many 
parts of Rule 17Ad-22 being adopted by the Commission today are a 
codification of usual and customary practices at CCPs and clearing 
agencies, they may still impose costs.
    As noted above, the standards contained in Rule 17Ad-22(b)(1)-(4) 
would impose certain burdens and related costs on respondent clearing 
agencies. As discussed in Section IV.C, based on policies and 
procedures requirements for Regulation NMS, and based on staff 
conversations with industry representatives, the Commission has 
estimated the burdens and related costs of these requirements for 
clearing agencies.
    The clearing agency standards in Rules 17Ad-22(b)(1)-(4) may 
require respondent clearing agencies to review and amend their policies 
and procedures. The standards contained in Rule 17Ad-22(b)(4) also 
would impose one-time costs on clearing agencies to create policies and 
procedures as well as require one-time systems adjustments related to 
the capability to perform an annual model validation. The costs of 
creating these policies are included in the $3.7 million startup cost 
estimates discussed earlier.
    The standards contained in Rules 17Ad-22(b)(1)-(3) also would 
impose ongoing costs on clearing agencies such as monitoring and 
enforcement activities with respect to the policies and procedures the 
registered clearing agency creates in response to the standards. The 
ongoing costs of these monitoring and enforcement activities are 
included in the estimated $10.1 million annual costs discussed 
earlier.\580\ These Rules may also impose additional incremental costs 
related to, for example, employee training, systems testing, and other 
operational considerations designed to ensure both initial and 
continued compliance with such policies and procedures.
---------------------------------------------------------------------------

    \580\ This number also reflects the costs of Rules 17Ad-
22(d)(1)-(15).
---------------------------------------------------------------------------

    The standards contained in Rule 17Ad-22(b)(4) would also impose 
ongoing costs on clearing agencies. For example, the clearing agency 
standards in Rule 17Ad-22(b)(4) would collectively require respondent 
CCPs to perform certain ongoing monitoring and enforcement activities 
with respect to the policies and procedures the clearing agency creates 
in response to the standard and to provide for an annual model 
validation. The Commission believes clearing agencies would hire a 
consulting firm \581\ that dedicates two consultants to the project. 
The costs for the consultants are included in the $10.1 million annual 
paperwork cost discussed earlier. Rule 17Ad-22(b)(4) may also impose 
additional incremental costs associated with employee training, systems 
testing, and other operational considerations designed to ensure 
initial and continued compliance with the clearing agencies model 
validation policies and procedures.
---------------------------------------------------------------------------

    \581\ Currently, the majority of the clearing agencies 
performing model validation employ a consulting firm; the remainder 
of the clearing agencies have created an internal model validation 
group that does not report to the person overseeing the development 
or operation of the models.
---------------------------------------------------------------------------

    Except as noted above, Rules 17Ad-22(b)(1)-(4) establish standards 
that are already largely adhered to in practice by each CCP registered 
with the Commission. Thus, while Rules 17Ad-22(b)(1)-(4) will require 
each currently registered CCP to continue the

[[Page 66277]]

expenditures associated with maintaining current rules, policies, and 
procedures, they should impose limited incremental costs.
    In the Proposing Release, the Commission identified potential costs 
and benefits resulting from Rules 17Ad-22(b)(1)-(4), as proposed, and 
requested comment on all aspects of the cost-benefit analysis, 
including the identification and assessment of any costs and benefits 
that were not discussed in the analysis. Although the Commission did 
not receive any comments on the specific cost-benefit analysis 
contained in the Proposing Release, several commenters raised concerns, 
which are discussed above in Section III.C.1.b, that have a bearing on 
the costs and benefits associated with the rule. In response to these 
comments, the Commission carefully considered alternatives to the 
approach we are adopting in Rule 17Ad-22, including more prescriptive 
alternatives (e.g., specifying how many times a day a clearing agency 
should measure its credit exposures to its participants). However, as 
noted above, clearing agencies match the frequency of credit exposure 
calculations to the horizon of the guarantee they provide. The 
requirement to measure credit exposure at least once per day does not 
preclude more frequent measurement of credit exposure, allowing those 
who guarantee intraday to measure exposures intraday. Therefore, the 
Commission believes the flexibility provided by Rules 17Ad-22(b)(1) and 
(2) appropriately reflects differences in clearing agency models.
    The Commission also considered alternatives to Rule 17Ad-22(b)(3), 
such as (1) requiring each clearing agency, regardless of the 
securities cleared, to maintain sufficient financial resources to 
withstand, at a minimum, a default by the participant family to which 
it has the largest exposure in extreme but plausible market conditions, 
and (2) requiring each clearing agency, regardless of the securities 
cleared, to maintain sufficient financial resources to withstand, at a 
minimum, a default by the two participant families to which it has the 
largest exposure in extreme but plausible market conditions. The 
Commission decided to create separate standards for the two different 
kinds of CCPs because it believes that clearing security-based swaps is 
inherently riskier than clearing other types of securities, as 
discussed above.
    Furthermore, the Commission considered a number of alternatives to 
provisions in Rule 17Ad-22(b)(4). For example, one alternative was to 
be more prescriptive in identifying who could perform the annual model 
validations. The Commission recognizes there is a tradeoff between the 
need for expertise in conducting model validations and the independence 
of the validator. Therefore, Rule 17Ad-22(b)(4) sets a principle that 
allows the clearing agencies to balance this trade-off in a way that 
satisfies the purpose of the validation. The Commission also considered 
alternatives, which would have required that model validations occur 
more or less frequently than annually. The Commission believes that 
requiring model validation at least annually is appropriate because it 
complies with CPSS-IOSCO Recommendations and clearing agencies have 
economic incentives to evaluate their models more frequently if market 
conditions change, whether or not they are required to do so by 
Commission rules.
5. Participant Access Standards for CCPs (Rules 17Ad(b)(5)-(7))
    These rules establish requirements for policies and procedures 
detailing membership practices. Although we believe that these rules 
reflect current practices for some CCPs, they may require a change in 
practice for others. Specifically, Rules 17Ad-22(b)(5), (6) and (7) 
would introduce certain requirements regarding access to CCPs, 
including that each CCP must: (1) Provide the opportunity for a person 
who does not perform any dealer or security-based swap dealer services 
to obtain membership; (2) preclude the use of minimum portfolio size 
thresholds and minimum transaction volume thresholds as conditions to 
membership; and (3) provide the ability to obtain membership to persons 
who maintain net capital equal to or greater than $50 million.
    The Commission is adopting Rules 17Ad-22(b)(5), (6) and (7) to 
establish a regulatory framework for registered CCPs regarding 
membership practices. These rules also address concerns about access to 
central clearing in light of the proposed implementation of mandatory 
clearing requirements around the world.\582\ The Commission believes 
that Rules 17Ad-22(b)(5), (6) and (7) will complement Section 17A of 
the Exchange Act, which requires that a clearing agency shall not be 
registered unless the Commission determines, among other things, that 
the clearing agency's rules do not impose burdens on competition that 
are unnecessary or inappropriate to promote the purposes of the 
Exchange Act \583\ and that the rules are not designed to permit unfair 
discrimination in the admission of participants or among participants 
in the use of the clearing agency.\584\
---------------------------------------------------------------------------

