[Federal Register Volume 76, Number 51 (Wednesday, March 16, 2011)]
[Proposed Rules]
[Pages 14472-14539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5182]
[[Page 14471]]
Vol. 76
Wednesday,
No. 51
March 16, 2011
Part II
Securities and Exchange Commission
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17 CFR Part 240
Clearing Agency Standards for Operation and Governance; Proposed Rule
Federal Register / Vol. 76, No. 51 / Wednesday, March 16, 2011 /
Proposed Rules
[[Page 14472]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-64017; File No. S7-08-11]
RIN 3235-AL13
Clearing Agency Standards for Operation and Governance
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: In accordance with Section 763 of Title VII (``Title VII'') of
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(``Dodd-Frank Act''), Section 805 of Title VIII (``Title VIII'') of the
Dodd-Frank Act, and Section 17A of the Securities Exchange Act of 1934
(``Exchange Act''), the Securities and Exchange Commission (``SEC'' or
``Commission'') is proposing rules regarding registration of clearing
agencies and standards for the operation and governance of clearing
agencies. The proposed rules are designed to enhance the regulatory
framework for the supervision of clearing agencies.
DATES: Comments should be submitted on or before April 29, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7-8-11 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F St., NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-8-11. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F St., NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Jeffrey Mooney, Assistant Director;
Peter Curley, Attorney Fellow; Andrew Blake, Special Counsel; Michael
Milone, Special Counsel; Alison Duncan, Attorney-Adviser; Marta
Chaffee, Branch Chief; and Andrew Bernstein, Attorney-Adviser, Office
of Clearance and Settlement, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-7010 at (202) 551-5710.
SUPPLEMENTARY INFORMATION: The Commission is proposing seven new rules
and an amendment to an existing rule related to clearing agencies,
including security-based swap clearing agencies. The proposed rules are
designed to enhance the regulatory framework for the supervision of
clearing agencies. Specifically, the Commission is proposing to: (1)
Identify certain minimum standards for all clearing agencies; (2)
require dissemination of pricing and valuation information by security-
based swap clearing agencies that perform central counterparty
services; (3) require all clearing agencies to have adequate safeguards
and procedures to protect the confidentiality of trading information of
clearing agency participants; (4) exempt certain security-based swap
dealers and security-based swap execution facilities from the
definition of a clearing agency; (5) amend rules concerning
registration of clearing agencies to account for security-based swap
clearing agencies and to make other technical changes; (6) require all
clearing agencies to have procedures that identify and address
conflicts of interest; (7) require standards for all members of
clearing agency boards of directors or committees; and (8) require all
clearing agencies to designate a chief compliance officer.
I. Introduction
On July 21, 2010, President Barack Obama signed the Dodd-Frank Act
into law.\1\ The Dodd-Frank Act was enacted to, among other things,
promote the financial stability of the United States by improving
accountability and transparency in the financial system.\2\ Title VII
of the Dodd-Frank Act provides the Commission and the Commodity Futures
Trading Commission (``CFTC'') with the authority to regulate over-the-
counter (``OTC'') derivatives in light of the recent financial crisis,
which demonstrated the need for enhanced regulation of the OTC
derivatives market. The Dodd-Frank Act is intended to bolster the
existing regulatory structure and to provide the Commission and the
CFTC with effective regulatory tools to oversee the OTC derivatives
market, which has grown exponentially in recent years and is capable of
affecting significant sectors of the U.S. economy.\3\
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\1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
\2\ Id. at Preamble.
\3\ See 156 Cong. Rec. 5878 (daily ed. July 15, 2010) (statement
of Sen. Dodd).
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The Dodd-Frank Act provides that the CFTC will regulate ``swaps,''
the Commission will regulate ``security-based swaps,'' and the CFTC and
the Commission will jointly regulate ``mixed swaps.'' \4\ The Dodd-
Frank Act amends the Exchange Act to require, among other things, the
following: (1) Transactions in security-based swaps must be cleared
through a clearing agency if they are of a type that the Commission
determines must be cleared, unless an exemption from mandatory clearing
applies; (2) transactions in security-based swaps must be reported to a
registered security-based swap data repository or the Commission; and
(3) if a security-
[[Page 14473]]
based swap is subject to a clearing requirement, it must be traded on a
registered trading platform, i.e., a security-based swap execution
facility or exchange, unless no facility makes such security-based swap
available for trading.\5\
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\4\ The Commission and the CFTC, in consultation with the Board
of Governors of the Federal Reserve System (``Federal Reserve''),
shall jointly further define the terms ``swap,'' ``security-based
swap,'' ``swap dealer,'' ``security-based swap dealer,'' ``major
swap participant,'' ``major security-based swap participant,''
``eligible contract participant,'' and ``security-based swap
agreement.'' Public Law 111-203 Sec. 712(d). Except for the term
``eligible contract participant'', these terms are defined in
Sections 721 and 761 of the Dodd-Frank Act. Public Law 111-203
Sec. Sec. 721, 761. The term ``eligible contract participant,'' is
defined in Section 1a(18) of the Commodity Exchange Act (``CEA''), 7
U.S.C. 1a(18), as re-designated and amended by Section 721 of the
Dodd-Frank Act. Public Law 111-203 Sec. 721. Further, Sections
721(c) and 761(b) of the Dodd-Frank Act respectively require the
CFTC to adopt rules to further define the terms ``swap,'' ``swap
dealer,'' ``major swap participant,'' and ``eligible contract
participant,'' and permit the Commission to adopt rules to further
define the terms ``security-based swap,'' ``security-based swap
dealer,'' ``major security-based swap participant,'' and ``eligible
contract participant,'' with regard to security-based swaps, for the
purpose of including transactions and entities that have been
structured to evade Title VII of the Dodd-Frank Act. Public Law 111-
203 Sec. Sec. 721(c), 761(b). Finally, Section 712(a) of the Dodd-
Frank Act provides that the Commission and CFTC, after consultation
with the Federal Reserve, shall jointly prescribe regulations
regarding ``mixed swaps,'' as may be necessary to carry out the
purposes of Title VII. Public Law 111-203 Sec. 712(a). Consistent
with the Dodd-Frank statutory structure described above, the
Commission and CFTC have proposed rules to define these terms. See
Exchange Act No. 63452 (December 7, 2010), 75 FR 80174 (December 21,
2010).
\5\ Section 761 of the Dodd-Frank Act adds Section 3(a)(77) to
the Exchange Act, which defines the term ``security-based swap
execution facility'' to mean ``a trading system or platform in which
multiple participants have the ability to execute or trade security-
based swaps by accepting bids and offers made by multiple
participants in the facility or system, through any means of
interstate commerce, including any trading facility that (A)
facilitates the execution of security-based swaps between persons;
and (B) is not a national securities exchange.'' See Public Law 111-
203 Sec. 761. The decision of a security-based swap execution
facility or exchange to list a security-based swap contract for
trading may not be sufficient to establish that the contract is
``made available for trading'' by that security-based swap execution
facility or exchange and therefore cannot be traded in the over-the-
counter market. See Exchange Act Release No. 63825 (February 2,
2011), 76 FR 10948 (February 28, 2011). The Dodd-Frank Act amends
the CEA to provide for a similar regulatory framework with respect
to transactions in swaps regulated by the CFTC.
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Beginning in December of 2008, the Commission acted to facilitate
the clearing of OTC security-based swaps by permitting certain clearing
agencies to clear credit default swaps (``CDS'') on a temporary
conditional basis.\6\ Consequently, a significant volume of security-
based swaps in the form of CDS transactions are centrally cleared
today, and the Commission oversees those activities pursuant to the CDS
Clearing Exemption Orders.\7\
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\6\ The Commission authorized five entities to clear credit
default swaps. See Exchange Act Release Nos. 60372 (July 23, 2009),
74 FR 37748 (July 29, 2009), 61973 (April 23, 2010), 75 FR 22656
(April 29, 2010) and 63389 (November 29, 2010), 75 FR 75520
(December 3, 2010) (CDS clearing by ICE Clear Europe Limited); 60373
(July 23, 2009), 74 FR 37740 (July 29, 2009), 61975 (April 23,
2010), 75 FR 22641 (April 29, 2010) and 63390 (November 29, 2010),
75 FR 75518 (December 3, 2010), (CDS clearing by Eurex Clearing AG);
59578 (March 13, 2009), 74 FR 11781 (March 19, 2009), 61164
(December 14, 2009), 74 FR 67258 (December 18, 2009), 61803 (March
30, 2010), 75 FR 17181 (April 5, 2010) and 63388 (November 29,
2010), 75 FR 75522 (December 3, 2010) (CDS clearing by Chicago
Mercantile Exchange Inc.); 59527 (March 6, 2009), 74 FR 10791 (March
12, 2009), 61119 (December 4, 2009), 74 FR 65554 (December 10,
2009), 61662 (March 5, 2010), 75 FR 11589 (March 11, 2010) and 63387
(November 29, 2010) 75 FR 75502 (December 3, 2010) (CDS clearing by
ICE Trust US LLC); 59164 (December 24, 2008), 74 FR 139 (January 2,
2009) (temporary CDS clearing by LIFFE A&M and LCH.Clearnet Ltd.)
(collectively, ``CDS Clearing Exemption Orders''). LIFFE A&M and
LCH.Clearnet Ltd. allowed their order to lapse without seeking
renewal.
\7\ Most cleared CDS transactions have cleared at ICE Trust US
LLC (``ICE Trust'') or ICE Clear Europe Limited (``ICE Clear
Europe''). However, Eurex Clearing AG (``Eurex'') and the Chicago
Mercantile Exchange Inc. (``CME'') are also authorized to operate
pursuant to the CDS Clearing Exemption Orders. As of October 8,
2010, ICE Trust had cleared approximately $7.1 trillion notional
amount of CDS contracts based on indices of securities and
approximately $490 billion notional amount of CDS contracts based on
individual reference entities or securities. As of October 8, 2010,
ICE Clear Europe had cleared approximately [euro]3.09 trillion
notional amount of CDS contracts based on indices of securities and
approximately [euro]560 billion notional amount of CDS contracts
based on individual reference entities or securities. See https://www.theice.com/marketdata/reports/ReportCenter.shtml. The Commission
has obtained data from The Depository Trust and Clearing Corporation
on new and assigned CDS trades in United States Dollars during the
month of November 2010 for ICE Trust. Cleared CDS trades represented
a small fraction of total trades. Specifically, cleared trades were
5.24% by notional amount of all new or assigned single name trades,
and 20.69% by notional amount of all new or assigned index trades.
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II. Prescribed Rulemaking for Clearing Agencies
A. Title VII of Dodd-Frank Act
Title VII of the Dodd-Frank Act added new provisions to the
Exchange Act that require clearing agencies that clear security-based
swaps (``security-based swap clearing agencies'') to register with the
Commission \8\ and require the Commission to adopt rules with respect
to security-based swap clearing agencies.\9\
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\8\ Public Law 111-203 Sec. 763(b) (adding subparagraph (g) to
Section 17A of the Exchange Act. Pursuant to Section 774 of the
Dodd-Frank Act, the requirement in Section 17A(g) of the Exchange
Act for securities-based swap clearing agencies to be registered
with the Commission takes effect on July 16, 2011).
\9\ Public Law 111-203 Sec. 763(b) (adding subparagraphs (i)
and (j) to Section 17A of the Exchange Act).
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Specifically, new Section 17A(j) of the Exchange Act requires the
Commission to adopt rules governing security-based swap clearing
agencies.\10\ New Section 17A(i) of the Exchange Act also gives the
Commission authority to promulgate rules that establish standards for
security-based swap clearing agencies.\11\ Compliance with any such
rules is a prerequisite to the registration of a clearing agency with
the Commission and is also a condition to the maintenance of that
security-based swap clearing agency's continued registration.\12\
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\10\ Public Law 111-203 Sec. 763(b) (adding subparagraph (j) to
Section 17A of the Exchange Act). See also Public Law 111-203 Sec.
774 of the Dodd-Frank Act (requiring that the provisions of Title
VII take effect on the later of 360 days after the date of the
enactment or, to the extent a provision of Title VII requires a
rulemaking, not less than 60 days after publication of the final
rule or regulation implementing such provision).
\11\ Public Law 111-203 Sec. 763(b) (adding subparagraph (i) to
Section 17A of the Exchange Act).
\12\ Under the Exchange Act, a clearing agency can be registered
with the Commission only if the Commission makes a determination
that the clearing agency satisfies the requirements set forth in
paragraphs (A) through (I) of Section 17A(b)(3) of the Exchange Act.
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B. Payment, Clearing, and Settlement Supervision Act of 2010
Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing,
and Settlement Supervision Act of 2010 (``Clearing Supervision Act''),
establishes an enhanced supervisory and risk control system for
systemically important clearing agencies and other financial market
utilities (``FMUs'').\13\ It provides that the Commission may prescribe
regulations containing risk management standards, taking into
consideration relevant international standards and existing prudential
requirements, for any designated clearing entities it regulates.\14\
The Council has not to date made any designations with respect to
whether any FMU is, or is likely to become, systemically important;
\15\ however, the
[[Page 14474]]
Commission believes it is beneficial to consider the requirements of
the Clearing Supervision Act in its proposed rules for clearing
agencies because the Clearing Supervision Act may apply to one or more
clearing agencies in the future and the Commission preliminarily
believes that its goals are consistent with the goals of Section 17A of
the Exchange Act. Specifically, Congress recognized in the Clearing
Supervision Act that the operation of multilateral payment, clearing or
settlement activities may reduce risks for clearing participants and
the broader financial system, while at the same time creating new risks
that require multilateral payment, clearing or settlement activities to
be well-designed and operated in a safe and sound manner.\16\ The
Clearing Supervision Act is designed, in part, to provide a regulatory
framework to help deal with such risk management issues, which is
generally consistent with the Exchange Act requirement that clearing
agencies be organized in a manner so as to facilitate prompt and
accurate clearance and settlement, safeguard securities and funds and
protect investors.\17\
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\13\ See supra note 1. Under Section 803 of the Clearing
Supervision Act, clearing agencies may be FMUs. Therefore, the
Commission may be the Supervisory Agency of a clearing agency that
is designated as systemically important (``designated clearing
entities'') by the Financial Stability Oversight Council
(``Council''). See 12 U.S.C. 5463. The definition of ``FMU,'' which
is contained in Section 803(6) of the Clearing Supervision Act,
contains a number of exclusions including, but not limited to,
designated contract markets, registered futures associations, swap
data repositories, swap execution facilities, national securities
exchanges, national securities associations, alternative trading
systems, security-based swap data repositories, security-based swap
execution facilities, brokers, dealers, transfer agents, investment
companies and futures commission merchants. 12 U.S.C. 5462(6)(B).
The designation of systemic importance hinges on a determination by
the Council that the failure of, or a disruption to, the functioning
of the FMU could create, or increase, the risk of significant
liquidity or credit problems spreading among financial institutions
or markets and thereby threaten the stability of the financial
system of the United States. See 12 U.S.C. 5463(a)(2)(A)-(E). The
designation of an FMU is significant, in part, because it will
subject such designated entity to heightened oversight consistent
with the terms of the Clearing Supervision Act. For example, the
Clearing Supervision Act requires the Supervisory Agency to examine
at least once annually any FMU that the Council has designated as
systemically important. The Commission intends to conduct such
annual statutory cycle examinations on the Commission's fiscal year
basis. The Commission staff anticipates conducting the first annual
statutory cycle examination of any designated FMU for which it is
the Supervisory Agency in the annual cycle following such
designation.
\14\ See Section 805(a)(2) of the Clearing Supervision Act.
Those regulations may govern ``(A) the operations related to
payment, clearing, and settlement activities of such designated
clearing entities; and (B) the conduct of designated activities by
such financial institutions.'' 12 U.S.C. 5464(a)(2).
\15\ See 12 U.S.C 5321 (among other things establishing the
Council and designating its voting and nonvoting members. In
accordance with Section 804 of the Clearing Supervision Act, the
Council has the authority, on a non-delegable basis and by a vote of
not fewer than two-thirds of the members then serving, including the
affirmative vote of its chairperson, to designate those FMUs that
the Council determines are, or are likely to become, systemically
important. The Council may, using the same procedures as discussed
above, rescind such designation if it determines that the FMU no
longer meets the standards for systemic importance. Before making
either determination, the Council is required to consult with the
Federal Reserve and the relevant Supervisory Agency as determined in
accordance with Section 803(8) of the Clearing Supervision Act). See
also Section 804 setting forth the procedures for giving entities 30
days advance notice and the opportunity for a hearing prior to being
designated as systemically important. 12 U.S.C. 5463.
\16\ 12 U.S.C. 5461(a)(2).
\17\ See 15 U.S.C. 78q-1(b)(3)(A).
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C. Section 17A of Exchange Act
As noted above, in addition to the new authority provided to the
Commission under Titles VII and VIII of the Dodd-Frank Act, the
Commission has existing authority over clearing agencies under the
Exchange Act. For example, entities are required to register with the
Commission pursuant to Section 17A of the Exchange Act \18\ and Rule
17Ab2-1,\19\ prior to performing the functions of a clearing agency.
Under this registration system, the Commission is not permitted to
grant registration unless it determines that the rules and operations
of the clearing agency meet the standards set forth in Section 17A.\20\
If a clearing agency is granted registration, the Commission oversees
the clearing agency to facilitate compliance with the Exchange Act
through the rule filing process for self-regulatory organizations
(``SROs'') and through on-site examinations by Commission staff.
Section 17A also gives the Commission authority to adopt rules for
clearing agencies as necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Exchange Act and prohibits a registered clearing agency
from engaging in any activity in contravention of these rules and
regulations.\21\
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\18\ See 15 U.S.C. 78q-1(b). See also Public Law 111-203 Sec.
763(b) (adding subparagraph (g) to Section 17 of the Exchange Act).
\19\ See 17 CFR 240.17b2-1.
\20\ Specifically, Sections 17A(b)(3)(A)-(I) identify
determinations that the Commission must make about the rules and
structure of a clearing agency prior to granting registration. See
15 U.S.C. 78q-1(b)(3)(A)-(I). The staff of the Commission provided
guidance on meeting the requirements of Section 17A in its
Announcement of Standards for the Registration of Clearing Agencies.
See Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920
(June 23, 1980).
\21\ See 15 U.S.C. 78q-1(d).
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III. Proposed Rules Governing Clearing Agencies
The Commission is proposing several new rules that would set
standards for the operation and governance of clearing agencies. As
noted above, the Dodd-Frank Act specifically gives the Commission
authority to regulate security-based swaps \22\ and to adopt
regulations addressing risk management standards for designated
clearing entities that the Commission regulates. In addition to
considering this specific directive in formulating the proposed rules,
the Commission preliminarily believes that applying certain rules to
all clearing agencies would promote financial stability, one of the
goals of the Dodd-Frank Act, by facilitating prompt and accurate
clearance and settlement of all securities transactions consistent with
Section 17A of the Exchange Act while promoting the Dodd-Frank Act's
stated aims of accountability and transparency.
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\22\ See supra note 4.
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The types of clearing agencies that are subject to the proposed
rules can be divided into four different categories: (i) Clearing
agencies that offer central counterparty (``CCP'') services for
transactions in securities that are not security-based swaps, (ii)
clearing agencies that offer CCP services for transactions in
securities that are security-based swaps; (iii) clearing agencies that
provide non-CCP services for transactions in securities that are not
security-based swaps; and (iv) clearing agencies that provide non-CCP
services for transactions in securities that are security-based swaps.
The table below illustrates how the proposed rules would apply to
different types of clearing agencies. In general, as illustrated in
column ``A'' in the table, clearing agencies offering CCP services
(regardless of whether they offer those services for transactions in
securities that are or are not security-based swaps) would be subject
to most of the proposed rules.\23\ Clearing agencies that offer only
non-CCP services would only be subject to certain of the proposed
rules, depending on whether they offer those services for transactions
in securities that are not security-based swaps (as illustrated in
column ``B'' in the table) \24\ or that are security-based swaps (as
illustrated in column ``C'' in the table).
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\23\ As noted in the table, proposed Rule 17Aj-1 would only
apply to CCPs for security-based swap transactions.
\24\ Within this category, as illustrated in column ``B'', the
proposed rules distinguish between clearing agencies that provide
central securities depository services, and those that do not.
Application of Proposed Rules to Clearing Agencies
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A CCP Clearing Services for
Securities that are or are not B Non-CCP Clearing Services in C Non-CCP Clearing Services for
Security-Based Swaps (``SBS'') Securities that are not SBS Securities that are SBS
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17Ad-22(b)(1): Measurement and management of [cir] ................................. .................................
credit exposures..............................
17Ad-22(b)(2): Margin requirements............. [cir] ................................. .................................
17Ad-22(b)(3): Financial resources............. [cir] ................................. .................................
17Ad-22(b)(4): Model validation................ [cir] ................................. .................................
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17Ad-22(b)(5): Non-dealer access............... [cir] ................................. .................................
17Ad-22(b)(6): Portfolio size and transaction [cir] ................................. .................................
volume thresholds restrictions................
17Ad-22(b)(7): Net capital restrictions........ [cir] ................................. .................................
17Ad-22(c)(1): Records of financial resources.. [cir] ................................. .................................
17Ad-22(c)(2): Audited financial statements.... [cir] [cir] [cir]
17Ad-22(d)(1): Transparent and enforceable [cir] [cir] [cir]
rules.........................................
17Ad-22(d)(2): Participation requirements...... [cir] [cir] [cir]
17Ad-22(d)(3): Custody of assets and investment [cir] [cir] [cir]
risk..........................................
17Ad-22(d)(4): Identification and mitigation of [cir] [cir] [cir]
operational risk..............................
17Ad-22(d)(5): Money settlement risks.......... [cir] [cir] [cir]
17Ad-22(d)(6): Cost-effectiveness.............. [cir] [cir] [cir]
17Ad-22(d)(7): Links........................... [cir] [cir] [cir]
17Ad-22(d)(8): Governance...................... [cir] [cir] [cir]
17Ad-22(d)(9): Information on services......... [cir] [cir] [cir]
17Ad-22(d)(10): Immobilization and ................................. Would Only Apply to Cle.................................
dematerialization of stock certificates....... Agencies that Provide Central
Securities Depository (``CSD'')
Services
17Ad-22(d)(11): Default procedures............. [cir] [cir] [cir]
17Ad-22(d)(12): Timing of settlement finality.. [cir] [cir] .................................
17Ad-22(d)(13): Delivery versus payment........ [cir] [cir] .................................
17Ad-22(d)(14): Controls to address ................................. Would Only Apply to Cle.................................
participants' failure to settle............... Agencies that Provide CSD
Services
17Ad-22(d)(15): Physical delivery risks........ [cir] [cir] .................................
17Aj-1: Dissemination of pricing and valuation Would Only Apply to Cle................................. .................................
information................................... Agencies that Provide CCP
Services for SBS
17Ad-23: Policies and procedures to protect [cir] [cir] [cir]
confidentiality of trading information of
participants..................................
Amendments to Rule 17Ab2-1: Registration of [cir] [cir] [cir]
clearing agencies.............................
17Ad-25: Procedures to identify and address [cir] [cir] [cir]
conflicts of interests........................
17Ad-26: Standards for board or board committee [cir] [cir] [cir]
directors.....................................
3Cj-1: Designation of chief compliance officer. [cir] [cir] [cir]
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[[Page 14476]]
A. Proposed Rule 17Ad-22 Standards for All Clearing Agencies
The Commission is proposing Rule 17Ad-22 to augment the statutory
requirements under the Exchange Act by establishing minimum
requirements regarding how clearing agencies must maintain effective
risk management procedures and controls as well as meet the statutory
requirements under the Exchange Act on an ongoing basis. For a clearing
agency to be registered under Section 17A, it must have the ability to
facilitate the prompt and accurate clearance and settlement of
transactions, safeguard investor funds and securities, remove
impediments to and perfect the mechanism of a national clearance and
settlement system, and generally protect investors.\25\ Also, the
clearing agency's rules must provide adequate access to qualified
participants, fair representation of shareholders and participants,
equitable pricing, fair discipline of participants, and must not impose
any undue burden on competition.\26\ Section 17A of the Exchange Act
explicitly provides the Commission with discretion to update the rules
for clearing agencies consistent with the Exchange Act.\27\ Further,
Section 805(a) of the Dodd-Frank Act directs the Commission to take
into consideration relevant international standards and existing
prudential requirements for clearing agencies that are designated as
FMUs.\28\ The current international standards most relevant to risk
management of clearing agencies are the standards developed by the
Technical Committee of the International Organization of Securities
Commissions (``IOSCO'') and the Committee on Payment and Settlement
Systems (``CPSS'') of the Bank for International Settlements that are
contained in the following reports: Recommendations for Securities
Settlement Systems (2001) (``RSSS''), and Recommendations for Central
Counterparties (2004) (``RCCP'') (collectively ``CPSS-IOSCO
Recommendations'').\29\
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\25\ See 15 U.S.C. 78q-1.
\26\ See id.
\27\ See id.
\28\ 12 U.S.C. 5464(a)(1).
\29\ The complete RSSS and RCCP Reports are available on the Web
site of the Bank for International Settlements at http://www.bis.org/publ/cpss46.htm and http://www.bis.org/publ/cpss64.htm
respectively.
The RSSS and RCCP Reports were drafted by IOSCO and CPSS
(``Task Force''). The Task Force consisted of securities regulators
and central bankers from 19 countries (i.e., Australia, Belgium,
Brazil, China, Czech Republic, France, Germany, Hong Kong, India,
Italy, Japan, Malaysia, Mexico, The Netherlands, Saudi Arabia,
Singapore, Spain, England, and the United States) and the European
Union. The U.S. representatives on the Task Force included staff
from the Commission, the Federal Reserve, and the CFTC. The Federal
Reserve has incorporated the RSSS and RCCP, as well as the Core
Principles for Systemically Important Payment Systems, in its
Federal Reserve Policy on Payment System Risk. The Federal Reserve
applies these standards in its supervisory process and expects
systemically important systems, as determined by the Federal Reserve
and subject to its authority, will complete a self-assessment
against the standards set forth in the policy. See Policy on Payment
System Risk, 72 FR 2518 (January 12, 2007).
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The Commission preliminarily believes that certain aspects of the
CPSS-IOSCO Recommendations should be made to clearly apply to clearing
agencies and that such application would further the objectives and
principles for clearing agencies under the Exchange Act and the Dodd-
Frank Act, including those that are related to sound risk management
practices and to fair and open access. These international standards
were formulated by securities regulators and central banks to promote
sound risk-management practices and encourage the safe design and
operation of entities that provide clearance and settlement services.
The Commission is proposing Rule 17Ad-22 (which is consistent with the
CPSS-IOSCO Recommendations but reflects modifications designed to
tailor the proposed rule to the Exchange Act and the U.S. clearance and
settlement system) because the Commission preliminarily believes that
the rule would help to facilitate prompt and accurate clearance and
settlement, safeguard securities and funds and protect investors.\30\
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\30\ See 15 U.S.C. 78q-1(d).
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The Commission preliminarily believes that the adoption of proposed
Rule 17Ad-22, which is based on the CPSS-IOSCO Recommendations, and the
application of this rule to all clearing agencies would have several
important benefits, including providing a robust framework for
assessing and addressing the risks within clearing agencies. The
Commission requests comment on proposed Rule 17Ad-22 and the
consideration of the CPSS-IOSCO Recommendations in connection with the
proposed rule. The Commission also requests comment on whether the
proposed rules are properly tailored to assess and address the risks at
clearing agencies and whether they are sufficiently clear to enable
clearing agencies to reasonably determine whether they are in
compliance with the rules or whether the Commission should provide
additional guidance.\31\
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\31\ Several clearing agencies have published their evaluations
of their compliance with the CPSS-IOSCO Recommendations on their Web
sites. See http://www.dtcc.com/legal/compliance/assessments.php. In
addition, several clearing agencies, as part of requests for the CDS
Clearing Exemption Orders, have represented to the Commission that
they met the standards set forth in the RCCP. See supra note 6.
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The Commission notes that IOSCO and the CPSS are currently in the
process of revising their existing sets of international standards.\32\
This review is intended to strengthen and clarify the CPSS-IOSCO
Recommendations, as well as the CPSS's existing standards for payment
systems entitled: Core Principles for Systemically Important Payment
Systems. The Commission may, as international standards evolve,
consider additional modifications to its rules as the Commission
determines is appropriate based on its own experience and the
requirements under the Exchange Act.
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\32\ In December 2009, IOSCO and CPSS began a comprehensive
review of existing standards for FMUs, which includes the RSSS and
RCCP. This review intends to strengthen and clarify the standards
based on experience with the standards since their publication and
specifically from lessons learned during the recent financial
crisis.
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Proposed Rule 17Ad-22 contains certain additional requirements that
are not addressed or contemplated by international standards. For
clearing agencies that perform CCP services, these additional
requirements are found in the following proposed rules: (1) Rule 17Ad-
22(b)(3), which would require heightened financial resources for
clearing agencies that provide CCP services for securities that are
security-based swaps; (2) Rule 17Ad-22(b)(5), which would prohibit
membership restrictions based on dealer status; (3) Rule 17Ad-22(b)(6),
which would prohibit membership restrictions based on minimum volume
and transaction thresholds; (4) Rule 17Ad-22(b)(7), which would
prohibit restrictions on clearing agency membership based on minimum
net capital requirements of $50 million or more; and (5) Rule 17Ad-
22(c)(1), which would require calculation and maintenance of records of
the clearing agency's financial resources. \33\
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\33\ Proposed Rule 17Ad-22(c)(2) would apply to all clearing
agencies and require them to post annual audited financial reports
on their Web sites.
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In addition, the Commission is proposing additional rules for all
clearing agencies (whether or not they offer CCP services) that are not
addressed or contemplated by the international standards. These
proposed rules would: (1) Require dissemination of pricing and
valuation information by security-based swap clearing agencies that
perform CCP services (Proposed Rule 17Aj-1); (2) require all clearing
agencies to have adequate safeguards and procedures to protect the
confidentiality of trading information of
[[Page 14477]]
clearing agency participants (Proposed Rule 17Ad-23); (3) exempt
certain security-based swap dealers and security-based swap execution
facilities from the definition of a clearing agency (Proposed Rule
17Ad-24); (4) amend rules concerning registration of clearing agencies
to account for security-based swap clearing agencies and to make other
technical changes (Rule 17Ab2-1); (5) require all clearing agencies to
have procedures that identify and address conflicts of interest
(Proposed Rule 17A-25); (6) require clearing agencies to set standards
for all members of their boards of directors or committees (Proposed
Rule 17Ad-26); and (7) require all clearing agencies to designate a
chief compliance officer (Proposed Rule 3Cj-1).
1. Proposed Rule 17Ad-22(a)
Proposed Rule 17Ad-22(a) contains five definitions. Proposed Rule
17Ad-22(a)(1) would define CCP as a clearing agency that interposes
itself between counterparties to securities transactions to act
functionally as the buyer to every seller and as the seller to every
buyer. Proposed Rule 17Ad-22(a)(2) would define ``central securities
depository services'' to mean services of a clearing agency that is a
securities depository as described in Section 3(a)(23) of the Exchange
Act.\34\ Proposed Rule 17Ad-22(a)(3) would define ``participant'', for
the limited purposes of proposed Rules 17Ad-22(b)(3) and 17Ad-
22(d)(14), to mean that if a participant controls another participant,
or is under common control with another participant, then the
affiliated participants shall be collectively deemed to be a single
participant. Proposed Rule 17Ad-22(a)(4) would define ``normal market
conditions'', for the limited purposes of proposed Rules 17Ad-22(b)(1)
and (2), to mean conditions in which the expected movement of the price
of cleared securities would produce changes in a clearing agency's
exposures to its participants that would be expected to breach margin
requirements or other risk control mechanisms only one percent of the
time. Proposed Rule 17Ad-22(a)(5) would define ``net capital'', for the
limited purposes of proposed Rule 17Ad-22(b)(7), to have the same
meaning as set forth in Rule 15c3-1 under the Exchange Act for broker-
dealers or any similar risk adjusted capital calculation for all other
prospective clearing members.\35\
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\34\ [Clearing agency] also means any person, such as a
securities depository, who (i) acts as a custodian of securities in
connection with a system for the central handling of securities
whereby all securities of a particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred, loaned, or pledged by bookkeeping entry without
physical delivery of securities certificates, or (ii) otherwise
permits or facilitates the settlement of securities transactions or
the hypothecation or lending of securities without physical delivery
of securities certificates. 15 U.S.C. 78c(a)(23).
\35\ As appropriate, the clearing agency would develop risk
adjusted capital calculations for prospective clearing members that
are not broker-dealers.
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The Commission preliminarily believes that these five proposed
definitions would be consistent with the common meaning of these terms
as understood in the clearance and settlement industry. In addition,
the Commission preliminarily believes the definition of ``normal market
conditions'' would be consistent with international use of that term in
the context of clearing agency risk management.\36\ The Commission
intends for these definitions to provide clearing agencies with
appropriate guidance to determine when requirements under proposed Rule
17Ad-22 would apply. The Commission requests comment on the proposed
definitions, including whether any additional clarification would be
helpful.
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\36\ In the context of the RCCP, ``normal market conditions''
means conditions in which the expected movement of the price of
cleared securities would produce changes in a clearing agency's
exposures to its participants that would be expected to breach
margin requirements or other risk control mechanisms only one
percent of the time. See CPSS Publications Recommendations for
Central Counterparties, (November 2004), available at http://www.bis.org/publ/cpss64.htm.
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2. Proposed Rule 17Ad-22(b)
Proposed Rule 17Ad-22(b) would set forth standards that are
applicable to clearing agencies that provide CCP services.
Specifically, the proposed rule would provide standards with respect to
measurement and management of credit exposures, margin requirements,
financial resources, and annual evaluations of the performance of the
clearing agency's margin models. The proposed rule would also require
membership access to clearing agencies for persons that are not dealers
or security-based swap dealers, prohibit the use of minimum portfolio
size and minimum volume transaction thresholds as a condition for
membership at a clearing agency, and permit membership access to a
clearing agency by persons with net capital equal to or greater than
$50 million. The discussion below provides greater detail regarding
each respective standard covered in proposed Rule 17Ad-22(b). The
proposed rule is designed to address risks and participant membership
structures that are specifically linked to the provision of services
associated with a clearing agency interposing itself between
counterparties to securities transactions and acting functionally as
the buyer to every seller and the seller to every buyer (i.e., CCP
services). Accordingly, the Commission preliminarily believes that
these requirements would not need to apply to clearing agencies that do
not provide CCP services because they would not be engaged in
activities that the proposed rule is designed to address.
The Commission preliminarily believes that proposed Rule 17Ad-22(b)
would provide standards designed to help ensure sound risk management
practices at clearing agencies providing CCP services. Further, the
Commission preliminarily believes that the requirements of proposed
Rule 17Ad-22(b) would help ensure that the rules, policies and
procedures of a clearing agency providing CCP services will be designed
to promote fair and open access, to promote the prompt and accurate
clearance and settlement of securities transactions, and to assure the
safeguarding of securities and funds that are in the custody or control
of the clearing agency or for which it is responsible.
Proposed Rule 17Ad-22(b)(1): Measurement and Management of Credit
Exposures
Proposed Rule 17Ad-22(b)(1) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to measure its
credit exposures to its participants at least once each day, and limit
its exposures to potential losses from defaults by its participants in
normal market conditions \37\ so that the operations of the clearing
agency would not be disrupted and non-defaulting participants would not
be exposed to losses that they cannot anticipate or control.
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\37\ See supra note 36.
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The Commission preliminarily believes that measurement and
management of credit exposures can, among other things, reduce the
likelihood in a participant default scenario that losses from default
would disrupt the operations of the clearing agency and its non-
defaulting participants and adversely affect the functioning of the
clearing agency. A clearing agency providing CCP services faces the
risk that its exposures to participants can change dramatically as a
result of changes in prices, in positions, or both. Adverse price
[[Page 14478]]
movements can rapidly increase exposures to participants, and
participants may rapidly change or concentrate their positions through
new trading. If not appropriately measured and managed, such results
could lead to significant liabilities accruing at the clearing agency.
Recognizing that the risks that clearing agencies are likely to
face will change over time, the Commission is proposing that a clearing
agency providing CCP services be required to measure its credit
exposures to its participants at least once each day. The Commission
preliminarily believes this is the minimum frequency of measurement
that would permit a clearing agency to effectively consider the risks
it faces because of the potential for significant changes to the risk
profiles of its participants to change on a daily basis.
In addition to requiring clearing agencies to take steps to measure
their credit exposures to participants, the proposed rule would also
require clearing agencies to limit their exposures to potential losses
from participant defaults. By collecting sufficient margin and having
other resources in place to account for losses arising under normal
market conditions, the Commission expects that a clearing agency would
be able to limit its exposures to potential losses from defaults by its
participants. The Commission preliminarily believes that the proposed
rule should thereby help ensure prompt and accurate clearance and
settlement.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(1). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding measurement
and management of credit exposures sufficiently clear? If not, why not
and what would be a better alternative?
How do current practices of clearing agencies providing
CCP services with respect to measurement and management of credit
exposures compare to the practices that the Commission proposes to
require in this rule? What are the expected incremental costs to
clearing agencies providing CCP services in connection with adding to
or revising their current practices in order to implement the
Commission's proposed rule?
Should the Commission require clearing agencies acting as
CCPs to use any specific confidence level for limiting potential losses
under the proposed rule when clearing certain products, or to use
minimum amounts of market data when calculating credit exposures? Why
or why not?
What level of discretion should the Commission allow
clearing agencies providing CCP services to exercise when measuring and
managing credit exposure? Are there circumstances when such discretion
should be limited?
Is it more difficult for clearing agencies providing CCP
services and their participants to anticipate and control losses
associated with certain types of financial products compared to others?
If so, how should the Commission take this into account when
establishing rules for clearing agency standards? For example, should
the Commission require additional risk management measures to be
applied by clearing agencies providing CCP services when judging the
risks associated with financial products that trade infrequently or
when valuation models for the product are not yet broadly accepted in
the financial market? Why or why not?
Extremely illiquid security-based swap products may be
difficult to clear under a conventional CCP clearing model because it
may be difficult to value them with a degree of accuracy that allows
the CCP to properly manage the risk of those positions. Should the
Commission explore developing alternatives to the requirements
contained in proposed Rule 17Ad-22(b)(1) based on the liquidity of
products a clearing agency clears? What effect would any such
requirements have on the potential development of alternative clearing
models for highly-illiquid products that would convey some of the
benefits of clearing (such as centralized holding of collateral by a
third-party custodian, daily adjustment of variation margin amounts,
daily posting and return of variation margin, independent valuation of
positions, and prompt close-out of positions held by a defaulting
market participant)?
Should the Commission consider requiring clearing agencies
that provide CCP services to measure exposures to participants more or
less frequently than a minimum of once daily?
Proposed Rule 17Ad-22(b)(2): Margin Requirements
Proposed Rule 17Ad-22(b)(2) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to: (i) Use margin
requirements to limit its credit exposures to participants in normal
market conditions; \38\ (ii) use risk-based models and parameters to
set margin requirements; and (iii) review the models and parameters at
least monthly.
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\38\ See supra note 36.
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The Commission preliminarily believes that use of margin
requirements by clearing agencies providing CCP services to collect
assets (e.g., cash or securities) from its participants as a way to
limit exposures to participants in normal market conditions would,
among other things, provide the clearing agency with assets it could
readily use to limit losses incurred by a participant in the event of a
default. By limiting its credit exposure in this manner, a clearing
agency providing CCP services would be less likely to be subject to
disruptions in its operations as a result of a participant default,
thereby promoting prompt and accurate clearance and settlement.
The Commission also preliminarily believes that risk-based models
and parameters should be used to set margin requirements because they
permit a clearing agency providing CCP services to tailor the amount of
margin collected to the needs of the clearing agency. Specifically,
models and parameters for collecting margin that account for the risks
the clearing agency providing CCP services faces when transacting with
a participant may be more likely to result in effective and efficient
margin requirements because the level of margin collected would be
commensurate with the level of risk presented by the participant to the
clearing agency.
In addition, the Commission preliminarily believes that the review
of these models and parameters should be required to occur at least
monthly. Market conditions and risks are constantly changing and
therefore the models and parameters used by a clearing agency providing
CCP services to set margin may not accurately reflect the needs of a
clearing agency if they are permitted to remain static. The Commission
recognizes, however, that there may be benefits to maintaining some
stability with respect to margin levels in order to limit operational
difficulties. Accordingly, the Commission is proposing that clearing
agencies providing CCP services be required to review their models and
parameters at least monthly because the Commission preliminarily
believes that such time frame would limit the potential that such
parameters or models will become stale while also providing the
clearing agency flexibility to maintain some stability with respect
[[Page 14479]]
to determinations for margin requirements.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(2). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding margin
requirements sufficiently clear? If not, why not and what would be a
better alternative?
How do current practices of clearing agencies regarding
margin requirements compare to the practices that the Commission
proposes to require in this rule? What are the expected incremental
costs to clearing agencies in connection with adding to or revising
their current practices in order to implement the Commission's proposed
rule?
Should the Commission require clearing agencies providing
CCP services to impose any special margin or intraday margin
requirements in certain circumstances? Are there circumstances when
special margin or intraday margining would not be appropriate? Why or
why not?
Should the Commission allow clearing agencies providing
CCP services to exercise significant discretion when establishing
margin practices? Why or why not? Are there circumstances when such
discretion should be limited? Is there a risk that clearing agencies
providing CCP services may lower margin standards to compete for
business? If so, how should the Commission take such factors into
account when establishing rules for clearing agencies providing CCP
services?
Should the Commission consider requiring a clearing agency
that provides CCP services to review its margin model and parameters
more or less frequently than at least monthly?
Proposed Rule 17Ad-22(b)(3): Financial Resources
Proposed Rule 17Ad-22(b)(3) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
sufficient financial resources to withstand, at a minimum, a default by
the participant to which it has the largest exposure in extreme but
plausible market conditions, provided that a security-based swap
clearing agency shall maintain sufficient financial resources to
withstand, at a minimum, a default by the two participants to which it
has the largest exposures in extreme but plausible market
conditions.\39\
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\39\ See proposed Rule 17Ad-22(a)(3), supra Section II.A.1
(defining ``participant'' for purposes of proposed Rule 17Ad-
22(b)(3)).
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The Commission preliminarily believes that requiring a clearing
agency, other than a security-based swap clearing agency, that provides
CCP services to maintain sufficient financial resources to withstand,
at a minimum, a default by the participant to which it has the largest
exposure in extreme but plausible market conditions would, among other
things, reduce the likelihood that a default would create losses that
would disrupt the operations of the clearing agency and adversely
affect the clearing agency's non-defaulting participants. However, the
Commission preliminarily believes that security-based swap clearing
agencies that provide CCP services face additional risk-management
challenges because of factors unique to the security-based swaps
market, such as more limited historical information on pricing and the
jump-to-default risk \40\ associated with certain security-based swaps,
such as CDS. The Commission preliminarily believes that to promote
prompt and accurate clearance and settlement and maintain higher levels
of financial resources to account for these risks, it is important for
security-based swap clearing agencies that provide CCP services to be
able to withstand a default by the two participants to which the
clearing agency has its largest exposures in extreme but plausible
market conditions. Moreover, the Commission expects that when a
clearing agency that provides CCP services determines what level of
financial resources would be sufficient to account for exposures in
extreme but plausible market conditions, the clearing agency would
consider potential losses that would be greater than those resulting
from observed periods of significant volatility or disturbances.
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\40\ Jump-to-default risk relates to the possibility of a
reference entity unexpectedly experiencing a credit event over a
short period resulting in significant changes in the value of any
CDS contracts written on that particular reference entity. For
example, a seller of a CDS could be collecting regular premiums with
little expectation that the reference entity may default. However,
if that reference entity suddenly experiences a credit event, it
will trigger an unexpected obligation on the protection seller to
pay a lump sum, dependent on the size of the contract, to the
protection buyer. See generally Darrell Duffie and Haoxiang Zhu,
Does a Central Clearing Counterparty Reduce Counterparty Risk?
(Stanford Univ. 2010), available at http://www.stanford.edu/~duffie/
DuffieZhu.pdf.
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(3). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding requiring
clearing agencies providing CCP services to maintain sufficient
financial resources sufficiently clear? If not, why not and what would
be a better alternative?
Should the Commission require all clearing agencies
providing CCP services, instead of only those clearing security-based
swaps, to maintain sufficient financial resources to withstand a
default by the two participants to which it has the largest exposures
in extreme but plausible market conditions? Should all or any subset of
clearing agencies be required to maintain sufficient financial
resources based on more or less than two participant defaults? For
example, should the financial resources requirements be different for
certain clearing agencies, such as security-based swap clearing
agencies or those designated as systemically important under the
Clearing Supervision Act? Should the Commission require that financial
resources be measured based on a different standard than resources
needed to withstand default by a certain number of participants, such
as a percentage of the total business conducted by the clearing agency?
How do current practices of clearing agencies pertaining
to financial resources compare to the practices that the Commission
proposes to require in this rule? What are the expected incremental
costs to clearing agencies in connection with adding to or revising
their current practices in order to implement the Commission's proposed
rule?
Are the financial resources standards for clearing
agencies providing CCP services proposed by the Commission sufficient
for the proper functioning of a clearing agency? Should a clearing
agency providing CCP services be able to mutualize losses during a
default using financial resources designed to cover price movements?
Should the Commission establish more specific rules? For example,
should the Commission establish standards for the level of clearing
agency resources maintained in a guarantee fund as opposed to a margin
fund, or should clearing agencies providing CCP services be given
discretion to manage the composition of their financial resources as
they see fit? Why or why not? Should the Commission establish more
prescriptive requirements concerning the financial resources of certain
clearing agencies providing CCP services, such as those
[[Page 14480]]
that clear security-based swaps or those that are designated as
systemically important under the Clearing Supervision Act?
Should the Commission provide additional guidance
regarding what constitutes ``extreme but plausible market conditions''?
Does allowing clearing agencies providing CCP services discretion to
interpret this term create uncertainty or introduce more risk into the
financial system than might otherwise be the case?
What are clearing agencies' providing CCP services and
their participants' incentives to maintain financial resources to
withstand the foreseeable consequences of participant defaults? Are
there identifiable circumstances in which these self-interested
incentives may vary? For example, do clearing agencies providing CCP
services with public shareholders have different incentives than
clearing agencies providing CCP services that are member-owned? Can the
capital structure of the clearing agency providing CCP services and the
order in which losses are suffered by defaulting parties, surviving
participants and any public shareholders affect the level of risk
accepted by the clearing agency? If so, how should the Commission take
these factors into account when establishing rules for clearing
agencies providing CCP services?
Proposed Rule 17Ad-22(b)(4): Model Validation
Proposed Rule 17Ad-22(b)(4) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide for an
annual model validation process consisting of evaluating the
performance of the clearing agency's margin models and the related
parameters and assumptions associated with such models by a qualified
person who does not perform functions associated with the clearing
agency's margin models (except as part of the annual model validation)
and does not report to a person who performs these functions.\41\
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\41\ Any person responsible for supervising the operation of the
clearing agency's margin model would be viewed as performing the
functions associated with the clearing agency's margin model and
could not therefore have supervisory authority over the person
conducting the model validation.
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The Commission preliminarily believes that clearing agencies that
provide CCP services need to have a qualified person conduct a review
of models that are used to set margin levels, along with related
parameters and assumptions, in order to assure that the models perform
in a manner that facilitates prompt and accurate clearance and
settlement of transactions. In determining whether a person is
qualified to conduct the model validation, clearing agencies providing
CCP services could consider several factors, including the person's
experience in validating margin models, expertise in risk management
generally, and understanding of the clearing agency's operations and
procedures.
In addition, the Commission is proposing that the person conducting
the model validation be a person who does not perform functions
associated with the clearing agency's margin models (except as part of
the annual model validation) and does not report to a person who
performs these functions. The Commission preliminarily believes that a
review by a person who is not involved in the day-to-day operation of
the margin model is important to identify potential vulnerabilities or
limitations and to promote a critical evaluation of the model. This is
because a person involved in the functions related to the model's
operation, or someone who reports to such a person, may be less likely
to critically evaluate the margin model because of preconceived views
or a desire not to find issues with a model that they help to
operate.\42\ The Commission preliminarily believes that the person
validating the clearing agency's margin model should be sufficiently
free from outside influences so that he or she can be completely candid
in their assessment of the model.
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\42\ Proposed Rule 17Ad-22(b)(4), however, would not prevent a
person conducting the model validation from being employed by the
clearing agency if the conditions in the proposed rule are
satisfied. For example, a qualified member of the internal audit
function that operates under a separate reporting line may be able
to provide the model validation.
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Finally, the Commission is proposing that the model validation be
conducted on an annual basis. The Commission preliminarily believes
that conducting the model validation on an annual basis would provide a
sufficiently frequent evaluation period because model performance
ordinarily would not be expected to vary significantly over short
periods but should be re-evaluated as market conditions change.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(4). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule requiring clearing
agencies to provide for a model validation sufficiently clear? If not,
why not and what would be a better alternative?
What are the advantages and disadvantages of requiring an
annual model validation? Should a more or less frequent model
validation be required? Should the model validation be specifically
triggered as a result of any material change in the clearing agency,
such as the introduction of new products or the addition of portfolio
margining arrangements with other clearing agencies?
Should the Commission place more or less stringent
restrictions on the type of person who is permitted to conduct the
model validation? For example, should the Commission prescribe any
specific qualifications that the person conducting the model validation
should have? Should the Commission require an outside consultant be
engaged to conduct the model validation? Should persons that perform
functions associated with the clearing agency's margin model be able to
conduct the model validation?
Does the proposal provide sufficient or excessive
separation of the person conducting the model validation from the
persons who develop and administer the model? In either case, please
explain. Should the Commission adopt additional requirements to help
ensure that the persons conducting the model validation are free from
retaliation and influence? If so, please explain. What costs or burdens
might such additional requirements impose on the effective validation
of models?
Proposed Rule 17Ad-22(b)(5): Non-Dealer Member Access
Proposed Rule 17Ad-22(b)(5) requires a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide the
opportunity for a person that does not perform any dealer \43\ or
security-based swap dealer \44\ services to
[[Page 14481]]
obtain membership on fair and reasonable terms at the clearing agency
in order to clear securities for itself or on behalf of other persons.
Dealer and security-based swap dealer services generally involve
services designed to facilitate securities transactions by buying and
selling securities for a person's own account. The Commission
preliminarily believes that requiring clearing agencies that perform
CCP services to allow persons who are not dealers or security-based
swap dealers to become members of the clearing agency will promote more
competition in and access to clearing through facilitating indirect
clearing arrangements, commonly referred to as correspondent clearing.
Correspondent clearing is an arrangement between a current participant
of a clearing agency and a non-participant that desires to use the
clearing agency for clearance and settlement services.
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\43\ The term ``dealer'' is defined in Section 3(a)(5) of the
Exchange Act and means any person engaged in the business of buying
and selling securities for such person's own account through a
broker or otherwise. The definition contains an exception for a
person that buys or sells securities for such person's own account,
either individually or in a fiduciary capacity, but not as a part of
a regular business. There is also an exception for banks engaging in
certain specified activities. See 15 U.S.C. 78c(a)(5) for the
complete definition.
\44\ Pursuant to Section 761 of the Dodd-Frank Act, the term
``security-based swap dealer'' is added as Section 3(a)(71) of the
Exchange Act, 15 U.S.C. 78c(a), and generally means any person who
(A) holds itself out as a dealer in security-based swaps; (B) makes
a market in security-based swaps; (C) regularly enters into
security-based swaps with counterparties as an ordinary course of
business for its own account; or (D) engages in any activity causing
it to be commonly known in the trade as a dealer or market maker in
security-based swaps. See Public Law 111-203, Section 761 for the
complete definition. See also Exchange Act Release No. 63452
(December 7, 2010), 75 FR 80174 (December 21, 2010), supra note 4.
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The Commission has previously noted that in situations where direct
access to clearing agencies is limited by reasonable participation
standards firms that do not meet these standards may still be able to
access clearing agencies through correspondent clearing arrangements
with direct participants.\45\ Such a process would involve the non-
participant entering into a correspondent clearing arrangement with a
participant so that the transaction may be submitted by the participant
to the clearing agency. Thus, the success of correspondent clearing
arrangements depends on the willingness of participants to enter into
such arrangements with non-participant firms which may act as direct
competitors to the participants in the participants' capacity as
dealers or security-based swap dealers in the market for buying or
selling the relevant securities. Given that participants that are
dealers or security-based swap dealers may have an incentive to
restrict clearing access to potential competitors, correspondent
clearing arrangements may not be readily established without providing
participants that do not provide dealer or security-based swap dealer
services with the ability to become members of a clearing agency and
thereby help develop correspondent clearing arrangements.
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\45\ See Exchange Act Release No. 63107 (October 14, 2010), 75
FR 65882 (October 26, 2010) (Ownership Limitations and Governance
Requirements for Security-Based Swap Clearing Agencies, Security-
Based Swap Execution Facilities, and National Securities Exchanges
with Respect to Security-Based Swaps under Regulation MC).
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At the same time, the Commission recognizes that persons who are
not dealers or security-based swap dealers may fail to meet other
standards for membership at a clearing agency, such as the operational
capabilities required for direct participation. Proposed Rule 17Ad-
22(b)(5) would not prohibit clearing agencies that provide CCP services
from taking these factors into account when establishing membership
criteria for non-dealers. Rather, the proposal would prohibit clearing
agencies that provide CCP services from denying membership on fair and
reasonable terms to otherwise qualified persons solely by virtue of the
fact that they do not perform any dealer or security-based swap dealer
services.
The Commission preliminarily believes that the incentives of
persons who do not provide dealer or security-based swap dealer
services to promote access at the clearing agency that provides CCP
services would not be limited by a desire to restrict competition in
the market for buying or selling the relevant securities. Accordingly,
the Commission preliminarily believes that permitting such persons to
become members of a clearing agency that provides CCP services may
foster the development of correspondent clearing arrangements that
would allow dealers and security-based swap dealers, who may otherwise
not be able to meet reasonable participation standards of a clearing
agency, to obtain access to the clearing agency through correspondent
clearing arrangements. The Commission preliminarily believes this would
be beneficial because it could result in greater competition in and
access to clearing.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(5). In addition, the Commission requests
comments on the following specific issues:
In addition to prohibiting denial of membership based on
whether a person provides dealer or security-based swap dealer services
as a way to facilitate greater indirect access to clearing, should the
Commission consider other measures to promote access to clearing at
clearing agencies that provide CCP services, including any requirements
designed to promote greater direct access to clearing (e.g., adding
specific membership categories)?
Should clearing agencies that provide CCP services be
required to have policies and procedures that are designed to promote
membership by non-dealers? If so, what would be the advantages and
disadvantages of requiring the clearing agency to periodically measure
its performance against the objectives contained in such policies and
procedures, and who within the clearing agency should be responsible
for conducting such a review (for instance the chief compliance
officer)?
Is the Commission's proposed rule requiring clearing
agencies that provide CCP services to provide the opportunity for a
person that does not perform any dealer or security-based swap dealer
services to obtain membership at the clearing agency to clear
securities for itself or on behalf of other persons sufficiently clear?
If not, why not?
Should the Commission consider more prescriptive
regulations to specify the criteria that clearing agencies should use
to grant membership privileges to persons that do not perform any
dealer or security-based swap dealer services to clear securities for
themselves or on behalf of other persons? Please explain why or why
not.
What are the potential advantages and disadvantages of
having persons that do not provide dealer or security-based swap dealer
services as members of a clearing agency?
If a clearing agency that provides CCP services does not
have rules that facilitate correspondent clearing, should the
Commission consider requiring that clearing agency to justify to the
Commission why its rules do not facilitate correspondent clearing? What
would be the advantages and disadvantages of such a requirement? What
are the potential reasons why a clearing agency may not have rules that
facilitate correspondent clearing arrangements?
Should the Commission consider limiting the proposed
requirement for providing membership access to persons who do not
provide dealer or security-based swap dealer services to a certain
category of clearing agencies, such as security-based swap clearing
agencies that provide CCP services or those designated as systemically
important? Please explain why or why not. In particular, are there
special considerations, such as market concentration, affecting
security-based swap clearing agencies that provide CCP services that
make access to those clearing agencies for non-dealers particularly
important? If not, why not? If so, what are those considerations and
how would this requirement address
[[Page 14482]]
them? Do any similar considerations exist, or is there a potential that
similar considerations could exist in the future, with respect to
clearing agencies that clear securities other than security-based
swaps? Would there be any advantages or disadvantages to maintaining
one standard for all clearing agencies that provide CCP services?
Please explain.
Proposed Rule 17Ad-22(b)(6): Portfolio Size and Transaction Volume
Thresholds Restrictions
Proposed Rule 17Ad-22(b)(6) prohibits a clearing agency that
provides CCP services from having membership standards that require
that participants maintain a portfolio of any minimum size or that
participants maintain a minimum transaction volume. The Commission
notes that the proposed rule would not prohibit a clearing agency that
provides CCP services from considering portfolio size and transaction
volume as one of several factors when reviewing a potential
participant's operations. Rather, the proposed rule would prohibit the
establishment of minimum portfolio sizes or transaction volumes that by
themselves would act as barriers to participation by new participants
in clearing. Such minimum thresholds would not function as a good
indicator of whether a participant is able to meet its obligations to a
clearing agency.\46\ This is because new participants to a clearing
agency that provides CCP services that do not initially intend to
transact in substantial size or volume may nevertheless have the
operational and financial capacity to perform the activities that other
participants are able to perform. Therefore, the Commission
preliminarily believes that the proposed rule may help to facilitate
the requirement in Section 17A of the Exchange Act that the rules of a
clearing agency permit fair and open access.\47\
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\46\ Proposed Rule 17Ad-22(b)(6) would not prohibit a clearing
agency from imposing maximums portfolio sizes or transaction volume
amounts.
\47\ See infra note 59.
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(6). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule prohibiting clearing
agencies that provide CCP services from having membership standards
that require participants to maintain a portfolio of any minimum size
or to meet a minimum transaction volume threshold sufficiently clear?
If not, why not?
What are the potential advantages and disadvantages of
prohibiting clearing agency membership standards from requiring
participants to maintain a minimum portfolio size or meet a minimum
transaction volume threshold? Please explain.
Should the Commission consider imposing the proposed
requirements on all clearing agencies, rather than only those that
provide CCP services? Why or why not?
Should the Commission consider prohibiting only security-
based swap clearing agencies that provide CCP services from having
membership standards that require participants to maintain a minimum
portfolio size or to maintain a minimum transaction volume? Please
explain why or why not. In particular, are there special considerations
affecting security-based swap clearing agencies that provide CCP
services that make it particularly important to prevent use of these
specific criteria in their membership standards? If so, what are those
special considerations and how would this requirement address them? If
not, in what ways would such a requirement impact the operations of
security-based swap clearing agencies that provide CCP services and
other types of clearing agencies? Would there be advantages to
maintaining one standard for all clearing agencies that provide CCP
services? Why or why not?
Proposed Rule 17Ad-22(b)(7): Net Capital Restrictions
Proposed Rule 17Ad-22(b)(7) requires a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide a person
that maintains net capital \48\ equal to or greater than $50 million
with the opportunity to obtain membership at the clearing agency, with
any net capital requirements being scalable so that they are
proportional to the risks posed by the participant's activities to the
clearing agency. This means that while a clearing agency that provides
CCP services could not restrict access to the clearing agency solely
because a participant does not have a net capital level above $50
million, the clearing agency's policies and procedures could be
reasonably designed to limit the activities of the participant in
comparison to the activities of other participants that maintained a
higher net capital level. For example, as a way to help make its
requirements scalable, a clearing agency may elect to place limits on
its potential exposure to participants operating at certain net capital
thresholds by restricting the maximum size of the portfolio such
participants are permitted to maintain at the clearing agency. The
Commission preliminarily believes that persons that maintain a net
capital level of $50 million would have sufficient net capital to be
able to participate at some level in a clearing agency that provides
CCP services, provided that they are able to comply with other
reasonable membership standards. Based on broker-dealer reporting data
available to the Commission, the $50 million threshold for net capital
is a standard that only approximately 4% of the total number of broker-
dealers could satisfy. Accordingly, the Commission preliminarily
believes that prohibitions on membership access that are based solely
on persons having net capital equal to or greater than $50 million
could introduce unnecessary barriers to clearing access. The Commission
also preliminarily believes that the proposed rule would facilitate
sound risk management practices by the clearing agencies by encouraging
the clearing agencies to examine and articulate the benefits of higher
net capital requirements as a result of having clearing agencies
develop scalable membership standards that link the nature and degree
of participation with the potential risks posed by the participant.\49\
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\48\ Proposed Rule 17Ad-22(a)(5) would define ``net capital'',
for the limited purposes of proposed Rule 17Ad-22(b)(7), to have the
same meaning as set forth in Rule 15c3-1 under the Exchange Act for
broker-dealers or any similar risk adjusted capital calculation for
all of other prospective clearing members.
\49\ The Commission notes there are examples of capital-related
requirements that differentiate among types of participants. For
instance, the Fixed Income Clearing Corporation has maintained a $50
million net worth requirement and $10 million excess net capital
requirement for its Category 1 Dealer Netting Members and a $25
million net worth requirement and $10 million excess net capital
requirement for its Category 2 Dealer Netting Members.
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Proposed Rule 17Ad-22(b)(7) also permits a clearing agency to
provide for a higher net capital requirement (i.e., higher than $50
million) as a condition for membership at the clearing agency if the
clearing agency demonstrates to the Commission that such a requirement
is necessary to mitigate risks that could not otherwise be effectively
managed by other measures, such as scalable limitations on the
transactions that the participants may clear through the clearing
agency, and the Commission approves the higher net capital requirement
as part of a rule filing or
[[Page 14483]]
clearing agency registration application. The Commission preliminarily
believes that by providing a method for clearing agencies to impose
higher net capital requirements in circumstances where such
requirements are necessary to mitigate risks, the proposed rule would
provide appropriate flexibility for risk management purposes.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(b)(7). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule limiting the ability of
clearing agencies that provide CCP services to deny membership access
to participants with $50 million or more in net capital sufficiently
clear? If not, why not?
What are advantages or disadvantages of requiring a
clearing agency that provides CCP services to provide a person that
maintains a net capital equal to or greater than $50 million with the
ability to obtain membership at the clearing agency, with any net
capital requirements being scalable so that they are proportional to
the risks posed by the participant's activities to the clearing agency?
Should the Commission consider a higher or lower threshold
for net capital than the proposed $50 million amount? Please explain
and describe the rationale for the desired threshold amount.
Should the Commission consider providing for the
adjustment of the $50 million net capital threshold to reflect
inflation, deflation or other factors? If so, how should the Commission
make such adjustment?
Would access to clearing agencies that provide CCP
services by dealers or security-based swap dealers that are not
currently members of such clearing agencies be significantly improved
as a result of the proposed requirement?
Are there any difficulties that clearing agencies that
provide CCP services may encounter in implementing a system that seeks
to scale net capital to the risk that a participant brings to a
clearing agency? Would clearing agencies be able to effectively model
such risks to prevent the potential of significant losses above the
amounts of margin collected? How would clearing agencies seek to limit
the activities of participants to prevent the risk of significant
losses above the amounts of margin collected?
Does the proposal, to permit a clearing agency to provide
for a higher net capital requirement (i.e., higher than $50 million) as
a condition for membership at the clearing agency if the clearing
agency demonstrates to the Commission that such a requirement is
necessary to mitigate risks that could not otherwise be effectively
managed by other measures, provide sufficient flexibility to be able to
address potential risk management concerns? Would the proposal lead to
higher or lower levels of risk at clearing agencies? Please explain.
Should the Commission consider requiring only security-
based swap clearing agencies that provide CCP services to be subject to
this requirement? Please explain why or why not. In particular, are
there special considerations affecting security-based swap clearing
agencies that provide CCP services, such as market concentration, that
make it particularly important for a person that maintains net capital
equal to or greater than $50 million to have the ability to obtain
membership? If so, what are those special considerations and how would
this requirement address them? If not, in what ways would this
requirement impact the operations of security-based swap clearing
agencies that provide CCP services and other clearing agencies? Would
there be any advantages or disadvantages to maintaining one requirement
for all clearing agencies that provide CCP services? Please explain.
3. Proposed Rule 17Ad-22(c)
Proposed Rule 17Ad-22(c)(1) would provide that each fiscal quarter
(based on calculations made as of the last business day of the clearing
agency's fiscal quarter), or at any time upon Commission request, a
clearing agency that performs central counterparty services shall
calculate and maintain a record \50\ of the financial resources
necessary to meet its requirement in proposed Rule 17Ad-22(b)(3) and
sufficient documentation to explain the methodology it uses to compute
such financial resource requirement.
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\50\ See Exchange Act Rule 17a-1 (17 CFR 240.17a-1). Clearing
agencies may destroy or otherwise dispose of records at the end of
five years consistent with Exchange Act Rule 17a-6 (17 CFR 240.17a-
6).
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The Commission preliminarily believes that it would be appropriate
to require clearing agencies that provide CCP services to make these
calculations quarterly or at any time based on the request of the
Commission because this proposed requirement would provide a periodic
update of the financial resources that are needed as market conditions
change, while also providing flexibility for the Commission to request
such calculations on a real-time basis, which may be useful during
periods of market stress or other circumstances where more timely
information is desired. These calculations and related documentation
should help the Commission in its oversight of clearing agencies'
compliance with proposed Rule 17Ad-22(b)(3) by providing a clear record
of the method used by the clearing agency providing CCP services to
maintain sufficient financial resources.
Proposed Rule 17Ad-22(c)(2) would require a clearing agency to post
on its Web site an annual audited financial report. Each financial
report would be required to (i) be a complete set of financial
statements of the clearing agency for the most recent two fiscal years
of the clearing agency and be prepared in accordance with U.S.
generally accepted accounting principles (``U.S. GAAP''), except that
for a clearing agency that is a corporation or other organization
incorporated or organized under the laws of any foreign country, the
financial statements may be prepared according to U.S. GAAP or
International Financial Reporting Standards as issued by the
International Accounting Standards Board (``IFRS''); (ii) be audited in
accordance with standards of the Public Company Accounting Oversight
Board by a registered public accounting firm that is qualified and
independent in accordance with Rule 2-01 of Regulation S-X (17 CFR
210.2-01); and (iii) include a report of the registered public
accounting firm that complies with paragraphs (a) through (d) of Rule
2-02 of Regulation S-X (17 CFR 210.2-02). The Commission preliminarily
believes that requiring the posting of the clearing agency's audited
annual financial report would provide an additional layer of
information about the activities and financial strength of the clearing
agency that market participants may find useful in assessing their use
of the clearing agency's services.\51\
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\51\ The requirements of proposed Rule 17Ad-22(c)(2) concerning
the audited annual financial report would apply individually to each
respective clearing agency.
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(c). In addition, the Commission requests comments
on the following specific issues:
Is the Commission's proposed rule regarding calculating
and maintaining a record of the financial resources necessary pursuant
to proposed Rule 17Ad-22(b)(3) sufficiently clear? If not,
[[Page 14484]]
why not and what would be a better alternative?
How do current practices by clearing agencies providing
CCP services compare to the practices that the Commission proposes
requiring in this rule with respect to determining needed financial
resources? What are the expected incremental costs to clearing agencies
that provide CCP services in connection with adding to or revising
their current practices in order to implement the Commission's proposed
rule?
Should the Commission require calculation of the financial
resources related information more or less frequently than quarterly?
Why or why not?
Should the Commission require any other financial
statements of a clearing agency to be posted on its Web site, such as
quarterly financial statements?
What are the advantages and disadvantages of permitting a
financial report to be in compliance with IFRS as an alternative to
U.S. GAAP? If the Commission adopts the proposal to permit certain
clearing agencies to report using IFRS as published by the IASB, should
the Commission require a reconciliation to U.S. GAAP for specified
accounts? If so, what accounts or items would be most useful to
participants and other regulators? Would permitting only clearing
agencies that are incorporated or organized under the laws of any
foreign country to report under IFRS create any incentives for changing
jurisdictions of incorporation or organization? If it is permitted,
should we exclude certain clearing agencies, such as those who fall
within one or more of the following categories: (i) Those whose
financial reports have not been audited by an independent public
accountant inspected by the PCAOB, (ii) those who have not received a
``clean'' audit opinion, or (iii) those who have previously had to
correct a material error in their financial statements?
4. Proposed Rule 17Ad-22(d)
Proposed Rule 17Ad-22(d) would set forth certain standards that
relate to clearance and settlement processes. The areas addressed
include: (1) Transparent and enforceable rules and procedures; (2)
participation requirements; (3) custody of assets and investment risk;
(4) operational risk; (5) money settlement risk; (6) cost-
effectiveness; (7) links; (8) governance; (9) information on services;
(10) immobilization and dematerialization of stock certificates; (11)
default procedures; (12) timing of settlement finality; (13) delivery
versus payment; (14) risk controls to address participants' failures to
settle; and (15) physical delivery risks. The discussion below provides
greater detail regarding each respective standard covered in proposed
Rule 17Ad-22(d).
Proposed Rule 17Ad-22(d)(1): Transparent and Enforceable Rules and
Procedures
Proposed Rule 17Ad-22(d)(1) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for a well founded,
transparent and enforceable (legally and practically) structure for
each aspect of their activities in all relevant jurisdictions.\52\ The
clearing agency should have written policies and procedures\53\ in
place that, at a minimum, address the significant aspects of a clearing
agency's operations and risk management in order to provide a well
founded legal framework and must be clear, internally consistent, and
readily accessible by the public in order to provide a transparent
legal framework. In addition, the clearing agency must be able to
enforce its policies and procedures that contemplate enforcement by the
clearing agency. Moreover, policies and procedures that govern or
create remedial measures that a party other than the clearing agency
(such as a clearing member) can undertake to seek redress or to promote
compliance with applicable rules must be enforceable.\54\ For the
clearing agency's policies and procedures to be enforceable, a clearing
agency must have appropriate means to compel parties to comply in a
timely manner, including members or service providers of clearing
agencies that are non-U.S. persons. The Commission preliminarily
believes this proposed requirement would help to reduce the legal risks
involved in the clearance and settlement process. Such legal risks
include, among other things, the likelihood that the policies and
procedures of a clearing agency are incomplete, opaque, or not
enforceable and will therefore adversely affect the functioning of the
clearing agency.\55\ Because they would function to reduce these legal
risks, the Commission preliminarily believes that well founded,
transparent and enforceable policies and procedures established by the
clearing agency to underpin the clearing agency's operational and
business activities are essential to a clearing agency's ability to
facilitate the prompt and accurate clearance and settlement of
securities transactions and safeguard securities and funds as required
for the protection of investors by Section 17A of the Exchange Act.\56\
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\52\ A relevant jurisdiction would include, among others,
activities (i) in the United States, (ii) involving any means of
interstate commerce, or (iii) in respect to providing clearing
services to any U.S. person. For clearing agencies that operate in
multiple jurisdictions, this also could include resolving possible
conflicts of laws issues that the clearing agency may encounter.
\53\ Clearing agencies are SROs as defined in Section 3(a)(26)
of the Exchange Act. A stated policy, practice, or interpretation of
an SRO, such as a clearing agency's written policies and procedures,
would generally be deemed to be a proposed rule change. See 17 CFR
240.19b-4.
\54\ The Commission preliminarily believes that proposed Rule
17Ad-22(d)(1) would augment the Exchange Act requirement that the
rules of the clearing agency must provide that its participants
shall be appropriately disciplined for any violation of any
provision of the rules of the clearing agency. See 15 U.S.C. 78q-
1(b)(3)(G).
\55\ See generally, RSSS Recommendation 1, Legal Framework and
RCCP Recommendation 1, Legal Risk.
\56\ 15 U.S.C. 78q-1(a)(1)(A).
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(1). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding policies and
procedures providing for a well founded, transparent, and enforceable
legal framework sufficiently clear? If not, why not? Is there a better
alternative?
How would this proposal affect the current practices of
clearing agencies in formulating policies and procedures? Would the
proposed rule affect the costs of providing clearing agency services?
Please explain.
What are the advantages and disadvantages of taking into
account that legal risks may vary by the types of services offered by
clearing agencies and whether the clearing agency operates in multiple
jurisdictions? Are there any considerations, such as issues concerning
compliance with regulations under various jurisdictions, that the
Commission should take into account for clearing agencies operating in
multiple jurisdictions?
Should the Commission consider more prescriptive rules to
define how clearing agencies would provide for a well founded,
transparent and enforceable legal framework? Please explain why or why
not. Alternatively, should the Commission consider more prescriptive
rules that would apply in the context of approval of a clearing
agency's application for registration?
Should the Commission require a clearing agency to submit
legal opinions or other supporting evidence to demonstrate the legal
adequacy of the mechanisms at the clearing agency that
[[Page 14485]]
are in place to handle participant defaults?
Proposed Rule 17Ad-22(d)(2): Participation Requirements
Proposed Rule 17Ad-22(d)(2) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to require participants to have
sufficient financial resources and robust operational capacity to meet
obligations arising from participation in the clearing agency. This
proposed requirement is intended to reduce the likelihood of defaults
by participants, while also providing flexibility to tailor standards
that are linked to the obligations of the participant. As a result, the
Commission preliminarily believes this requirement would protect
investors and facilitate prompt and accurate clearance and settlement
by promoting membership standards at clearing agencies that are likely
to limit the potential for defaults.
The proposed rule also would require clearing agencies to have
procedures in place to monitor that participation requirements are met
on an ongoing basis. Operational and financial stability of
participants is subject to market forces and can therefore change over
time. Because participants collectively contribute to the operational
and financial stability of a clearing agency, the Commission
preliminarily believes that the proposed requirement to continue to
monitor compliance with the clearing agency's participation
requirements supports the Exchange Act requirement that clearing
agencies are able to facilitate prompt and accurate clearance and
settlement.\57\
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\57\ 15 U.S.C 78q-1(b)(3)(A).
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In addition, clearing agencies would be required to have
participation requirements that are objective,\58\ publicly disclosed,
and facilitate fair and open access.\59\ The Commission preliminarily
believes this requirement would foster compliance with the requirement
under Section 17A of the Exchange Act that the rules of a clearing
agency must not be designed to permit unfair discrimination in the
admission of participants by requiring standards that are designed to
be measurable, open and fair.\60\
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\58\ Objective criteria would generally include, but not be
limited to, criteria that are based on measureable facts such as
capital requirements.
\59\ Having open access, in part, involves having a process for
admission of participants that does not unfairly discriminate. See
15 U.S.C. 78q-1(b)(3)(F) (``The rules of a clearing agency * * * are
not designed to permit unfair discrimination in the admission of
participants or among participants in the use of the clearing
agency''). In addition, the Dodd-Frank Act added Section 3C to the
Exchange Act which provides in relevant part: ``(2) OPEN ACCESS.--
The rules of a clearing agency described in paragraph (1) shall--
(A) prescribe that all security-based swaps submitted to the
clearing agency with the same terms and conditions are economically
equivalent within the clearing agency and may be offset with each
other within the clearing agency; and (B) provide for non-
discriminatory clearing of a security-based swap executed
bilaterally or on or through the rules of an unaffiliated national
securities exchange or security-based swap execution facility.''
Public Law 111-203 Sec. 763(a) (adding Section 3C to the Exchange
Act).
\60\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(2). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding participation
requirements sufficiently clear? If not, why not and what would be a
better alternative?
How do current practices of registered clearing agencies
with respect to participation standards compare to the proposed
requirements in this rule? Are there any expected costs or benefits to
clearing agencies in connection with adding to or revising their
participation standards in order to implement this portion of the
Commission's proposed rule?
Should the Commission's proposed rule regarding
participation requirements be more specific? If so, why and in what
way? Should the Commission's proposed rule regarding participation
requirements be less specific to allow for greater flexibility? If so,
why and in what way?
Should more specific monitoring obligations be imposed to
ensure compliance with participation standards? For example, should the
Commission consider mandating an independent review of the process for
monitoring participants' compliance with the clearing agency's
participation requirements? Why or why not?
Proposed Rule 17Ad-22(d)(3): Custody of Assets and Investment Risk
Proposed Rule 17Ad-22(d)(3) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to hold assets in a manner whereby risk
of loss or of delay in access to them is minimized. Minimizing the risk
of loss or delay in access is intended to refer to holding assets in
ways that, to the extent reasonably practicable, would limit the
potential for loss of those assets and delay in access to them. For
example, the Commission is aware that clearing agencies currently seek
to minimize the risk of loss or delay in access by holding assets that
are highly-liquid (e.g., cash, U.S. Treasury securities or securities
issued by a U.S. government agency) and engaging banks to custody the
assets and facilitate settlement. Compliance with the proposed
requirement is intended to improve the ability of the clearing agency
to meet its settlement obligations by reducing the likelihood that
assets securing participant obligations to the clearing agency would be
unavailable or insufficient when the clearing agency needs to draw on
them. The proposed rule would also require clearing agencies to invest
assets in instruments with minimal credit, market, and liquidity risks.