    \582\ See, e.g., CFTC-SEC Staff Roundtable on Clearing of Credit 
Default Swaps (Oct. 2010), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission7_102210-transcrip.pdf.
    \583\ 15 U.S.C. 78q-1(b)(3)(F).
    \584\ 15 U.S.C. 78q-1(b)(3)(G).
---------------------------------------------------------------------------

    As described above, CCPs for securities other than security-based 
swaps generally do not engage in the practices that Rules 17Ad-
22(b)(5), (6), and (7) are designed to prevent. However, CCPs for 
security-based swaps have required members to have a minimum portfolio 
size (e.g., $1 trillion outstanding) or minimum trading volume, meet 
very high minimum capital requirements (e.g., $5 billion), and require 
members to operate a dealer business. Rule 17Ad-22 is designed to 
prohibit these types of practices by all CCPs, irrespective of the 
types of products cleared, by establishing a minimum standard that 
would have the benefit of uniformity for currently registered CCPs and 
any future market entrants.
    CCPs have membership requirements so that the CCPs and their 
members can limit their exposures to less creditworthy market 
participants. However, as noted above, members may have the incentive 
to promote membership requirements that limit access to the CCP for 
competitive reasons. While such requirements have to date been adopted 
only by CCPs that engage in the clearance and settlement of credit 
default swaps, the Commission believes that preventing the introduction 
of such requirements also may be an important consideration for CCPs 
that clear other instruments.\585\ If a clearing agency clears both 
security-based swaps and other securities, Rule 17Ad-22(b)(6) will 
prohibit the clearing agency from denying membership solely because the 
applicant did not maintain a minimum portfolio size or minimum volume 
in security-based swap transactions. The rule is being applied to all 
clearing agencies, regardless of the type of instrument cleared, so 
that an existing or future clearing agency could not use its market 
power to exclude potential applicants for the benefit of its existing 
members or unnecessarily restrict access to central clearing. Indeed, 
the concerns noted above about the incentives to control access to CCPs 
could apply to the clearing of any security. Accordingly, all CCPs, 
regardless of the type of security, will be subject to Rules 17Ad-
22(b)(5), (6), and (7).
---------------------------------------------------------------------------

    \585\ See supra Section V.B.2.b and note 547.
---------------------------------------------------------------------------

    The Commission believes that no registered CCP should deny

[[Page 66278]]

membership solely because a person does not perform any dealer or 
security-based swap dealer services or based on a minimum portfolio 
size or minimum transaction volume thresholds. The Commission does not 
believe that these factors are, by themselves, appropriate indicators 
of whether an applicant should be admitted to membership in a clearing 
agency. The Commission is adopting Rule 17Ad-22(b)(5) to help to foster 
the development of correspondent clearing arrangements that will allow 
market participants that are not dealers or security-based swap dealers 
to obtain access to a CCP, which should have the beneficial result of 
greater competition in and access to central clearing because these 
persons do not execute securities trades for their own account. 
Instead, they provide correspondent clearing services for market 
participants.\586\ As a result, their ability to provide correspondent 
clearing services would tend to increase as competition and transaction 
volumes increased. The Commission further believes that imposing 
minimum thresholds on the size or transaction volume of a participant's 
portfolio would not function as a good indicator of whether the 
participant is able to meet its obligations to a clearing agency.\587\ 
New participants in a CCP that do not initially intend to or have the 
capacity 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 but at lower size or volume 
levels. Accordingly, the Commission believes that Rule 17Ad-22(b)(6) 
will help facilitate the requirement in Section 17A of the Exchange Act 
that the rules of a clearing agency must permit fair and open access to 
qualified participants.
---------------------------------------------------------------------------

    \586\ See supra note 235.
    \587\ Proposed Rule 17Ad-22(b)(6) would not prohibit a clearing 
agency from imposing maximum portfolio sizes or transaction volume 
amounts.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(7) will significantly increase access to clearing 
membership in CCPs that clear credit default swaps while still allowing 
CCPs to maintain what the Commission believes will be sufficient net 
capital standards for members. For example, the rule establishes a 
minimum net capital requirement of $50 million that only approximately 
201 broker-dealers, or four percent of the total number of registered 
broker-dealers, can satisfy today according to broker-dealer data 
available to the Commission. A net capital threshold of $100 million 
would reduce the number of broker-dealers that could meet the standard 
by 73 (36%) to 128 eligible firms, while a further reduction of the net 
capital requirement to $25 million would increase the number of 
eligible broker-dealer firms by 86 (42%) to 287 (6% of all registered 
broker-dealers).\588\ The Commission believes that firms that maintain 
a net capital level of at least $50 million have sufficient financial 
resources to participate at some level in a CCP, provided that they are 
able to comply with other reasonable membership standards, and that the 
increase in the potential pool of clearing members is consistent with 
the Commission's intention of expanding access to clearing.
---------------------------------------------------------------------------

    \588\ As stated above, the $50 million net capital requirement 
affects access to CCPs that clear CDS. The Commission recognizes 
that the number of dealers that clear CDS is significantly smaller 
than the total number of broker-dealers, and that even if Proposed 
Rule 17Ad-22(b)(7) is successful in encouraging the broadening of 
membership in CCPs that clear CDS, the Commission believes the 
number of broker-dealers newly eligible for clearing membership that 
become clearing members as a result of this change is likely to be 
substantially less than 201.
---------------------------------------------------------------------------