A requirement that a clearing agency hold assets in instruments with
minimal credit, market and liquidity risk may promote the clearing
agency's ability to retrieve these assets promptly. That, in turn,
could help to increase the potential for a clearing agency to timely
meet its settlement obligations to its participants.
The Commission preliminarily believes that proposed Rule 17Ad-
22(d)(3) would strengthen the requirement in Section 17A(b)(3)(F) of
the Exchange Act that the rules of a clearing agency must be designed
to ensure the safeguarding of securities and funds in the custody or
control of the clearing agency or for which the clearing agency is
responsible.\61\ In this way, the Commission preliminarily believes the
proposed rule would also promote protection of the financial market
served by the clearing agency.
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\61\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(3). In addition, the Commission requests
comments on the following specific issues:
Are the proposed rule's requirements regarding custody and
investment of assets sufficiently clear? If not, why not and what would
be a better alternative?
How do current practices of clearing agencies for holding
or investing in assets compare to the Commission's proposal? What are
the expected incremental costs to clearing agencies in connection with
adding to or revising these current practices in order to comply with
the Commission's proposed rule?
Are there any other factors not mentioned that the
Commission should take into consideration with respect to
[[Page 14486]]
minimizing custody of assets and investment risk?
Should clearing agencies ever be permitted to hold assets
in instruments that do not have minimal credit, market and liquidity
risk? If so, why and under what circumstances?
What measures should clearing agencies have in place to
minimize risk of loss or delay in access to assets? Should the proposed
rule specify any such measures?
Proposed Rule 17Ad-22(d)(4): Identification and Mitigation of
Operational Risk
Proposed Rule 17Ad-22(d)(4) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify sources of operational risk
and minimize these risks through the development of appropriate
systems, controls, and procedures. A clearing agency that develops
systems, controls and procedures which, taken as a whole, are designed
to limit the identified sources of operational risk to the extent
reasonably practicable would be able to satisfy this requirement. The
proposed rule also would require clearing agencies to implement systems
that are reliable, resilient and secure and have adequate scalable
capacity. This should help to ensure that clearing agencies are able to
operate with minimal disruptions, even during times of market stress
when there may be greater demands on their systems due to higher
volume. In addition, the proposed rule would require that clearing
agencies have business continuity plans that allow for timely recovery
of operations and ensure the fulfillment of a clearing agency's
obligations. This requirement would be relevant in the event of, among
other things, deficiencies in information systems or internal controls,
human errors, management failures, unauthorized intrusions into
corporate or production systems, or disruptions from external events
such as natural disasters.
The Commission preliminarily believes that the requirements under
proposed Rule 17Ad-22(d)(4) should collectively help to address risks
posed by potential operational deficiencies to the clearing agency and
its participants. Specifically, to help limit disruptions that may
impede the proper functioning of a clearing agency, the Commission
preliminarily believes it is imperative that clearing agencies review
their operations for potential weaknesses and develop appropriate
systems, controls, and procedures to address weaknesses contemplated
under the proposed rule. Moreover, the Commission preliminarily
believes that maintaining reliable, resilient and secure systems with
adequate backup capability, as well as continuity plans providing for
timely recovery of operations, are essential components of facilitating
prompt and accurate clearance and settlement. The Commission intends
for proposed Rule 17Ad-22(d)(4) to complement the existing guidance
provided by the Commission in its Automation Review Policy statements
\62\ and Interagency White Paper on Sound Practices to Strengthen the
Resilience of the U.S. Financial System.\63\
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\62\ See Exchange Act Release Nos. 27445 (November 16, 1989), 54
FR 48704 (``ARP I'') and 29815 (May 9, 1991), 56 FR 22489 (``ARP
II''). Generally, the guidance in ARP I and ARP II provides for the
following activities by clearing agencies: (1) Performing periodic
risk assessments of its automated data processing (``ADP'') systems
and facilities; (2) providing for the selection of the clearing
agency's independent auditors by non-management directors and
authorizing such non-management directors to review the nature,
scope, and results of all audit work performed; (3) having an
adequately staffed and competent internal audit department; (4)
furnishing annually to participants audited financial statements and
an opinion from an independent public accountant as to the clearing
agency's system of internal control--including unaudited quarterly
financial statements also should be provided to participants upon
request; and (5) developing and maintaining plans to assure the
safeguarding of securities and funds, the integrity of the ADP
system, and recovery of securities, funds, or data under a variety
of loss or destruction scenarios.
\63\ See Exchange Act Release No. 47638 (April 7, 2003), 68 FR
17809 (April 11, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(4). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding identification
and mitigation of operational risk sufficiently clear? If not, why not
and what would be a better alternative?
How do current practices of clearing agencies with respect
to operational risks compare to the practices that the Commission
proposes to require in this rule? What are the expected incremental
costs to clearing agencies in connection with adding to or revising
their current practices relating to operational risks in order to
implement the Commission's proposed rule?
Should the Commission's proposal require a specific
methodology to identify and mitigate operational risk? If so, what is
the methodology and why should this methodology be required?
Should the Commission require that business continuity
plans be tested with participants on an ongoing basis or with a
specified frequency? Should any other more prescriptive requirements be
considered by the Commission?
Would a clearing agency's ability to comply with the
proposed rule be affected if the clearing agency's operations were
outsourced to another firm? If so, how should the proposed rule address
these differences in compliance? Would the need to minimize operational
risk require limits on the types of operations that can be outsourced
by clearing agencies? Would the answer depend on whether the function
was outsourced to an affiliated or unaffiliated firm? Please explain.
Proposed Rule 17Ad-22(d)(5): Money Settlement Risks
Proposed Rule 17Ad-22(d)(5) would require clearing agencies
establish, implement, maintain and enforce written policies and
procedures reasonably designed to employ money settlement arrangements
that eliminate or strictly limit the clearing agency's settlement bank
risks, that is, its credit and liquidity risks from the use of banks to
effect money settlements with its participants, and require funds
transfers to the clearing agency to be final when effected. The
Commission notes that there are a number of arrangements that clearing
agencies could establish to comply with the proposed rule. For example,
a clearing agency could establish criteria for use of banks to effect
money settlements with its participants that address the banks'
creditworthiness, access to liquidity, and operational reliability.
Where practicable, a clearing agency could use multiple settlement
banks and monitor the concentration of payments among its settlement
banks. A clearing agency also could employ agreements with such banks
to ensure that funds transfers to the clearing agency are final when
effected. In addition, where available, a clearing agency could use a
central bank to effect money settlements with its participants. Use of
the Federal Reserve System in the United States or other central bank
would eliminate the risks associated with using a settlement bank.\64\
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\64\ The Board of Governors of the Federal Reserve System will
determine whether systemically important clearing agencies may
obtain account access from the Federal Reserve System.
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These proposed requirements are meant to reduce the risk that
financial obligations related to the activities of a clearing agency
are not timely settled or discharged with finality. Failure by a bank
to effectuate timely and final settlement adversely affects the
clearing
[[Page 14487]]
agency by exposing it to credit and liquidity pressures that can
destabilize the clearing agency's ability to facilitate prompt and
accurate clearance and settlement. Accordingly, the Commission is
proposing this new rule, which is designed to limit the potential that
the money settlement arrangements cause the clearing agency to face
higher levels of credit and liquidity risks and to provide assurance
that funds transfers are final when effected. In addition, the
Commission preliminarily believes that the proposed rule would assist a
clearing agency in meeting the requirement of Section 17A(b)(3)(F) of
the Exchange Act, which requires the rules of a clearing agency to be
designed to assure the safeguarding of securities and funds which are
in the custody or control of the clearing agency or for which it is
responsible.\65\
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\65\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(5). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding money
settlement risk sufficiently clear? If not, why not and what would be a
better alternative?
How do current practices regarding money settlement risk
of clearing agencies compare to the practices that the Commission
proposes to require in this rule? What are the expected incremental
costs to clearing agencies in connection with adding to or revising
their current practices regarding money settlement risk in order to
implement the Commission's proposed rule?
Would it be reasonable to eliminate the clearing agency's
credit and liquidity risks from the use of banks to effect money
settlements with its participants? If so, how?
Are there other rules that the Commission should establish
regarding money settlement risk management, for example, by mandating
the minimum number of banks that a clearing agency may use to effect
money settlements with its participants in order to avoid reliance on a
small number of such banks, or by specifying characteristics of
financial institutions that may be used by clearing agencies for
settlement purposes? If so, what would be the appropriate rules and
what would be the effect of adopting them?
Should rules for money settlement risk management
established by the Commission be uniform, or are there circumstances in
which it would be appropriate for clearing agencies to accept a higher
level of money settlement risk, such as when transacting in certain
product categories or with certain types of customers? Could the rules
proposed by the Commission limit the ability of clearing agencies to
compete for certain types of business either within the United States
or internationally? Why or why not?
Should the Commission adopt rules to govern the clearing
agency's use of banks that are affiliated with participants in the
clearing agency? Should the Commission prohibit this practice? Please
explain.
Proposed Rule 17Ad-22(d)(6): Cost-Effectiveness
Proposed Rule 17Ad-22(d)(6) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide that their operations are
cost-effective in meeting the requirements of participants while
maintaining the safety and security of operations. To maintain safe and
secure operations, a clearing agency would need to comply with the
requirements under the Exchange Act and the rules thereunder. For
example, a clearing agency would need to maintain the ability to comply
with any recordkeeping or other regulatory requirement. Having clearing
agencies be mindful of the costs that are incurred by their
participants, while maintaining such compliance, should help to reduce
inefficiencies in the provision of clearing agency services. This is
particularly important in circumstances where clearing agencies may not
be subject to strong competitive forces (such as when there is only one
clearing agency for an asset class) for the provision of their services
and therefore may have less of an incentive to be cost-effective in
meeting the requirements of participants. Accordingly, the Commission
preliminarily believes the proposed rule is appropriate in the public
interest, for the protection of investors, because it would potentially
help reduce the costs incurred for clearing agency services while also
maintaining appropriate standards for a clearing agency's operations.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(6). In addition, the Commission requests
comments on the following specific issues:
Would the proposed rule help to assure that a clearing
agency's operations are cost-effective? Does the proposed rule
establish a standard for maintaining cost-effectiveness that is
sufficiently clear? If not, why not and how might the rule be altered?
Are there any other requirements that the Commission
should include in the rule to help ensure that clearing agencies are
cost-effective in providing clearing and settlement services while also
maintaining safe and secure operations and compliance with all
regulatory requirements?
Does any specific business model for clearing agencies
help to promote cost-effectiveness? Should the business model of a
clearing agency affect the type of rule regarding cost-effectiveness
that should apply to the clearing agency?
Should the Commission consider issuing additional guidance
on how clearing agencies could be cost-effective in meeting the
requirements of participants while maintaining safe and secure
operations? If so, what type of guidance would be helpful?
Proposed Rule 17Ad-22(d)(7): Links
Proposed Rule 17Ad-22(d)(7) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to evaluate the potential sources of
risks that can arise when the clearing agency establishes links either
cross-border or domestically to clear trades, and to ensure that these
risks are managed prudently on an ongoing basis.
Section 17A(a)(1)(D) of the Exchange Act states that the linking of
all clearance and settlement facilities and the development of uniform
standards and procedures for clearance and settlement will reduce
unnecessary costs and increase the protection of investors and persons
facilitating transactions by and acting on behalf of investors.\66\
Further, Section 17A(b)(3)(F) of the Exchange Act requires that the
rules of a clearing agency foster cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions.\67\ In the clearance and settlement process, links should
help deepen market liquidity and enable participants to trade in other
markets.\68\ However, by tying the
[[Page 14488]]
clearing operations of different clearing agencies together, link
arrangements potentially expose a clearing agency and its members to
the risk management profile of another clearing organization and to the
risk of financial loss if that clearing organization experiences a
default or is otherwise unable to meet its settlement obligations.\69\
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\66\ 15 U.S.C. 78q-1(a)(1)(D).
\67\ 15 U.S.C. 78q-1(b)(3)(F).
\68\ For example, The Depository Trust Company's (``DTC'')
Canadian Link Service allows qualifying DTC participants to clear
and settle valued securities transactions with participants of a
Canadian securities depository. The link is designed to facilitate
cross-border transactions by allowing participants to use a single
depository interface for U.S. and Canadian dollar transactions and
eliminate the need for split inventories. See Exchange Act Release
Nos. 52784 (November 16, 2005), 71 FR 70902 (November 23, 2005) and
55239 (February 5, 2007), 72 FR 6797 (February 13, 2007) (File No.
SR-DTC 2006-15).
\69\ A clearing agency may be required to enter into a
participant agreement with the other clearing organization as part
of the link arrangement, which includes sharing in the loss
allocations of that clearing organization. See RCCP 4.10.6, supra
note 29.
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Although the design and operation of each link will present a
unique risk profile, clearing agencies potentially face legal,
operational, credit and liquidity risks from link arrangements. In
addition, because links can create interdependencies, clearing agencies
may be affected by systemic risk if there are deficiencies in these
arrangements. The Commission preliminarily believes that requiring
clearing agencies to evaluate and monitor any link arrangements they
maintain is essential to protect the marketplaces that clearing
agencies serve because the requirement would reduce the likelihood that
such arrangements perpetuate risks that could create disruptions in the
operations of clearing agencies. Accordingly, the Commission is
proposing this rule, which would require clearing agencies to evaluate
and manage the risks associated with its links.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(7). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding evaluating
link arrangements and prudently managing the associated risks on an
ongoing basis sufficiently clear? If not, why not and how might the
rule be stated more clearly?
How do current practices of clearing agencies with respect
to link arrangements meet or fail to meet the standard that the
Commission proposes to require in this rule? What are the expected
incremental costs to clearing agencies in connection with adding to or
revising their current practices for link arrangements to comply with
the Commission's proposed rule?
Should the Commission include specific requirements
regarding the clearing agency's responsibility to evaluate a link for,
among other things, the other clearing organization's structure,
financial strength, regulatory and disciplinary history, disaster
recovery, banking relationships and lines of credit, and risk
management controls?
Should the Commission establish additional requirements
for clearing agencies that create linkages with other parties, such as
information reporting requirements to the Commission? Would such
additional requirements reduce or increase the likelihood that linkages
would be established in appropriate circumstances?
How could clearing agencies ensure that the laws and
contractual rules governing linked systems support the design of the
link and provide adequate protection to both clearing agencies and
their participants? Are additional rules or requirements needed when a
link is established with a non-U.S. clearing organization?
Should the Commission place any limits on or promote the
use of linked arrangements in light of potential effects on systemic
risk?
Proposed Rule 17Ad-22(d)(8): Governance
Proposed Rule 17Ad-22(d)(8) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent to fulfill the public interest requirements in
Section 17A of Exchange Act applicable to clearing agencies,\70\ to
support the objectives of owners and participants, and to promote the
effectiveness of the clearing agency's risk management procedures.\71\
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\70\ Section 17A(b)(3)(F) of the Exchange Act requires that the
rules of a clearing agency be designed to protect investors and the
public interest. 15 U.S.C. 78q-1(b)(3)(F).
\71\ Proposed Rule 17Ad-22(d)(8) would complement other
applicable requirements concerning governance at clearing agencies
that may also separately apply. These other requirements include the
existing regulatory framework of Section 17A of the Exchange Act and
the related requirements contemplated by proposed Rule 17Ad-25, as
well as Section 765 of the Dodd-Frank Act with respect to security-
based swap clearing agencies. See supra Section III.F. (proposing
that clearing agencies be required to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
identify and address existing or potential conflicts of interest).
See also Exchange Act Release No. 63107, 75 FR 65882, supra note 45.
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Clear and transparent governance arrangements promote
accountability and reliability in the decisions, rules and procedures
of the clearing agency because they provide interested parties (such as
owners, participants, and general members of the public) with
information about how such decisions are made and what the rules and
procedures are designed to accomplish.\72\ The key components of a
clearing agency's governance arrangements include the clearing agency's
ownership structure, the composition and role of its board, the
structure and role of board committees, reporting lines between
management and the board, and the processes that ensure management is
held accountable for the clearing agency's performance.
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\72\ The Exchange Act currently requires that certain aspects of
a clearing agency's governance arrangements be made clear and
transparent. Section 19(b) of the Exchange Act requires that
clearing agencies, as SROs, file with the Commission any proposed
rule or any proposed change in, addition to, or deletion from the
rules of the clearing agency, accompanied by a concise general
statement of the basis and purpose of the proposed rule change. 15
U.S.C. 78s(b).
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Governance arrangements have the potential to play an important
role in making sure that clearing agencies fulfill the Exchange Act
requirements that the rules of a clearing agency be designed to protect
investors and the public interest and to support the objectives of
owners and participants. Similarly, governance arrangements may promote
the effectiveness of a clearing agency's risk management procedures by
creating an oversight framework that fosters a focus on the critical
role that risk management plays in promoting prompt and accurate
clearance and settlement.\73\
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\73\ The role of governance arrangements in promoting effective
risk management has also been a focus of rules recently proposed by
the Commission to mitigate conflicts of interest at security-based
swap clearing agencies. See Exchange Act Release No. 63107, 75 FR
65882, supra note 45.
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The Commission preliminarily believes that the requirements
regarding governance arrangements contained in proposed Rule 17Ad-
22(d)(8) would be appropriate in the public interest and for the
protection of investors because they would enhance the ability of a
clearing agency to serve the interests of its various constituents and
the interests of the general public while maintaining prudent risk
management processes to promote prompt and accurate clearance and
settlement.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(8). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding clear and
transparent governance arrangements sufficiently clear? If not, why not
and how might the rule be stated more clearly?
Would the proposed rule require clearing agencies to
change their current
[[Page 14489]]
practices with respect to governance arrangements? If so, how? What are
the expected incremental costs to clearing agencies in connection with
adding to or revising their current practices with respect to
governance arrangements in order to implement the Commission's proposed
rule?
Are there any other requirements that should be included
in the rule to promote clear and transparent governance arrangements,
such as mandating specific board or ownership structures? If so, what
should they be?
Should the Commission propose more prescriptive
requirements for the governance of all clearing agencies? If so, what
should they be? For example, should the Commission specify certain
reporting lines or board composition?
How direct should the Commission's role be in the
oversight and monitoring of the composition and activities of clearing
agency boards and board committees? If the Commission's role should be
more direct, what mechanisms or structure would facilitate the
Commission taking such a role? For example, should the Commission
consider any additional requirements related to fiduciary duties to
either enhance mitigation of conflicts or address deficiencies?
Proposed Rule 17Ad-22(d)(9): Information on Services
Proposed Rule 17Ad-22(d)(9) would require clearing agencies
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide market participants with
sufficient information for them to identify and evaluate the risks and
costs associated with using clearing agencies' services. The types of
information that a clearing agency may disclose, as appropriate, to its
participants to satisfy this requirement include the clearing agency
rulebook,\74\ the costs of its services, a description of netting and
settlement activities the clearing agency provides, procedures relating
to participants' rights and obligations, information regarding the
clearing agency's margin methodology, and information regarding the
``extreme but plausible'' scenarios that the clearing agency uses to
stress test its financial resources. Requiring a clearing agency to
disclose information sufficient for participants to identify risks and
costs associated with using the clearing agency will allow participants
to make informed decisions about the use of the clearing agency and
take appropriate actions to mitigate their risks and costs associated
with the use of the clearing agency. Accordingly, the Commission's
proposed rule is designed to promote participants' understanding of the
risks and costs associated with using a clearing agency's services,
thereby facilitating prompt and accurate clearance and settlement,
safeguarding securities and funds and protecting investors.\75\
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\74\ Because clearing agencies are SROs, their rules are
published by the Commission and are generally available on each
clearing agency's Web site. Nevertheless, discrete rule proposals
may not necessarily provide a complete picture of a clearing
agency's operations and risk mitigation procedures.
\75\ See 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(9). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding providing
market participants with sufficient information to identify and
evaluate the risks and costs associated with using the clearing
agency's services sufficiently clear? If not, why not and what would be
a better alternative?
How do current practices of clearing agencies with respect
to providing market participants with information meet or fail to meet
the requirements in the proposed rule? What are the expected
incremental costs to clearing agencies in connection with adding to or
revising their current practices in order to implement the proposed
requirements?
Should the Commission consider more detailed requirements
concerning disclosure of certain matters such as pricing information
and the cost of specific services, as well as default and risk
management procedures? Why or why not?
Should any of the examples of the types of information
that a clearing agency may disclose be specifically required to be
provided by clearing agencies to their participants or to the public?
Proposed Rule 17Ad-22(d)(10): Immobilization and Dematerialization of
Stock Certificates
Proposed Rule 17Ad-22(d)(10) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to immobilize \76\ and dematerialize
\77\ securities certificates and transfer them by book entry to the
greatest extent possible when the clearing agency provides central
securities depository services.\78\ The Commission preliminarily
believes that the immobilization and dematerialization of securities
and their transfer by book entry would result in reduced costs and
risks associated with securities settlements and custody by removing
the need to hold and transfer many, if not most, physical
certificates.\79\ The Commission also preliminarily believes that the
proposed rule would strengthen the requirement in Section 17A(b)(3)(F)
of the Exchange Act that requires the rules of a clearing agency to
assure the safeguarding of securities and funds that are in the custody
or control of the clearing agency or for which it is responsible.\80\
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\76\ Immobilization refers to any circumstance where an investor
does not receive a physical certificate upon the purchase of shares
or is required to physically deliver a certificate upon the sale of
shares.
\77\ Dematerialization is the process of eliminating physical
certificates as a record of security ownership.
\78\ See proposed Rule 17Ad-22(a)(2) for definition of ``central
securities depository services.'' In the U.S., DTC is currently the
only registered clearing agency that provides central securities
depository services.
\79\ By concentrating the location of physical securities in a
single central securities depository, clearing agencies are able to
centralize the operations associated with custody and transfer and
reduce costs through economies of scale. Virtually all mutual fund
securities, government securities, options, and municipal bonds in
the U.S. are dematerialized and most of the equity and corporate
bonds in the U.S. market are either immobilized or dematerialized.
While the U.S. markets have made great strides in achieving
immobilization and dematerialization for institutional and broker-
to-broker transactions, many industry representatives believe that
the small percentage of securities held in certificated form impose
unnecessary risk and expense to the industry and to investors. See
Exchange Act Release No. 8398 (March 11, 2004), 69 FR 12921 (March
18, 2004).
\80\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(10). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding immobilization
and dematerialization of securities certificates and transferring them
by book entry to the greatest extent possible sufficiently clear? If
not, why not and what would be a better alternative?
How do current practices of clearing agencies regarding
immobilization and dematerialization of securities certificates compare
to the practices that the Commission proposes to require in this rule?
What are the expected incremental costs to clearing agencies in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
What advantages or disadvantages might certificates have
over securities
[[Page 14490]]
held in book-entry-only form (e.g., proof of ownership in the event of
a loss of electronic records of ownership)? Under what circumstances,
if any, should the Commission encourage or discourage the use of
physical certifications?
Proposed Rule 17Ad-22(d)(11): Default Procedures
Proposed Rule 17Ad-22(d)(11) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to make key aspects of their default
procedures publicly available. The Commission preliminarily believes
that this would provide certainty and predictability to market
participants about the measures a clearing agency will take in the
event of a participant default. Key aspects of a clearing agency's
default procedures should generally include the following: (i) The
circumstances in which action may be taken (e.g., what events trigger
mutualization of losses); (ii) who may take those actions (e.g.,
division of responsibilities when clearing agencies operate links to
other clearing agencies); (iii) the scope of the actions that may be
taken (e.g., any limits on the total losses that would be mutualized);
(iv) the mechanisms to address a clearing agency's obligations to non-
defaulting participants (e.g., process for clearing trades guaranteed
by the clearing agency to which a defaulting participant is a party);
and (v) the mechanisms to address the defaulting participant's
obligations to its customers (e.g., process for dealing with defaulting
participants' customer accounts). The proposed rule also would require
that clearing agencies establish default procedures that ensure that
the clearing agency can take timely action to contain losses and
liquidity pressures \81\ and to continue meeting its obligations when
due in the event of a participant default. Default procedures, among
other things, are meant to reduce the likelihood that a default by a
participant, or multiple participants, will disrupt the clearing
agency's operations. By creating a framework of default procedures that
are designed to permit a clearing agency to take actions to contain
losses and liquidity pressures it faces while continuing to meet its
obligations, the clearing agency should be in a better position to
continue providing its services in a manner that promotes accurate
clearance and settlement during times of market stress.
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\81\ A clearing agency may be able to contain liquidity
pressures it faces by taking actions to secure additional sources of
liquidity or limiting transactions that potentially serve to drain
liquidity resources.
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The Commission preliminarily believes that the requirements in
proposed Rule 17Ad-22(d)(11) would increase the possibility that
defaults by participants, should they occur, would proceed in an
orderly and transparent manner. This is because the Commission
preliminarily believes that the proposed rule would help to ensure that
all participants are aware of the default process and are able to plan
accordingly and that clearing agencies would have sufficient time to
take corrective actions to mitigate potential losses.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(11). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule requiring a clearing
agency to establish default procedures and make key aspects of those
default procedures publicly available sufficiently clear? If not, why
not and what would be a better alternative?
How do current practices of clearing agencies with respect
to default procedures compare to the requirements of the proposed rule?
What are the expected incremental costs to clearing agencies in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
Should the Commission require specific default procedures
for all clearing agencies, or should clearing agencies have discretion
to create their own default procedures consistent with the proposed
rule? Should the default procedures include a resolution plan if the
clearing agency is unable to obtain sufficient financial resources?
How much flexibility should a clearing agency have in the
time it takes to manage a default and perform any liquidation of
positions?
Proposed Rule 17Ad-22(d)(12): Timing of Settlement Finality
Proposed Rule 17Ad-22(d)(12) would require clearing agencies
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure that final settlement occurs
no later than the end of the settlement day and that intraday or real-
time finality is provided where necessary to reduce risks. A clearing
agency would be able to comply with this requirement by having a
reasonable process for facilitating final settlement to occur no later
than the end of the settlement day and for providing intraday or real-
time finality where necessary to reduce risks. Intraday or real-time
finality may be necessary to reduce risk in circumstances where the
lack of intraday or real-time finality may impede the clearing agency's
ability to facilitate prompt and accurate clearance and settlement,
cause the clearing agency's participants to fail to meet their
obligations, or cause significant disruptions in the securities
markets.
The Commission preliminarily believes that requiring intraday or
real-time finality for settlements, where such requirement is necessary
to reduce risks, would facilitate prompt and accurate clearance and
settlement by providing certainty that a settlement is final and
irrevocable within a timeframe that is commensurate with the level of
risk created by the lack of settlement finality. The risks associated
with lack of settlement finality stem from the undermining of
confidence that transaction obligations will be discharged by the
clearing agency or its participants. Moreover, the Commission
preliminarily believes that settlement finality should occur not later
than the end of the settlement day to limit the volume of outstanding
obligations that are subject to settlement at any one time and thereby
reduce the settlement risk exposure of participants and the clearing
agency.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(12). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding the timing of
settlement finality sufficiently clear? If not, why not and what would
be a better alternative?
How do current practices of clearing agencies with respect
to settlement finality compare to the practices that the Commission
proposes to require in this rule? What are the expected incremental
costs to clearing agencies in connection with adding to or revising
their current practices in order to implement the Commission's proposed
rule?
What changes, if any, would be created by the requirement
under the proposed rule that final settlement occur no later than the
end of the settlement day? Does the proposed rule affect certain
identifiable categories of market participants differently than others,
such as smaller entities or entities with limited operations in the
U.S.? If so, how?
[[Page 14491]]
Are there operational, legal or regulatory impediments to
intraday or real-time settlement? Will the proposed standard make it
harder for clearing agencies to conduct certain types of business for
which intraday or real-time finality may be difficult? Are any
additional rules or regulations needed to encourage intraday or real-
time finality to reduce risks?
Are there circumstances when the requirements of intraday,
real-time or end of day settlement finality proposed by the rule are
not feasible or are not beneficial? If so, in what circumstances?
Proposed Rule 17Ad-22(d)(13): Delivery Versus Payment
Proposed Rule 17Ad-22(d)(13) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to eliminate principal risk by linking
securities transfers to funds transfers to achieve delivery versus
payment (``DVP''). DVP is achieved in the settlement process when the
mechanisms facilitating settlement ensure that delivery occurs if and
only if payment occurs.\82\
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\82\ See Bank for International Settlements, Delivery Versus
Payment in Securities Settlement Systems (1992), available at http://www.bis.org/publ/cpss06.pdf. Three different DVP models can be
differentiated according to whether the securities and/or funds
transfers are settled on a gross (trade-by-trade) basis or on a net
basis.
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Among other things, DVP eliminates the risk that a party would lose
some or its entire principal because payment is made only if securities
are delivered. The Commission preliminarily believes that clearing
agencies should be required to use this payment method in order to
reduce the potential that delivery of the security is not appropriately
matched with payment for a security, thereby impeding the clearing
agency's ability to facilitate prompt and accurate clearance and
settlement. Therefore, the Commission is proposing that clearing
agencies be required to link securities transfers to funds transfers in
a way that achieves DVP.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(13). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding using DVP to
eliminate principal risk by linking securities transfers to funds
transfers sufficiently clear? If not, why not and what would be a
better alternative?
How do current practices of clearing agencies for linking
securities transfers to funds transfers compare to the practices that
the Commission proposes to require in this rule? What are the expected
incremental costs to clearing agencies in connection with adding to or
revising their current practices in order to implement the Commission's
proposed rule?
What are the advantages and disadvantages of the proposed
rule mandating a strict DVP standard? Does the proposed rule affect
certain identifiable categories of clearing agencies differently than
others, such as clearing agencies with more diversified post-trade
services as compared to clearing agencies that specialize in fewer
activities?
Are there operational or legal impediments to implementing
the proposed DVP rule? Would the proposed rule make it more difficult
for clearing agencies to conduct certain types of business that may
require a longer settlement cycle, for reasons outside of the clearing
agency's control? Are any additional rules or regulations needed to
support achievement of the proposed DVP rule?
Are there circumstances when DVP is not feasible or
practicable? If so, when?
Proposed Rule 17Ad-22(d)(14): Risk Controls To Address Participants'
Failure To Settle
Proposed Rule 17Ad-22(d)(14) requires clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to institute risk controls, including
collateral requirements and limits to cover the clearing agency's
credit exposure to each participant exposure fully, that ensure timely
settlement in the event that the participant with the largest payment
obligation is unable to settle when the clearing agency provides
central securities depository services \83\ and extends intraday credit
to participants.
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\83\ See proposed Rule 17Ad-22(a)(2) for definition of ``central
securities depository services.''
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Clearing agencies that provide central securities depository
services may sometimes extend intraday credit to participants to, among
other things, facilitate timely settlements by providing participants
with an additional tool to meet delivery obligations. If a participant
fails to settle its obligations to the clearing agency, the clearing
agency must cover those obligations to be able to continue to
facilitate prompt and accurate clearance and settlement.
The Commission preliminarily believes it is important for clearing
agencies that provide central securities depository services to
institute risk controls, including collateral requirements and limits
to cover the clearing agency's credit exposure to each participant
exposure fully, that ensure timely settlement in these circumstances to
address the risk that the participant may fail to settle after credit
has been extended. The Commission also preliminarily believes that
requiring the controls to be designed to withstand the inability of the
participant with the largest payment obligation to settle, in such
circumstances, would reduce the likelihood of disruptions at the
clearing agency by having controls in place to account for the largest
possible loss from any individual participant and thereby help the
clearing agency to provide prompt and accurate clearance and settlement
during times of market stress.\84\
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\84\ As previously indicated, IOSCO and the CPSS are currently
in the process of revising their existing sets of international
standards which include those related to a clearing agency's ability
to withstand participant failures and to meet payment obligations.
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(14). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding risk controls
to ensure timely settlement for a clearing agency providing central
securities depository services sufficiently clear? If not, why not and
what would be a better alternative?
How do current practices of clearing agencies that provide
central securities depository services compare to the practices that
the Commission proposes to require in this rule? What are the expected
incremental costs to clearing agencies in connection with adding to or
revising their current practices in order to implement the Commission's
proposed rule?
In addition to collateral requirements and limits on
credit exposure to participants, are there other controls on intra-day
credit that could be effective in managing settlement risk? If so,
should the Commission require the use of any of these other risk
controls?
What are the advantages and disadvantages of requiring
that controls be designed to withstand a failure to
[[Page 14492]]
settle by the participant with the largest payment obligation?
Should the Commission require that the clearing agency be
able to withstand a settlement failure by more than the largest
participant? For example, should the Commission require the clearing
agency be able to withstand a settlement failure by the participants
with the two largest payment obligations? Why or why not?
Proposed Rule 17Ad-22(d)(15): Physical Delivery Risks
Proposed Rule 17Ad-22(d)(15) would require clearing agencies
establish, implement, maintain and enforce written policies and
procedures reasonably designed to disclose to their participants the
clearing agency's obligations with respect to physical deliveries.\85\
For example, if a clearing agency (as part of its operations) takes
physical delivery of securities from its participants in return for
payments of cash, then it must inform its participants of the extent of
the clearing agency's obligations to make payment. A statement by the
clearing agency to its participants about the clearing agency's
obligations with respect to physical deliveries, among other things,
would help to ensure that participants have information that is likely
to enhance the participants' understanding of their rights and
responsibilities with respect to using the clearance and settlement
services of the clearing agency. The Commission preliminarily believes
that providing such information to participants would promote a shared
understanding regarding physical delivery practices between the
clearing agency and its participants which could help reduce the
potential for fails and thereby facilitate prompt and accurate
clearance and settlement.
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\85\ The proposed rule would provide clearing agencies with the
flexibility to determine the method by which the clearing agency
will state this information to its participants. However, the
clearing agencies should take care to develop an approach that
provides sufficient notice to its participants regarding the
clearing agency's obligations.
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The proposed rule would also require clearing agencies to
reasonably design their operations to identify and manage the risks
that arise in connection with their obligations for physical
deliveries. The risks associated with physical deliveries could stem
from, among other factors, operational limitations with respect to
assuring receipt of physical deliveries and processing of physical
deliveries. The Commission preliminarily believes that requiring
clearing agencies to identify and manage these risks would reduce the
potential that issues will arise as a result of physical deliveries
because the clearing agency will have acted preemptively to deal with
potential issues that may disrupt the clearance and settlement process.
Accordingly, the Commission preliminarily believes this requirement
would help a clearing agency to facilitate prompt and accurate
clearance and settlement consistent with Section 17A of the Exchange
Act.\86\
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\86\ 15 U.S.C. 78q-1(b)(3)(F).
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-22(d)(15). In addition, the Commission requests
comments on the following specific issues:
Is the Commission's proposed rule regarding providing
information regarding physical delivery and identifying and managing
risks associated with physical delivery sufficiently clear? If not, why
not and what would be a better alternative?
How do current practices of clearing agencies with respect
to physical delivery compare to the practices that the Commission
proposes to require in this rule? What are the expected incremental
costs to clearing agencies in connection with adding to or revising
their current practices in order to implement the Commission's proposed
rule?
What type of information would be useful for participants
to receive from a clearing agency regarding the clearing agency's
obligations to participants with respect to physical deliveries? What
are the advantages or disadvantages of including specific disclosure
requirements with respect to any of this information?
Are there physical delivery obligations that clearing
agencies should not assume or for which the Commission should consider
additional restrictions?
B. Proposed Rule 17Aj-1 Dissemination of Pricing and Valuation
Information by Security-Based Swap Clearing Agencies That Perform
Central Counterparty Services
The Commission is proposing Rule 17Aj-1 to incorporate requirements
regarding dissemination of pricing and valuation information in the CDS
Clearing Exemption Orders into the Commission's rules for security-
based swap clearing agencies.\87\ Recently, the Commission voted to
extend these temporary conditional exemptions from certain provisions
of the Federal securities laws until July 16, 2011 to continue to
facilitate central clearing of certain CDS.\88\ The proposed rule is
designed in part to continue the existing dissemination requirements
from the CDS Clearing Exemption Orders which would otherwise expire
along with those exemption orders.
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\87\ See, e.g., the CDS Clearing Exemption Order relating to ICE
Trust. ``[T]his temporary extension is conditioned on ICE Trust,
directly or indirectly, making available to the public on terms that
are fair and reasonable and not unreasonably discriminatory: (i) All
end-of-day settlement prices and any other prices with respect to
Cleared CDS that ICE Trust may establish to calculate mark-to-market
margin requirements for ICE Trust clearing members; and (ii) any
other pricing or valuation information with respect to Cleared CDS
as is published or distributed by ICE Trust.'' Exchange Act Release
No. 63387 (November 29, 2010) 75 FR 75502 (December 3, 2010).
\88\ The extensions of the temporary conditional exemptions
applied to central clearing of certain CDS by ICE Trust, ICE Clear
Europe, CME and Eurex. See Exchange Act Release Nos. 63389 (November
29, 2010), 75 FR 75520 (December 3, 2010); 63390 (November 29,
2010), 75 FR 75518 (December 3, 2010); 63388 (November 29, 2010), 75
FR 75522 (December 3, 2010); 63387 (November 29, 2010) 75 FR 75502
(December 3, 2010) (extending the CDS Clearing Exemption Orders for
ICE Clear, Eurex, CME and ICE Trust respectively).
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Proposed Rule 17Aj-1 would require dissemination of pricing and
valuation information by security-based swap clearing agencies that
perform CCP services.\89\ In particular, proposed Rule 17Aj-1 would
require each security-based swap clearing agency that performs CCP
services to make available to the public, on terms that are fair,
reasonable, and not unreasonably discriminatory,\90\ all end-of-day
settlement prices and any other prices for security-based swaps that
the clearing agency may establish to calculate its participants' mark-
to-market \91\ margin requirements and any
[[Page 14493]]
other price or valuation information with respect to security-based
swaps as is published or distributed by the clearing agency to its
participants.\92\ The Commission preliminarily believes this
requirement should apply to security-based swap clearing agencies that
perform CCP services because, based on the Commission's oversight
experience pursuant to the CDS Clearing Exemption Orders, price and
valuation information with respect to security-based swaps may often be
limited and such a requirement could help to provide information to
market participants that may otherwise only be available to the
participants of a particular clearing agency. Clearing agencies that
clear standard securities may not face similar limitations on price and
valuation information. As a result, the Commission is proposing this
rule only with respect to security-based swap clearing agencies that
perform CCP services but is requesting comment on whether the rule
should apply more broadly.
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\89\ Under the proposed rule, security-based swap clearing
agencies would be permitted to use different approaches to make
certain pricing and valuation information available to the public.
For example, some may choose to engage the services of a third-party
vendor while others may make the information directly available
through the clearing agency's Web site or some other means.
\90\ Proposed Rule 17Aj-1 does not prohibit charges that may be
assessed with respect to security-based swap clearing agencies
making this information available to the public as long as such
charges are fair, reasonable, and not unreasonably discriminatory.
The fair, reasonable, and not unreasonably discriminatory
requirements for open access to information pursuant to proposed
Rule 17Aj-1 are consistent with requirements the Commission adopted
pursuant to the CDS Clearing Exemption Orders as well as in Rule
603(a) of Regulation NMS which requires all exchanges, alternative
trading systems, and other broker-dealers that offer individual data
feeds to make the data available on terms that are fair and
reasonable and not unreasonably discriminatory. See 17 CFR
242.603(a).
\91\ In this specific context of the margin practices of
security-based swap clearing agencies, the term ``mark-to-market''
refers to the variation margin practices used by a clearing agency
to account for ongoing fluctuations in the market value of its
participants' security-based swap positions.
\92\ Clearing agencies may destroy or otherwise dispose of
records at the end of five years consistent with Rule 17a-6 of the
Exchange Act. See 17 CFR 240.17a-6.
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As noted above, the Commission granted the CDS Clearing Exemption
Orders to promote the use of CCPs with respect to CDS.\93\ Section
763(b) of the Dodd-Frank Act provides that certain security-based swap
clearing agencies will be deemed registered for the purpose of clearing
security-based swaps (``Deemed Registered Provision'').\94\ The Deemed
Registered Provision becomes effective on July 16, 2011.\95\ After the
Deemed Registered Provision becomes effective, certain clearing
agencies would no longer need an exemption from registration as a
clearing agency under Section 17A of the Exchange Act in order to clear
security-based swaps.\96\ Proposed Rule 17Aj-1 would require
securities-based swap clearing agencies that perform CCP services, once
registered, to make publicly available the same pricing and valuation
information required by the CDS Clearing Exemption Orders.
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\93\ See discussion supra in Section I.
\94\ See Public Law 111-203 Sec. 763(b) (adding new Section
17A(l) to the Exchange Act. Under this Deemed Registered Provision,
eligible clearing agencies will be required to comply with all
requirements of the Exchange Act, and the rules thereunder,
applicable to registered clearing agencies to the extent it clears
security-based swaps after the effective date of the Deemed
Registered Provision, including, for example, the obligation to file
proposed rule changes under Section 19(b) of the Exchange Act.
\95\ See Public Law 111-203 Sec. 774.
\96\ ICE Trust, ICE Clear Europe and CME are each eligible for
the Deemed Registered Provision based on the specified criteria in
Section 763(b) of the Dodd-Frank Act. See Exchange Act Release Nos.
63389 (November 29, 2010), 75 FR 75520 (December 3, 2010); 63390
(November 29, 2010), 75 FR 75518 (December 3, 2010); 63388 (November
29, 2010), 75 FR 75522 (December 3, 2010); 63387 (November 29,
2010), 75 FR 75502 (December 3, 2010) (extending the CDS Clearing
Exemption Orders for ICE Clear, Eurex, CME and ICE Trust
respectively).
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The clearing agencies operating pursuant to the CDS Clearing
Exemption Orders have been generating model end-of-day settlement
prices for CDS, which they in turn provide to clearing members and use
to establish margin requirements for member positions. Pursuant to the
terms of the CDS Clearing Exemption Orders, these clearing agencies
have also made this information available to the public. The Commission
preliminarily believes that public availability of this information and
other related pricing data has helped to improve fairness, efficiency,
and market competition by making available to all market participants
data that may otherwise be available to only a limited subset of market
participants. For example, end-of-day settlement prices generated by
security-based swap clearing agencies represent pricing during the
lifecycle of a security-based swap. As a result, this end-of-day
pricing information would generally not be captured as part of any pre-
or post-trade market data and may therefore provide additional
information for market participants to consider in determining the
value of the same or similar security-based swap positions.
Accordingly, the Commission is proposing Rule 17Aj-1 to incorporate the
current requirements for dissemination of price and valuation
information under the CDS Clearing Exemption Orders.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Aj-1. In addition, the Commission requests comments on
the following specific issues:
Is the current requirement in the CDS Clearing Exemption
Orders to provide certain pricing information helpful in promoting
price transparency and efficiency in the CDS market? If so, why? If
not, why not? Are there ways in which the requirement could be
improved, for instance to ensure better access to those who may want to
access the information but find it difficult to obtain?
Have market participants found the standard to make
information available to the public on terms that are fair, reasonable,
and not unreasonably discriminatory sufficiently clear? If not, what
type of additional guidance would be useful? Should it be expanded to
apply to all clearing agencies? Why or why not?
Is there any other pricing information, such as with
respect to valuation of security-based swaps by clearing agencies, that
the Commission should consider requiring security-based swap clearing
agencies to make available to the public?
C. Proposed Rule 17Ad-23 Clearing Agency Policies and Procedures To
Protect the Confidentiality of Trading Information of Clearing Agency
Participants
The Commission is proposing Rule 17Ad-23 to require all clearing
agencies to establish, implement, maintain, and enforce written
policies and procedures that are reasonably designed to protect the
confidentiality of transaction information received by the clearing
agency. Such transaction information may include, but is not limited
to, trade data, position data, and any non-public personal information
about a clearing agency participant or any of its participants'
customers. The Commission preliminarily believes that such policies and
procedures would help to limit the potential misuse of confidential
information that could impede prompt and accurate clearance and
settlement and reduce confidence in the operations of the clearing
agency.
The proposed rule also provides that the required written policies
and procedures shall include, but are not limited to, (a) limiting
access to confidential trading information of clearing members to those
employees of the clearing agency who are operating the system or
responsible for its compliance with applicable laws or rules and (b)
limitations on personal trading by employees and agents of the clearing
agency. This proposed requirement would incorporate certain conditions
under the CDS Clearing Exemption Orders previously granted to security-
based swap clearing agencies related to the confidential treatment of
proprietary information of participants.\97\ As an intermediary in
[[Page 14494]]
security transactions, a clearing agency receives confidential
information which, if not protected, could disclose the terms of market
participant's trades, trading strategies, or non-public personal
information. The Commission believes that the requirement that clearing
agencies operating under the CDS Clearing Exemption Orders develop
policies and procedures to limit access to confidential information and
develop standards restricting trading that may be based on confidential
information has contributed to the formation of more robust controls
limiting the potential misuse of confidential information (such as
trading based on non-public information) and therefore preliminarily
believes that it would be appropriate for all clearing agencies to be
subject to these requirements.
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\97\ See, e.g., CDS Clearing Exemption Order for ICE Trust.
``ICE Trust shall establish and maintain adequate safeguards and
procedures to protect clearing members' confidential trading
information. Such safeguards and procedures shall include: (A)
Limiting access to the confidential trading information of clearing
members to those employees of ICE Trust who are operating the system
or responsible for its compliance with this exemption or any other
applicable rules; and (B) establishing and maintaining standards
controlling employees of ICE Trust trading for their own accounts.
ICE Trust must establish and maintain adequate oversight procedures
to ensure that the safeguards and procedures established pursuant to
this condition are followed.'' Exchange Act Release Nos. 59527
(March 6, 2009), 74 FR 10791 (March 12, 2009), Exchange Act Release
No. 61119 (December 4, 2009), 74 FR 65554 (December 10, 2009) and
Exchange Act Release No. 61662 (March 5, 2010), 75 FR 11589 (March
11, 2010) and 63387 (November 29, 2010), 75 FR 75502 (December 3,
2010).
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Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-23. In addition, the Commission requests comments on
the following specific issues:
How do clearing agencies currently maintain
confidentiality of the transaction information they receive? How do
those practices compare to what the proposed rule requires? What are
the expected incremental costs to clearing agencies in connection with
adding to or revising their current practices to implement the
Commission's proposed rule?
Is the current requirement in the CDS Clearing Exemption
Orders helpful in restricting the misuse of confidential information in
the CDS market? If so, why? If not, why not? Are there ways in which
the requirement could be improved, for instance by permitting fewer
restrictions on access to information within a clearing agency?
In addition to the types of transaction information
discussed, what other kinds of transaction information do clearing
agencies receive? To what extent would this information be non-public?
How do clearing agencies monitor or restrict their
employees' and agents' trading activities? What are the advantages or
disadvantages of such methods?
Should the Commission propose any specific restrictions
(such as prohibitions on trading) instead of having clearing agencies
develop their own policies and procedures?
Should the Commission require the written policies and
procedures of the clearing agency to provide for a clear audit trail of
transaction information that is processed by the clearing agency?
Please explain.
Instead of applying this proposed rule to all clearing
agencies, should the Commission consider requiring that only certain
types of clearing agencies be subject to this requirement (e.g.,
security-based swap clearing agencies)? Why or why not?
D. Proposed Rule 17Ad-24: Exemption From Clearing Agency Definition for
Certain Registered Securities-Based Swap Dealers and Registered
Security-Based Swap Execution Facilities
Section 3(a)(23)(B) of the Exchange Act currently excludes from the
definition of clearing agency certain national securities exchanges,
dealers, and certain other entities.\98\ These exclusions are designed
to limit the potential for overlapping or duplicative requirements that
may otherwise be imposed on these regulated entities. Because the Dodd-
Frank Act creates new categories of entities in the security-based swap
markets that may perform functions similar to the functions performed
by the excluded entities under Section 3(a)(23)(B) of the Exchange Act
in the traditional securities markets, the Commission is considering
whether a similar exclusion from the definition of clearing agency may
be warranted.
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\98\ 15 U.S.C. 78c(a)(23)(B). The term ``clearing agency'' does
not include (i) any Federal Reserve bank, Federal home loan bank, or
Federal land bank; (ii) any national securities exchange or
registered securities association solely by reason of its providing
facilities for comparison of data respecting the terms of settlement
of securities transactions effected on such exchange or by means of
any electronic system operated or controlled by such association;
(iii) any bank, broker, dealer, building and loan, savings and loan,
or homestead association, or cooperative bank if such bank, broker,
dealer, association, or cooperative bank would be deemed to be a
clearing agency solely by reason of functions performed by such
institution as part of customary banking, brokerage, dealing,
association, or cooperative banking activities, or solely by reason
of acting on behalf of a clearing agency or a participant therein in
connection with the furnishing by the clearing agency of services to
its participants or the use of services of the clearing agency by
its participants, unless the Commission, by rule, otherwise provides
as necessary or appropriate to assure the prompt and accurate
clearance and settlement of securities transactions or to prevent
evasion of this title; (iv) any life insurance company, its
registered separate accounts, or a subsidiary of such insurance
company solely by reason of functions commonly performed by such
entities in connection with variable annuity contracts or variable
life policies issued by such insurance company or its separate
accounts; (v) any registered open-end investment company or unit
investment trust solely by reason of functions commonly performed by
it in connection with shares in such registered open-end investment
company or unit investment trust, or (vi) any person solely by
reason of its performing functions described in 15 U.S.C.
78c(a)(25)(E).
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The Commission preliminarily believes that exemptions from the
clearing agency definition with respect to registered security-based
swap dealers' and registered security-based swap execution facilities'
activities, which are comparable to functions carved out from the
definition of clearing agency for dealers and exchanges in the
traditional securities markets, is necessary and appropriate, in the
public interest, and is consistent with the protection of investors
because it would mitigate the potential for overlapping or duplicative
requirements consistent with prior exclusions from the definition of
the term clearing agency. Accordingly, pursuant to the Commission's
authority under Section 36 of the Exchange Act,\99\ the Commission is
proposing Rule 17Ad-24 to exempt certain registered security-based swap
dealers and registered security-based swap execution facilities from
the definition of clearing agency.
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\99\ 15 U.S.C. 78mm. Section 36 of the Exchange Act authorizes
the Commission to conditionally or unconditionally exempt any
person, security, or transaction, or any class of classes of
persons, securities, or transactions, from any provision or
provisions of the Exchange Act or any rule or regulation thereunder,
by rule, regulation, or order, to the extent that such exemption is
necessary or appropriate in the public interest, and is consistent
with the protection of investors.
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Specifically, proposed Rule 17Ad-24 would provide that a registered
security-based swap dealer would not be considered a clearing agency
solely by reason of functions it performs as part of customary dealing
activities, or solely because it acts on behalf of a clearing agency or
a participant in connection with services performed by the clearing
agency. For example, a security-based swap dealer that acts as an
intermediary in making payments or deliveries or both in connection
with transactions in securities as part of its customary dealing
activities would not be considered a clearing agency. The exemptions in
proposed Rule 17Ad-24 for security-based swap dealers mirror exclusions
already applicable to dealers under Section 3(a)(23)(B) of the Exchange
Act.
In addition, proposed Rule 17Ad-24 provides that a registered
security-based swap execution facility would not be considered a
clearing agency solely because it provides facilities for comparison of
data relating to the terms
[[Page 14495]]
of settlement of securities transactions effected on such registered
security-based swap execution facility. The exemptions in proposed Rule
17Ad-24 for security-based swap execution facilities mirror exclusions
applicable to national securities exchanges under Section 3(a)(23)(B)
of the Exchange Act.
The Commission cautions, however, that security-based swap dealers
and security-based swap execution facilities that engage in clearing
agency activities beyond the scope of the proposed exemptions could be
considered a clearing agency under the broad definition in Section
3(a)(23) of the Exchange Act. Moreover, other participants in the
security-based swap market could also qualify as a clearing agency
given the broad definition of clearing agency under the Exchange Act.
If a participant in the security-based swap market qualified as a
clearing agency, it would be required to register with the Commission.
Section 763(b) of the Dodd-Frank Act adds a new Section 17A(g) to the
Exchange Act, which directs entities that use instrumentalities of
interstate commerce to perform clearing agency functions for security-
based swaps to register with the Commission. The Commission notes that
the definition of clearing agency under Section 3(a)(23)(A) of Exchange
Act is defined broadly to include any person who:
Acts as an intermediary in making payments or deliveries
or both in connection with transactions in securities;
Provides facilities for the comparison of data regarding
the terms of settlement of securities transactions, to reduce the
number of settlements of securities transactions, or for the allocation
of securities settlement responsibilities;
Acts as a custodian of securities in connection with a
system for the central handling of securities whereby all securities of
a particular class or series of any issuer deposited within the system
are treated as fungible and may be transferred, loaned, or pledged by
bookkeeping entry, without physical delivery of securities certificates
(such as a securities depository); or
Otherwise permits or facilitates the settlement of
securities transactions or the hypothecation or lending of securities
without physical delivery of securities certificates (such as a
securities depository).\100\
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\100\ 15 U.S.C. 78c(a)(23)(A).
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Based on this broad definition, the Commission preliminarily
believes that certain service providers that facilitate security-based
swap contract management may meet the clearing agency definition. The
Commission preliminarily believes the following activities, if engaged
in by security-based swap market participants, would qualify these
participants as clearing agencies and therefore trigger the statutory
requirement to register as clearing agencies: \101\
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\101\ The Commission stresses that the functions highlighted
herein are not an exhaustive list and urges each security-based swap
lifecycle event service provider to consider whether its functions
place it within the clearing agency definition.
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Collateral Management Activities. Collateral management
involves calculating collateral requirements and facilitating the
transfer of collateral between counterparties. Entities that calculate
net payment obligations among counterparties for security-based swaps
and provide instructions for payments, including with respect to
quarterly interest, credit events, and upfront fees, are likely acting
as an intermediary in making payments or deliveries or both in
connection with transactions in securities. As a result of acting as
such an intermediary in making payments or deliveries or both in
connection with transactions in securities, the Commission
preliminarily believes that these entities would fall within the
definition of a clearing agency \102\ and would generally need to
register.
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\102\ See supra note 98 and accompanying text.
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Trade Matching Services. ``Matching service'' is the term
that is used to describe the process whereby an intermediary compares
each market participant's trade data regarding the terms of settlement
of securities transactions, in order to reduce the number of
settlements of securities transactions, or to allocate securities
settlement responsibilities. An intermediary that captures trade
information regarding a securities transaction and performs an
independent comparison of that information which results in the
issuance of binding matched terms to the transaction is providing
matching services and falls within the definition of clearing
agency.\103\ As a result of comparing each market participant's trade
data regarding the terms of settlement of securities transactions, in
order to reduce the number of settlements of securities transactions,
or to allocate securities settlement responsibilities, the Commission
preliminarily believes that entities providing these trade ``matching
services'' with respect to security-based swaps would meet the
statutory definition of a clearing agency \104\ and would generally
need to register.\105\ However, the Commission also preliminarily
believes that providing preliminary comparisons, such as those provided
by certain affirmation and novation service providers that are followed
by independent comparisons that result in the issuance of legally
binding matched terms, would generally not fall within the definition
of clearing agency. Similarly, the Commission preliminarily believes
that reconciliation service providers that function solely to permit
parties to reconcile trade information records with their
counterparties would generally not fall within the definition of
clearing agency.
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\103\ See also Exchange Act Release No. 39829 (April 6, 1998),
63 FR 17943 (April 13, 1998) (File No. S7-10-98) (``A vendor that
provides a matching service will actively compare trade and
allocation information and will issue the affirmed confirmation that
will be used in settling the transaction.'').
\104\ See supra note 98 and accompanying text.
\105\ See Exchange Act Release No. 63727 (January 14, 2011) 76
FR 3859 (January 21, 2011) (discussing generally, at footnotes 20
through 22 and the accompanying text, the confirmation process for
security-based swap transactions and the Commission's preliminary
expectations about the role of matching services in that setting).
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Tear Up/Compression Services (``Tear Up services'').\106\
Based on discussions between the Commission staff and market
participants, the Commission understands that Tear Up service providers
generally operate in the following manner:
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\106\ Tear-up or multilateral portfolio trade compression
services for OTC derivatives seek to eliminate unnecessary or
duplicative trades from the market while maintaining a market
participant's overall exposure or risk in the market. This allows
dealers to reduce operational risk, freeing up liquidity and
capital. By reducing the gross notional outstanding of OTC
derivatives in normal times, portfolio trade compression provides
effective measures to address the risk associated with
uncoordinated, disorderly close-out transactions in individual
dealers of the positions of a defaulting major dealer. Compression
is offered by several vendors and major market participants are now
engaged in regular compression exercises. See Financial Stability
Board, Implementing OTC Derivatives Market Reforms, (October 25,
2010), available at http://www.Financialstabilityboard.org/publications/r_101025.pdf.
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[cir] Tear Up services execute an algorithm seeking to reduce the
gross notional value of trades and the total number of trades but do
not alter the counterparty risk or market risk associated with the
trades beyond specified parameters.
[cir] When using a Tear Up service, the users send all transactions
they are willing to terminate to the service. Each user sets tolerances
for counterparty exposures it is willing to absorb and how much money
it is willing to pay in trade termination costs. The submitted
transactions are matched using an
[[Page 14496]]
algorithm and tolerances specified by the user.
[cir] The service then proposes terminations across all parties who
participated, including, payments for termination. The users consider
the proposal, check their own records, and, if they choose to accept
the proposal, fax or otherwise notify their acceptance to the service.
If the service receives acceptances from all users, the transaction is
considered binding and the relevant transactions are considered
terminated.
[cir] The users generally exchange payments and confirmations
outside the service. The Tear Up service will send the completed files
to a third party service provider for matching and the ``torn up''
transactions are terminated in bulk at the security-based swap data
repository. The security-based swap data repository maintains a record
of which parties terminated the ``torn up'' trades.
The Commission preliminarily believes that a Tear Up service
provider that performs these functions would generally fall within the
definition of clearing agency and would need to register because, among
other activities, it would be acting as an intermediary that provides
facilities for the comparison of data regarding the terms of settlement
of securities transactions, to reduce the number of settlements of
securities transactions, or the allocation of securities settlement
responsibilities.\107\
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\107\ See supra note 98 and accompanying text.
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The Commission requests comment on all aspects of the proposed
exemptions from the definition of clearing agency for registered
security-based swap dealers and registered security-based swap
execution facilities in proposed Rule 17Ad-24. The Commission also
requests comments on which activities fall within the definition of
clearing agency, particularly within the context of activities in the
security-based swap market. In addition, the Commission requests
comments on the following specific issues:
What are the advantages or disadvantages of the Commission
granting the proposed exemptions from the definition of clearing
agency? If there are disadvantages to these proposed exemptions, what
are they and how do they compare to the benefits?
Under what circumstances are market participants likely to
use the proposed exemptions for registered security-based swap dealers
and registered security-based swap execution facilities? Are there any
additional terms or conditions that the Commission should consider
imposing with respect to the proposed exemptions? Are there any
advantages or disadvantages related to the proposed exemptions that the
Commission should consider?
Under Section 17A(b)(3)(I) of the Exchange Act, the rules
of a clearing agency should not impose any undue burden on competition.
Should the Commission augment this statutory requirement by adopting
rules that prohibit clearing agencies from entering into certain types
of arrangements? If so, which arrangements, and why? In particular,
should the Commission promulgate rules concerning any revenue sharing
arrangements used by clearing agencies? Please explain why or why not.
Are revenue sharing arrangements common among clearing agencies? How
are they used? Are revenue sharing arrangements a manner of directing
funds to a subset of clearing members, which funds otherwise could
support a general reduction of clearing costs that could be equitably
distributed among members? If the Commission adopts rules regarding
revenue sharing, what aspects of the revenue sharing arrangements
should the rules address and how might the rules be designed to promote
competition and fair access to the clearing agency? If the Commission
promulgates rules regarding certain arrangements, how should the
Commission mitigate the potential risk of unduly limiting the ability
of clearing agencies to develop new commercial arrangements?
Are there any additional entities for which the Commission
should consider providing exemptions with respect to the definition of
clearing agency, particularly in the context of the security-based swap
market? If so, why would providing such exemptions be necessary or
appropriate in the public interest, and consistent with the protection
of investors? Under what terms and conditions should the Commission
consider providing such exemptions?
Is there additional information about any of the security-
based swap services described by the Commission that would affect the
consideration of whether these activities trigger the definition of
clearing agency?
Are there any other security-based swap services that may
fall within the clearing agency definition? If so, what are those
services? Why would they be appropriately classified as clearing agency
functions?
If a security-based swap clearing agency that does not
provide CCP services is required to register with the Commission as a
clearing agency, are there certain requirements that are applicable or
proposed to be applicable to other clearing agencies that should not
apply to these security-based swap clearing agencies? For example:
[cir] Should non-CCP security-based swap clearing agencies be
subject to proposed Regulation MC,\108\ which the Commission proposed
on October 14, 2010 to mitigate the potential conflicts of interest
that could exist at certain entities, including security-based swap
clearing agencies, through conditions and structures relating to
ownership, voting, and governance of these entities? Why or why not?
Should proposed Regulation MC apply to some but not all security-based
swap clearing agencies that do not provide CCP services? If so, which
ones?
---------------------------------------------------------------------------
\108\ See Exchange Act Release No. 63107, 75 FR 65882, supra
note 45.
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[cir] Should non-CCP security-based swap clearing agencies be
subject to proposed Rule 17Ad-25, which would require clearing agencies
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify and address existing or
potential conflicts of interest? Why or why not? Should proposed Rule
17Ad-25 apply to some but not all security-based swap clearing agencies
that do not provide CCP services? If so, which ones?
[cir] Should non-CCP security-based swap clearing agencies be
subject to proposed Rule 17Ad-26, which would require each clearing
agency to establish governance standards for its board or board
committee members? Why or why not? Should proposed Rule 17Ad-26 apply
to some but not all security-based swap clearing agencies that do not
provide CCP services? If so, which ones?
What are the costs associated with requiring the types of
entities described above that do not offer CCP services to register as
a clearing agency and operate as an SRO (including compliance with
ongoing SRO rule filings requirements)? Please consider both the
initial and ongoing costs, and please consider the burdens that such
requirements may place on the ability of these entities to operate in a
commercially viable manner. Are there competitors who might offer
competing services (either in the United States or abroad) without
being subject to these requirements? Are these costs offset by
regulatory requirements or industry commitments to use certain
security-based swap service providers that fall within the definition
of a clearing agency? What implications would registration of these
entities have for the security-based swap
[[Page 14497]]
markets more generally, and for the availability of their services to
market participants?
E. Proposed Amendment of Rule 17Ab2-1: Registration of Clearing
Agencies
The Commission is proposing to amend Rule 17Ab2-1(c) regarding the
registration of clearing agencies. Rule 17Ab2-1(c) currently provides
that, if requested by an applicant, the Commission may grant a
temporary registration providing for exemptions from certain
registration requirements in Section 17A(b)(3) of the Exchange Act.
Prior to the Dodd-Frank Act's amendments to the Exchange Act, the
Commission was not restricted in its ability to grant exemptions from
registration requirements to any category of clearing agencies.
Therefore, the exemptions discussed in Rule 17Ab2-1(c) applied with
respect to all clearing agencies.
The Dodd-Frank Act amended Section 36 of the Exchange Act and
altered the Commission's authority to provide exemptions from the
registration requirements applicable to security-based swap clearing
agencies pursuant to Section 17A(g) of the Exchange Act.\109\
Accordingly, the Commission proposes to amend Rule 17Ab2-1 to reflect
these changes. Specifically, the proposal would amend Rule 17Ab2-1(c)
to clarify that when granting a temporary registration, the Commission
may do so for ``a specific period of time and may exempt, other than
for purposes of section 17A(g) of the Act, the registrant from one or
more of the requirements * * * ''. The Commission preliminarily
believes this proposed amendment to Rule 17Ab2-1(c), clarifying how the
rule would operate in light of changes to the Commission's exemptive
authority under Section 36 of the Exchange Act with respect to Section
17A(g) of the Exchange Act, is appropriate given the change to the
Commission's exemptive authority under Section 36 of the Exchange Act
effected by the Dodd-Frank Act.\110\
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\109\ See Section 772 of Public Law 111-203, 124 Stat. 1376
(2010) amending Section 36 of the Exchange Act.
\110\ Id.
---------------------------------------------------------------------------
The Commission also proposes other technical changes to Rule 17Ab2-
1(c) unrelated to the Dodd-Frank Act that the Commission preliminarily
believes would help in the administration of the rule pertaining to
temporary registrations and would thereby be appropriate in the public
interest, for the protection of investors.\111\ Specifically, the
Commission proposes to amend Rule 17Ab2-1(c) to clarify that the
temporary registration may be issued at the discretion of the
Commission. The Commission preliminarily believes that the ability to
grant a temporary registration provides useful flexibility to further
evaluate whether a clearing agency is meeting required standards before
granting a permanent registration. Operational, resource, internal
control or other issues may only become apparent after a clearing
agency has commenced operations. In addition, the proposal would amend
the current provision indicating that the Commission may grant the
temporary registration for eighteen months or such longer period as the
Commission may provide by order, to state that the Commission may grant
the temporary registration for twenty-four months or such longer period
as the Commission may provide by order.\112\ The Commission
preliminarily believes that the temporary registration process should
explicitly provide greater time to allow the clearing agency to operate
before registration becomes final because doing so would enhance the
Commission's capacity to provide oversight that promotes prompt and
accurate clearance and settlement.
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\111\ See 15 U.S.C. 78q-1(d).
\112\ This change would also include a conforming change to the
timing for granting a non-temporary registration.
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Request for Comment
The Commission generally requests comments on all aspects of the
proposed amendments to Rule 17Ab2-1. In addition, the Commission
requests comments on the following specific issues:
Are the proposed changes to Rule 17Ab2-1 setting forth the
restrictions on providing exemptions with respect to security-based
swap clearing agencies sufficiently clear?
Would any additional changes to Rule 17Ab2-1 regarding how
the clearing agency registration requirements apply with respect to
security-based swap clearing agencies be beneficial to market
participants?
What are the advantages and disadvantages of the proposed
changes to the temporary registration process, such as stating the
temporary registration may be issued at the discretion of the
Commission and the revisions to the timeframe for the temporary
registration?
F. Proposed Rule 17Ad-25: Clearing Agency Procedures To Identify and
Address Conflicts of Interest
The Commission is proposing Rule 17Ad-25 to require clearing
agencies to establish, implement, maintain and enforce written policies
and procedures reasonably designed to identify and reasonably existing
or potential conflicts of interest.\113\ For example, there may be
actual or potential conflicts of interest between the activities of a
clearing agency and the interests of its participants or board members,
which could affect decision making by officers or directors or actions
by participants in seeking to influence its operations. The proposed
rule also would require the clearing agency's policies and procedures
to be reasonably designed to minimize conflicts of interest in decision
making by the clearing agency.
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\113\ Proposed Rule 17Ad-25 would complement other applicable
requirements concerning conflicts of interests at clearing agencies
that may also separately apply. These other requirements include the
existing regulatory framework of Section 17A of the Exchange Act and
the conflicts-related requirements contemplated by proposed Rule
17Ad-22(d)(8) as well as Section 765 of the Dodd-Frank Act with
respect to security-based swap clearing agencies. See supra Section
III.A. (proposing that clearing agencies be required to have
governance arrangements that are clear and transparent to fulfill
Exchange Act requirements and to support the objectives of owners
and participants and promote the effectiveness of the clearing
agency's risk management procedures). See also Exchange Act Release
No. 63107, 75 FR 65882, supra note 45.
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The Commission preliminarily believes it is important for clearing
agencies to evaluate their activities and determine potential sources
for conflicts of interests that exist within their organization and to
reasonably address such conflicts so that they do not disrupt the
clearing agency's ability to facilitate prompt and accurate clearance
and settlement. The Commission also preliminarily believes that
requiring clearing agencies, under proposed Rule 17Ad-25, to have
reasonably designed policies and procedures to minimize conflicts of
interest in decision making by the clearing agency would facilitate the
development of tailored policies and procedures that mitigate conflicts
specific to the clearing agency's business. Moreover, the Commission
preliminarily believes the proposed rule would be useful in
facilitating its oversight of clearing agencies by providing a
documented plan against which the Commission could evaluate a clearing
agency's efforts to mitigate conflicts and potentially provide the
Commission with a better understanding of the potential sources of
conflicts for a specific clearing agency.
[[Page 14498]]
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-25. In addition, the Commission requests comments on
the following specific issues:
Under the proposal, clearing agencies would be required to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify and address existing or
potential conflicts of interest. Such policies and procedures would
also be required to be reasonably designed to minimize conflicts of
interest in decision making by the clearing agency. Should the
Commission require any specific measures to address conflicts of
interests, such as mandating certain boards or board committee
compositions with respect to all clearing agencies instead of using a
policies and procedures approach? What are the advantages and
disadvantages of a more prescriptive approach?
What, if any, additional guidance by the Commission would
be helpful regarding how clearing agencies should evaluate their own
activities and determine the potential sources of conflicts?
Should the Commission consider requiring only certain
types of clearing agencies (e.g., security-based swap clearing
agencies) to be subject to this requirement? Please explain why or why
not. Are there special considerations, such as market concentration,
affecting security-based swap clearing agencies that make it
particularly important for them to establish, implement, maintain and
enforce written policies and procedures to identify and address
existing or potential conflicts of interest? If so, what are those
special considerations and how would this requirement address them? If
not, how would various types of clearing agencies be affected by this
requirement? Would there be advantages to maintaining one requirement
for all clearing agencies? Why or why not?
G. Proposed Rule 17Ad-26: Standards for Board or Board Committee
Directors
The Commission is proposing Rule 17Ad-26 to require clearing
agencies to establish governance standards for their directors serving
on the board or board committees. The Commission preliminarily believes
that directors serving on the board and board committees of a clearing
agency play a vital role in creating a framework that supports prompt
and accurate clearance and settlement because of their role in the
decision-making process within a clearing agency. Accordingly, the
expertise, diversity of perspectives, conduct and incentives of
directors serving on the board and board committees of a clearing
agency are likely to affect its effective operation. For example, a
lack of expertise by board members or board committee members may deter
them from challenging decisions by management and lessen the potential
that management will escalate appropriate issues for the board's
consideration. In addition, clearing agencies should consider the
extent to which persons who have been found to have violated the
securities laws, or other similar laws or statutes, may not be fit to
serve on the clearing agency's board or board committees. Moreover, a
lack of clear guidance as to the roles and responsibilities of
directors and procedures for assessing their performance may negatively
impact the efficient functioning of the clearing agency.
Therefore, the Commission is proposing Rule 17Ad-26 to require that
clearing agencies establish and articulate baseline standards for
appointing and retaining their directors, which may help to increase
the potential that directors' actions will benefit the clearing
organization. The proposed rule specifies that the clearing agency's
standards must address the following areas:
A clear articulation of the roles and responsibilities of
directors serving on the clearing agency's board and any board
committees;
Director qualifications providing criteria for expertise
in the securities industry, clearance and settlement of securities
transactions, and financial risk management; \114\
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\114\ The Commission notes that in other contexts under the
Exchange Act certain persons have been required to meet
qualification standards. For example, Section 15(b)(7) requires all
Commission-registered brokers and dealers to meet such standards of
operational capability and all natural persons associated with
registered brokers and dealers to meet such standards of training,
experience, competence, and such other qualifications as the
Commission finds necessary or appropriate in the public interest or
for the protection of investors. See 15 U.S.C. 78o(b)(7). Section
15(b)(7) permits the Commission to rely on the rules of certain SROs
in devising and administering these requirements. For example, the
NASD Rule 1000 series contains registration and qualification
requirements for registered representatives and principals
associated with FINRA-member firms. In addition, NASD Rule 3010
requires all FINRA members to have a supervisory system that
provides for, among other things, reasonable efforts to determine
that all supervisory personnel are qualified by virtue of experience
or training to carry out their assigned responsibilities.
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Disqualifying factors concerning serious legal misconduct,
including violations of the Federal securities laws; and \115\
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\115\ The Exchange Act and the rules promulgated thereunder
contain a number of restrictions on the ability of certain
registered entities, including clearing agencies, brokers, dealers,
transfer agents and other SROs, to be associated with persons
subject to a ``statutory disqualification,'' as such term is defined
in Section 3(a)(39) of the Exchange Act. 15 U.S.C. 78c(a)(39). For
example, Section 17A(b)(4) of the Exchange Act provides that a
``registered clearing agency may, and in cases in which the
Commission, by order, directs as appropriate in the public interest
shall, deny participation to any person subject to a statutory
disqualification.'' 12 U.S.C. 78q-1(b)(4).
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Policies and procedures for the periodic review by the
board or board committees of the performance of individual members.
The proposed rule would require the clearing agency to clearly
articulate the roles and responsibilities of directors serving on the
clearing agency's board and any board committees. This would involve
the clearing agency setting forth the duties of directors and the
functions within the clearing agency for which they are responsible.
The Commission preliminarily believes that such a delineation of
responsibilities will help to focus directors' efforts to areas that
promote the effective operations of a clearing agency.
The proposed rule would also require that the clearing agency
establish director qualifications that address the clearing agency's
criteria for expertise in the securities industry, clearance and
settlement of securities transactions and financial risk management
because each of these would have a bearing on the director's ability to
understand the operations and risks of a clearing agency. When
developing these criteria, clearing agencies could consider the
specialized needs of individual board committees, the overall mix of
expertise within the board or on a committee, and the benefits of
having members with different backgrounds (e.g., regulatory, trading,
and risk management experience). The Commission preliminarily believes
that this requirement would be beneficial because it could provide
greater focus within a clearing agency for the selection of directors
that have appropriate expertise, as determined by the clearing agency,
which would facilitate the ability of the clearing agency to provide
prompt and accurate clearance and settlement.
In addition, the proposed rule would require the development of
disqualifying factors concerning serious legal misconduct, including
violations of the Federal securities laws. For example, a clearing
agency might consider whether to preclude a person
[[Page 14499]]
who has had a securities license denied, suspended, revoked or
restricted by a regulatory authority from serving as a director. The
Commission preliminarily believes that such qualification criteria are
important with respect to identifying potential issues that would call
into question the ability of the persons who are responsible for the
governance of the clearing agency to ensure that it complies with
applicable laws and regulations.
Finally, the proposed rule would require the clearing agency to
establish policies and procedures for the periodic review by the board
or a board committee of the performance of its individual members. As
previously noted, the Commission preliminarily believes that directors
serving on the board or board committees of a clearing agency play a
vital role in creating a framework that supports prompt and accurate
clearance and settlement because of their role in decision-making
processes. Therefore, the Commission preliminarily believes that the
board, or a board committee, should establish policies and procedures
for the periodic review of the performance of the relevant directors.
Such a review should consider the contributions that the directors are
making to the clearing agency and to its ability to operate in an
effective manner. The policies and procedures for such a review, to be
developed by the clearing agency as appropriate given its particular
circumstances, might include self-assessments, peer review procedures,
or the use of internal or external parties or consultants to facilitate
an evaluation of the performance of each relevant director.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 17Ad-26. In addition, the Commission requests comments on
the following specific issues:
Are there any additional standards for director or board
committee members that the Commission should consider requiring? Should
any of the requirements in proposed Rule 17Ad-26 be modified or
changed? If so, how?
How direct should the Commission's role be in the
oversight and monitoring of the composition and activities of clearing
agency boards and board committees? If the Commission's role should be
more direct, what mechanisms or structure would facilitate the
Commission taking such a role? For example, should the Commission
consider any additional requirements related to fiduciary duties to
either enhance mitigation of conflicts or address deficiencies?
What, if any, additional guidance by the Commission would
be helpful regarding standards for a clearing agency's directors?
Should the Commission develop more or less prescriptive
requirements regarding standards for directors or board committee
members? What are the advantages or disadvantages of any contemplated
approach?
The Commission has previously proposed independence
requirements with respect to the board and board committees of
security-based swap clearing agencies. Should the boards of all
clearing agencies consist of a certain proportion of independent
directors? Please explain why or why not.
Should the Commission require clearing agencies to develop
any limits on the type or amount of compensation that directors may
receive, such as including prohibiting compensation of independent and
other non-management directors from being linked to the business
performance of the clearing agency, or being subject to discretion of
management? Please explain.
Should the Commission consider requiring only certain
types of clearing agencies (e.g., security-based swap clearing
agencies) to be subject to this requirement? Please explain why or why
not. Are there special considerations, such as market concentration,
affecting security-based swap clearing agencies that make these
governance requirements particularly important for them? If so, what
are those special considerations and how would this requirement address
them? If not, how would clearing agencies that provide different types
of clearing services be affected by the application of this
requirement? Would there be advantages to maintaining one requirement
for all clearing agencies? Why or why not?