    The Commission carefully considered the tradeoffs of selecting a 
lower or higher net capital threshold. A higher net capital requirement 
may permit CCPs to exercise market power for the benefit of members by 
limiting membership to an unduly small group of firms.\589\ This could 
limit competition in the market for supplying dealer services as 
dealers who are CCP members would have an advantage over other dealers. 
It could also increase overall systemic risk by concentrating the 
counterparty risk in relatively few participants. A less restrictive 
capital requirement may also result in incentives for firms that are 
not capable of participating in the default management process of a CPP 
to effectively ``free ride'' on the default services provided by the 
rest of the membership.\590\ The Commission believes that the $50 
million capital requirement appropriately balances these concerns and 
bridges the differences in current membership standards across 
registered clearing agencies. At the same time, the Commission notes 
that having a $50 million capital level does not create a right to 
membership.
---------------------------------------------------------------------------

    \589\ See Craig Pirrong, The Economics of Central Clearing: 
Theory and Practice (ISDA Discussion Papers Series, No. 1, May 
2011), at 28.
    \590\ See id. at 28.
---------------------------------------------------------------------------

    In addition, we note that the $50 million requirement is the same 
as the CFTC's capital requirement for DCO membership.\591\ Establishing 
a different requirement than that adopted by the CFTC could create 
opportunities for regulatory arbitrage and would in effect make one 
regulator's standard irrelevant for dually registered clearing agencies 
like CME, ICE Clear Credit and OCC. Furthermore, some of these 
competing concerns are addressed by the flexibility contemplated by 
Rule 17Ad-22(b)(7), as it permits each clearing agency to develop 
scalable policies and procedures to limit the activities of 
participants based on their level of net capital.\592\ For example, a 
clearing agency can 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 also believes that Rule 
17Ad-22(b)(7) would facilitate sound risk management practices by 
encouraging 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.\593\
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    \591\ See supra note 38.
    \592\ The Commission notes that some clearing agencies currently 
utilize capital-related requirements that differentiate among types 
of participants. For instance, FICC 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.
    \593\ See supra note 264.
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    The Commission believes that Rules 17Ad-22(b)(5), (6) and (7) will 
create the potential for greater access to clearing services for, and 
opportunities for competition among market participants, particularly 
for credit default swaps. The Commission believes that greater access 
to clearing should benefit market participants by allowing them to 
provide equivalent access to CCP clearing services for security-based 
swaps to their customers. Doing so should increase opportunities for 
competition among clearing firms on both price and service which 
should, in turn, reduce costs to the ultimate customers for the 
financial services being offered.
    Rules 17Ad-22(b)(5), (6) and (7) may impose some costs on clearing 
agencies due to the increased complexity of the policies and procedures 
regulating access to the clearing agency. The Commission acknowledges 
that lowering membership standards to increase the number of 
participants may increase the likelihood of a participant default. 
Nevertheless, broadening direct access will tend to reduce the 
concentration of risk in any individual

[[Page 66279]]

direct clearing member. Further, while Rules 17Ad-22(b)(5), (6) and (7) 
prohibit certain barriers to entry, these provisions nevertheless still 
provide clearing agencies with the flexibility to develop membership 
standards that maintain a robust risk management framework.
    Typically, dealers innovate and customize in new financial 
contracts to address specific risk-management problems of their 
clients. It is not uncommon for these contracts to become exchange-
traded, as the market for the product matures. Dealers, however, may 
have an incentive to maintain wider bid-ask spreads associated with a 
customized contract relative to the spreads that might apply if it were 
a standardized product. Greater access to a CCP could promote greater 
standardization because all CCP members could submit transactions to 
the CCP based on the CCP's pre-established rules. Accordingly, the 
Commission believes that expanded membership will promote the natural 
evolution of customized contracts to standardized contracts with deeper 
liquidity and reduced bid-asked spreads.
    In terms of comments received, one commenter believed that the 
proposed rules are unnecessary and pointed to the existing requirement 
in Section 17A(b)(3)(F) of the Exchange Act that a clearing agency 
shall not be registered unless the Commission determines that the 
clearing agency's rules are not designed to permit unfair 
discrimination in the admission of participants or among participants 
in the use of the clearing agency. The Commission believes Rules 17Ad-
22(b)(5)-(7) will guide registered CCPs to practices that support the 
requirement to provide fair and open access.
    The Commission is mindful of the costs associated with the final 
rules. In particular, the Commission recognizes that creating new 
policies and procedures can impose costs even if those policies and 
procedures largely codify current practice.
    As noted above, the standards contained in Rules 17Ad-22(b)(5)-(7) 
would impose certain burdens and related costs on respondent clearing 
agencies. As discussed in Section IV.C.3, based on policies and 
procedures requirements for Regulation NMS, and based on staff 
conversations with industry representatives, the Commission has 
estimated the burdens and related costs of these requirements for 
clearing agencies.
    The clearing agency standards in Rules 17Ad-22(b)(5)-(7) would 
require respondent clearing agencies to create policies and procedures. 
The standards contained in Rules 17Ad-22(b)(5)-(7) would also impose 
ongoing costs on clearing agencies. For example, the clearing agency 
standards in Rules 17Ad-22(b)(5)-(7) 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 standard. The costs of 
creating these policies and procedures, and performing ongoing 
monitoring and enforcement activities were included, respectively, in 
the $3.7 million startup costs and $10.1 million annual ongoing costs 
discussed earlier. These provisions may also impose incremental costs 
related to, for example, employee training, systems testing, and other 
operational considerations designed to ensure both initial and 
continued compliance with the clearing agency's participant access 
policies and procedures.
6. Record of Financial Resources and Annual Audited Financial 
Statements (Rules 17Ad-22(c)(1)-(2))
    Rule 17Ad-22(c)(1) provides 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 CCP shall 
calculate and maintain a record \594\ 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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    \594\ 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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    Rule 17Ad-22(c)(2) requires a clearing agency, within 60 days after 
the end of its fiscal year, to post on its Web site annual audited 
financial statements. Such financial statements shall: (i) Include, for 
the clearing agency and its subsidiaries, consolidated balance sheets 
as of the end of the two most recent fiscal years and statements of 
income, changes in stockholders' equity and other comprehensive income 
\595\ and cash flows for each of the two most recent fiscal years; (ii) 
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 consolidated \596\ 
financial statements may be prepared in accordance with U.S. GAAP or 
IFRS; (iii) 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 (iv) 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).
---------------------------------------------------------------------------