H. Proposed Rule 3Cj-1 Designation of Chief Compliance Officer
The Dodd-Frank Act amended the Exchange Act to require each
clearing agency to appoint a chief compliance officer (``CCO'') and
specifies the CCO's duties.\116\ The Commission is proposing Rule 3Cj-1
to establish requirements concerning a clearing agency's CCO. In
particular, proposed Rule 3Cj-1 would incorporate the duties of a
clearing agency's CCO that are enumerated in Exchange Act Section 3C(j)
\117\ and impose additional requirements.
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\116\ Public Law 111-203, Sec. 763(a) (adding Exchange Act
Section 3C(j)).
\117\ Id.
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Consistent with the requirements under Section 3C(j) of the
Exchange Act, proposed Rule 3Cj-1(a) would require each clearing agency
to designate a CCO. The Commission preliminarily believes that a
clearing agency would not necessarily need to hire an additional person
to serve as its CCO. Instead, a clearing agency could designate an
individual already employed by the clearing agency as its CCO.
Consistent with the requirements under Section 3C(j) of the
Exchange Act, under proposed Rule 3Cj-1(b), each CCO shall: (1) Report
directly to the board or to a senior officer of the clearing agency;
(2) in consultation with its board or the senior officer of the
registered clearing agency, resolve any conflicts of interest that may
arise; (3) be responsible for administering each policy and procedure
that is required to be established pursuant to Section 3C of the
Exchange Act and rules and regulations thereunder; (4) ensure
compliance with the Exchange Act and the rules and regulations
thereunder; (5) establish policies and procedures for the prompt
remediation of any compliance issues identified by the CCO, and (6)
establish and follow appropriate procedures for the prompt handling of
management response, remediation, retesting, and closing of non-
compliance issues.
In order to clarify the requirements under Section 3C(j) of the
Exchange Act, the Commission is also proposing (as part of proposed
Rule 3Cj-1(e)) to define the term senior officer for purposes of
proposed Rule 3Cj-1 to include the chief executive officer, or other
equivalent officer. As the chief executive officer is generally the
most senior officer in a clearing agency, the Commission preliminarily
believes that such officer should be identified as the responsible
individual for purposes of the proposed rule because it would help to
promote enhanced focus on compliance issues and thereby potentially
lead to more effective operations at a clearing agency.
Consistent with the requirements under Section 3C(j) of the
Exchange Act, proposed Rule 3Cj-1(c) would require the CCO to prepare,
sign and submit an annual compliance report that describes (i) the
compliance of the clearing agency with the Federal securities laws and
the rules and regulations thereunder, and (ii) each policy and
procedure of the clearing agency (including the code of ethics and
conflict of interest policies of
[[Page 14500]]
the registered clearing agency). Also consistent with the requirements
under Section 3C(j) of the Exchange Act, proposed Rule 3Cj-1(c) would
require the annual compliance report to accompany each appropriate
financial report of the clearing agency that is required to be
furnished to the Commission pursuant to the Exchange Act and the rules
thereunder. Finally, the CCO must certify under penalty of law that the
compliance report is accurate and complete.
In addition, to clarify and enhance the requirements under Section
3C(j) of the Exchange Act, the Commission is proposing to require that
each annual compliance report:
Be submitted to the board of directors and audit committee
(or equivalent bodies) of the clearing agency promptly after the date
of execution of the required certification and prior to filing of the
report with the Commission;
Be filed with the Commission in a tagged data format in
accordance with the instructions contained in the EDGAR Filer Manual,
as described in Rule 301 of Regulation S-T; \118\ and
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\118\ The term ``tag'' (including the term ``tagged'') refers to
an identifier that highlights specific information submitted to the
Commission that is in the format required by the EDGAR Filer Manual,
as described in Rule 301 of Regulation S-T. See 17 CFR 32.301. The
term ``EDGAR Filer Manual'' is defined in Rule 11 of Regulation S-T
as ``the current version of the manual prepared by the Commission
setting out the technical format requirements for an electronic
submission.'' See 17 CFR 232.11. If the Commission adopts Rule 3Cj-1
as proposed, it is possible that clearing agencies might be required
to file the annual compliance report in paper until such time as an
electronic filing system is operational and capable of receiving the
annual compliance report. The Commission would notify clearing
agencies as soon as the electronic filing system can accept filings
of annual compliance reports.
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Be filed with the Commission within 60 days after the end
of the fiscal year covered by such report.
The Commission preliminarily believes it would be appropriate to
require that the annual compliance report be submitted to the board of
directors and audit committee (or equivalent bodies) prior to filing of
the report with the Commission because it would help to focus attention
at senior levels of the clearing agency on the contents of the report
that is being filed with the Commission. This in turn could help to
promote a robust compliance program at the clearing agency by ensuring
appropriate attention and response at the Board level.
In addition, the Commission preliminarily believes that it would be
appropriate for clearing agencies to file the report with the
Commission in a tagged data format in accordance with the instructions
contained in the EDGAR Filer Manual in order to provide an electronic
system for submitting this report that builds on an existing framework
for filings to the Commission. This in turn should help to ease the
potential administrative burdens on clearing agencies. As previously
noted, the proposed rule would also require that the annual compliance
report be filed with the Commission within 60 days after the end of the
fiscal year covered by such report. The report would be subject to
public availability and the Commission anticipates making such report
available through its EDGAR system. The Commission preliminarily
believes such time frame would be appropriate because it should give
clearing agencies adequate time to review and draft a report based on
actions that occurred during the prior year, while also limiting the
potential that the information would be stale and thus not be as useful
in the Commission's oversight of the clearing agency.
Request for Comment
The Commission generally requests comments on all aspects of
proposed Rule 3Cj-1. In addition, the Commission requests comments on
the following specific issues:
Is the definition of ``senior officer'' appropriate? If
not, is it over-inclusive or under-inclusive and how should it be
defined?
Should the Commission include in its proposed rule a
requirement that a CCO's compensation must be approved by the board?
Should the Commission include in its proposed rule a
requirement that a CCO may only be removed by action of the board?
Are there other measures that would further enhance the
independence and effectiveness of a CCO and that should be prescribed
in a rule, such as requiring that a CCO not perform any other
functions?
Should the Commission impose any additional duties on a
CCO of a clearing agency?
Should the Commission provide guidance in its proposed
rules about the CCO's procedures for the remediation of non-compliance
issues?
What is the likely effect of the Commission's proposed
rule on the development of the financial markets? Would the proposed
rule impede the establishment of clearing agencies?
Does requiring the compliance report to be filed annually
with the Commission within sixty days after the end of the fiscal year
covered by such report give a clearing agency enough time to prepare
the report? Should the Commission consider a longer or short time
frame? Please explain.
Should the Commission require submission of the CCO
compliance report to the board before or after submission to the
Commission? How would submission of the compliance report to the board
before or after submission to the Commission affect the board's review
of the compliance report?
Should the Commission prescribe any specific method of
review by the board with respect to the CCO compliance report? For
example, should the Commission require that (i) the CCO compliance
report include, as appropriate, recommended actions to be taken by the
clearing agency to improve compliance or correct any compliance
deficiencies, (ii) the board review any such recommendations and
determine whether to approve them, and (iii) the clearing agency notify
the Commission if the board declines to approve such recommendations,
or approves different actions than those recommended in the CCO
compliance report? What are the advantages and disadvantages of such an
approach? Should clearing agencies be required to have the CCO report
directly to the board instead of also permitting reporting to a senior
officer of the clearing agency? What would be the advantages and
disadvantages of requiring the CCO to report to the board?
IV. General Request for Comments
The Commission seeks comment on all aspects of the proposed rules
with respect to clearing agencies. The Commission particularly requests
comment from the point of view of investors, entities that are
registered as clearing agencies, are likely to become registered
clearing agencies, entities operating platforms that currently trade or
clear security-based swaps, broker-dealers, and financial institutions.
Title VII requires that the SEC consult and coordinate to the
extent possible with the CFTC for the purposes of assuring regulatory
consistency and comparability, to the extent possible, and states that
in adopting rules, the CFTC and SEC shall treat functionally or
economically similar products or entities in a similar manner. In the
process of developing the proposed rules the Commission staff has
consulted with the CFTC staff.
The CFTC is adopting rules related to derivatives clearing
organizations (``DCO'') in connection with Section 725
[[Page 14501]]
of the Dodd-Frank Act.\119\ Understanding that the Commission and the
CFTC regulate different products and markets, and as such,
appropriately may be proposing alternative regulatory requirements, we
request comments on the effect of any differences between the
Commission and CFTC approaches to the regulation of clearing agencies
and DCOs respectively. Specifically, would the regulatory approaches
under the Commission's proposed rulemaking pursuant to Sections 17A(d),
17A(j) and 3C(j) under the Exchange Act and the CFTC's proposed
rulemaking pursuant to Section 725 of the Dodd-Frank Act result in
duplicative or inconsistent requirements for market participants
subject to both regulatory regimes or result in gaps between those
regimes? If so, in what ways do commenters believe that such
duplication, inconsistencies, or gaps should be minimized? Do
commenters believe the approaches proposed by the Commission and the
CFTC to govern clearing agencies and DCOs are comparable? If not, why?
Do commenters believe there are approaches that would result in more
comparable treatment? If so, what are they and what would be the
advantages and disadvantages of adopting such approaches? Do commenters
believe that it would be appropriate for the Commission to adopt an
approach proposed by the CFTC that differs from our proposal? If so,
which one?
---------------------------------------------------------------------------
\119\ See 75 FR 63113 (October 14, 2010) and 75 FR 77576
(December 13, 2010).
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Commenters should, when possible, provide the Commission with
empirical data to support their views. Commenters suggesting
alternative approaches should provide comprehensive proposals,
including any conditions or limitations that they believe should apply,
the reasons for their suggested approaches, and their analysis
regarding why their suggested approaches would satisfy the statutory
mandates of the Exchange Act with respect to clearing agencies.
V. Paperwork Reduction Act
Certain provisions of the proposed rules would impose new
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\120\ Accordingly, the
Commission has submitted the information to the Office of Management
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507 and 5
CFR 1320.11. The title of the new collection of information is Clearing
Agency Standards for Operation and Governance. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid OMB
control number.
---------------------------------------------------------------------------
\120\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
A. Summary of Collection of Information
1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
Proposed Rule 17Ad-22(b)(1) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(1) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to measure its credit exposures to its
participants at least once each day, and limit its exposures to
potential losses from defaults by its participants in normal market
conditions so that the operations of the clearing agency would not be
disrupted and non-defaulting participants would not be exposed to
losses that they cannot anticipate or control.
b. Margin Requirements
Proposed Rule 17Ad-22(b)(2) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(2) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to: (i) Use margin requirements to limit
its credit exposures to participants in normal market conditions; (ii)
use risk-based models and parameters to set margin requirements; and
(iii) review the models and parameters at least monthly.
c. Financial Resources
Proposed Rule 17Ad-22(b)(3) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(3) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to maintain sufficient financial
resources to withstand, at a minimum, a default by the participant to
which it has the largest exposure in extreme but plausible market
conditions, and if the clearing agency provides CCP services for
security-based swaps then a default by the two participants to which it
has the largest exposures in extreme but plausible market conditions;
provided that if a participant controls another participant or is under
common control with another participant, then the affiliated
participants shall be collectively deemed to be a single participant.
d. Model Validation
Proposed Rule 17Ad-22(b)(4) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(4) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for an annual model
validation consisting of evaluating the performance of the clearing
agency's margin models and the related parameters and assumptions
associated with such models by a qualified person who does not perform
functions associated with the clearing agency's margin models (except
as part of the annual model validation) and does not report to such a
person.
e. Non-Dealer Access
Proposed Rule 17Ad-22(b)(5) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(5) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide the opportunity for a person
that does not perform any dealer or security-based swap dealer services
to obtain membership at the clearing agency to clear securities for
itself or on behalf of other persons.
f. Portfolio Size and Transaction Volume Thresholds Restrictions
Proposed Rule 17Ad-22(b)(6) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(6) would require a clearing agency that provides CCP services to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to have membership standards that do not
require that participants maintain a portfolio of any minimum size or
that participants maintain a minimum transaction volume.
g. Net Capital Restrictions
Proposed Rule 17Ad-22(b)(7) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(b)(7) would require a clearing agency that provides CCP services to
establish,
[[Page 14502]]
implement, maintain and enforce written policies and procedures
reasonably designed to provide a person that maintains net capital
equal to or greater than $50 million with the ability to obtain
membership at the clearing agency, with any net capital requirements
being scalable so that they are proportional to the risks posed by the
participant's activities to the clearing agency. The proposed rule also
permits a clearing agency to provide for a higher net capital
requirement (i.e., higher than $50 million) as a condition for
membership at the clearing agency if the clearing agency demonstrates
to the Commission that such a requirement is necessary to mitigate
risks that could not otherwise be effectively managed by other
measures, such as scalable limitations on the transactions that the
participants may clear through the clearing agency, and the Commission
approves the higher net capital requirement as part of a rule filing or
clearing agency registration application.
h. Record of Financial Resources
Proposed Rule 17Ad-22(c)(1) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(c)(1) would require that each fiscal quarter (based on calculations
made as of the last business day of the clearing agency's fiscal
quarter), or at any time upon Commission request, a clearing agency
that performs CCP services shall calculate and maintain a record of the
financial resources necessary to meet the requirement in proposed Rule
17Ad-22Ad-22(b)(3) and sufficient documentation to explain the
methodology it uses to compute such financial resource requirement.
i. Annual Audited Financial Report
Proposed Rule 17Ad-22(c)(2) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed rule 17Ad-
22(c)(2) would require a clearing agency to post on its Web site an
annual financial report which must (i) be a complete set of financial
statements of the clearing agency for the most recent two fiscal years
and be prepared in accordance with U.S. GAAP, except that for a
clearing agency that is a corporation or other organization
incorporated or organized under the laws of any foreign country the
financial statements may be prepared according to U.S. GAAP or IFRS,
(ii) be audited in accordance with standards of the Public Company
Accounting Oversight Board by a registered public accounting firm that
is qualified and independent in accordance with rule 2-01 of Regulation
S-X (17 CFR 210.2-01), (iii) include a report of the registered public
accounting firm that complies with paragraphs (a) through (d) of Rule
2-02 of Regulation S-X (17 CFR 210.2-02).
j. Transparent and Enforceable Rules and Procedures
Proposed Rule 17Ad-22(d)(1) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(1) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide for a well founded, transparent, and enforceable
legal framework for each aspect of its activities in all relevant
jurisdictions.
k. Participation Requirements
Proposed Rule 17Ad-22(d)(2) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(2) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to require participants to have sufficient financial resources
and robust operational capacity to meet obligations arising from
participation in the clearing agency. Clearing agencies would also be
required to have procedures in place to monitor that participation
requirements are met on an ongoing basis, and to have participation
requirements that are objective, publicly disclosed, and permit fair
and open access.
l. Custody of Assets and Investment Risk
Proposed Rule 17Ad-22(d)(3) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(3) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to hold assets in a manner that minimizes risk of loss or
delay in access to them and to invest assets in instruments with
minimal credit, market, and liquidity risks.
m. Identification and Mitigation of Operational Risk
Proposed Rule 17Ad-22(d)(4) contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-
22(d)(4) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to: (i) Identify sources of operational risk and minimize them
through the development of appropriate systems, controls, and
procedures; (ii) implement systems that are reliable, resilient and
secure, and have adequate, scalable capacity; and (iii) have business
continuity plans that allow for timely recovery of operations and
fulfillment of a clearing agency's obligations.
n. Money Settlement Risks
Proposed Rule 17Ad-22(d)(5) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(5) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to employ money settlement arrangements that eliminate or
strictly limit the clearing agency's settlement bank risks, that is,
its credit and liquidity risks from the use of banks to effect money
settlements with its participants, and require funds transfers to the
clearing agency to be final when effected.
o. Cost-Effectiveness
Proposed Rule 17Ad-22(d)(6) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(6) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to be cost-effective in meeting the requirements of
participants while maintaining safe and secure operations.
p. Links
Proposed Rule 17Ad-22(d)(7) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(7) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to evaluate the potential sources of risks that can arise when
the clearing agency establishes links either cross-border or
domestically to clear trades and ensure that the risks are managed
prudently on an ongoing basis.
q. Governance
Proposed Rule 17Ad-22(d)(8) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(8) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to have governance arrangements that are clear and transparent
to fulfill the public interest requirements in Section 17A of the
Exchange Act applicable to clearing
[[Page 14503]]
agencies, to support the objectives of owners and participants, and to
promote the effectiveness of the clearing agency's risk management
procedures.
r. Information on Services
Proposed Rule 17Ad-22(d)(9) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(9) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide market participants with sufficient information for
them to identify and evaluate the risks and costs associated with using
their services.
s. Immobilization and Dematerialization of Stock Certificates
Proposed Rule 17Ad-22(d)(10) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(10) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to immobilize or dematerialize securities certificates and
transfer them by book entry to the greatest extent possible if the
clearing agency performs central securities depository services.
t. Default Procedures
Proposed Rule 17Ad-22(d)(11) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(11) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to make key aspects of the clearing agency's default
procedures publicly available and to establish default procedures that
ensure that the clearing agency can take timely action to contain
losses and liquidity pressures and to continue meeting its obligations
in the event of a participant default.
u. Timing of Settlement Finality
Proposed Rule 17Ad-22(d)(12) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(12) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to ensure that final settlement occurs no later than the end
of the settlement day and that intraday or real-time finality is
provided where necessary to reduce risks.
v. Delivery Versus Payment
Proposed Rule 17Ad-22(d)(13) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(13) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to eliminate principal risk linking securities transfers to
funds transfers in a way that achieves DVP.
w. Risk Controls To Address Participants' Failure To Settle
Proposed Rule 17Ad-22(d)(14) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(14) would require clearing agencies that perform central
securities depository services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to
institute risk controls when the clearing agency extends intraday
credit to participants, including collateral requirements and limits to
cover the clearing agency's credit exposure to each participant fully,
and that ensure timely settlement in the event that the participant
with the largest payment obligation is unable to settle. If a
participant controls another participant or is under common control
with another participant, then the affiliated participants shall be
collectively deemed to be a single participant.
x. Physical Delivery Risks
Proposed Rule 17Ad-22(d)(15) would contain ``collection of
information requirements'' within the meaning of the PRA. Proposed Rule
17Ad-22(d)(15) would require clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to state to its participants the clearing agency's obligations
with respect to physical deliveries. Clearing agencies would also be
required to identify and manage the risks that arise in connection with
these obligations.
2. Dissemination of Pricing and Valuation Information by Security-Based
Swap Clearing Agencies That Perform Central Counterparty Services
Proposed Rule 17Aj-1 contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Aj-1 is
designed to preserve the information dissemination requirement from the
CDS Clearing Exemption Orders.\121\ The proposed rule would require
every security-based swap clearing agency that performs CCP services to
make available to the public all end-of-day settlement prices and any
other prices with respect to security-based swaps that it may use to
calculate mark-to-market \122\ margin requirements for its
participants. Proposed Rule 17Aj-1 also would require every security-
based swap clearing agency that performs CCP services to make available
to the public any other pricing or valuation information with respect
to security-based swaps that it otherwise publishes or makes available
to its participants. Proposed Rule 17Aj-1 would not require that this
information be made available to the public free of charge. Instead, it
would require that the information be provided to the public on terms
that are fair, reasonable and not unreasonably discriminatory.
---------------------------------------------------------------------------
\121\ See generally note 6 (providing citations to the CDS
Clearing Exemption Orders).
\122\ See supra note 91 (explaining that in the specific context
of the margin practices of security-based swap clearing agencies,
the term ``mark-to-market'' implies the variation margin practices
used by the clearing agency to account for ongoing fluctuations in
the market value of its participants' security-based swap
positions).
---------------------------------------------------------------------------
3. Clearing Agency Policies and Procedures To Protect the
Confidentiality of Trading Information of Clearing Agency Participants
Proposed Rule 17Ad-23 contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-23
would require each registered clearing agency to establish, implement,
maintain and enforce written policies and procedures designed to
protect the confidentiality of any and all transaction information that
the clearing agency receives. Such transaction information may include,
but is not limited to, trade data, position data, and any non-public
personal information about a clearing agency member or participant or
any of its members' or participants' customers. The proposed rule also
provides that the required policies and procedures shall include, but
are not limited to, (a) limiting access to confidential trading
information of clearing members to those employees of the clearing
agency who are operating the system or responsible for its compliance
with any other applicable laws or rules and (b) standards controlling
employees and agents of the clearing agency trading for their personal
benefit or the benefit of others.
[[Page 14504]]
4. Exemption From Clearing Agency Definition for Certain Registered
Securities-Based Swap Dealers and Registered Security-Based Swap
Execution Facilities
Proposed Rule 17Ad-24 provides that a registered security-based
swap dealer would not be considered a clearing agency solely by reason
of functions performed by such institution as part of customary dealing
activities, or solely because it acts on behalf of a clearing agency or
a participant in connection with services performed by the clearing
agency. In addition, proposed Rule 17Ad-24 provides that a registered
security-based swap execution facility would not be considered a
clearing agency solely because it provides facilities for comparison of
data relating to the terms of settlement of securities transactions.
Accordingly, the rule does not impose recordkeeping or information
collection requirements, or other collections of information that
require approval of the OMB under 44 U.S.C. 3501, et seq. Thus, it
would not be a ``collection of information'' within the meaning of the
PRA.
5. Registration of Clearing Agencies
The proposed amendment to Rule 17Ab2-1 would mainly clarify that
when granting a temporary registration the Commission may do so for ``a
specific period of time and may exempt, other than for purposes of
Section 17A(g) of the Act, the registrant from one or more of the
requirements * * *''. Accordingly, the proposed rule does not impose
recordkeeping or information collection requirements, or other
collections of information that require approval of the OMB under 44
U.S.C. 3501, et seq. Thus, it would not be a ``collection of
information'' within the meaning of the PRA.
6. Clearing Agency Procedures To Identify and Address Conflicts of
Interest
Proposed Rule 17Ad-25 contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-25
would require each clearing agency to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
identify and address existing or potential conflicts of interest, as
well as that address methods of minimizing conflicts of interest in
decision-making at the clearing agency.
7. Standards for Board or Board Committee Directors
Proposed Rule 17Ad-26 contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 17Ad-26
outlines the proposed standards that would a registered clearing agency
would be required to establish for its board members and board
committee members. These standards include at least the following
areas: (i) A clear articulation of the roles and responsibilities of
directors serving on the clearing agency's board and any board
committees; (ii) director qualifications providing criteria for
expertise in the securities industry, clearance and settlement of
securities transactions, and financial risk management; (iii)
disqualifying factors concerning serious legal misconduct, including
violations of the Federal securities laws; and (iv) policies and
procedures for the periodic review by the board or a board committee of
the performance of its individual members.
8. Designation of Chief Compliance Officer
Proposed Rule 3Cj-1 contains ``collection of information
requirements'' within the meaning of the PRA. Proposed Rule 3Cj-1 would
require each registered clearing agency to designate a CCO. Under
proposed Rule 3Cj-1(b), the CCO would be responsible for, among other
matters, establishing policies and procedures for the remediation of
non-compliance issues identified by the CCO and establishing and
following appropriate procedures for the prompt handling of management
response, remediation, retesting, and closing of compliance issues.
Under Proposed Rule 3Cj-1(c), the CCO would also be responsible for
preparing and signing an annual compliance report that contains a
description of (i) the compliance of the clearing agency with respect
to the Federal securities laws and the rules and regulations
thereunder, and (ii) each policy and procedure of the clearing agency
of the compliance officer (including the code of ethics and conflict of
interest policies of the registered clearing agency). This compliance
report must accompany each appropriate financial report of the clearing
agency that is required to be furnished to the Commission pursuant to
the Exchange Act and the rules thereunder and include a certification
that, under penalty of law, the compliance report is accurate and
complete.
Additionally, the compliance report would be required to: (i) Be
submitted to the board of directors and audit committee (or equivalent
bodies) of the clearing agency promptly after the date of execution of
the required certification and prior to filing of the report with the
Commission, (ii) be filed with the Commission in a tagged data format
in accordance with the instructions contained in the EDGAR Filer Manual
as described in Rule 301 of Regulation S-T, and (iii) be filed with the
Commission within 60 days after the end of the fiscal year covered by
such report.
B. Proposed Use of Information
1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
As discussed above, proposed Rule 17Ad-22(b)(1) would require a
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to measure its credit exposures to its participants at least
once each day, and limit its exposures to potential losses from
defaults by its participants in normal market conditions so that the
operations of the clearing agency would not be disrupted and non-
defaulting participants would not be exposed to losses that they cannot
anticipate or control. The purpose of the collection of information is
to enable the clearing agency to monitor and limit its exposures to its
participants.
b. Margin Requirements
As discussed above, proposed Rule 17Ad-22(b)(2) would require a
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to: (i) Use margin requirements to limit its credit exposures
to participants in normal market conditions; (ii) use risk-based models
and parameters to set margin requirements; and (iii) review the models
and parameters at least monthly. The purpose of the collection of
information is to enable the clearing agency to maintain sufficient
collateral or margin.
c. Financial Resources
As discussed above, proposed Rule 17Ad-22(b)(3) would require a
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to maintain sufficient financial resources to withstand, at a
minimum, a default by the participant to which it has the largest
exposure in extreme but plausible market conditions, and if the
clearing agency provides CCP services for security-based swaps then a
default by the two participants to which it has the largest exposures
in extreme but
[[Page 14505]]
plausible market conditions; provided that if a participant controls
another participant or is under common control with another
participant, the affiliated participant and the participant shall be
deemed to be a single participant. The purpose of the collection of
information is to enable the clearing agency to satisfy all of its
settlement obligations in the event of a participant default.
d. Model Validation
As discussed above, proposed Rule 17Ad-22(b)(4) would require a
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide for an annual model validation. The purpose of the
collection of information is to enable the clearing agency to obtain an
assessment of its margin model by a qualified, independent person.
e. Non-Dealer Access
As discussed above, proposed Rule 17Ad-22(b)(5) would require a
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide the opportunity for a person that does not perform
any dealer or security-based swap dealer services to obtain membership
at the clearing agency to clear securities for itself or on behalf of
other persons. The purpose of the collection of information is to
enable more market participants to obtain indirect access to clearing
agencies.
f. Portfolio Size and Transaction Volume Restrictions
As discussed above, proposed Rule 17Ad-22(b)(6) would require a
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to have membership standards that do not require that
participants maintain a portfolio of any minimum size or that
participants maintain a minimum transaction volume. The purpose of the
collection of information is to remove unnecessary barriers to
participation in clearing agencies that provide CCP services.
g. Net Capital Restrictions
As discussed above, proposed Rule 17Ad-22(b)(7) would require a
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide a person that maintains net capital equal to or
greater than $50 million with the ability to obtain membership at the
clearing agency, with any net capital requirements being scalable so
that they are proportional to the risks posed by the participant's
activities to the clearing agency. The rule also permits a clearing
agency to provide for a higher net capital requirement (i.e., higher
than $50 million) as a condition for membership at the clearing agency
if the clearing agency demonstrates to the Commission that such a
requirement is necessary to mitigate risks that could not otherwise be
effectively managed by other measures, such as scalable limitations on
the transactions that the participants may clear through the clearing
agency, and the Commission approves the higher net capital requirement
as part of a rule filing or clearing agency registration application.
The purpose of the collection of information is to remove unnecessary
barriers to clearing access by market participants with a net capital
level above $50 million, while at the same time facilitating sound risk
management practices by clearing agencies by encouraging them to
examine and articulate the benefits that higher net capital
requirements would create through having clearing agencies develop
scalable membership standards that links the activities any
participants could potentially engage in with the potential risks posed
by the participant.
h. Record of Financial Resources
As discussed above, proposed Rule 17Ad-22(c)(1) would require that
each fiscal quarter (based on calculations made as of the last business
day of the clearing agency's fiscal quarter), or at any time upon
Commission request, a clearing agency that performs CCP services shall
calculate and maintain a record of the financial resources necessary to
meet the requirement in proposed Rule 17Ad-22c)(3) and sufficient
documentation to explain the methodology it uses to compute such
financial resource requirement. The purpose of the collection of
information is to enable the Commission to monitor the financial
resources of clearing agencies that provide CCP services.
i. Annual Audited Financial Report
As discussed above, proposed Rule 17Ad-22(c)(2) would require a
clearing agency that provides CCP services to post on its Web site an
annual audited financial report that must (i) be a complete set of
financial statements of the clearing agency for the most recent two
fiscal years and be prepared in accordance with U.S. GAAP, except that
for a clearing agency that is a corporation or other organization
incorporated or organized under the laws of any foreign country the
financial statements may be prepared according to U.S. GAAP or IFRS;
(ii) be audited in accordance with standards of the Public Company
Accounting Oversight Board by a registered public accounting firm that
is qualified and independent in accordance with rule 2-01 of Regulation
S-X (17 CFR 210.2-01); and (iii) include a report of the registered
public accounting firm that complies with paragraphs (a) through (d) of
Rule 2-02 of Regulation S-X (17 CFR 210.2-02). The purpose of the
collection of information is to enable the Commission to monitor the
financial resources of clearing agencies that provide CCP services.
j. Transparent and Enforceable Rules and Procedures
As discussed above, proposed Rule 17Ad-22(d)(1) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for a well
founded, transparent, and enforceable legal framework for each aspect
of their activities in all relevant jurisdictions. The purpose of the
collection of information is to help ensure that clearing agencies'
policies and procedures do not cause confusion or legal uncertainty
among their participants because they are unclear, incomplete or
conflict with other applicable laws or judicial precedent.
k. Participation Requirements
As discussed above, proposed Rule 17Ad-22(d)(2) has three principle
requirements related to establishing, implementing, maintaining and
enforcing written policies and procedures for participation
requirements. First, it would require clearing agencies to require
participants to have sufficient financial resources and robust
operational capacity to meet their obligations. The purpose of the
collection of information is to enable clearing agencies to ensure that
only persons with sufficient financial and operational capacity are
direct participants. Second, clearing agencies would be required to
have procedures in place to monitor that participation requirements are
met on an ongoing basis. The purpose of the collection of information
is to help clearing agencies identify a participant experiencing
financial difficulties before the participant fails to meet its
settlement obligations. Third, a clearing agency's participation
requirements would have to be objective, publicly disclosed, and permit
fair and open access. The purpose of the collection of information is
to ensure that all qualified persons
[[Page 14506]]
can access a clearing agency's services on an equivalent basis.
l. Custody of Assets and Investment Risk
As discussed above, proposed Rule 17Ad-22(d)(3) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to hold assets in a manner
that minimizes risk of loss or delay in access to them, and to invest
assets in instruments with minimal credit, market, and liquidity risks.
The purpose of the collection of information is to enable clearing
agencies to access their financial resources quickly so that they
settle securities transactions on time and at the agreed upon terms.
m. Identification and Mitigation of Operational Risk
As discussed above, proposed Rule 17Ad-22(d)(4): Would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to: (i) Identify sources of
operational risk and minimize them through the development of
appropriate systems, controls, and procedures; (ii) implement systems
that are reliable, resilient and secure, and have adequate, scalable
capacity; and (iii) have business continuity plans that allow for
timely recovery of operations and fulfillment of a clearing agency's
obligations. The purpose of the collection of information is to ensure
that clearing agencies can maintain operations in the event of an
operational problem, natural disaster or other similar event.
n. Money Settlement Risks
As discussed above, proposed Rule 17Ad-22(d)(5) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to employ money settlement
arrangements that eliminate or strictly limit the clearing agency's
settlement bank risks, that is, its credit and liquidity risks from the
use of banks to effect money settlements with its participants, and
require funds transfers to the clearing agency to be final when
effected. The purpose of the collection of information is to promote
reliability in a clearing agency's settlement operations.
o. Cost-Effectiveness
As discussed above, proposed Rule 17Ad-22(d)(6) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to be cost-effective in
meeting the requirements of participants while maintaining safe and
secure operations. The purpose of the collection of information is to
help ensure that the services of clearing agencies do not become too
expensive.
p. Links
As discussed above, proposed Rule 17Ad-22(d)(7) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to evaluate the potential
sources of risks that can arise when the clearing agency establishes
links either cross-border or domestically to clear trades, and ensure
that the risks are managed prudently on an ongoing basis. The purpose
of the collection of information is to help ensure that clearing
agencies adequately assess the risks associated with establishing a
link with another clearing organization.
q. Governance
As discussed above, proposed Rule 17Ad-22(d)(8) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to have governance
arrangements that are clear and transparent to fulfill the public
interest requirements in Section 17A of the Exchange Act applicable to
clearing agencies; to support the objectives of owners and
participants; and to promote the effectiveness of the clearing agency's
risk management procedures. The purpose of the collection of
information is to promote boards of directors that exercise sufficient
oversight of the clearing agency's management and appropriately
represent the interests of relevant stakeholders.
r. Information on Services
As discussed above, proposed Rule 17Ad-22(d)(9) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide market
participants with sufficient information for them to identify and
evaluate the risks and costs associated with using their services. The
purpose of the collection of information is to help market participants
identify the risks and costs associated with using the clearing agency
and would allow market participants to make informed decisions about
the use of the clearing agency and take appropriate actions to mitigate
their risks and costs associated with the use of the clearing agency.
s. Immobilization and Dematerialization of Stock Certificates
As discussed above, proposed Rule 17Ad-22(d)(10) would require
clearing agencies that perform central securities depository services
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to immobilize or dematerialize
securities certificates and transfer them by book entry to the greatest
extent possible. The purpose of the collection of information is to
enable clearing agencies to promote greater efficiency in the
settlement of securities transactions and reduce risk by transferring
securities by book entry movements.
t. Default Procedures
As discussed above, proposed Rule 17Ad-22(d)(11) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to make key aspects of
their default procedures publicly available and to establish default
procedures that ensure that the clearing agency can take timely action
to contain losses and liquidity pressures and to continue meeting its
obligations in the event of a participant default. The purpose of the
collection of information is to foster a greater understanding by
market participants of possible steps a clearing agency may take when a
participant defaults and possibly reduce the likelihood of market
participants taking actions based on incorrect information.
u. Timing of Settlement Finality
As discussed above, proposed Rule 17Ad-22(d)(12) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to ensure that final
settlement occurs no later than the end of the settlement day and
require that intraday or real-time finality be provided where necessary
to reduce risks. The purpose of the proposed rule is to promote
consistent standards of timing and reliability in the settlement
process.
v. Delivery Versus Payment
As discussed above, proposed Rule 17Ad-22(d)(13) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to eliminate principal risk
by linking securities transfers to funds transfers in a way that
achieves delivery versus payment. The purpose of the proposed rule is
to eliminate principal risk in the transfer of securities and funds.
[[Page 14507]]
w. Risk Controls To Address Participant's Failure To Settle
As discussed above, proposed Rule 17Ad-22(d)(14) would require
clearing agencies that perform central securities depository services
and extend intraday credit to participants to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to institute risk controls, including collateral requirements
and limits to cover the clearing agency's credit exposure to each
participant fully, and ensure timely settlement in the event that the
participant with the largest payment obligation is unable to settle.
The purpose of the collection of information is to enable clearing
agencies to satisfy their settlement obligations on time and for the
agreed upon terms.
x. Identification and Management of Physical Delivery Risks
As discussed above, proposed Rule 17Ad-22(d)(15) would require
clearing agencies to establish, implement, maintain and enforce written
policies and procedures reasonably designed to state to their
participants the clearing agency's obligations with respect to physical
deliveries and to identify and manage the risks that arise in
connection with these obligations. The purpose of the collection of
information is to provide the clearing agency's participants with
sufficient information to evaluate the risks and costs associated with
participation in the clearing agency.
2. Dissemination of Pricing and Valuation Information by Security-Based
Swap Clearing Agencies That Perform Central Counterparty Services
As discussed above, proposed Rule 17Aj-1 would require security-
based swap clearing agencies that perform CCP services to make
available to the public all end-of-day settlement prices and any other
prices with respect to security-based swaps that it may use to
calculate mark-to-market margin requirements for its participants and
any other pricing or valuation information with respect to security-
based swaps that it otherwise publishes or makes available to its
participants. The purpose of the collection of information is to help
improve fairness, efficiency and market competition by providing market
participants and, more generally, the public with a source of pricing
data on security-based swaps that may otherwise be difficult to obtain.
3. Clearing Agency Policies and Procedures To Protect the
Confidentiality of Trading Information of Clearing Agency Participants
As discussed above, proposed Rule 17Ad-23 would require each
registered clearing agency to establish, implement, maintain and
enforce written policies and procedures designed to protect the
confidentiality of any and all transaction information that the
clearing agency receives. Such transaction information may include, but
is not limited to, trade data, position data, and any non-public
personal information about a clearing agency member or participant or
any of its members or participant's customers. The proposed rule also
provides that the required policies and procedures shall include, but
are not limited to: (a) Limiting access to confidential trading
information of clearing members to those employees of the clearing
agency who are operating the system or responsible for its compliance
with any other applicable laws or rules and (b) standards controlling
employees and agents of the clearing agency trading for their personal
benefit or the benefit of others. The purpose of the collection of
information is to foster confidence in clearing agencies by market
participants.
4. Clearing Agency Procedures To Identify and Address Conflicts of
Interest
As discussed above, proposed Rule 17Ad-25 would require each
registered clearing agency to establish, implement, maintain and
enforce written policies and procedures reasonably designed to identify
and address existing or potential conflicts of interest and that are
reasonably designed to minimize conflicts of interest in decision-
making at the clearing agency. The purpose of the collection of
information is to enable the Commission to examine and evaluate a
clearing agency's efforts to minimize conflicts and help to ensure the
transparent, equitable operation of the clearing agency.
5. Standards for Board or Board Committee Directors
As discussed above, proposed Rule 17Ad-26 would require that a
registered clearing agency establish certain governance standards
applicable to its board or board committee members. The proposed
collection of information is to help improve the effectiveness of a
clearing agency's board of directors.
6. Designation of Chief Compliance Officer
As discussed above, proposed Rule 3Cj-1 would require each
registered clearing agency to designate a CCO who would establish and
oversee the implementation of certain policies and procedures relating
to non-compliance issues, as well as prepare, sign and submit an annual
compliance report. The proposed collection of information should
promote better compliance by clearing agencies with all applicable
laws, regulations and policies.