    \595\ The added language, ``changes in stockholders' equity and 
other comprehensive income,'' does not change the substance of the 
rule as provided in the Proposing Release. This language has been 
added in the final rule to clarify the scope of what is meant by 
complete set of financial statements consistent with customary 
industry accounting practices.
    \596\ The ``consolidation'' language does not change the 
substance of the rule as provided in the Proposing Release, but has 
been added to clarify that the financial statements requirement 
pertains to that of the clearing agencies and its subsidiaries on a 
consolidated basis.
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    Rule 17Ad-22(c)(1) is, for the most part, identical to what is 
described in the baseline section above, and thus, this rule will, for 
the most part, codify an existing practice of clearing agencies. The 
difference is that CCPs will now have to format and synthesize existing 
information in a manner sufficient to explain the methodology the 
clearing agency uses to meet the requirement of Rule 17Ad-22(b)(3).
    In addition, Rule 17Ad-22(c)(2) is substantially similar to what is 
described in the baseline section above. Most clearing agencies report 
financial statements in accordance with Rule 17Ad-22(c)(2) with one 
exception.\597\ Accordingly, Rule 17Ad-22(c)(2) is largely consistent 
with current practice and will impose minimal costs on registered 
clearing agencies.\598\
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    \597\ See supra note 549.
    \598\ Because BSECC and SCCP conduct no operations, we also 
expect their respective costs to be minimal.
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    As described above, these two rules, except where noted above, 
codify current practice. To the extent that current practice is not 
currently required by rule, the rules being adopted today allow for 
greater enforceability of these disclosure practices, and as a result 
ensure that CCPs continue to maintain an environment of transparency.
    Rule 17Ad-22(c)(1) ensures that the Commission continues to be able 
to monitor whether CCPs maintain the financial resources necessary to 
meet its requirement in proposed Rule 17Ad-22(b)(3). The requirement 
that CCPs will have to format and synthesize existing information in a 
manner sufficient to explain the methodology the clearing agency uses 
to meet the requirement of Rule 17Ad-22(c)(1), facilitates the

[[Page 66280]]

Commission's access to this information in a format that is clear and 
understandable, and ensures that the Commission can obtain sufficient 
documentation to understand and evaluate the methodology used by the 
CCP to compute such financial resource requirement.
    Rule 17Ad-22(c)(2) ensures that CCPs continue to provide 
transparency to regulators and market participants. Transparency helps 
to ensure that market participants in general have better information 
about the stability of the system, and facilitates monitoring by the 
Commission and other regulators, clearing members, investors, academics 
and the public in general. Further, to the extent that CCPs are 
systemically important institutions, regulators may also be monitoring 
systemic risk when monitoring CCPs.
    Transparency is particularly important to clearing members, whose 
capital is at risk if a clearing member fails. Clearing members can use 
the information codified in this rule to assess risks related to their 
participation in the CCP and manage those risks. The information 
codified in this rule can also be used by clearing members in a way 
that promotes competition. In situations where multiple CCPs clear the 
same product, clearing members may base their decision on which CCP to 
use on the financial information codified in Rule 17Ad-22(c)(2), which 
requires that CCPs make their financial information available to the 
public, even during times of market stress. It is possible that if the 
financial position of the CCP deteriorates, clearing members and 
investors may discontinue membership in or otherwise limit their use of 
that CCP, therefore driving CCPs with substandard risk management 
practices out of business.
    The Commission carefully considered alternatives to these 
provisions. For example, an alternative to the requirements of Rule 
17Ad-22(c)(2) would be to permit registered clearing agencies to post 
audited financial statements prepared in accordance with the laws of 
their country of origin, reconciled to U.S. GAAP. Indeed, one 
registered clearing agency, ICE Clear Europe, currently posts on its 
Web site audited financial statements prepared according to UK GAAP. 
Having foreign CCPs prepare financial statements using more widely 
applied bases of accounting such as U.S. GAAP or IFRS may offer greater 
utility to market participants, regulators and other stakeholders of 
clearing agencies. Therefore, we have limited the different bases of 
accounting upon which the annual audited consolidated financial 
statements may be prepared to IFRS and U.S. GAAP. The Commission 
recognizes that there are costs associated with requiring that a 
registered CCP comply with these reporting standards. However, to the 
extent that the parent company of ICE Clear Europe already prepares 
financial statements according to U.S. GAAP, we expect the costs of 
this requirement to be less burdensome. The Commission also believes 
that allowing CCPs to prepare financial statements in accordance with 
the laws of their countries of origin and then reconcile the 
differences to U.S. GAAP would add complexity associated with the 
reconciliation that may offer less utility to market participants, 
regulators and other stakeholders of clearing agencies because of the 
burden of understanding and interpreting additional bases of accounting 
would create for users.
    The Commission is mindful of the costs associated with the final 
rule. The exact nature of the procedures a clearing agency will 
establish to support this requirement is likely to vary between 
clearing agencies. Nevertheless, clearing agencies already make this 
type of information available to the Commission and/or on their Web 
sites. Therefore, the incremental cost of this Rule is unlikely to be 
significant.
    As noted above, the standards contained in Rules 17Ad-22 (c)(1) and 
(2), would impose certain burdens and related costs on respondent 
clearing agencies. As discussed in Section IV.C.4, based on policies 
and procedures requirements for Regulation NMS, and based on staff 
conversations with industry representatives, the Commission has 
estimated the burdens and related costs of these requirements for 
clearing agencies.
    The clearing agency standards in Rules 17Ad-22(c)(1) and (2) would 
require respondent clearing agencies to create policies and procedures. 
The requirements would impose one-time costs related to the adjustment 
of systems. These costs are included in the $3.7 million in startup 
costs discussed earlier.
    The standards contained in Rule 17Ad-22(c) would also impose 
ongoing costs on clearing agencies. For example, the clearing agency 
standards in Rules 17Ad-22 (c)(1) and (2) 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 standard. These costs are 
included in the $10.1 million in annual costs discussed earlier. These 
rules may impose additional incremental costs related to, for example, 
employee training, systems testing, and other operational 
considerations designed to ensure both initial and continued compliance 
with such policies and procedures.
    Rule 17Ad-22(c)(2) would require each clearing agency to post on 
its Web site its annual audited financial statements. The audited 
financial statements would have to (i) be a complete set of 
consolidated financial statements of the clearing agency and its 
subsidiaries 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 consolidated 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). 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. These costs are included in the 
$10.1 million in annual costs discussed earlier.
7. Minimum Standards for All Clearing Agencies
    Rules 17Ad-22(d)(1)-(15) require certain minimum standards for 
rules and procedures to be met by all clearing agencies. Rule 17Ad-
22(d)(1) requires that clearing agencies have rules and procedures that 
are well-founded, transparent and enforceable for each aspect of their 
activities in all relevant jurisdictions.\599\ Rules 17Ad-22(d)(2)-(15) 
require that clearing agencies reasonably establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to:
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    \599\ 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. Clearing agencies that operate in 
multiple jurisdictions may need to resolve possible conflicts of 
laws issues that they may encounter.