C. Respondents
1. Standards in Proposed Rule 17Ad-22(b) That Impose a PRA Burden
The standards in proposed Rule 17Ad-22(b) that the Commission
preliminarily believes impose a PRA burden are 17Ad-22(b)(1), (2), (3),
(4), (5), (6) and (7). The requirements in proposed Rules 17Ad-
22(b)(1), (2), (3), (4), (5), (6) and (7) would apply to all clearing
agencies that perform central counterparty services. There are
currently four clearing agencies authorized to provide CCP services for
security-based swap transactions pursuant to the CDS Clearing Exemption
Orders.\123\ The Commission estimates, based on staff discussions with
industry representatives, that there could conceivably be one or two
more entities that clear security-based swaps in the future. Thus, the
Commission estimates that four to six clearing agencies may seek to
clear security-based swaps.\124\ The Commission is using the higher
estimate of six security-based swap clearing agencies for this PRA
analysis. There are also eleven additional clearing agencies currently
registered with the Commission,\125\ of which only three are currently
performing central counterparty services. Thus, for these provisions,
the Commission estimates that there would be nine respondents.\126\
---------------------------------------------------------------------------
\123\ See supra note 6.
\124\ The Commission preliminarily believes that there is a
potential for new security-based swap clearing agencies to form but
does not expect there to be a large number based on the significant
level of capital and other financial resources needed for the
formation of a clearing agency.
\125\ There are four clearing agencies with active operations
currently registered with the Commission, plus seven registered
clearing agencies that are inactive. Although the inactive entities
may not be acting as clearing agencies, for purposes of the PRA the
Commission is estimating 11 total clearing agencies.
\126\ This figure was calculated as follows: 6 clearing agencies
providing CCP services for security-based swaps + 3 registered
clearing agencies providing CCP services = 9 respondent clearing
agencies.
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[[Page 14508]]
2. Standards in Proposed Rule 17Ad-22(c) That Impose a PRA Burden
The standards in proposed Rule 17Ad-22(c) that the Commission
preliminarily believes impose a PRA burden are 17Ad-22(c)(1) and (2).
The requirements of proposed Rule 17Ad-22(c)(1) would apply to all
clearing agencies that perform CCP services. As noted above, there are
currently four clearing agencies authorized to provide CCP services for
security-based swap transactions pursuant to the CDS Clearing Exemption
Orders,\127\ and there could conceivably be one or two more entities
that clear security-based swaps in the future. Thus, the Commission
estimates that four to six clearing agencies may seek to clear
security-based swaps.\128\ The Commission is using the higher estimate
of six respondent clearing agencies for this PRA analysis. There are
also eleven additional clearing agencies currently registered with the
Commission,\129\ of which only three are currently performing central
counterparty services. Thus, for proposed Rule 17Ad-22(c)(1), the
Commission estimates that there would be nine respondents.\130\
---------------------------------------------------------------------------
\127\ See supra note 6.
\128\ See supra note 124 and accompanying text.
\129\ See supra note 125.
\130\ See supra note 126.
---------------------------------------------------------------------------
The requirements of proposed Rule 17Ad-22(c)(2) would apply to all
clearing agencies. Therefore, the Commission preliminarily believes
that these PRA burdens would be imposed on all clearing agencies
registered with the Commission. As noted above, there are currently
four clearing agencies authorized to clear security-based swaps
pursuant to the CDS Clearing Exemption Orders.\131\ The Commission
estimates, based on staff discussions with industry representatives,
that there could conceivably be one or two more entities that clear
security-based swaps in the future. Thus, the Commission estimates that
four to six clearing agencies may seek to clear security-based
swaps.\132\ The Commission is using the higher estimate of six for the
PRA analysis. There are also eleven additional clearing agencies
currently registered with the Commission.\133\ Thus, for proposed Rule
17Ad-22(c)(2), the Commission estimates that there would be seventeen
respondents.\134\
---------------------------------------------------------------------------
\131\ See supra note 6.
\132\ See supra note 124 and accompanying text.
\133\ See supra note 125.
\134\ This figure was calculated as follows: 6 clearing agencies
providing CCP services for security-based swaps + 11 additional
registered clearing agencies = 17 respondent clearing agencies.
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3. Standards in Proposed Rule 17Ad-22(d) That Impose a PRA Burden
In proposed Rule 17Ad-22(d), the requirements that the Commission
preliminarily believes impose a PRA burden are 17Ad-22(d)(1), (2), (3),
(4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15).
The Commission preliminarily believes that these PRA burdens would be
imposed on all clearing agencies registered with the Commission. As
noted above, there are currently four clearing agencies authorized to
clear security-based swaps pursuant to the CDS Clearing Exemption
Orders.\135\ The Commission estimates based on staff discussions with
industry representatives, that there could conceivably be one or two
more entities that clear security-based swaps in the future. Thus, the
Commission estimates that four to six clearing agencies may seek to
clear security-based swaps.\136\ The Commission is using the higher
estimate of six for the PRA analysis. There are also eleven additional
clearing agencies currently registered with the Commission.\137\ Thus,
for these provisions, the Commission estimates that there would be
seventeen respondents.\138\
---------------------------------------------------------------------------
\135\ See supra note 6.
\136\ See supra note 124.
\137\ See supra note 125.
\138\ See supra note 134.
---------------------------------------------------------------------------
4. Dissemination of Pricing and Valuation Information by Security-Based
Swap Clearing Agencies That Perform Central Counterparty Services
The requirements of proposed Rule 17Aj-1 to disseminate pricing and
valuation information with respect to security-based swaps would apply
to every security-based swap clearing agency that performs CCP
services. As noted above, there are currently four entities providing
CCP services for security-based swaps that are authorized to do so
pursuant to the CDS Clearing Exemption Orders,\139\ and there could
conceivably be one or two more entities that clear security-based swaps
in the future. Thus, the Commission estimates that four to six clearing
agencies that provide CCP services may seek to clear security-based
swaps.\140\ The Commission is using the higher estimate of six
respondent clearing agencies for this PRA analysis.
---------------------------------------------------------------------------
\139\ See supra note 6.
\140\ See supra note 124 and accompanying text.
---------------------------------------------------------------------------
5. Clearing Agency Policies and Procedures To Protect the
Confidentiality of Trading Information of Clearing Agency Participants
The safeguards and procedures applicable to the confidential
treatment of trading information received by a clearing agency under
proposed Rule 17Ad-23 would apply to all clearing agencies registered
with the Commission. As noted above, there are currently four clearing
agencies authorized to clear security-based swaps pursuant to the CDS
Clearing Exemption Orders,\141\ and there could conceivably be one or
two more entities that clear security-based swaps in the future. Thus,
the Commission estimates that four to six clearing agencies may seek to
clear security-based swaps.\142\ The Commission is using the higher
estimate of six respondent clearing agencies for this PRA analysis.
There are also eleven additional clearing agencies currently registered
with the Commission.\143\ Thus, for this provision, the Commission
estimates that there would be seventeen respondents.\144\
---------------------------------------------------------------------------
\141\ See supra note 6.
\142\ See supra note 124 and accompanying text.
\143\ See supra note 125.
\144\ See supra note 134.
---------------------------------------------------------------------------
6. Clearing Agency Procedures To Identify and Address Conflicts of
Interest
The conflicts of interest policies and procedures to be adopted by
clearing agencies pursuant to proposed Rule 17Ad-25 would apply to all
clearing agencies registered with the Commission. As noted above, there
are currently four clearing agencies authorized to clear security-based
swaps pursuant to the CDS Clearing Exemption Orders,\145\ and that
there could conceivably be one or two more entities that clear
security-based swaps in the future. Thus, the Commission estimates that
four to six clearing agencies may seek to clear security-based
swaps.\146\ The Commission is using the higher estimate of six
respondent clearing agencies for this PRA analysis. There are also
eleven additional clearing agencies currently registered with the
Commission.\147\ Thus, for this provision, the Commission estimates
that there would be seventeen respondents.\148\
---------------------------------------------------------------------------
\145\ See supra note 6.
\146\ See supra note 124 and accompanying text.
\147\ See supra note 125.
\148\ See supra note 134.
---------------------------------------------------------------------------
7. Standards for Board or Board Committee Directors
The board and board committee directors governance standards to be
[[Page 14509]]
established by clearing agencies pursuant to proposed Rule 17Ad-26
would apply to all clearing agencies registered with the Commission. As
noted above, there are currently four clearing agencies authorized to
clear security-based swaps pursuant to the CDS Clearing Exemption
Orders,\149\ and there could conceivably be one or two more entities
that clear security-based swaps in the future. Thus, the Commission
estimates that four to six clearing agencies may seek to clear
security-based swaps.\150\ The Commission is using the higher estimate
of six respondent clearing agencies for this PRA analysis. There are
also eleven additional clearing agencies currently registered with the
Commission.\151\ Thus, for this provision, the Commission estimates
that there would be seventeen respondents.\152\
---------------------------------------------------------------------------
\149\ See supra note 6.
\150\ See supra note 124 and accompanying text.
\151\ See supra note 125.
\152\ See supra note 134.
---------------------------------------------------------------------------
8. Designation of Chief Compliance Officer
The provisions regarding CCOs of proposed Rule 3Cj-1 would apply to
all clearing agencies registered with the Commission. As noted above,
there are currently four clearing agencies authorized to clear
security-based swaps pursuant to the CDS Clearing Exemption
Orders,\153\ and there could conceivably be one or two more entities
that clear security-based swaps in the future. Thus, the Commission
estimates that four to six clearing agencies may seek to clear
security-based swaps.\154\ The Commission is using the higher estimate
of six respondent clearing agencies for this PRA analysis. There are
also eleven additional clearing agencies currently registered with the
Commission.\155\ Thus, for this provision, the Commission estimates
that there would be seventeen respondents.\156\
---------------------------------------------------------------------------
\153\ See supra note 6.
\154\ See supra note 124 and accompanying text.
\155\ See supra note 125.
\156\ See supra note 134.
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D. Total Annual Reporting and Recordkeeping Burden
1. Standards for Clearing Agencies Reporting Requirements
a. Measurement and Management of Credit Exposures
Proposed Rule 17Ad-22(b)(1) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to measure its
credit exposures to its participants at least once a day and limit its
exposures to potential losses from defaults by its participants in
normal market conditions so that the operations of the clearing agency
would not be disrupted and non-defaulting participants would not be
exposed to losses that they cannot anticipate or control. The exact
nature of any rules and procedures a clearing agency would likely
establish to support this requirement is likely to vary between
clearing agencies. However, there are estimates of the burden imposed
by similar policies and procedures requirements in Regulation NMS and
in proposed requirements for security-based swap data repositories
(``SDRs'').\157\ Specifically, Rule 611 of Regulation NMS, referred to
as the ``Order Protection Rule'', requires trading centers to
establish, maintain, and enforce written policies and procedures that
are reasonably designed to prevent trade-throughs on that trading
center of protected quotations in NMS stocks, unless an exception
applies.\158\ While the requirements underlying those estimates are not
identical to this requirement for clearing agencies, the Commission
preliminarily believes that for PRA purposes the requirement for
policies and procedures to be created and maintained by SRO and non-SRO
trading centers in Rule 611 of Regulation NMS is similar in nature and
scope to this requirement for clearing agencies to create policies and
procedures.
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\157\ See Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR
37496 (June 29, 2005) (discussing in Section VIII.A.4. the time
needed from legal, compliance, information technology and business
operations personnel to create policies and procedures for
preventing and monitoring trade-throughs) and 63347 (November 19,
2010), 75 FR 77306 (December 10, 2010) (discussing in Section V.D.7.
the time needed for SDRs to establish and enforce written policies
and procedures reasonably designed to minimize conflicts of
interest).
\158\ See 17 CFR 242.611.
---------------------------------------------------------------------------
Accordingly, the Commission believes that the burdens imposed on
respondents to create policies and procedures in both contexts would be
roughly equivalent. In its adoption of the final Order Protection Rule,
the Commission estimated the approximate hourly burdens imposed on
trading centers that are SROs and on trading centers that are not SROs
to establish written policies and procedures that are reasonably
designed to prevent execution of trade-throughs. For SRO trading
centers, the Commission estimated that creating written policies and
procedures would require approximately 270 hours and require efforts
from the various skill sets of the clearing agency's legal, compliance,
information technology and business operations personnel. For non-SRO
trading centers, the Commission estimated an approximate hourly burden
of 210 hours to meet the same requirement. This difference between the
hourly burden imposed on non-SRO trading centers and SRO trading
centers is primarily due to a slightly lower expectation for the hourly
burden imposed on the legal and compliance staff at a non-SRO trading
center.
The Commission preliminarily believes that this hourly burden
estimate of 210 hours for non-SRO trading centers under Regulation NMS
is an appropriate estimate for the burden that would be imposed on
clearing agencies to create policies and procedures because, as
discussed below, recent assessments of the registered U.S. clearing
agencies support the conclusion that clearing agencies and their rule
books generally meet or exceed analogous standards of operation and
governance to those standards within proposed Rule 17Ad-22.\159\
Therefore, those findings and the Commission's experience in oversight
of clearing agencies support a preliminary view that the requirements
in the rules for clearing agencies proposed by the Commission would in
many cases impose a burden on legal and compliance personnel at
clearing agencies that would involve adjustments to a registered
clearing agency's rule book and its policies and procedures rather than
creation of entirely separate policies and procedures to support
entirely new operations and practices.
---------------------------------------------------------------------------
\159\ See infra note 291.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(1) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 1,890 hours.\160\ The
[[Page 14510]]
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\160\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours.
See Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR 37496
(June 29, 2005) (Section VIII.A.4. finding a burden of 210 hours
needed for non-SRO trading centers to create one policy and
procedure) and 63347 (November 19, 2010), 75 FR 77306 (December 10,
2010) (Section V.D.7. finding a burden of 210 hours needed for an
SDR to create one policy and procedure).
The Commission based these estimates on the estimates for non-
SRO trading centers that appear in Exchange Act Release Nos. 51808
and 63347 because the Commission preliminarily believes that the
existing clearing agency requirements under Section 17A of the
Exchange Act make these proposed burdens more similar to the less
burdensome requirements for non-SRO trading centers than the burdens
for SRO trading centers.
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Clearing agencies that provide CCP services would be required to
measure their credit exposures as required by proposed Rule 17Ad-
22(b)(1) on an ongoing basis. The Commission expects that the exact
burden of administering the procedures for monitoring custody and
investment standards would vary depending on how frequently each
clearing agency may need to update its procedures. Based on the
analogous policies and procedures requirements and the corresponding
burden estimates in Regulation NMS and for security-based swap data
repositories, the Commission estimates that the ongoing requirements of
this rule would impose an aggregate annual burden of 60 hours on each
respondent clearing agency, corresponding to an aggregate annual burden
for all respondent clearing agencies of 540 hours.\161\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\161\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent clearing agencies = 540 hours for all
respondent clearing agencies. See Exchange Act Release Nos. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005) (Section VIII.A.4.
estimating that it would take the average SRO and non-SRO trading
center approximately two hours per month of internal legal time and
three hours of internal compliance time to ensure that its written
policies and procedures are up-to-date and remain in compliance
amounting to an annual burden of 60 hours per year per respondent)
and 63347 (November 19, 2010), 75 FR 77306 (December 10, 2010)
(Section V.D.7. estimating the time needed for SDRs to establish and
enforce written policies and procedures).
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b. Margin Requirements
Proposed Rule 17Ad-22(b)(2) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to use margin
requirements to limit its credit exposures to participants in normal
market conditions and use risk-based models and parameters to set
margin requirements and review them at least monthly. The exact nature
of any rules and procedures a clearing agency would likely establish to
support this requirement is likely to vary between clearing agencies.
However, there are estimates of the burden imposed by similar policies
and procedures requirements in Regulation NMS and in proposed
requirements for security-based swap data repositories.\162\ While the
requirements underlying those estimates are not identical to this
requirement for clearing agencies, the Commission preliminarily
believes that for PRA purposes there is similarity in the burden to
create policies and procedures.
---------------------------------------------------------------------------
\162\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(2) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 1,890 hours.\163\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\163\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours.
See supra note 160.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their custody and
investment standards required by proposed Rule 17Ad-22(b)(2) on an
ongoing basis. The Commission expects that the exact burden of
administering the procedures for monitoring custody and investment
standards would vary depending on how frequently each clearing agency
may need to update its procedures. Based on the analogous policies and
procedures requirements and the corresponding burden estimates in
Regulation NMS and for security-based swap data repositories, the
Commission estimates that the ongoing requirements of this rule would
impose an aggregate annual burden of 60 hours on each respondent
clearing agency, corresponding to an aggregate annual burden for all
respondent clearing agencies of 540 hours.\164\ The Commission solicits
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\164\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent clearing agencies = 540 hours for all
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------
c. Financial Resources
Proposed Rule 17Ad-22(b)(3) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
sufficient financial resources to withstand, at a minimum, a default by
the participant to which it has the largest exposure in extreme but
plausible market conditions, and if the clearing agency provides CCP
services for security-based swaps then a default by the two
participants to which it has the largest exposures in extreme but
plausible market conditions; provided that if a participant controls
another participant or is under common control with another
participant, the affiliated participant and the participant shall be
deemed to be a single participant. The exact nature of any rules and
procedures a clearing agency would likely establish to support this
requirement is likely to vary between clearing agencies. However, there
are estimates of the burden imposed by similar policies and procedures
requirements in Regulation NMS and in proposed requirements for
security-based swap data repositories.\165\ While the requirements
underlying those estimates are not identical to this requirement for
clearing agencies, the Commission preliminarily believes that for PRA
purposes there is similarity in the burden to create policies and
procedures.
---------------------------------------------------------------------------
\165\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(3) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 1,890 hours.\166\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\166\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours.
See supra note 160.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their financial
resources standards required by proposed Rule 17Ad-22(b)(3) on an
ongoing basis. The Commission expects that the exact burden of
administering the procedures for financial resources standards would
vary depending on how frequently each clearing agency may need to
update its procedures. Based on the analogous policies and procedures
requirements and the corresponding burden estimates in Regulation NMS
and for security-based swap data repositories, the Commission estimates
that the ongoing requirements of this rule would impose an aggregate
annual burden of 60 hours on each respondent clearing agency,
corresponding to an aggregate annual burden for all respondent clearing
[[Page 14511]]
agencies of 540 hours.\167\ The Commission solicits comment regarding
the accuracy of this estimate.
---------------------------------------------------------------------------
\167\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent clearing agencies = 540 hours for all
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------
d. Model Validation
As discussed above, proposed Rule 17Ad-22(b)(4) would require a
clearing agency that provides CCP services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide for an annual model validation. The Commission
preliminarily believes this requirement would help to ensure that a
clearing agency's margin model remains effective in determining the
appropriate margin level. The exact nature of any rules and procedures
a clearing agency would likely establish to support this requirement is
likely to vary between clearing agencies. However, there are estimates
of the burden imposed by similar policies and procedures requirements
in Regulation NMS and in proposed requirements for security-based swap
data repositories.\168\ While the requirements underlying those
estimates are not identical to this requirement for clearing agencies,
the Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\168\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(4) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 1,890 hours.\169\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\169\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours.
See supra note 160.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their model
validation standards required by proposed Rule 17Ad-22(b)(4) on an
ongoing basis. The Commission expects that the exact burden of
administering the procedures for model validation standards would vary
depending on how frequently each clearing agency may need to update its
procedures. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS and for
security-based swap data repositories, the Commission estimates that
the ongoing requirements of this rule would impose an aggregate annual
burden of 60 hours on each respondent clearing agency, corresponding to
an aggregate annual burden for all respondent clearing agencies of 540
hours.\170\ The Commission solicits comment regarding the accuracy of
this estimate.
---------------------------------------------------------------------------
\170\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent clearing agencies = 540 hours for all
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------
Based on its oversight of clearing agencies, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(4) would impose
an annual burden on all respondent clearing agencies of 6,480
hours.\171\ The Commission solicits comment regarding the accuracy of
this estimate.
---------------------------------------------------------------------------
\171\ This figure was calculated as follows: Consultant at 30
hours per week x 12 weeks x 2 Consultants x 9 respondent clearing
agencies = 6,480 hours.
---------------------------------------------------------------------------
e. Non-Dealer Access
Proposed Rule 17Ad-22(b)(5) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide the
opportunity for a person that does not perform any dealer or security-
based swap dealer services to obtain membership at the clearing agency
to clear securities for itself or on behalf of other persons. The exact
nature of the procedures a clearing agency would establish to support
this requirement is likely to vary between clearing agencies. However,
there are estimates of the burden imposed by similar policies and
procedures requirements in Regulation NMS and in proposed requirements
for security-based swap data repositories.\172\ While the requirements
underlying those estimates are not identical to this requirement for
clearing agencies, the Commission preliminarily believes that for PRA
purposes there is similarity in the burden to create policies and
procedures.
---------------------------------------------------------------------------
\172\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(5) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 1,890 hours.\173\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\173\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours.
See supra note 160.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their membership
standards required by proposed Rule 17Ad-22(b)(5) on an ongoing basis.
The Commission expects that the exact burden of administering the
procedures for granting membership to persons that do not perform any
dealer or security-based swap dealer services would vary depending on
how frequently each clearing agency may need to update its procedures.
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and for security-based
swap data repositories, the Commission estimates that the ongoing
requirements of this rule would impose an aggregate annual burden of 60
hours on each respondent clearing agency, corresponding to an aggregate
annual burden for all respondent clearing agencies of 540 hours.\174\
The Commission solicits comment regarding the accuracy of this
estimate.
---------------------------------------------------------------------------
\174\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent clearing agencies = 540 hours for all
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------
f. Portfolio Size and Transaction Volume Thresholds Restrictions
Proposed Rule 17Ad-22(b)(6) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to have membership
standards that do not require that participants maintain a portfolio of
any minimum size or that participants maintain a minimum transaction
volume. The exact nature of the procedures a clearing agency would
establish to support this requirement is likely to vary between
clearing agencies. However, there are estimates of the burden imposed
by similar policies and procedures requirements in Regulation NMS and
in proposed requirements for security-based swap data
repositories.\175\ While the requirements underlying those estimates
are not identical to this requirement for clearing agencies, the
Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\175\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
[[Page 14512]]
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(6) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 1,890 hours.\176\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\176\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours.
See supra note 160.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their membership
standards required by proposed Rule 17Ad-22(b)(6) on an ongoing basis.
The Commission expects that the exact burden of administering the
procedures for not having membership standards that require
participants to maintain a portfolio of any minimum size or that
participants maintain a minimum transaction volume would vary depending
on how frequently each clearing agency may need to update its
procedures. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS and for
security-based swap data repositories, the Commission estimates that
the ongoing requirements of this rule would impose an aggregate annual
burden of 60 hours on each respondent clearing agency, corresponding to
an aggregate annual burden for all respondent clearing agencies of 540
hours.\177\ The Commission solicits comment regarding the accuracy of
this estimate.
---------------------------------------------------------------------------
\177\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent clearing agencies = 540 hours for all
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------
g. Net Capital Requirements
Proposed Rule 17Ad-22(b)(7) would require a clearing agency that
provides CCP services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide a person
that maintains a net capital equal to or greater than $50 million with
the ability to obtain membership at the clearing agency, with any net
capital requirements being scalable so that they are proportional to
the risks posed by the participant's activities to the clearing agency.
The exact nature of the procedures a clearing agency would establish to
support this requirement is likely to vary between clearing agencies.
However, there are estimates of the burden imposed by similar policies
and procedures requirements in Regulation NMS and in proposed
requirements for security-based swap data repositories.\178\ While the
requirements underlying those estimates are not identical to this
requirement for clearing agencies, the Commission preliminarily
believes that for PRA purposes there is similarity in the burden to
create policies and procedures.
---------------------------------------------------------------------------
\178\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(7) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 1,890 hours.\179\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\179\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x nine respondent clearing agencies = 1,890
hours. See supra note 160.
---------------------------------------------------------------------------
Clearing agencies may need to update these policies and procedures
over time, particularly due to the fact that proposed Rule 17Ad-
22(b)(7) permits a clearing agency to provide for a higher net capital
requirement (i.e., higher than $50 million) as a condition for
membership at the clearing agency if the clearing agency demonstrates
to the Commission that such a requirement is necessary to mitigate
risks that could not otherwise be effectively managed by other
measures, such as scalable limitations on the transactions that the
participants may clear through the clearing agency, and the Commission
approves the higher net capital requirement as part of a rule filing or
clearing agency registration application. While the number of times
each clearing agency will need to update its policies and procedures to
revise its net capital requirements is likely to vary, both over time
and between clearing agencies, such changes may occur as a result of an
annual review of a clearing agency's operations and default mechanisms.
For the same reasons as discussed above, the Commission believes that
the estimates of the burden imposed by the policies and procedures
requirements in Regulation NMS and in proposed requirements for
security-based swap data repositories \180\ are sufficiently similar to
serve as a basis for these estimates. Accordingly, the Commission
preliminarily estimates that proposed Rule 17Ad-22(b)(7) would impose
an annual burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate annual burden on all respondent clearing
agencies of 1,890 hours.\181\ The Commission solicits comment regarding
the accuracy of this estimate.
---------------------------------------------------------------------------
\180\ See supra note 157.
\181\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x nine respondent clearing agencies = 1,890
hours. See supra note 160.
---------------------------------------------------------------------------
Clearing agencies that provide CCP services would be required to
administer their net capital requirements required by proposed Rule
17Ad-22(b)(7) on an ongoing basis. The Commission expects that the
exact burden of administering the net capital requirements would vary
depending on how frequently each clearing agency providing CCP services
may need to update its procedures. Based on the analogous policies and
procedures requirements and the corresponding burden estimates in
Regulation NMS and for security-based swap data repositories, the
Commission estimates that the ongoing requirements of this rule would
impose an aggregate annual burden of 60 hours on each respondent
clearing agency, corresponding to an aggregate annual burden for all
respondent clearing agencies of 540 hours.\182\ The Commission solicits
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\182\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent clearing agencies = 540 hours for all
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------
h. Record of Financial Resources
As detailed above, pursuant to proposed Rule 17Ad-22(c)(1),
clearing agencies that perform central counterparty services would be
required each fiscal quarter (based on calculations made as of the last
business day of the clearing agency's fiscal quarter), or at any time
upon Commission request, to calculate and maintain a record of the
financial resources necessary to meet the requirement in proposed Rule
17Ad-22(c)(1) and sufficient documentation to explain the methodology
it uses to compute such financial resource requirement.
The exact nature of the procedures a clearing agency would
establish to support this requirement is likely to vary between
clearing agencies. However, there are estimates of the burden imposed
by similar policies and procedures requirements in Regulation
[[Page 14513]]
NMS and in proposed requirements for security-based swap data
repositories.\183\ While the requirements underlying those estimates
are not identical to this requirement for clearing agencies, the
Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\183\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(c)(1) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 1,890 hours.\184\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\184\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent clearing agencies = 1,890 hours.
See supra note 160.
---------------------------------------------------------------------------
Based on its oversight of clearing agencies, the Commission
believes that the respondent clearing agencies already have
methodologies designed to ensure that in providing CCP services the
clearing agency can withstand a default by the participant to which the
clearing agency has the largest exposure in extreme but plausible
market conditions.\185\ Because clearing agencies that provide CCP
services already use such methodologies, the Commission preliminarily
believes the one-time burden imposed would involve adjustments needed
to synthesize and format existing information in a manner sufficient to
explain the methodology the clearing agency uses to meet the
requirement of proposed Rule 17Ad-22(c)(1). The Commission
preliminarily believes these adjustments would impose a one-time burden
of 100 hours on each clearing agency, corresponding to an aggregate
one-time burden imposed on all clearing agencies of 900 hours.\186\ The
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\185\ See, e.g., International Monetary Fund, Publication of
Financial Sector Assessment Program Documentation--Detailed
Assessment of Observance of the National Securities Clearing
Corporation's Observance of the CPSS-IOSCO Recommendations for
Central Counterparties, 10 (2010) (assessing National Securities
Clearing Corporation's observance of Recommendation 5 from the RCCP
that a CCP should maintain sufficient financial resources to
withstand, at a minimum, the default of a participant to which it
has the largest exposure in extreme but plausible market conditions
and noting that NSCC began evaluating itself against this standard
in 2009 and has back-testing results to support that during the
period from January through April 2009 there was sufficient
liquidity to cover the needs of the failure of the largest
affiliated family 99.98 percent of the time), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf.
\186\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) = 100 hours x 9 respondent
clearing agencies = 900 hours. See infra note 253 and accompanying
text.
---------------------------------------------------------------------------
On an ongoing basis, the Commission estimates that for a clearing
agency to generate the required reports concerning its financial
resources would impose a burden of three hours per respondent clearing
agency per quarter. This amounts to an annual burden of 12 hours for
each clearing agency and corresponds to an aggregate annual burden of
108 hours for all respondent clearing agencies.\187\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\187\ This figure was calculated as follows: ((Compliance
Attorney at 1 hour) + (Computer Operations Department Manager at 2
hours)) = 3 hours per quarter x 4 quarters per year = 12 hours per
year x 9 respondent clearing agencies = 108 hours.
---------------------------------------------------------------------------
Clearing agencies providing CCP services would also be required to
administer any procedures used to support compliance with Rule 17Ad-
22(c)(1) on an ongoing basis. The Commission expects that the exact
burden of administering the procedures for granting membership to
persons that do not perform any dealer or security-based swap dealer
services would vary depending on how frequently each clearing agency
may need to update its procedures. Based on the analogous policies and
procedures requirements and the corresponding burden estimates in
Regulation NMS and for security-based swap data repositories, the
Commission estimates that the ongoing requirements of this rule would
impose an aggregate annual burden of 60 hours on each respondent
clearing agency, corresponding to an aggregate annual burden for all
respondent clearing agencies of 540 hours.\188\ The Commission solicits
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\188\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent clearing agencies = 540 hours for all
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------
i. Annual Audited Financial Report
Proposed Rule 17Ad-22(c)(2) would also require that a clearing
agency post on its Web site an annual financial report. Each financial
report shall (i) be a complete set of financial statements of the
clearing agency for the most recent two fiscal years and be prepared in
accordance with U.S. GAAP, except that for a clearing agency that is a
corporation or other organization incorporated or organized under the
laws of any foreign country the financial statements may be prepared
according to U.S. GAAP or IFRS; (ii) be audited in accordance with
standards of the Public Company Accounting Oversight Board by a
registered public accounting firm that is qualified and independent in
accordance with Rule 2-01 of Regulation S-X; and (iii) include report
of the registered public accounting firm that complies with paragraphs
(a) through (d) of Rule 2-02 of Regulation S-X.
The exact nature of the procedures a clearing agency would
establish to support this requirement is likely to vary between
clearing agencies. However, there are estimates of the burden imposed
by similar policies and procedures requirements in Regulation NMS and
in proposed requirements for security-based swap data
repositories.\189\ While the requirements underlying those estimates
are not identical to this requirement for clearing agencies, the
Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\189\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(c)(2) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\190\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\190\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 160.
---------------------------------------------------------------------------
The Commission preliminarily believes, based on its oversight of
clearing agencies, that the one-time burden imposed by the rule would
involve systems adjustments at the clearing agency needed to facilitate
posting of the annual audited financial report to the clearing agency's
Web site. The Commission preliminarily believes these adjustments would
impose a one-time burden of 100 hours on each clearing agency,
corresponding to an aggregate one-time burden imposed on
[[Page 14514]]
all clearing agencies of 1,700 hours.\191\ The Commission solicits
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\191\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) = 100 hours x 9 respondent
clearing agencies = 900 hours. See infra note 253 and accompanying
text.
---------------------------------------------------------------------------
On an ongoing basis, clearing agencies would be required to
administer any policies and procedures used to support compliance with
Rule 17Ad-22(c)(2). The Commission expects that the exact burden of
administering the procedures for facilitating an annual audit report of
the clearing agency and posting that annual audit report to the
clearing agency's Web site would vary. However, based on the analogous
policies and procedures requirements and the corresponding burden
estimates in Regulation NMS and for security-based swap data
repositories, the Commission estimates that the ongoing requirements of
this rule would impose an aggregate annual burden of 60 hours on each
respondent clearing agency, corresponding to an aggregate annual burden
for all respondent clearing agencies of 1,020 hours.\192\ The
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\192\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all
respondent clearing agencies. See supra note 161.
---------------------------------------------------------------------------
The Commission estimates based on its experience with entities of
similar size to the respondents to this collection, that these reports
would generally require on average 500 hours annually per respondent
clearing agency to generate and cost $500,000 for independent public
accounting services. Thus, the Commission preliminarily believes this
corresponds to an aggregate annual burden to all clearing agencies of
8,500 hours and $8,500,000.\193\ The Commission solicits comment as to
the accuracy of this estimate.
---------------------------------------------------------------------------
\193\ See Exchange Act Release No. 63347 (November 19, 2010), 75
FR 77306 (December 10, 2010) (Section VI.F.2. discussing the time
the Commission preliminarily estimates an SDR would need to prepare
and file annual financial reports with the Commission pursuant to
proposed Rule 13n-11(f) and (g)). This figure was calculated as
follows: Senior Accountant at 500 hours x 17 respondent clearing
agencies = 8,500 hours.
---------------------------------------------------------------------------
j. Transparent and Enforceable Rules and Procedures
Proposed Rule 17Ad-22(d)(1) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for a well founded,
transparent and enforceable legal framework. The exact nature of the
policies and procedures a clearing agency would establish is likely to
vary between clearing agencies. However, there are estimates of the
burden imposed by similar policies and procedures requirements in
Regulation NMS and in proposed requirements for SDRs.\194\ Based on the
analogous policies and procedures requirements and the corresponding
burden estimates in Regulation NMS and in the proposed requirements for
security-based swap data repositories, the Commission preliminarily
estimates that proposed Rule 17Ad-22(d)(1) would impose a one-time
burden on each respondent clearing agency of 210 hours, corresponding
to an aggregate one-time burden on all respondent clearing agencies of
3,570 hours.\195\ The Commission solicits comment regarding the
accuracy of this estimate.
---------------------------------------------------------------------------
\194\ See supra note 157.
\195\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their rules and
procedures to ensure they provide for a well founded, transparent and
enforceable legal framework on an ongoing basis. The Commission expects
that the exact burden of administering the procedures for monitoring
participation standards would vary depending on how frequently each
clearing agency may need to update its rules and procedures. Based on
the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and for security-based
swap data repositories, the Commission estimates that the ongoing
requirements of this rule would impose an aggregate annual burden of 60
hours on each respondent clearing agency, corresponding to an aggregate
annual burden for all respondent clearing agencies of 1,020 hours.\196\
The Commission solicits comment regarding the accuracy of this
estimate.
---------------------------------------------------------------------------
\196\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours.
---------------------------------------------------------------------------
k. Participation Requirements
Proposed Rule 17Ad-22(d)(2) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to have procedures in place to monitor
that their participation requirements are met on an ongoing basis. The
exact nature of the procedures a clearing agency would establish is
likely to vary between clearing agencies. However, there are estimates
of the burden imposed by similar policies and procedures requirements
in Regulation NMS and in proposed requirements for security-based swap
data repositories.\197\ While the requirements underlying those
estimates are not identical to this requirement for clearing agencies,
the Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\197\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(2) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\198\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\198\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their
participation requirements required by proposed Rule 17Ad-22(d)(2) on
an ongoing basis. The Commission expects that the exact burden of
administering the procedures for monitoring participation requirements
would vary depending on how frequently each clearing agency may need to
update its procedures. Based on the analogous policies and procedures
requirements and the corresponding burden estimates in Regulation NMS
and for security-based swap data repositories, the Commission estimates
that the ongoing requirements of this rule would impose an aggregate
annual burden of 60 hours on each respondent clearing agency,
corresponding to an aggregate annual burden for all respondent clearing
agencies of 1,020 hours.\199\ The Commission solicits comment regarding
the accuracy of this estimate.
---------------------------------------------------------------------------
\199\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See
supra note 196.
---------------------------------------------------------------------------
Additionally, proposed Rule 17Ad-22(d)(2) would require clearing
agencies to publicly disclose their participation requirements. Based
on staff discussions with respondents that are already subject to a
similar requirement in the CDS Clearing Exemption Orders to make
publicly available certain pricing and
[[Page 14515]]
valuation information for security-based swaps,\200\ the Commission
estimates that the one-time burden for a security-based swap clearing
agency to comply with the requirements of proposed Rule 17Ad-22(d)(2)
would involve slight adjustments to computer data systems that would
already be in place as part of its clearing agency operations under
Exchange Act Section 17A. The Commission preliminarily believes that a
similar analysis would apply to each of the other registered clearing
agencies. Therefore, the Commission does not anticipate that new
hardware, such as additional computer equipment, would be required.
Instead, the Commission broadly estimates that a clearing agency's
adjustments to its systems to meet the requirements of proposed Rule
17Ad-22(d)(2) would impose a one-time burden of 100 hours on each
respondent clearing agency, corresponding to an aggregate one-time
burden imposed on all respondent clearing agencies of 1,700 hours.\201\
The Commission solicits comment regarding the accuracy of this
estimate.
---------------------------------------------------------------------------
\200\ See infra notes 251-254 and accompanying text.
\201\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) = 100 hours x 17
respondent clearing agencies = 1,700 hours. See infra note 253 and
accompanying text.
---------------------------------------------------------------------------
Respondent clearing agencies would also have an ongoing
responsibility to make their participation requirements available. Also
based on staff discussion with respondents that are already subject to
the requirement in the CDS Clearing Exemption Orders to make certain
pricing and valuation information publicly available, the Commission
preliminarily believes that the ongoing burden would be limited and
would likely involve maintenance and troubleshooting of computer
systems used to facilitate dissemination of participant requirements.
Therefore, the Commission preliminarily estimates this would impose an
annual aggregate burden of 60 hours for each respondent clearing
agency, which corresponds to an ongoing aggregate annual burden of
1,020 hours for all respondent clearing agencies.\202\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\202\ This figure was calculated as follows: Computer Operations
Department Manager at 60 hours annually x 17 respondent clearing
agencies = 1,020 hours for all respondent clearing agencies. See
supra note 196.