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[[Page 66281]]

     Require participants to have sufficient financial 
resources and robust operational capacity to meet obligations arising 
from participation in the clearing agency,
     Hold assets in a manner whereby risk of loss or of delay 
in access to them is minimized,
     Identify sources of operational risk and minimize these 
risks through the development of appropriate systems, controls, and 
procedures,
     Employ money settlement arrangements that eliminate or 
strictly limit the clearing agency's settlement bank risks,
     Provide that their operations are cost-effective in 
meeting the requirements of participants while maintaining the safety 
and security of operations,
     Evaluate the potential sources of risks that can arise 
when the clearing agency establishes links either cross-border or 
domestically to clear or settle trades, and to ensure that these risks 
are managed prudently on an ongoing basis,
     Have governance arrangements that are clear and 
transparent to fulfil the public interest requirements in Section 17A 
of Exchange Act applicable to clearing agencies,\600\ to support the 
objectives of owners and participants, and to promote the effectiveness 
of the clearing agency's risk management procedures,
---------------------------------------------------------------------------

    \600\ 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).
---------------------------------------------------------------------------

     Provide market participants with sufficient information 
for them to identify and evaluate the risks and costs associated with 
using clearing agencies' services,
     Immobilize or dematerialize securities certificates and 
transfer them by book entry to the greatest extent possible when the 
clearing agency provides CSD services,
     Make key aspects of their 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,
     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,
     Eliminate principal risk by linking securities transfers 
to funds transfers to achieve delivery versus payment (DVP),\601\
---------------------------------------------------------------------------

    \601\ See supra note 422.
---------------------------------------------------------------------------

     Institute risk controls, including collateral requirements 
and limits to cover the clearing agency's credit exposure to each 
participant family 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 CSD services \602\ 
and extends intraday credit to participants,
---------------------------------------------------------------------------

    \602\ See proposed Rule 17Ad-22(a)(2) for definition of 
``central securities depository services.''
---------------------------------------------------------------------------

     Disclose to their participants the clearing agency's 
obligations with respect to physical deliveries.\603\
---------------------------------------------------------------------------

    \603\ 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.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission identified potential costs 
and benefits resulting from Rules 17Ad-22(d)(1)-(15), as proposed, and 
requested comment on all aspects of the cost-benefit analysis, 
including the identification and assessment of any costs and benefits 
that were not discussed in the analysis. The Commission did not receive 
any comments on the specific cost-benefit analysis contained in the 
Proposing Release.
    Rules 17Ad-22(d)(1)-(15) are consistent with CPSS-IOSCO 
Recommendations.\604\ As discussed below, Rules 17Ad-22(d)(1)-(15) for 
the most part codify existing practices of clearing agencies registered 
with the Commission. Adopting rules that reflect current practices has 
the benefit of ensuring that future business practices are both 
consistent with current practice and conform to international standards 
without subjecting clearing agencies to significant costs. Accordingly, 
the Commission believes that registered clearing agencies would not 
need to build new infrastructure or modify operations to meet the 
requirements of Rule 17Ad-22(d).\605\ The primary costs of implementing 
such rules will be the incremental costs of enhancing and reviewing 
existing policies and procedures for compliance and updating existing 
policies and procedures where appropriate as discussed above in Section 
IV.
---------------------------------------------------------------------------

    \604\ See table in Section V.B.2.d.
    \605\ See generally International Monetary Fund, Publication of 
Financial Sector Assessment Program Documentation--Detailed 
Assessment of Observance of the NSCC's Observance of the CPSS-IOSCO 
Recommendations for Central Counterparties (2010), at 4-29, 
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 DTC's Observance of the CPSS-IOSCO Recommendations 
for Securities Settlement Systems (2010), at 4-40, available at 
http://www.imf.org/external/pubs/ft/scr/2010/cr10128.pdf.
---------------------------------------------------------------------------

    The requirements would impose one-time costs and ongoing costs to 
perform certain ongoing monitoring and enforcement activities with 
respect to the policies and procedures that are included in the $3.7 
million in startup costs and $10.1 million in ongoing cost discussed 
earlier.\606\ The Rules also may impose incremental costs related to, 
for example, employee training, systems testing, and other operational 
considerations designed to ensure both initial and continued compliance 
with such policies and procedures.
---------------------------------------------------------------------------

    \606\ This number also reflects the costs of Rules 17Ad-
22(b)(1)-(3).
---------------------------------------------------------------------------

    As stated above, there are currently seven clearing agencies 
registered with the Commission that provide CCP or CSD services. These 
clearing agencies are SROs so the rules and procedures governing each 
aspect of the clearance and settlement process are filed with the 
Commission for notice and approval. Rule 17Ad-22(d)(1) will codify the 
existing practices of registered clearing agencies of establishing a 
rule book and developing policies and procedures to address each aspect 
of their operations. Therefore, the SRO rule filing process should help 
to ensure that such rules are well-founded, transparent, and provide an 
enforceable legal framework for its activities.
    As described above, each registered clearing agency has established 
membership criteria and has procedures in place to monitor the 
sufficiency of its participants' financial resources. Rule 17Ad-
22(d)(2) will codify these existing practices. The 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 registered 
clearing agency, the Commission believes that the proposed requirement 
to continue to monitor compliance with the registered clearing agency's 
participation requirements supports the Exchange Act requirement that 
clearing agencies are able to facilitate prompt and accurate clearance 
and settlement.\607\
---------------------------------------------------------------------------

    \607\ 15 U.S.C 78q-1(b)(3)(A).
---------------------------------------------------------------------------

    In addition, clearing agencies would be required to have 
participation requirements that are objective,\608\

[[Page 66282]]

publicly disclosed, and facilitate fair and open access.\609\ The 
Commission believes this requirement would foster compliance with the 
requirement under Section 17A of the Exchange Act that the rules of a 
registered 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.\610\
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    \608\ Objective criteria would generally include, but not be 
limited to, criteria that are based on measureable facts such as 
capital requirements.
    \609\ 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 registered clearing 
agency * * * are not designed to permit unfair discrimination in the 
admission of participants or among participants in the use of the 
registered clearing agency''). In addition, the Dodd-Frank Act added 
Section 3C to the Exchange Act which provides in relevant part that 
the rules of a registered clearing agency described in paragraph (1) 
shall prescribe that all security-based swaps submitted to the 
registered clearing agency with the same terms and conditions are 
economically equivalent within the registered clearing agency and 
may be offset with each other within the registered clearing agency; 
and 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).
    \610\ 15 U.S.C. 78q-1(b)(3)(F).
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    During the clearance and settlement process, registered clearing 
agencies are responsible for safeguarding assets that secure 
participants' obligations. Registered clearing agencies currently seek 
to minimize the risk of loss or delay in access by holding assets that 
are highly-liquid (e.g., cash, U.S. Treasury securities or securities 
issued by a U.S. government agency) and engaging banks to custody the 
assets and facilitate settlement. The requirements of Rule 17Ad-
22(d)(3) are intended to codify existing practices and help ensure the 
ability of the registered clearing agency to meet its settlement 
obligations by reducing the likelihood that assets securing participant 
obligations to the registered clearing agency would be unavailable or 
insufficient when the registered clearing agency needs to draw on them.
    Pursuant to guidance provided by the Division's Automated Review 
Policy Statement,\611\ and Interagency White Paper on Disaster 
Recovery,\612\ all registered clearing agencies, among other things, 
develop and maintain plans to assure the safeguarding of securities and 
funds, the integrity of the automated data processing systems, and 
recovery of securities, funds, or data under a variety of loss or 
destruction scenarios. In addition, the rule requires that clearing 
agencies have business continuity plans that allow for timely recovery 
of operations and ensure the fulfillment of a registered clearing 
agency's obligations. Rule 17Ad-22(d)(4) would codify existing practice 
and strengthen the requirement in Section 17A(b)(3)(F) of the Exchange 
Act, which requires that the rules of a registered clearing agency must 
be designed to ensure the safeguarding of securities and funds in the 
custody or control of the registered clearing agency or for which the 
registered clearing agency is responsible.\613\ In this way, the 
Commission believes the rule also would promote protection of the 
financial market served by the registered clearing agency.
---------------------------------------------------------------------------

    \611\ See Automation Review Policy Statements, supra note 330. 
The Automation Review Policy Statements are not rules, but rather 
general statements of policy based on cooperation between the SROs 
and the Commission.
    \612\ Sound Practices to Strengthen the Resilience of the U.S. 
Financial System (Interagency Paper), Release No. 34-47638; File No. 
S7-32-02 (Apr. 7, 2003).
    \613\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Registered clearing agencies use settlement banks to facilitate the 
cash portion of the securities transaction. Failure by that bank to 
effectuate timely and final settlement adversely affects the registered 
clearing agency by exposing it to credit and liquidity pressures that 
can adversely affect the registered clearing agency's ability to 
facilitate prompt and accurate clearance and settlement. Rule 17Ad-
22(d)(5) is designed to reduce the risk that financial obligations 
related to the activities of a registered clearing agency are not 
settled in a timely manner or not discharged with finality. The 
Commission also believes that the rule would assist a registered 
clearing agency in meeting the requirement of Section 17A(b)(3)(F) of 
the Exchange Act, which requires the rules of a registered clearing 
agency to be designed to assure the safeguarding of securities and 
funds which are in the custody or control of the registered clearing 
agency or for which it is responsible.\614\
---------------------------------------------------------------------------

    \614\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Registered clearing agencies have procedures to control costs and 
to regularly review pricing levels against operating costs. The 
Commission believes that Rule 17Ad-22(d)(6) codifies this practice and 
may help to reduce the fees a participant in a registered clearing 
agency incurs for clearance and settlement services while also helping 
to ensure that registered clearing agency maintains appropriate 
operational standards. 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 
clearance and settlement services. Because there is often only a single 
registered clearing agency per asset class per market, competitive 
forces may not be sufficient by themselves in creating incentives to be 
cost-effective in meeting the requirements of participants.
    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.\615\ 
Further, Section 17A(b)(3)(F) of the Exchange Act requires that the 
rules of a registered clearing agency foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions.\616\ Each registered clearing agency is linked 
to other clearing organizations, trading platforms, and service 
providers. The Commission believes that in the clearance and settlement 
process, links should help improve market liquidity and make it easier 
for participants to trade in other markets.\617\ Rule 17Ad-22(d)(7) 
promotes these statutory requirements under the Exchange Act and 
establishes a requirement that links created between clearing agencies 
are managed in a safe and prudent manner.
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    \615\ 15 U.S.C. 78q-1(a)(1)(D).
    \616\ 15 U.S.C. 78q-1(b)(3)(F).
    \617\ For example, 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 (Nov. 16, 2005), 71 
FR 70902 (Nov. 23, 2005) and 55239 (Feb. 5, 2007), 72 FR 6797 (Feb. 
13, 2007) (File No. SR-DTC 2006-15).
---------------------------------------------------------------------------

    Each registered clearing agency has a board that governs the 
operations of the entity and supervises its senior management. Rule 
17Ad-22(d)(8) is designed enhance the board's governance of the 
registered clearing agency and the ability of the registered clearing 
agency to serve the interests of its various constituencies while 
maintaining prudent risk management processes. Clear and transparent 
governance arrangements promote accountability and reliability in the 
decisions, rules and procedures of the registered clearing agency 
because they provide interested parties (such as owners, participants, 
and the general public) with information about how such decisions are 
made and what the