---------------------------------------------------------------------------
l. Identification and Mitigation of Custody of Assets and Investment
Risk
Proposed Rule 17Ad-22(d)(3) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to hold assets in a manner that
minimizes risk of loss or delay in access to them, and to invest assets
in instruments with minimal credit, market, and liquidity risks. The
exact nature of any rules and procedures a clearing agency would likely
establish to support this requirement is likely to vary between
clearing agencies. However, there are estimates of the burden imposed
by similar policies and procedures requirements in Regulation NMS and
in proposed requirements for security-based swap data
repositories.\203\ While the requirements underlying those estimates
are not identical to this requirement for clearing agencies, the
Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\203\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(3) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\204\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\204\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their custody and
investment standards required by proposed Rule 17Ad-22(d)(3) on an
ongoing basis. The Commission expects that the exact burden of
administering the procedures for monitoring custody and investment
standards would vary depending on how frequently each clearing agency
may need to update its procedures. Based on the analogous policies and
procedures requirements and the corresponding burden estimates in
Regulation NMS and for security-based swap data repositories, the
Commission estimates that the ongoing requirements of this rule would
impose an aggregate annual burden of 60 hours on each respondent
clearing agency, corresponding to an aggregate annual burden for all
respondent clearing agencies of 1,020 hours.\205\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\205\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------
m. Identification and Mitigation of Operational Risk
Proposed Rule 17Ad-22(d)(4) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify and have procedures in
place, including business continuity plans, to minimize sources of
operational risk. The exact nature of the procedures a clearing agency
would establish is likely to vary between clearing agencies. However,
there are estimates of the burden imposed by similar policies and
procedures requirements in Regulation NMS and in proposed requirements
for security-based swap data repositories.\206\ While the requirements
underlying those estimates are not identical to this requirement for
clearing agencies, the Commission preliminarily believes that for PRA
purposes there is similarity in the burden to create policies and
procedures.
---------------------------------------------------------------------------
\206\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(4) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\207\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\207\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their operational
standards required by proposed Rule 17Ad-22(d)(4) on an ongoing basis.
The Commission expects that the exact burden of administering the
procedures for monitoring operational risks would vary depending on how
frequently each clearing agency may need to update its procedures.
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and for security-based
swap data repositories, the Commission estimates that the ongoing
requirements of this rule would impose an aggregate annual burden of 60
hours
[[Page 14516]]
on each respondent clearing agency, corresponding to an aggregate
annual burden for all respondent clearing agencies of 1,020 hours.\208\
The Commission solicits comment regarding the accuracy of this
estimate.
---------------------------------------------------------------------------
\208\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------
n. Money Settlement Risks
Proposed Rule 17Ad-22(d)(5) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to employ money settlement arrangements
that eliminate or strictly limit the clearing agency's settlement bank
risks, that is, its credit and liquidity risks from the use of banks to
effect money settlements with its participants; and require funds
transfers to the clearing agency to be final when effected. The exact
nature of any rules and procedures a clearing agency would likely
establish to support this requirement is likely to vary between
clearing agencies. However, there are estimates of the burden imposed
by similar policies and procedures requirements in Regulation NMS and
in proposed requirements for security-based swap data
repositories.\209\ While the requirements underlying those estimates
are not identical to this requirement for clearing agencies, the
Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\209\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(5) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\210\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\210\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their settlement
arrangements required by proposed Rule 17Ad-22(d)(5) on an ongoing
basis. The Commission expects that the exact burden of administering
the procedures for monitoring settlement arrangements would vary
depending on how frequently each clearing agency may need to update its
procedures. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS and for
security-based swap data repositories, the Commission estimates that
the ongoing requirements of this rule would impose an aggregate annual
burden of 60 hours on each respondent clearing agency, corresponding to
an aggregate annual burden for all respondent clearing agencies of
1,020 hours.\211\ The Commission solicits comment regarding the
accuracy of this estimate.
---------------------------------------------------------------------------
\211\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------
o. Cost-Effectiveness
Proposed Rule 17Ad-22(d)(6) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to be cost effective in meeting the
requirements of participants while maintaining safe and secure
operations. The exact nature of any rules and procedures a clearing
agency would likely establish to support this requirement is likely to
vary between clearing agencies. However, there are estimates of the
burden imposed by similar policies and procedures requirements in
Regulation NMS and in proposed requirements for security-based swap
data repositories.\212\ While the requirements underlying those
estimates are not identical to this requirement for clearing agencies,
the Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\212\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(6) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\213\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\213\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their cost-
effectiveness standards required by proposed Rule 17Ad-22(d)(6) on an
ongoing basis. The Commission expects that the exact burden of
administering the procedures for monitoring cost-effectiveness
standards would vary depending on how frequently each clearing agency
may need to update its procedures. Based on the analogous policies and
procedures requirements and the corresponding burden estimates in
Regulation NMS and for security-based swap data repositories, the
Commission estimates that the ongoing requirements of this rule would
impose an aggregate annual burden of 60 hours on each respondent
clearing agency, corresponding to an aggregate annual burden for all
respondent clearing agencies of 1,020 hours.\214\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\214\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------
p. Links
Proposed Rule 17Ad-22(d)(7) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to evaluate the potential sources of
risks that can arise when the clearing agency establishes links either
cross-border or domestically to clear trades and ensure that the risks
are managed prudently on an ongoing basis. The exact nature of any
rules and procedures a clearing agency would likely establish to
support this requirement is likely to vary between clearing agencies.
However, there are estimates of the burden imposed by similar policies
and procedures requirements in Regulation NMS and in proposed
requirements for security-based swap data repositories.\215\ While the
requirements underlying those estimates are not identical to this
requirement for clearing agencies, the Commission preliminarily
believes that for PRA purposes there is similarity in the burden to
create policies and procedures.
---------------------------------------------------------------------------
\215\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(7) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time
[[Page 14517]]
burden on all respondent clearing agencies of 3,570 hours.\216\ The
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\216\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their links
arrangements as required by proposed Rule 17Ad-22(d)(7) on an ongoing
basis. The Commission expects that the exact burden of administering
the procedures for monitoring links arrangements would vary depending
on how frequently each clearing agency may need to update its
procedures. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS and for
security-based swap data repositories, the Commission estimates that
the ongoing requirements of this rule would impose an aggregate annual
burden of 60 hours on each respondent clearing agency, corresponding to
an aggregate annual burden for all respondent clearing agencies of
1,020 hours.\217\ The Commission solicits comment regarding the
accuracy of this estimate.
---------------------------------------------------------------------------
\217\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------
q. Governance
Proposed Rule 17Ad-22(d)(8) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent to fulfill the public interest requirements in
Section 17A of the Act applicable to clearing agencies, to support the
objectives of owners and participants, and to promote the effectiveness
of the clearing agency's risk management procedures. The exact nature
of any rules and procedures a clearing agency would likely establish to
support this requirement is likely to vary between clearing agencies.
However, there are estimates of the burden imposed by similar policies
and procedures requirements in Regulation NMS and in proposed
requirements for security-based swap data repositories.\218\ While the
requirements underlying those estimates are not identical to this
requirement for clearing agencies, the Commission preliminarily
believes that for PRA purposes there is similarity in the burden to
create policies and procedures.
---------------------------------------------------------------------------
\218\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(8) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\219\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\219\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their governance
arrangements as required by proposed Rule 17Ad-22(d)(8) on an ongoing
basis. The Commission expects that the exact burden of administering
the procedures for monitoring governance arrangements would vary
depending on how frequently each clearing agency may need to update its
procedures. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS and for
security-based swap data repositories, the Commission estimates that
the ongoing requirements of this rule would impose an aggregate annual
burden of 60 hours on each respondent clearing agency, corresponding to
an aggregate annual burden for all respondent clearing agencies of
1,020 hours.\220\ The Commission solicits comment regarding the
accuracy of this estimate.
---------------------------------------------------------------------------
\220\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------
Based on information from respondents that are already subject to a
similar requirement in the CDS Clearing Exemption Orders to make
publicly available certain pricing and valuation information with
respect to security-based swaps,\221\ the Commission estimates that the
one-time burden for a clearing agency to provide transparency about its
governance arrangements to fulfill the public interest requirements in
Section 17A of the Exchange Act would involve slight adjustments to
data systems that would already be in place as part of the clearing
agency's operations. Therefore, the Commission does not anticipate that
new hardware, such as additional computer equipment, would be required.
Instead, the Commission broadly estimates that for a clearing agency to
adjust its systems to meet the requirements of proposed Rule 17Ad-
22(d)(8) would impose a one-time burden of 100 hours on each respondent
clearing agency, corresponding to an aggregate one-time burden imposed
on all respondent clearing agencies of 1,700 hours.\222\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\221\ See infra notes 251-254 and accompanying text.
\222\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) x 17 respondent clearing
agencies = 1,700 hours. See infra note 253 and accompanying text.
---------------------------------------------------------------------------
r. Information on Services
Proposed Rule 17Ad-22(d)(9) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide market participants with
sufficient information for them to identify and evaluate the risks and
costs associated with using their services. The exact nature of any
rules and procedures a clearing agency would likely establish to
support this requirement is likely to vary between clearing agencies.
However, there are estimates of the burden imposed by similar policies
and procedures requirements in Regulation NMS and in proposed
requirements for security-based swap data repositories.\223\ While the
requirements underlying those estimates are not identical to this
requirement for clearing agencies, the Commission preliminarily
believes that for PRA purposes there is similarity in the burden to
create policies and procedures.
---------------------------------------------------------------------------
\223\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(9) would impose a
one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\224\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\224\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
[[Page 14518]]
Respondent clearing agencies would also have an ongoing
responsibility to make this information available. Also based on
informal comments from respondents already subject to a similar
requirement in the CDS Clearing Exemption Orders to make certain
pricing and valuation information with respect to security-based swaps
publicly available, the Commission preliminarily believes that the
ongoing burden would be limited and would likely involve maintenance
and troubleshooting of computer systems used to facilitate
dissemination of information responsive to Rule 17Ad-22(d)(9).
Therefore, the Commission preliminarily estimates this would impose an
annual aggregate burden of 60 hours for each respondent clearing
agency, which corresponds to an ongoing aggregate annual burden of
1,020 hours for all respondent clearing agencies.\225\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\225\ This figure was calculated as follows: Computer Operations
Department Manager at 60 hours annually x 17 respondent clearing
agencies = 1,020 hours for all respondent clearing agencies. See
supra note 196.
---------------------------------------------------------------------------
Based on information from respondents that are already subject to a
similar requirement in the CDS Clearing Exemption Orders to make
publicly available certain pricing and valuation information with
respect to security-based swaps,\226\ the Commission estimates that the
one-time burden to provide market participants with sufficient
information for them to identify and evaluate accurately the risks and
costs associated with using a clearing agency's services would involve
slight adjustments to data systems that would already be in place as
part of the clearing agency's operations under Exchange Act Section
17A. Therefore, the Commission does not anticipate that new hardware,
such as additional computer equipment, would be required. Instead, the
Commission broadly estimates that for a clearing agency to adjust its
systems to meet the requirements of proposed Rule 17Ad-22(d)(9) would
impose a one-time burden of 100 hours on each respondent clearing
agency, corresponding to an aggregate one-time burden imposed on all
respondent clearing agencies of 1,700 hours.\227\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\226\ See infra notes 251-254 and accompanying text.
\227\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) x 17 respondent clearing
agencies = 1,700 hours. See infra note 253 and accompanying text.
---------------------------------------------------------------------------
s. Immobilization and Dematerialization of Stock Certificates
Proposed Rule 17Ad-22(d)(10) would require clearing agencies that
provide central securities depository services to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to immobilize or dematerialize securities certificates and
transfer them by book entry to the greatest extent possible. The exact
nature of any rules and procedures a clearing agency would likely
establish to support this requirement is likely to vary between
clearing agencies. However, there are estimates of the burden imposed
by similar policies and procedures requirements in Regulation NMS and
in proposed requirements for security-based swap data
repositories.\228\ While the requirements underlying those estimates
are not identical to this requirement for clearing agencies, the
Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\228\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17AAd-22d)(10) would impose
a one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\229\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\229\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies that provide central securities depository
services would be required to administer their standards for
immobilizing or dematerializing securities certificates as required by
proposed Rule 17AAd-22d)(10) on an ongoing basis. The Commission
expects that the exact burden of administering the procedures for
immobilizing and dematerializing securities certificates would vary
depending on how frequently each clearing agency may need to update its
procedures. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS and for
security-based swap data repositories, the Commission estimates that
the ongoing requirements of this rule would impose an aggregate annual
burden of 60 hours on each respondent clearing agency, corresponding to
an aggregate annual burden for all respondent clearing agencies of 1020
hours.\230\ The Commission solicits comment regarding the accuracy of
this estimate.
---------------------------------------------------------------------------
\230\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agency = 1020 hours for all
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------
t. Default Procedures
Proposed Rule 17AAd-22d)(11) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to make key aspects of the clearing
agency's default procedures publicly available and to establish default
procedures that ensure that the clearing agency can take timely action
to contain losses and liquidity pressures and to continue meeting its
obligations in the event of a participant default. The exact nature of
the procedures a clearing agency would establish is likely to vary
between clearing agencies. However, there are estimates of the burden
imposed by similar policies and procedures requirements in Regulation
NMS and in proposed requirements for security-based swap data
repositories.\231\ While the requirements underlying those estimates
are not identical to this requirement for clearing agencies, the
Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\231\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17AAd-22d)(11) would impose
a one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\232\
---------------------------------------------------------------------------
\232\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their default
standards required by proposed Rule 17AAd-22d)(11) on an ongoing basis.
The Commission expects that the exact burden of administering the
procedures
[[Page 14519]]
for monitoring default standards would vary depending on how frequently
each clearing agency may need to update its procedures. Based on the
analogous policies and procedures requirements and the corresponding
burden estimates in Regulation NMS and for security-based swap data
repositories, the Commission estimates that the ongoing requirements of
this rule would impose an aggregate annual burden of 60 hours on each
respondent clearing agency, corresponding to an aggregate annual burden
for all respondent clearing agencies of 1,020 hours.\233\ The
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\233\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See
supra note 196.
---------------------------------------------------------------------------
Based on information from respondents that are already subject to a
similar requirement in the CDS Clearing Exemption Orders to make
publicly available certain pricing and valuation information with
respect to security-based swaps,\234\ the Commission estimates that the
one-time burden for a clearing agency to make key aspects of its
default procedures publicly available would involve slight adjustments
to data systems that would already be in place as part of the clearing
agency's operations under Section 17A of the Exchange Act. Therefore,
the Commission does not anticipate that new hardware, such as
additional computer equipment, would be required. Instead, the
Commission broadly estimates that for a clearing agency to adjust its
systems to meet the requirements of proposed Rule 17AAd-22d)(11) would
impose a one-time burden of 100 hours on each respondent clearing
agency, corresponding to an aggregate one-time burden imposed on all
respondent clearing agencies of 1,700 hours.\235\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\234\ See infra notes 251-254 and accompanying text.
\235\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) x 17 respondent clearing
agencies = 1,700 hours. See infra note 253 and accompanying text.
---------------------------------------------------------------------------
u. Timing of Settlement Finality
Proposed Rule 17Ad-22(d)(12) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure that final settlement occurs
no later than the end of the settlement day and require that intraday
or real-time finality be provided where necessary to reduce risks. The
exact nature of the procedures a clearing agency would establish is
likely to vary between clearing agencies. However, there are estimates
of the burden imposed by similar policies and procedures requirements
in Regulation NMS and in proposed requirements for security-based swap
data repositories. While the requirements underlying those estimates
are not identical to this requirement for clearing agencies, the
Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(12) would impose
a one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\236\
---------------------------------------------------------------------------
\236\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their settlement
finality standards required by proposed Rule 17Ad-22(d)(12) on an
ongoing basis. The Commission expects that the exact burden of
administering the procedures for ensuring the timing of settlement
finality would vary depending on how frequently each clearing agency
may need to update its procedures. Based on the analogous policies and
procedures requirements and the corresponding burden estimates in
Regulation NMS and for security-based swap data repositories, the
Commission estimates that the ongoing requirements of this rule would
impose an aggregate annual burden of 60 hours on each respondent
clearing agency, corresponding to an aggregate annual burden for all
respondent clearing agencies of 1,020 hours.\237\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\237\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See
supra note 196.
---------------------------------------------------------------------------
v. Delivery Versus Payment
Proposed Rule 17Ad-22(d)(13) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to eliminate principal risk by linking
securities transfers to funds transfers in a way that achieves delivery
versus payment. The exact nature of the procedures a clearing agency
would establish is likely to vary between clearing agencies. However,
there are estimates of the burden imposed by similar policies and
procedures requirements in Regulation NMS and in proposed requirements
for security-based swap data repositories.\238\ While the requirements
underlying those estimates are not identical to this requirement for
clearing agencies, the Commission preliminarily believes that for PRA
purposes there is similarity in the burden to create policies and
procedures.
---------------------------------------------------------------------------
\238\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(13) would impose
a one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\239\
---------------------------------------------------------------------------
\239\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their delivery
versus payment standards required by proposed Rule 17Ad-22(d)(13) on an
ongoing basis. The Commission expects that the exact burden of
administering the procedures for delivery versus payment would vary
depending on how frequently each clearing agency may need to update its
procedures. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS and for
security-based swap data repositories, the Commission estimates that
the ongoing requirements of this rule would impose an aggregate annual
burden of 60 hours on each respondent clearing agency, corresponding to
an aggregate annual burden for all respondent clearing agencies of
1,020 hours.\240\ The Commission solicits comment regarding the
accuracy of this estimate.
---------------------------------------------------------------------------
\240\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See
supra note 196.
---------------------------------------------------------------------------
w. Risk Controls To Address Participants' Failure To Settle
Proposed Rule 17Ad-22(d)(14) would require clearing agencies to
establish, implement, maintain and enforce
[[Page 14520]]
written policies and procedures reasonably designed to institute risk
controls, including collateral requirements and limits to cover the
clearing agency's credit exposure to each participant exposure fully,
and that ensure timely settlement in the event that the participant
with the largest payment obligation is unable to settle when the
clearing agency provides central securities depository services and
extends intraday credit to participants. The exact nature of any rules
and procedures a clearing agency would likely establish to support this
requirement is likely to vary between clearing agencies. However, there
are estimates of the burden imposed by similar policies and procedures
requirements in Regulation NMS and in proposed requirements for
security-based swap data repositories.\241\ While the requirements
underlying those estimates are not identical to this requirement for
clearing agencies, the Commission preliminarily believes that for PRA
purposes there is similarity in the burden to create policies and
procedures.
---------------------------------------------------------------------------
\241\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(14) would impose
a one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\242\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\242\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies that provide central securities depository
services would be required to administer their risk control standards
required by proposed Rule 17Ad-22(d)(14) on an ongoing basis. The
Commission expects that the exact burden of administering the
procedures for risk controls, including collateral requirements and
limits to cover the clearing agency's credit exposure to each
participant exposure fully and that ensure timely settlement in the
event that the participant with the largest payment obligation is
unable to settle would vary depending on how frequently each clearing
agency may need to update its procedures. Based on the analogous
policies and procedures requirements and the corresponding burden
estimates in Regulation NMS and for security-based swap data
repositories, the Commission estimates that the ongoing requirements of
this rule would impose an aggregate annual burden of 60 hours on each
respondent clearing agency, corresponding to an aggregate annual burden
for all respondent clearing agencies of 1,020 hours.\243\ The
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\243\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours for all
respondent clearing agencies. See supra note 196.
---------------------------------------------------------------------------
x. Identification and Management of Physical Delivery Risks
Proposed Rule 17Ad-22(d)(15) would require a clearing agency to
state to its participants the clearing agency's obligations with
respect to physical deliveries and to identify and manage the risks
that arise in connection with these obligations. The exact form in
which a clearing agency would state to its participants the clearing
agency's obligations with respect to physical deliveries and to
identify and manage the risks in connection with those obligations is
likely to vary between clearing agencies. However, there are estimates
of the burden imposed by similar policies and procedures requirements
in Regulation NMS and in proposed requirements for security-based swap
data repositories.\244\ While the requirements underlying those
estimates are not identical to this requirement for clearing agencies,
the Commission preliminarily believes that for PRA purposes there is
similarity in the burden to create policies and procedures.
---------------------------------------------------------------------------
\244\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-22(d)(15) would impose
a one-time burden on each respondent clearing agency of 210 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 3,570 hours.\245\ The Commission solicits comment
regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\245\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their physical
delivery standards required by proposed Rule 17Ad-22(d)(15) on an
ongoing basis. The Commission expects that the exact burden of
administering the procedures for monitoring physical delivery standards
would vary depending on how frequently each clearing agency may need to
update its procedures. Based on the analogous policies and procedures
requirements and the corresponding burden estimates in Regulation NMS
and for security-based swap data repositories, the Commission estimates
that the ongoing requirements of this rule would impose an aggregate
annual burden of 60 hours on each respondent clearing agency,
corresponding to an aggregate annual burden for all respondent clearing
agencies of 1,020 hours.\246\ The Commission solicits comment regarding
the accuracy of this estimate.
---------------------------------------------------------------------------
\246\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See
supra note 196.
---------------------------------------------------------------------------
Based on information from respondents that are already subject to a
similar requirement in the CDS Clearing Exemption Orders to make
publicly available certain pricing and valuation information with
respect to security-based swaps,\247\ the Commission estimates that the
one-time burden for a clearing agency to state to its participants its
obligations with respect to physical deliveries would involve slight
adjustments to data systems that would already be in place as part of
the clearing agency's operations under Section 17A of the Exchange Act.
Therefore, the Commission does not anticipate that new hardware, such
as additional computer equipment, would be required. Instead, the
Commission broadly estimates that for a clearing agency to adjust its
systems to meet the requirements of proposed Rule 17Ad-22(d)(15) would
impose a one-time burden of 100 hours on each respondent clearing
agency, corresponding to an aggregate one-time burden imposed on all
respondent clearing agencies of 1,700 hours.\248\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\247\ See infra notes 251-254 and accompanying text.
\248\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) x 17 respondent clearing
agencies = 1,700 hours. See infra note 253 and accompanying text.
---------------------------------------------------------------------------
Total Burden
The Commission preliminarily believes that for all respondent
clearing agencies the aggregate paperwork burdens contained in proposed
Rules
[[Page 14521]]
17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10), (11),
(12), (13), (14), (15), (b)(1), (2), (3), (4), (5), (6), (7), (c)(1)
and (2) would impose a one-time burden of 83,343 hours \249\ and an
ongoing annual burden of 39,658 hours.\250\ The Commission solicits
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\249\ This figure combines the one-time burdens for proposed
Rules 17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10),
(11), (12), (13), (14), (15), (b)(1), (2), (3), (4), (5), (6), (7),
(c)(1) and (2) and was calculated as follows: (((3,570 hours x 16
standards pursuant to proposed Rules 17Ad-22(d)(1), (2), (3), (4),
(5), (6), (7), (8), (9), (10), (11), (12), (13), (14), (15) and
(d)(2) = 57,123 hours) + (1,890 hours x 8 standards pursuant to
proposed Rules 17Ad-22(b)(1), (2), (3), (4), (5), (6), (7) and
(d)(1) = 15,120 hours) + (1,700 hours x 6 systems adjustments
pursuant to Rules 17Ad-22(d)(2), (8), (9), (11), (15), (d)(2) =
10,200 hours) + (900 hours x 1 systems adjustment pursuant to Rule
17Ad-22(c)(1)) = 83,343 hours.
\250\ This figure combines the annual burdens for proposed Rules
17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10), (11),
(12), (13), (14), (15), (b)(1), (2), (3), (4), (5), (6), (7), (c)(1)
and (2) and was calculated as follows: ((1,020 hours x 16 standards
to be administered pursuant to Rules 17Ad-22(d)(1), (2), (3), (4),
(5), (6), (7), (8), (9), (10), (11), (12), (13), (14), (15) and
(d)(2) = 16,320 hours) + (540 hours x 8 standards to be administered
pursuant to proposed Rules 17Ad-22(b)(1), (2), (3), (4), (5), (6),
(7) and (d)(1) = 4,320 hours) + (1,020 hours x 2 ongoing efforts to
maintain and troubleshoot computer systems used to facilitate
dissemination of information responsive to Rules 17Ad-22(d)(2) and
(9) = 2,040 hours) + (6,480 hours to prepare the annual model
validation required pursuant to Rule 17Ad-22(b)(4)) + (1,890 hours
to prepare revised policies and procedures providing for a higher
net capital requirement pursuant to Rule 17Ad-22(b)(7) + (108 hours
to generate the financial information required pursuant to Rule
17Ad-22(c)(1)) + (8,500 hours to coordinate the posting of financial
information to the clearing agency's Web site as required pursuant
to Rule 17Ad-22(c)(2)) = 39,658 hours.
---------------------------------------------------------------------------
2. Dissemination of Pricing and Valuation Information by Security-
Based Swap Clearing Agencies That Perform Central Counterparty Services
The requirement for dissemination of pricing and valuation
information in proposed Rule 17Aj-1 would effectively require each of
the entities authorized to provide CCP services for security-based
swaps pursuant to the CDS Clearing Exemption Orders \251\ to continue
the information dissemination practices they already perform. These
entities generate end of day settlement prices and other model prices
for security-based swaps, which can be used to establish margin
requirements for participant positions and could provide prices in the
event of a default scenario. As outlined above, the Commission
estimates a total of six respondents would be subject to this
requirement.\252\
---------------------------------------------------------------------------
\251\ See supra note 6.
\252\ See supra notes 139-140 and accompanying text. The
Commission notes that clearing agencies operating under the existing
CDS Clearing Exemption Orders may not need to make additional
changes to meet the requirements of the proposed rule because they
are already subject to similar conditions as part of the orders.
However, for purposes of this PRA analysis the Commission assumes
that these would be new requirements.
---------------------------------------------------------------------------
Based on information from respondents that are already subject to a
similar requirement in the CDS Clearing Exemption Orders to disseminate
pricing and valuation information, the Commission preliminarily
believes that the requirements of proposed Rule 17Aj-1 would impose
one-time and ongoing burdens on respondent clearing agencies. For
instance, compliance professionals may need to work with information
technology and operations professionals to accurately memorialize in
writing the specific policy and procedure requirements regarding the
dissemination of pricing and valuation information. Information
technology personnel may be relied on to develop or modify computer
programs that facilitate the requirements of the policies and
procedures.
The Commission estimates that the one-time burden for a security-
based swap clearing agency to comply with the requirements of proposed
Rule 17Aj-1 would involve slight adjustments to data systems that would
already be in place as part of the operation of the respondent as a
registered clearing agency that provides CCP services for security-
based swaps. Therefore, the Commission does not anticipate that new
hardware, such as additional computer equipment, would be required.
Instead, the Commission broadly estimates that for a clearing agency to
adjust its systems to meet the requirements of proposed Rule 17Aj-1
would impose a one-time burden of 100 hours on each respondent clearing
agency, corresponding to an aggregate one-time burden imposed on all
respondent clearing agencies of 600 hours.\253\ The Commission solicits
comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\253\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) = 100 hours x 6 respondent
clearing agencies = 600 hours.
---------------------------------------------------------------------------
Respondent clearing agencies would also have an ongoing
responsibility to make their relevant pricing and valuation information
available. Based on informal comments from respondents that are already
subject to a similar requirement in the CDS Clearing Exemption Orders,
the Commission preliminarily believes that the ongoing burden would be
limited and would likely involve maintenance and troubleshooting of
computer systems used to facilitate dissemination of covered pricing
and valuation information. Therefore, the Commission preliminarily
estimates this would impose an annual aggregate burden of 60 hours for
each respondent clearing agency, which corresponds to an ongoing
aggregate annual burden of 360 hours for all respondent clearing
agencies.\254\ The Commission solicits comment regarding the accuracy
of this estimate.
---------------------------------------------------------------------------
\254\ This figure was calculated as follows: Computer Operations
Department Manager at 60 hours annually x 6 respondent clearing
agencies = 360 hours.
---------------------------------------------------------------------------
3. Clearing Agency Policies and Procedures To Protect the
Confidentiality of Trading Information of Clearing Agency Participants
Proposed Rule 17Ad-23 would require each clearing agency to
establish, maintain and enforce written policies and procedures
designed to protect the confidentiality of clearing members' trading
information. As outlined above, the Commission estimates a total of 17
respondents to this requirement.\255\
---------------------------------------------------------------------------
\255\ See supra notes 141-144 and accompanying text.
---------------------------------------------------------------------------
Based on the staff's conversations with respondents that are
already subject to a similar policies and procedures requirement as
part of the CDS Clearing Exemption Orders, the Commission preliminarily
believes that establishing, maintaining and enforcing written policies
and procedures to protect confidential information of clearing members
would require collaboration and coordination across business units
within the clearing agency. For instance, legal or compliance
professionals may need to work with information technology and
operations professionals to accurately memorialize in writing the
specific policy and procedure requirements that the clearing agency
decides to establish. Information technology personnel may be heavily
relied on to develop or modify computer programs that facilitate the
requirements of the policies and procedures. Developing business
practices that are synchronized with the policies and procedures may
also entail coordination with the clearing agency's human resources or
risk management personnel to ensure effective adoption of any employee
training created to inform employees about trading restrictions or
other areas of the policies and procedures that impact them.
The exact nature of the written policies and procedures a clearing
agency would establish is likely to vary. However, based on preliminary
[[Page 14522]]
information from respondents that are affected by similar requirements
under the CDS Clearing Exemption Orders and also based on the
Commission's experience in administering those orders, the Commission
preliminarily believes that the proposed rule would impose a one-time
burden on each respondent clearing agency of 610 hours, corresponding
to an aggregate one-time burden on all respondent clearing agencies of
10,370 hours.\256\ The Commission solicits comment regarding the
accuracy of this estimate.
---------------------------------------------------------------------------
\256\ This figure was calculated as follows: ((Chief Compliance
Officer at 210 hours) + (Computer Operations Department Manager at
180 hours) + (Senior Programmer at 180 hours) + (Senior Risk
Management Specialist at 40 hours)) = 610 hours x 17 respondent
clearing agencies = 10,370 hours.
---------------------------------------------------------------------------
Also based on information from respondents that have been subject
to the CDS Clearing Exemption Orders, the Commission preliminarily
believes that a clearing agency would likely purchase computer software
from a third party vendor that the clearing agency would then use to
implement the aspects of its policies and procedures designed to
restrict, as appropriate, the trading of clearing agency employees for
their own account and to prevent misuse and misappropriation of
participant information protected by the rule. The cost of such
computer software is likely to vary according to the specific policies
and procedures of the clearing agency (i.e., based on the number of
licenses it may need to cover its employees, the types of services it
needs the software to provide, etc.). However the Commission
preliminarily estimates that the rule would impose a one-time cost of
approximately $10,000 dollars on each clearing agency, corresponding to
an aggregate one-time burden on all clearing agencies of $170,000.\257\
The Commission solicits comment regarding the accuracy of this
estimate.
---------------------------------------------------------------------------
\257\ This figure was calculated as follows: $10,000 dollars in
software costs per respondent clearing agency x 17 respondent
clearing agencies = $170,000.
---------------------------------------------------------------------------
The Commission also preliminarily understands from respondents
subject to the similar requirement in the CDS Clearing Exemption Orders
that monitoring and enforcing the written policies and procedures
required by proposed Rule 17Ad-23 would likely require resource
commitments from many of the same business units needed to develop such
policies and procedures. For instance, as part of the effort to
restrict, as appropriate, trading by clearing agency employees for
their own accounts and to prevent misuse and misappropriation of
information protected by the rule, the Commission preliminarily
believes a clearing agency would need to devote fifty percent of the
work hours of a full-time, compliance attorney. The Commission
preliminarily expects this resource commitment may, among other things,
take the form of obtaining and reviewing brokerage statements of
clearing agency employees and reviewing their e-mails. Time for
employee training related to the requirements of the policies and
procedures, troubleshooting any computer systems designed to protect
information in connection with the policies and procedures, and
amendments to the policies and procedures are also factors that may
contribute to the ongoing burden on clearing agencies. Accordingly, the
Commission preliminarily estimates the rule would impose an annual
aggregate burden on each respondent of 1,128 hours, corresponding to an
aggregate annual burden on all clearing agencies of 19,176 hours.\258\
The Commission solicits comment regarding the accuracy of this
estimate.
---------------------------------------------------------------------------
\258\ This figure was calculated as follows ((Compliance
Attorney at 4 hours per business day x 260 business days per year) =
1040 hours per year + (Computer Operations Department Manager at 40
hours per year) + (Senior Programmer at 40 hours per year) + (Senior
Risk Management Specialist at 8 hours per year)) = 1,128 hours per
year x 17 respondent clearing agencies = 19,176 hours per year.
---------------------------------------------------------------------------
4. Clearing Agency Procedures To Identify and Address Conflicts of
Interest
Proposed Rule 17Ad-25 would require each clearing agency to
establish, implement, maintain and enforce written policies and
procedures that are reasonably designed to identify and address
existing or potential conflicts of interest and minimize conflicts of
interest in the decision-making process of the clearing agency. As
outlined above, the Commission estimates a total of 17 respondents to
this requirement.\259\
---------------------------------------------------------------------------
\259\ See supra notes 145-148 and accompanying text.
---------------------------------------------------------------------------
The exact nature of the policies and procedures a clearing agency
would establish is likely to vary between clearing agencies. For
instance, legal or compliance professionals may need to work to
accurately memorialize in writing the specific policy and procedure
requirements regarding conflicts of interest. Information technology
personnel may be relied on to develop, modify or implement computer
programs that facilitate the requirements of the policies and
procedures.
There are estimates of the burden imposed by similar policies and
procedures requirements in Regulation NMS and in proposed requirements
for security-based swap data repositories.\260\ While the requirements
underlying those estimates are not identical to this requirement for
clearing agencies, the Commission preliminarily believes that for PRA
purposes there is similarity in the burden to create policies and
procedures.
---------------------------------------------------------------------------
\260\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily estimates that proposed Rule 17Ad-25 would impose a one-
time burden on each respondent clearing agency of 420 hours,
corresponding to an aggregate one-time burden on all respondent
clearing agencies of 7,140 hours.\261\ Also based on the estimates in
Regulation NMS and for security-based swap data repositories, the
Commission estimates that a burden of $40,000 in initial outside legal
costs would be incurred per respondent clearing agency for an aggregate
outside cost burden of $680,000 for all clearing agencies.\262\ The
Commission solicits comment regarding the accuracy of these estimates.
---------------------------------------------------------------------------
\261\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours to create one policy and procedure x 2 policies
and procedures x 17 respondent clearing agencies = 7,140 hours. See
supra note 195.
\262\ This estimated $680,000 figure has been calculated as
follows: $400 per hour cost for outside legal services x 50 hours x
2 policies and procedures x 17 clearing agencies. This is the same
estimate used by the Commission for these services in the proposed
consolidated audit trail rule. See Exchange Act Release No. 62174
(May 26, 2010), 75 FR 32556 (June 8, 2010).
---------------------------------------------------------------------------
For a clearing agency to monitor, enforce, and potentially adjust
its policies and procedures in connection with proposed Rule 17Ad-25,
the Commission preliminarily believes these activities would impose an
ongoing aggregate annual burden on each respondent clearing agency of
120 hours, corresponding to an aggregate annual ongoing burden for all
respondents of 2,040 hours.\263\ The Commission solicits comment
regarding the accuracy of these estimates.
---------------------------------------------------------------------------
\263\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours to
administer one policy and procedure x 2 policies and procedures =
2,040 hours. See supra note 196.
---------------------------------------------------------------------------
[[Page 14523]]
5. Standards for Board or Board Committee Directors
Proposed Rule 17Ad-26 outlines the proposed governance standards
that clearing agencies would be required to establish for board or
board committee directors. As outlined above, the Commission estimates
a total of 17 respondents to this requirement.\264\
---------------------------------------------------------------------------
\264\ See supra notes 149-152 and accompanying text.
---------------------------------------------------------------------------
The exact nature of the policies and procedures a clearing agency
would establish is likely to vary between clearing agencies. For
instance, legal or compliance professionals may need to work with a law
firm to accurately memorialize in writing the specific policy and
procedure requirements regarding the selection of directors. However,
as noted above in the discussion of the burdens associated with
proposed Rule 17Ad-25, there are estimates of similar burdens imposed
by policies and procedures requirements in Regulation NMS and in the
proposed requirements for security-based swap data repositories.\265\
While the requirements underlying those estimates are not identical to
this requirement for clearing agencies, the Commission preliminarily
believes that there is sufficient similarity between them for PRA
purposes that the burden would be roughly equivalent.
---------------------------------------------------------------------------
\265\ See supra note 157.
---------------------------------------------------------------------------
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories, the Commission
preliminarily believes that this rule would impose an aggregate one-
time burden on each respondent clearing agency of 210 hours to create
the minimum standards required by the rule, corresponding to a one-time
aggregate burden for all clearing agencies of 3,570 hours.\266\ The
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\266\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 17 respondent clearing agencies = 3,570 hours.
See supra note 195.
---------------------------------------------------------------------------
The Commission also estimates, based on similar requirements and
the corresponding burdens in Regulation NMS and for security-based swap
data repositories that a total burden of $20,000 in outside legal costs
would be incurred by each respondent clearing agency, corresponding to
an aggregate cost burden of $340,000 for all respondent clearing
agencies.\267\ The Commission solicits comment regarding the accuracy
of this information.
---------------------------------------------------------------------------
\267\ This estimated figure was calculated as follows: ($400 per
hour cost for outside legal services x 50 hours) x 17 respondent
clearing agencies = $170,000. See supra note 262.
---------------------------------------------------------------------------
Clearing agencies would be required to administer their governance
standards required by proposed Rule 17Ad-26 on an ongoing basis. The
Commission expects that the exact burden of administering the
governance standards would vary depending on factors that include, but
are not limited to, how frequently a clearing agency elects new board
members and how many board and board committee members are involved
with the governance of each clearing agency. These factors would
influence the time spent evaluating potential new board members as well
as the time needed to assess existing board members at least annually
for compliance with the standards.
Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS and for security-based
swap data repositories, the Commission estimates that the ongoing
requirements of this rule would impose an aggregate annual burden of 60
hours on each respondent clearing agency, corresponding to an aggregate
annual burden for all respondent clearing agencies of 1,020 hours.\268\
The Commission solicits comment regarding the accuracy of this
information. The proposed rule also encourages clearing agencies to use
a third party to facilitate completion of the board's annual assessment
of its members against its governance standards. The Commission
estimates that using a third party would impose an average annual
burden of 20 hours on each respondent clearing agency, corresponding to
aggregate of 340 hours all clearing agencies.\269\ The Commission
solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\268\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 17 respondent clearing agencies = 1,020 hours. See
supra note 196.
\269\ This figure was calculated as follows: Consultant at 20
hours x 17 respondent clearing agencies = 340 hours.