[[Page 66283]]

rules and procedures are designed to accomplish.\618\
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    \618\ The Exchange Act currently requires that certain aspects 
of a registered 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 registered clearing agency, accompanied by a 
concise general statement of the basis and purpose of the proposed 
rule change. 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    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 registered 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 registered 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.\619\
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    \619\ 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 231.
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    Because clearing agencies are SROs, their rules are published by 
the Commission and are available on each registered clearing agency's 
Web site. In addition information regarding the operations and services 
of each clearing agency can be found either on the clearing agency's 
Web site or a Web site maintained by an affiliated entity of the 
clearing agency. Rule 17Ad-22(d)(9) will maintain and enhance this 
existing practice by requiring a registered clearing agency to disclose 
information sufficient for participants to identify risks and costs 
associated with using the registered clearing agency, thereby allowing 
participants to make informed decisions about the use of the registered 
clearing agency and to take appropriate actions to mitigate their risks 
and costs associated with the use of the registered clearing agency.
    While U.S. markets have made great strides in achieving 
immobilization and/or 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. Rule 
17Ad-22(d)(10) will codify the existing practice, and promote further 
immobilization and dematerialization of securities and their transfer 
by book entry. This would result in reduced costs and risks associated 
with securities settlements and custody for both clearing agencies and 
participants by removing the need to hold and transfer many, if not 
most, physical certificates.\620\
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    \620\ See Exchange Act Release No. 8398 (Mar. 11, 2004), 69 FR 
12921 (Mar. 18, 2004).
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    Each registered clearing agency makes public rules, policies or 
procedures that set forth the actions the clearing agency may take in 
the event of a participant default and each makes key aspects of their 
default procedures publicly available, with the exception of certain of 
their policies and procedures that are kept non-public to ensure their 
integrity, such as those associated with the oversight of clearing 
participants. Rule 17Ad-22(d)(11) codifies this existing practice. The 
Commission believes that default procedures reduce the likelihood that 
a default by a participant, or multiple participants, will disrupt the 
operations of the clearing agency and have a cascading effect on the 
viability of the other participants of the clearing agency. Default 
procedures also allow a clearing agency to wind down positions in an 
orderly way and continue to perform its obligations in the event of a 
participant default, assuring continued functioning of the securities 
market in times of stress and reducing systemic risk.
    The Commission believes that Rule 17Ad-22(d)(11) would increase the 
probability that defaults by participants, should they occur, would 
proceed in an orderly and transparent manner. This is the case because 
the 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. In addition, the transparency of default 
procedures will increase the confidence of market participants as well 
as members of the general public, that should a default occur, the 
proper procedures would be followed, decreasing uncertainty and 
lessening the likelihood of further market stress.
    Each registered clearing agency has rules, policies or procedures 
that provide for the settlement of its respective securities 
transactions no later than the end of a pre-defined settlement day. 
Rule 17Ad-22(d)(12) codifies this existing practice. The Commission 
believes that settlement finality should occur no 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 registered clearing 
agency. 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 registered clearing agency's ability to facilitate prompt 
and accurate clearance and settlement, cause the registered clearing 
agency's participants to fail to meet their obligations, or cause 
significant disruptions in the securities markets.\621\
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    \621\ See FMI Report, Principle 8, supra note 32.
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    Generally, Rules 17Ad-22(d)(13)-(15) would apply to registered 
clearing agencies that provide CSD services. DTC currently is the only 
registered clearing agency that is a CSD. DTC operates a Model 2 DVP 
system which provides for gross settlements of securities transfers 
during the day followed by an end of day net funds settlement.\622\ 
Rule 17Ad-22(d)(13) codifies this existing practice. Delivery versus 
payment eliminates the risk that a buyer would lose the purchase price 
of a security purchased from a defaulting seller (or that a seller 
would lose the sold security without receiving payment for a security 
acquired by a defaulting buyer), because payment is made only if 
securities are delivered. While the use of this payment method 
eliminates principal risk, DVP procedures do not eliminate the risk 
that the failure of the defaulting participant could result in systemic 
disruptions, because the failure of a participant could produce 
substantial liquidity pressures and replacement costs.
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    \622\ See DTC's Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties (Dec. 12, 2011), 
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf.
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    As discussed above, DTC has policies and procedures in place to 
ensure that timely settlement can be completed in the event of the 
default participant with the largest settlement obligation. DTC 
establishes setting limits (called net debit caps) for each 
participant. The net debit cap ensures that the amount of cash that a 
participant owes the clearing agency does not exceed this pre-defined 
limit or cap. Rule 17Ad-22(d)(14) codifies this existing practice. The 
Commission believes it is important for clearing agencies that provide 
CSD services to institute risk controls, including collateral 
requirements and limits to cover the registered 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 believes that requiring the controls to be designed to 
withstand

[[Page 66284]]

the inability of the participant with the largest payment obligation to 
settle, in such circumstances, would reduce the likelihood of 
disruptions at the registered clearing agency by having controls in 
place to account for the largest possible loss from any individual 
participant and thereby help the registered clearing agency to provide 
prompt and accurate clearance and settlement during times of market 
stress.
    A registered clearing agency faces both credit and liquidity risks 
from the delivery process. At delivery, the entire principal value of a 
transaction may be at risk, and this form of credit risk is often 
termed principal risk. Liquidity risk arises because the registered 
clearing agency, faced with a defaulting participant, must still make 
payment to the non-defaulting party. The Commission believes that a 
registered clearing agency should therefore ensure that its rules and 
procedures provide clear risk management controls so that it can 
identify and mitigate the credit and liquidity risks to which it is 
exposed in the delivery process. These procedures should ensure that 
the registered clearing agency will be able to adapt its risk 
management framework as appropriate, as the steps necessary to mitigate 
risks will depend on the obligations the registered clearing agency has 
assumed, the mechanisms available for settlement, and the importance of 
the risks from physical settlement to its overall operations.
    The Commission also believes that providing such information to 
participants would promote a shared understanding regarding physical 
delivery practices between the registered clearing agency and its 
participants that could help reduce the potential for fails and thereby 
facilitate prompt and accurate clearance and settlement.
    Registered clearing agencies have rules and procedures that 
describe their obligations to its participants when they assume 
deliveries of physical instruments. The Commission believes that Rule 
17Ad-22(d)(15), by requiring a statement by the registered clearing 
agency to its participants about the cleaning agency's obligations with 
respect to physical deliveries, among other things, would 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 
registered clearing agency. The Commission believes that ensuring 
delivery of this information to participants about the clearing 
agency's physical delivery obligations would promote a shared 
understanding about physical delivery practices between the clearing 
agency and its participants that would help mitigate misunderstandings 
in the clearing agency's physical delivery operations and would 
therefore facilitate prompt and accurate clearance and settlement.
    The Commission carefully considered alternatives to Rule 17Ad-
22(d), including a more prescriptive approach suggested by some of the 
commenters, and has decided to adopt the rule, modeled after recognized 
international standards, in the form proposed. The Commission believes 
the final rule will have the effect of harmonizing the Commission's 
regulatory requirements with such standards as are now contemplated by 
the Exchange Act and the Clearing Supervision Act, as well as 
international standards. In particular, the Commission believes Rule 
17Ad-22(d) will help market participants compare the operations of U.S. 
clearing agencies with non-U.S. clearing organizations. The 
Commission's adoption of Rule 17Ad-22(d) may also reduce some of the 
potential regulatory burden for CCPs and CSDs that may be dually-
regulated by the SEC and another domestic or foreign regulator because 
it is modeled on standards already employed by other regulatory 
authorities.

VI. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \623\ requires the 
Commission, in promulgating rules, to consider the impact of those 
rules on small entities. The Commission certified in the Proposing 
Release, pursuant to Section 605(b) of the Regulatory Flexibility Act 
of 1980 (``RFA''),\624\ that the proposed rule would not, if adopted, 
have a significant impact on a substantial number of small entities. We 
received no comments on this certification.
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    \623\ 5 U.S.C. 601 et seq.
    \624\ See 5 U.S.C. 605(b).
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A. Registered Clearing Agencies

    Rule 17Ad-22 applies to all registered clearing agencies and sets 
standards for such clearing agencies. For the purposes of Commission 
rulemaking and as applicable to Rule 17Ad-22, a small entity includes, 
when used with reference to a clearing agency, a clearing agency that 
(i) Compared, cleared and settled less than $500 million in securities 
transactions during the preceding fiscal year, (ii) had less than $200 
million of funds and securities in its custody or control at all times 
during the preceding fiscal year (or at any time that it has been in 
business, if shorter) and (iii) is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization.\625\ 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.\626\
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    \625\ 17 CFR 240.0-10(d).
    \626\ 13 CFR 121.201, Sector 52.
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    Based on the Commission's existing information about the clearing 
agencies currently registered with the Commission, the Commission 
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 registered clearing agencies and while 
other security-based swap lifecycle event service providers may be 
required to register as clearing agencies, the Commission does not 
believe that any such entities would be ``small entities'' as defined 
in Exchange Act Rule 0-10.\627\ Furthermore, we believe it is unlikely 
that any registered 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-
10.
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    \627\ 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.
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B. Certification

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

VII. Statutory Authority and Text of Rule 17Ad-22

    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, 
15 U.S.C. 78q-1(i), 78q-1(j) and 78c-3(j), respectively, Pub. L. 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

[[Page 66285]]

805(a)(2) of the Clearing Supervision Act, 12 U.S.C. 5464(a)(2), the 
Commission adopts new Rule 17Ad-22 to govern clearing agencies.

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 amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE

0
1. The authority citation for Part 240 is amended by revising the 
general authority and adding an authority for Sec.  240.17Ad-22 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, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq.; 12 
U.S.C. 5221(e)(3), 15 U.S.C. 8302, and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    Section 240.17Ad-22 is also issued under 12 U.S.C. 5464(a)(2).
* * * * *

0
2. Section 240.17Ad-22 is added to read as follows:


Sec.  240.17Ad-22  Standards for clearing agencies.

    (a) Definitions. For purposes of this section:
    (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 (15 U.S.C. 78c(a)(23)(A)).
    (3) Participant family means that if a participant directly, or 
indirectly through one or more intermediaries, controls, is controlled 
by, or is under common control with, another participant then the 
affiliated participants shall be collectively deemed to be a single 
participant family for purposes of paragraphs (b)(3) and (d)(14) of 
this section.
    (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 Sec.  240.15c3-1 for broker-dealers or any 
similar risk adjusted capital calculation for all other prospective 
clearing members.
    (b) A registered 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 under 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 under normal market conditions and use risk-based models 
and parameters to set margin requirements and review such margin 
requirements and the related risk-based models and parameters at least 
monthly.
    (3) Maintain sufficient financial resources to withstand, at a 
minimum, a default by the participant family to which it has the 
largest exposure in extreme but plausible market conditions; provided 
that a registered clearing agency acting as a central counterparty for 
security-based swaps shall maintain additional financial resources 
sufficient to withstand, at a minimum, a default by the two participant 
families to which it has the largest exposures in extreme but plausible 
market conditions, in its capacity as a central counterparty for 
security-based swaps. Such policies and procedures may provide that the 
additional financial resources may be maintained by the security-based 
swap clearing agency generally or in separately maintained funds.
    (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 is free from influence from the persons responsible for the 
development or operation of the models being validated.
    (5) Provide the opportunity for a person that does not perform any 
dealer or security-based swap dealer services to obtain membership on 
fair and reasonable terms at the clearing agency to clear securities 
for itself or on behalf of other persons.
    (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, provided that such persons are able to comply with other 
reasonable membership standards, 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 
statements. (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 registered 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 section, and sufficient documentation to explain the 
methodology it uses to compute such financial resource requirement.
    (2) Within 60 days after the end of its fiscal year, each 
registered clearing agency shall post on its Web site its annual 
audited financial statements. Such financial statements shall:
    (i) Include, for the clearing agency and its subsidiaries, 
consolidated balance sheets as of the end of the two most recent fiscal 
years and statements of income, changes in stockholders' equity and 
other comprehensive income and cash flows for each of the two most 
recent fiscal years;
    (ii) 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 consolidated financial statements may 
be prepared in accordance with

[[Page 66286]]

U.S. generally accepted accounting principles or International 
Financial Reporting Standards as issued by the International Accounting 
Standards Board;
    (iii) 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 17 CFR 210.2-01; and
    (iv) Include a report of the registered public accounting firm that 
complies with paragraphs (a) through (d) of 17 CFR 210.2-02.
    (d) Each registered 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 and publicly 
disclosed, and permit fair and open access.
    (3) Hold assets in a manner that minimizes risk of loss or of delay 
in its access to them; and invest assets in instruments with minimal 
credit, market and liquidity risks.
    (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 or settle 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 (15 
U.S.C. 78q-1) 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.
    (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 family 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.

    By the Commission.

    Dated: October 22, 2012.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-26407 Filed 11-1-12; 8:45 am]
BILLING CODE 8011-01-P