---------------------------------------------------------------------------
6. Designation of Chief Compliance Officer
Under proposed Rule 3Cj-1(b), a registered clearing agency's CCO
would be responsible for, among other matters, (1) establishing
policies and procedures for the remediation of non-compliance issues
identified by the CCO and (2) establishing and following appropriate
procedures for the handling of management response, remediation,
retesting and closing of non-compliance issues. As outlined above, the
Commission estimates a total of 17 respondents to this
requirement.\270\
---------------------------------------------------------------------------
\270\ See supra note 153-156 and accompanying text.
---------------------------------------------------------------------------
The exact nature of the policies and procedures a clearing agency
would establish is likely to vary between clearing agencies. However,
as noted in the discussion of the estimated burdens for proposed Rules
17Ad-25 and 17Ad-26, there are similarly positioned requirements and
corresponding burden estimates in Regulation NMS and in the proposed
requirements for security-based swap data repositories.\271\ The
proposed rule requirements that create the estimated PRA burden for the
CCO of a security-based swap data repository \272\ are highly-similar
to the proposed requirements for the CCO of a clearing agency in Rule
3Cj-1(b).\273\ This is because both rules are predicated on statutory
provisions of the Exchange Act that contain statutory requirements that
mirror one another to a large degree.\274\ Therefore, the Commission
preliminarily believes that for PRA purposes the burdens would be
roughly equivalent.
---------------------------------------------------------------------------
\271\ See supra note 157.
\272\ See Exchange Act Release No. 63347 (November 19, 2010), 75
FR 77306 (December 10, 2010) (proposed Rules 13n-11(c)(6),(7) and
13n-11(d), (h). See generally Public Law 111-203 Sec. 763(a)
(adding Section 3C(n)(6) to the Exchange Act).
\273\ Compare Public Law 111-203 Sec. 763(a) adding Section
3C(j) to the Exchange Act concerning requirements for the CCO of a
clearing agency with Public Law 111-203 Sec. 763(a) adding Section
3C(n)(6) concerning requirements for the CCO of an SDR.
\274\ Compare Public Law 111-203 Sec. 763(a) adding Section
3C(j) to the Exchange Act concerning requirements for the CCO of a
clearing agency with Public Law 111-203 Sec. 763(a) adding Section
3C(n)(6) concerning requirements for the CCO of an SDR.
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Consequently, the Commission preliminarily estimates that the two
requirements for the CCO of a clearing agency under proposed Rule 3Cj-1
would require 420 hours to create policies and procedures,
corresponding to a total burden of 7,140 hours initially.\275\ The
Commission also preliminarily estimates 120 hours to administer each
policy and procedure per year per respondent, corresponding to 1,200
hours on average annually.\276\
[[Page 14524]]
The Commission preliminarily believes that this work will be conducted
internally and solicits comments regarding the accuracy of this
information. The Commission solicits comment regarding the accuracy of
these estimates.
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\275\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours to create one policy and procedure x 2 policies
and procedures x 17 respondent clearing agencies = 7,140 hours. See
supra note 195.
\276\ This figure was calculated as follows: (Compliance
Attorney at 60 hours x 17 respondent clearing agencies) = 1,020
hours to administer one policy and procedure x 2 policies and
procedures = 2,040 hours. See supra note 196.
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Also, based on the similarly positioned burdens in Regulation NMS
and in the proposed requirements for the CCO of a security-based swaps
data repository, the Commission preliminarily estimates that a total of
$40,000 in initial outside legal costs would be incurred by each
respondent clearing agency. This corresponds to an aggregate, one-time
outside cost burden of $680,000 for all clearing agencies.\277\ The
Commission solicits comment regarding the accuracy of this estimate.
---------------------------------------------------------------------------
\277\ This figure was calculated as follows: (($400 per hour
cost for outside legal services x 50 hours) x (2 policies and
procedures)) x 17 clearing agencies = $680,000. See supra note 262.
---------------------------------------------------------------------------
The CCO would also be required under proposed Rule 3Cj-1(c) to
prepare, sign and submit (to the clearing agency's board of directors
and audit committee (or equivalent bodies) and to the Commission) an
annual compliance report that contains a description of (i) the
compliance of the clearing agency with respect to the Federal
securities laws and the rules and regulations thereunder, and (ii) each
policy and procedure of the clearing agency of the compliance officer
(including the code of ethics and conflict of interest policies of the
registered clearing agency). Based upon the Commission's experience
with similar reports, the Commission preliminarily estimates that this
would require an average of 54 hours per respondent per year. Thus, the
Commission preliminarily estimates an aggregate annual burden of 918
hours on all respondent clearing agencies.\278\ Because the report will
be submitted by the internal CCO, the Commission preliminarily does not
expect any external costs. The Commission solicits comments regarding
the accuracy of this estimate.
---------------------------------------------------------------------------
\278\ This figure is based on the following: ((Compliance
Attorney at 50 hours) + (Senior Systems Analyst at 4 hours)) x 17
clearing agencies = 918 hours.
---------------------------------------------------------------------------
E. Collection of Information Is Mandatory
1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
The collection of information relating to measuring credit
exposures to its participants at least once a day and limiting its
exposures to potential losses from defaults by its participants in
normal market conditions so that the operations of the clearing agency
would not be disrupted and non-defaulting participants would not be
exposed to losses that they cannot anticipate or control under proposed
Rule 17Ad-22(b)(1) would be mandatory for all clearing agencies that
provide CCP services.
b. Margin Requirements
The collection of information relating to using margin requirements
to limit credit exposures to participants in normal market conditions
and using risk-based models and parameters to set margin requirements
and review them at least monthly under proposed Rule 17Ad-22(b)(2)
would be mandatory for all clearing agencies that provide CCP services.
c. Financial Resources
The collection of information relating to maintaining sufficient
financial resources to withstand, at a minimum, a default by the
participant to which it has the largest exposure in extreme but
plausible market conditions, and if the clearing agency provides CCP
services for security-based swaps then a default by the two
participants to which it has the largest exposures in extreme but
plausible market conditions; provided that if a participant controls
another participant or is under common control with another
participant, then the affiliated participants shall be collectively
deemed to be a single participant under proposed Rule 17Ad-22(b)(3)
would be mandatory for all clearing agencies that provide CCP services.
d. Model Validation
The collection of information relating to providing for an annual
model validation consisting of evaluating the performance of the
clearing agency's margin models and the related parameters and
assumptions associated with such models by a qualified person who does
not perform functions associated with the clearing agency's margin
models (except as part of the annual model validation) and does not
report to a person who performs these functions under proposed Rule
17Ad-22(b)(4) would be mandatory for all clearing agencies that provide
CCP services.
e. Non-Dealer Access
The collection of information relating to providing the opportunity
for a person that does not perform any dealer or security-based swap
dealer services to obtain membership at the clearing agency to clear
securities for itself or on behalf of other persons under proposed Rule
17Ad-22(b)(5) would be mandatory for all clearing agencies that provide
CCP services.
f. Net Capital Requirements
The collection of information relating to providing the opportunity
for a person that maintains net capital equal to or greater than $50
million with the ability to obtain membership at the clearing agency,
with any net capital requirements being scalable so that they are
proportional to the risks posed by the participant's activities to the
clearing agency; provided, however, that the clearing agency may
provide for a higher net capital requirement as a condition for
membership at the clearing agency if the clearing agency demonstrates
to the Commission that such a requirement is necessary to mitigate
risks that could not otherwise be effectively managed by other measures
and the Commission approves the higher net capital requirement as part
of a rule filing or clearing agency registration application under
proposed Rule 17Ad-22(b)(7) would be mandatory for all clearing
agencies that provide CCP services.
g. Record of Financial Resources
The collection of information each fiscal quarter, or at any time
upon request by the Commission, relating to the calculation and
maintenance of a record of the financial resources necessary to meet
the requirements of proposed Rule 17Ad-22(b)(3) under proposed Rule
17Ad-22(c)(1) would be mandatory for all clearing agencies that perform
CCP services.
h. Annual Audited Financial Report
The collection of information relating to the annual audited
financial report that shall (i) be a complete set of financial
statements of the clearing agency for the most recent two fiscal years
and be prepared in accordance with U.S. GAAP, except that for a
clearing agency that is a corporation or other organization
incorporated or organized under the laws of any foreign country the
financial statements may be prepared according to U.S. GAAP or IFRS;
(ii) be audited in accordance with standards of the Public Company
Accounting Oversight Board by a registered public accounting firm that
is qualified and independent in accordance with Rule 2-01 of Regulation
S-X (17 CFR 210.2-01); and (iii) include a report of the registered
public accounting firm that complies with paragraphs (a) through (d) of
Rule
[[Page 14525]]
2-02 of Regulation S-X (17 CFR 210.2-02) under proposed Rule 17Ad-
22(c)(2) would be mandatory for all clearing agencies.
i. Transparent and Enforceable Rules and Procedures
The collection of information relating to policies and procedures
providing for a well founded, transparent, and enforceable legal
framework for each aspect of its activities in all relevant
jurisdictions under proposed Rule 17Ad-22(d)(1) would be mandatory for
all clearing agencies.
j. Participation Requirements
The collection of information relating to requiring participants to
have sufficient financial resources and robust operational capacity to
meet obligations arising from participation in the clearing agency;
have procedures in place to monitor that participation requirements are
met on an ongoing basis; and have participation requirements that are
objective, publicly disclosed, and permit fair and open access under
proposed Rule 17Ad-22(d)(2) would be mandatory for all clearing
agencies.
k. Identification and Mitigation of Custody of Assets and Investment
Risk
The collection of information relating to holding assets in a
manner whereby risk of loss or of delay in its access to them is
minimized; and investing assets in instruments with minimal credit,
market and liquidity risks under proposed Rule 17Ad-22(d)(3) would be
mandatory for all clearing agencies.
l. Identification and Mitigation of Operational Risk
The collection of information relating to identifying sources of
operational risk and minimizing them through the development of
appropriate systems, controls, and procedures; implementing systems
that are reliable, resilient and secure, and have adequate, scalable
capacity; and having business continuity plans that allow for timely
recovery of operations and fulfillment of a clearing agency's
obligations under proposed Rule 17Ad-22(d)(4) would be mandatory for
all clearing agencies.
m. Money Settlement Risks
The collection of information relating to employing money
settlement arrangements that eliminate or strictly limit the clearing
agency's settlement bank risks, that is, its credit and liquidity risks
from the use of banks to effect money settlements with its
participants; and requiring funds transfers to the clearing agency to
be final when effected under proposed Rule 17Ad-22(d)(5) would be
mandatory for all clearing agencies.
n. Cost-Effectiveness
The collection of information relating to being cost-effective in
meeting the requirements of participants while maintaining safe and
secure operations under proposed Rule 17Ad-22(d)(6) would be mandatory
for all clearing agencies.
o. Links
The collection of information relating to evaluating the potential
sources of risk for any link arrangements the clearing agency
establishes and prudently managing those risks under proposed Rule
17Ad-22(d)(7) would be mandatory for all clearing agencies.
p. Governance
The collection of information relating to having governance
arrangements that are clear and transparent to fulfill the public
interest requirements in Section 17A of the Exchange Act applicable to
clearing agencies, to support the objectives of owners and
participants, and to promote the effectiveness of the clearing agency's
risk management procedures under proposed Rule 17Ad-22(d)(8) would be
mandatory for all clearing agencies.
q. Information on Services
The collection of information relating to providing market
participants with sufficient information for them to identify and
evaluate the risks and costs associated with using its services under
proposed Rule 17Ad-22(d)(9) would be mandatory for all clearing
agencies.
r. Immobilization and Dematerialization of Stock Certificates
The collection of information relating to immobilization and
dematerialization of securities certificates and transferring them by
book entry to the greatest extent possible under proposed Rule 17Ad-
22(d)(10) would be mandatory for all clearing agencies that perform
central securities depository services.
s. Default Procedures
The collection of information relating to making key aspects of the
clearing agency's default procedures publicly available and
establishing default procedures that ensure that the clearing agency
can take timely action to contain losses and liquidity pressures and to
continue meeting its obligations in the event of a participant default
under proposed Rule 17Ad-22(d)(11) would be mandatory for all clearing
agencies.
t. Risk Controls To Address Participants' Failure To Settle
The collection of information relating to instituting risk controls
including collateral requirements and limits to cover the clearing
agency's credit exposure to each participant exposure fully, and that
ensure timely settlement in the event that the participant with the
largest payment obligation is unable to settle when the clearing agency
provides central securities depository services and extends intraday
credit to participants, provided that if a participant controls another
participant or is under common control with another participant then
the affiliated participants shall be collectively deemed to be a single
participant, under proposed Rule 17Ad-22(d)(14) would be mandatory for
all clearing agencies.
u. Identification and Management of Physical Delivery Risks
The collection of information relating to stating to participants
the clearing agency's obligations with respect to physical deliveries
and identifying and managing the risks from those obligations under
proposed Rule 17Ad-22(d)(15) would be mandatory for all clearing
agencies.
2. Dissemination of Pricing and Valuation Information by Security-
Based Swap Clearing Agencies That Perform Central Counterparty Services
The collection of information relating to the dissemination of
pricing and valuation information of security-based swaps under
proposed Rule 17Aj-1 would be mandatory for all security-based swap
clearing agencies that perform CCP services.
3. Clearing Agency Policies and Procedures To Protect the
Confidentiality of Trading Information of Clearing Agency Participants
The collection of information relating to the establishment,
maintenance and enforcement of written policies and procedures under
proposed Rule 17Ad-23 pertaining to the confidentiality of trading
information would be mandatory for all clearing agencies.
4. Clearing Agency Procedures To Identify and Address Conflicts of
Interest
The collection of information relating to the establishment,
implementation, maintenance and enforcement of written policies and
procedures reasonably designed to identify and address conflicts of
interest under proposed Rule 17Ad-25 would be mandatory for all
clearing agencies.
[[Page 14526]]
5. Standards for Board or Board Committee Directors
The collection of information relating to board or board committee
directors governance standards under proposed Rule 17Ad-26 would be
mandatory for all clearing agencies.
6. Designation of Chief Compliance Officer
The collection of information relating to the CCO under proposed
Rule 3Cj-1 requirements would be mandatory for all clearing agencies.
F. Confidentiality
1. Standards for Clearing Agencies
a. Measurement and Management of Credit Exposures
The collection of information relating to the measurement and
management of credit exposures under proposed Rule 17Ad-22(b)(1) would
be provided to the Commission staff but not subject to public
availability.
b. Margin Requirements
The collection of information relating to margin requirements under
proposed Rule 17Ad-22(b)(2) would be provided to the Commission staff
but not subject to public availability.
c. Financial Resources
The collection of information relating to financial resources under
proposed Rule 17Ad-22(b)(3) would be provided to the Commission staff
but not subject to public availability.
d. Model Validation
The collection of information relating to conducting an annual
model validation under proposed Rule 17Ad-22(b)(4) would be provided to
the Commission staff but not subject to public availability.
e. Non-Dealer Access
The collection of information relating to non-dealer access under
proposed Rule 17Ad-22(b)(5) would be provided to the Commission staff
but not subject to public availability.
f. Net Capital Requirements
The collection of information relating to the procedures for net
capital requirements under proposed Rule 17Ad-22(b)(7) would be
provided to the Commission staff but not subject to public
availability.
g. Record of Financial Resources
The collection of information relating to the calculation and
maintenance by a clearing agency that provides CCP services of a
quarterly report describing the financial resources necessary to meet
the requirements of proposed Rule 17Ad-22(b)(3) would be provided to
the Commission staff under proposed Rule 17Ad-22(c)(1) but would not be
subject to public availability.
h. Annual Audited Financial Report
The collection of information relating to the annual audited
financial report published to the clearing agency's Web site under
proposed Rule 17Ad-22(c)(2) would be subject to public availability.
i. Transparent and Enforceable Rules and Procedures
The collection of information relating to a clearing agency's well
founded, transparent and enforceable legal framework under proposed
Rule 17Ad-22(d)(1) would be provided to the Commission staff but not
subject to public availability.
j. Participation Requirements
The collection of information relating to the procedures for
monitoring and publicly disseminating the participation requirements
under proposed Rule 17Ad-22(d)(2) would be provided to the Commission
staff and would be subject to public availability.
k. Custody of Assets and Investment Risk
The collection of information relating minimizing custody and
investment risk under proposed Rule 17Ad-22(d)(3) would be provided to
the Commission staff but not subject to public availability.
l. Identification and Mitigation of Operational Risk
The collection of information relating to identifying and
minimizing operational risk under proposed Rule 17Ad-22(d)(4) would be
provided to the Commission staff but not subject to public
availability.
m. Money Settlement Risks
The collection of information relating to the procedures for money
settlement arrangements under proposed Rule 17Ad-22(d)(5) would be
provided to the Commission staff but not subject to public
availability.
n. Cost-Effectiveness
The collection of information relating to being cost-effective
under proposed Rule 17Ad-22(d)(6) would be provided to the Commission
staff but not subject to public availability.
o. Links
The collection of information relating to evaluating potential
sources of risk in links arrangements under proposed Rule 17Ad-22(d)(7)
would be provided to the Commission staff but not subject to public
availability.
p. Governance
The collection of information relating to a clearing agency's
governance arrangements under proposed Rule 17Ad-22(d)(8) would be
provided to the Commission staff but not subject to public
availability.
q. Information on Services
The collection of information relating to the provision of
sufficient information to market participants under proposed Rule 17Ad-
22(d)(9) would be provided to the Commission staff and market
participants but not subject to public availability.
r. Immobilization and Dematerialization of Stock Certificates
The collection of information relating to the procedures for
immobilizing and dematerializing stock certificates under proposed Rule
17Ad-22(d)(10) would be provided to the Commission staff but not
subject to public availability.
s. Default Procedures
The collection of information relating to the establishment and
maintenance of default procedures under proposed Rule 17Ad-22(d)(11)
would be subject to public availability.
t. Risk Controls To Address Participants' Failure To Settle
The collection of information relating to risk controls to address
participants' failure to settle under proposed Rule 17Ad-22(d)(14)
would be provided to the Commission staff, but not subject to public
availability.
u. Identification and Management of Physical Delivery Risks
The collection of information relating to the statement and
management of physical delivery risk under proposed Rule 17Ad-22(d)(15)
would be provided to the Commission staff, but not subject to public
availability.
2. Dissemination of Pricing and Valuation Information by Security-
Based Swap Clearing Agencies That Perform Central Counterparty Services
The collection of information relating to the dissemination of
pricing and valuation information under proposed Rule 17Aj-1 would be
subject to public availability.
[[Page 14527]]
3. Clearing Agency Policies and Procedures To Protect the
Confidentiality of Trading Information of Clearing Agency Participants
The collection of information pertaining to the establishment,
maintenance and enforcement of written policies and procedures
pertaining to the confidentiality of trading information under proposed
Rule 17Ad-23 would be provided to the Commission staff and would be
subject to public availability.
4. Clearing Agency Procedures To Identify and Address Conflicts of
Interest
The collection of information relating to the establishment,
implementation, maintenance and enforcement of written policies and
procedures reasonably designed to identify and address conflicts of
interest under proposed Rule 17Ad-25 would be provided to the
Commission staff and would be subject to public availability.
5. Standards for Board or Board Committee Directors
The collection of information relating to board or board committee
directors governance standards under proposed Rue 17Ad-26 would be
provided to the Commission staff and would be subject to public
availability.
6. Designation of Chief Compliance Officer
The collection of information relating to the CCO under proposed
Rule 3Cj-1 would be provided to the Commission staff and would be
subject to public availability.
G. Retention Period of Recordkeeping Requirements
Registered clearing agencies will be required to retain all
correspondence and other communications reduced to writing (including
comment letters) to and from such clearing agency for a period of not
less than five years, the first two years of which are to be in a place
immediately available to the Commission staff for inspection and
examination, pursuant to the recordkeeping requirements set forth in
Rule 17a-1 of the Exchange Act.
H. Request for Comment
The Commission invites comments on all of the above estimates.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission requests comment in
order to: (a) Evaluate whether the collection of information is
necessary for the proper performance of our functions, including
whether the information will have practical utility; (b) evaluate the
accuracy of our estimate of the burden of the collection of
information; (c) determine whether there are ways to enhance the
quality, utility and clarity of the information to be collected; and
(d) evaluate whether there are ways to minimize the burden of the
collection of information on those who respond, including through the
use of automated collection techniques or other forms of information
technology.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-8-11. Requests
for materials submitted to OMB by the Commission with regard to this
collection of information should be in writing, with reference to File
No. S7-8-11, and be submitted to the Securities and Exchange
Commission, Office of Investor Education and Advocacy, 100 F Street,
NE., Washington, DC 20549-0213. As OMB is required to make a decision
concerning the collections of information between 30 and 60 days after
publication, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication.
VI. Consideration of Costs and Benefits \279\
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\279\ The hourly rates use for professionals used throughout
this Section VI. Consideration of Costs and Benefits are taken from
the Securities Industry and Financial Markets Association's
Management & Professional Earnings in the Securities Industry 2010,
modified by the Commission's staff to account for an 1800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.
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The Commission is proposing several new rules that would set
standards for the operation and governance of clearing agencies. In
part, the Dodd-Frank Act is intended to promote financial stability in
the financial system of the United States by improving accountability
and transparency.\280\ Key aspects of the framework of the Dodd-Frank
Act specifically give the Commission authority to regulate security-
based swaps \281\ and to prescribe regulations containing risk
management standards for designated clearing entities that the
Commission regulates. In addition to considering these specific
concerns in formulating the proposed rules, the Commission believes
that designing several of the proposed rules to be applicable to all
clearing agencies promotes financial stability by facilitating prompt
and accurate clearance and settlement of securities transactions
consistent with Section 17A of the Exchange Act while concurrently
promoting the Dodd-Frank Act's stated aims of accountability and
transparency.
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\280\ See supra note 2.
\281\ See supra note 3.
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Proposed Rules 17Ad-22 through 17Ad-26 and 3Cj-1 would establish
operational standards for registered clearing agencies and require
those clearing agencies to adopt written policies and procedures
pertaining to, among other matters, the confidential treatment of
trading information received by the clearing agency, identifying and
addressing conflicts of interest, establishing board governance
standards and designating a CCO for the clearing agency. Proposed Rule
17Aj-1 would require the public dissemination of certain pricing and
valuation information by clearing agencies that perform CCP services
with respect to security-based swaps. Finally, the proposed amendments
to existing Rule 17Ab2-1 would modify the temporary registration
process for clearing agencies.
The Commission is sensitive to the costs and benefits imposed by
its rules and has identified the following costs and benefits. In
particular, the discussion below is focused on the costs and benefits
flowing from the decisions proposed by the Commission to fulfill the
mandates of the Dodd-Frank Act rather than the mandates of the Dodd-
Frank Act itself. However, to the extent that the Commission's
discretion is aligned to take full advantage of the benefits intended
by the Dodd-Frank Act, the two types of benefits are not entirely
separable. The Commission requests that commenters provide data and any
other information or statistics on which they relied on to reach any
conclusions.
A. Standards for Clearing Agencies
The standards set forth under proposed Rule 17Ad-22 build off of
the recommendations of the CPSS-IOSCO RSSS and RCCP, adjusted to
conform to the U.S. system for clearing agency regulation and to adopt
those tailored standards as rule requirements. Included in this
proposed rule is the requirement that each fiscal quarter (based on
calculations made as of the last business day of the clearing agency's
fiscal quarter), or at any time upon Commission request, a clearing
[[Page 14528]]
agency that performs central counterparty services shall calculate and
maintain a record of the financial resources necessary to comply with
proposed Rule 17Ad-22(b)(3), as well as sufficient documentation to
explain the methodology it uses to compute such financial resource
requirement.
1. Benefits
The proposed standards are intended to provide benefits to clearing
agencies and the markets they serve by promoting implementation of
measures that would enhance the safety and efficiency of clearing
agencies and reduce systemic risk. Safe and reliable clearing agencies
are essential not only for the stability of the securities markets they
serve but often also to payment systems, which may be used by a
clearing agency or may themselves use a clearing agency to transfer
collateral. The safety of securities settlement arrangements and post-
trade custody arrangements is also critical to the goal of protecting
the assets of investors from claims by creditors of intermediaries and
other entities that perform various functions in the operation of the
clearing agency.
Permitting persons who do not provide dealer or security-based swap
dealer services to become members of a clearing agency, as required
under proposed Rule 17Ad-22(b)(5), should foster the development of
correspondent clearing arrangements that would allow dealers and
security-based swap dealers, who may otherwise not be able to meet
reasonable participation standards of a clearing agency, to obtain
access to the clearing agency through correspondent clearing
arrangements, thereby increasing competition among clearing agencies.
The net capital requirements contained in proposed Rule 17Ad-22(b)(7)
would help remove an overly burdensome barrier to clearing agency
access for market participants with a net capital level of at least $50
million, and promote greater direct access to clearing agencies.
Entities that become participants will also benefit from an elimination
of fee costs that the entities might otherwise have incurred to gain
indirect access to the clearing agency through existing participants
with higher levels of net capital. Proposed Rule 17Ad-22(b)(7) also may
facilitate greater competition among market participants of varying
sizes because smaller market participants may not incur additional cost
to clear and settle transactions.
Finally, the standards in proposed Rule 17Ad-22(d) have the
potential to mitigate various risks associated with providing clearing
agency services by establishing standards to address (1) transparent
and enforceable rules and procedures; (2) participation requirements;
(3) custody of assets and investment risk; (4) operational risk; (5)
money settlement risk; (6) cost-effectiveness; (7) links; (8)
governance; (9) information on services; (10) immobilization and
dematerialization of stock certificates; (11) default procedures; (12)
timing of settlement finality; (13) delivery versus payment; (14) risk
controls to address participants' failures to settle; and (15) physical
delivery risks. This should help to create a framework for the
operation of clearing agencies that would promote sound and efficient
practices by the clearing agency. Moreover, standards relating to
measurement and management of credit exposures, margin requirements,
and financial resources should act as a helpful tool to manage systemic
risk as increasing amounts of clearance and settlement activity is
centralized within clearing agencies. At the same time, requiring
annual evaluations of the performance of the clearing agency's margin
models should help to ensure that clearing agencies' margin models
perform in a manner that facilitates prompt and accurate clearance and
settlement of transactions.
2. Costs
As noted above, the standards contained in proposed Rules 17Ad-
22(b)(1), (2), (3), (4), (5), (6), (7), (c)(1), (2), (d)(1), (2), (3),
(4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15)
would impose certain burdens and related costs on respondent clearing
agencies. As discussed in section V.D.1., based on policies and
procedures requirements for Regulation NMS and security-based swap data
repositories and based on staff conversations with industry
representatives, the Commission has estimated the burdens and related
costs of these requirements for clearing agencies.
The proposed clearing agency standards in proposed Rules 17Ad-
22(b)(1), (2), (3), (4), (5), (6), (7), (c)(1), (2), (d)(1), (2), (3),
(4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15)
would require respondent clearing agencies to create policies and
procedures. The requirements would impose one-time costs of
approximately $26,084,488 in the aggregate for all respondent clearing
agencies.\282\ The standards contained in proposed Rules 17Ad-22(b)(4),
(c)(2), (d)(2), (8), (9), (11) and (15) would also impose one-time
costs on clearing agencies that are related to the adjustment of
systems. With respect to proposed Rules 17Ad-22(b)(2), (d)(2), (8),
(9), (11) and (15), this adjustment would be related to facilitating
compliance with requirements to provide information or make information
available. Proposed Rule 17Ad-22(b)(4) would require one-time systems
adjustments related to the capability to perform an annual model
validation. These adjustments would amount to a one-time cost of
approximately $4,182,480 in the aggregate for all respondent clearing
agencies.\283\ Consequently, this results in a total one-time burden
imposed by proposed Rule 17Ad-22 of approximately $30,266,968 in the
aggregate for all respondent clearing agencies.\284\
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\282\ This figure was calculated as follows: ((Assistant General
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77
hours at $320 per hour) + (Computer Operations Department Manager
for 23 hours at $367 per hour) + (Senior Business Analyst for 23
hours at $232 per hour)) = $75,827 x 16 standards pursuant to
proposed Rules 17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8),
(9), (10), (11), (14), (15) and (c)(2) = $1,213,232 x 17 respondent
clearing agencies = $20,624,944) + (($75,827 x 8 standards pursuant
to proposed Rules 17Ad-22(b)(1), (2), (3), (4), (5), (6), (7) and
(c)(1) = $606,616 x 9 clearing agencies = $5,459,544) = $26,084,488.
See supra note 195.
\283\ This figure was calculated as follows: ((Chief Compliance
Officer for 40 hours at $423 per hour) + (Computer Department
Operations Manager for 40 hours at $367 per hour) + (Senior
Programmer for 20 hours at $304 per hour) = $37,680 x proposed Rules
17Ad-22(d)(2), (8), (9), (11), (15) and (d)(2)) = $226,080 x 17
respondent clearing agencies = $3,843,360 + ($37,680 x 9 clearing
agencies for proposed Rules 17Ad-22(b)(4) = $339,120) = $4,182,480.
See supra note 253.
\284\ This $30,266,968 figure is the sum of the one-time costs
calculated in note 282, $26,084,488, plus the one-time costs
calculated in note 283, $4,182,480.
---------------------------------------------------------------------------
The standards contained in Rule 17Ad-22 would also impose ongoing
costs on clearing agencies. For example, the proposed clearing agency
standards in proposed Rules 17Ad-22(b)(1), (2), (3), (4), (5), (6),
(7), (c)(1), (2), (d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10),
(11), (14) and (15) would collectively require respondent clearing
agencies to perform certain ongoing monitoring and enforcement
activities with respect to the policies and procedures the clearing
agency creates in response to the proposed standard. Accordingly, the
Commission preliminarily believes that those ongoing activities would
impose total annual costs of approximately $6,660,800 in the aggregate
for all respondent clearing agencies.\285\
---------------------------------------------------------------------------
\285\ This figure was calculated as follows: ((Compliance
Attorney for 60 hours at $320 per hour = $19,200 x 16 standards
pursuant to proposed Rules 17Ad-22(d)(1), (2), (3), (4), (5), (6),
(7), (8), (9), (10), (11), (12), (13), (14), (15) and (c)(2) =
$307,200 x 17 respondent clearing agencies = $5,222,400) + ($19,200
x 8 standards pursuant to proposed Rules 17Ad-22(b)(1), (2), (3),
(4), (5), (6), (7) and (c)(1) = $153,600 x 9 clearing agencies =
$1,382,400)) = $6,660,800. See supra note 196.
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[[Page 14529]]
Proposed Rule 17Ad-22(b)(4) would entail ongoing costs. To meet the
requirements of the proposed Rule 17Ad-22(b)(4) to provide for an
annual model validation, the Commission preliminarily believes clearing
agencies would hire a consulting firm that dedicates two consultants to
the project. The Commission estimates that this requirement would
impose an ongoing annual cost of approximately $432,000 for each
respondent, which corresponds to a total annual cost of approximately
$7,776,000 in the aggregate for all respondent clearing agencies.\286\
---------------------------------------------------------------------------
\286\ This figure was calculated as follows: 2 Consultants for
30 hours per week at $600 per hour = $36,000 per week x 12 weeks =
$432,000 per clearing agency x 9 clearing agencies = $7,776,000.
---------------------------------------------------------------------------
Proposed Rule 17Ad-22(b)(6) would impose ongoing costs on the nine
estimated clearing agencies that provide CCP services. The rule would
impose these ongoing costs to the extent that staff from the legal,
compliance, risk or other departments at the clearing agency providing
CCP services would be responsible for ensuring that the clearing
agency's membership standards do not require participants to maintain a
portfolio of a minimum size or to maintain a minimum transaction volume
threshold. This gate-keeping responsibility required in Rule 17Ad-
22(b)(6) is unlikely to require the complete work hours of a full-time
employee. Instead, as an ongoing cost related to preventing these
specific types of participation standards, the cost would likely
represent a fraction of total staff time and related costs. Based on
the Commission's experience regulating clearing agencies that provide
CCP services, it is unlikely that such a clearing agency would
frequently seek to change its membership requirements in a way that
would be inconsistent with proposed Rule 17Ad-22(b)(6). Therefore, the
fractional cost imposed on the clearing agency by the proposed rule
would likely be small compared to the clearing agency's overall cost of
paying the same staff to perform their other job responsibilities.
In addition, proposed Rule 17Ad-22(b)(7) may require a clearing
agency that provides CCP services to update its policies and procedures
relating to its net capital requirements if it determines that the
clearing agency should provide for a higher net capital requirement
(i.e., higher than $50 million) as a condition for membership. This
work would entail the preparation of potentially one new policy
annually reflecting the clearing agency's updated net capital
requirements. To meet these ongoing requirements of proposed Rule 17Ad-
22(b)(7), the Commission preliminarily estimates a total annual cost of
$682,443 in the aggregate for all respondent clearing agencies.\287\
The proposed rule's requirement that a clearing agency that provides
CCP services must provide a person with net capital equal to or greater
than $50 million with the ability to obtain membership at the clearing
agency (with any net capital requirements being scalable so that they
are proportional to the risks posed to the clearing agency by the
participant's activities) would also impose costs on the operations of
the clearing agency. Specifically, certain clearing agencies that
provide CCP services would likely need to revise their admission
criteria so that they are scalable and still provides for effective
measures to limit the risks that smaller members present to the
clearing agency. This would involve implementation and oversight of any
measures such as heightened margin requirements, limited access to
clearing services, portfolio and transaction requirements, or other
risk management measures used as part of the scalable membership
classes that would be designed by the clearing agency under the
proposed rule.
---------------------------------------------------------------------------
\287\ This figure was calculated as follows: ((Assistant General
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77
hours at $320 per hour) + (Computer Operations Department Manager
for 23 hours at $367 per hour) + (Senior Business Analyst for 23
hours at $232 per hour)) = $75,827 x 1 new policy annually in
response to Rule 17Ad-22(b)(7) = $75,827 x 9 respondent clearing
agencies = $682,443. See supra note 195.
---------------------------------------------------------------------------
The requirements in proposed Rules 17Ad-22(c)(1) and (2) would also
impose ongoing costs on clearing agencies. Under proposed Rule 17Ad-
22(c)(1), the requirement for a clearing agency that provides CCP
services to calculate and maintain a record of the financial resources
necessary to meet the requirements of proposed Rule 17Ad-22(b)(3), as
well as sufficient documentation to explain the methodology it uses to
compute such financial resource requirement, would require the efforts
of clearing agency compliance and operational personnel to create the
reports, properly document them and ensure the reports and supporting
documentation are properly record kept. To meet these ongoing
requirements of proposed Rule 17Ad-22(c)(1), the Commission
preliminarily estimates a total annual cost of $37,944.\288\
---------------------------------------------------------------------------
\288\ This figure was calculated as follows (Compliance Attorney
for 1 hour at $320 per hour) + (Computer Operations Department
Manager for 2 hours at $367)) = $1,054 per quarter x 4 quarters per
year = $4216 per year x 9 clearing agencies = $37,944.
---------------------------------------------------------------------------
Proposed Rule 17Ad-22(c)(2) would require each clearing agency to
post on its Web site an annual audited financial report. Each financial
report would have to: (i) be a complete set of financial statements of
the clearing agency for the most recent two fiscal years and be
prepared in accordance with U.S. GAAP, except that for a clearing
agency that is a corporation or other organization incorporated or
organized under the laws of any foreign country the financial
statements may be prepared according to U.S. GAAP or IFRS as issued by
the International Accounting Standards Board; (ii) be audited in
accordance with standards of the Public Company Accounting Oversight
Board by a registered public accounting firm that is qualified and
independent in accordance with Rule 2-01 of Regulation S-X (17 CFR
210.2-01); and (iii) include a report of the registered public
accounting firm that complies with paragraphs (a) through (d) of Rule
2-02 of Regulation S-X (17 CFR 210.2-02). This requirement would
necessitate work hours of compliance personnel and finance personnel at
the clearing agency to compile relevant data, organize and analyze that
data, and then post it to the clearing agency's Web site consistent
with the rule. The requirement would also require the services of a
registered public accounting firm. The Commission estimates those
services would cost approximately $500,000 annually. Therefore, to meet
the ongoing requirements of proposed Rule 17Ad-22(c)(2) the Commission
estimates a total annual cost of approximately $10,239,984 in the
aggregate for all respondent clearing agencies.\289\
---------------------------------------------------------------------------
\289\ This figure was calculated as follows: ((Senior Accountant
for 500 hours at $198 per hour) + (Senior Systems Analyst for 8
hours at $259 per hour) + (Compliance Attorney for 4 hours at $320)
= $102,352 + $500,000 for independent public accounting services =
$602,352 x 17 respondent clearing agencies = $10,239,984. See supra
notes 192 and 193.
---------------------------------------------------------------------------
Consequently, this results in a total, annual burden imposed by
proposed Rule 17Ad-22 of approximately $25,397,171.\290\
---------------------------------------------------------------------------
\290\ This $25,397,171 figure is the sum of the aggregate annual
costs estimated in note 285, $6,660,800, plus the aggregate annual
cost estimated in note 286, $7,776,000, plus the aggregate cost
estimated in note 287, $682,443, plus the aggregate annual cost
estimated in note 288, $37,944, plus the aggregate annual cost
estimated in note 289, $10,239,984.
---------------------------------------------------------------------------
Recent assessments of the registered U.S. clearing agencies support
the conclusion that these entities generally meet or exceed analogous
standards of operation and governance to those that are contained
within Rule 17Ad-22. Those findings support a view that the
[[Page 14530]]
requirements of proposed Rule 17Ad-22 would not be likely to require
the clearing agencies to build new infrastructure or modify operations
to continue to meet the standards.\291\ The Commission's oversight of
the entities clearing CDS pursuant to the CDS Clearing Exemption Orders
forms the basis for a similar belief that no associated start-up costs
would be imposed because those entities already represent through the
CDS Clearing Exemption Orders that they meet the CPSS-IOSCO standards
for central counterparties, which impose similar requirements to those
contained in proposed Rule 17Ad-22.
---------------------------------------------------------------------------
\291\ See generally International Monetary Fund, Publication of
Financial Sector Assessment Program Documentation--Detailed
Assessment of Observance of the National Securities Clearing
Corporation's Observance of the CPSS-IOSCO Recommendations for
Central Counterparties 4-29 (2010), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf; International Monetary Fund,
Publication of Financial Sector Assessment Program Documentation--
Detailed Assessment of Observance of the Depository Trust Company's
Observance of the CPSS-IOSCO Recommendations for Securities
Settlement Systems 4-40 (2010), available at http://www.imf.org/external/pubs/ft/scr/2010/cr10128.pdf.
---------------------------------------------------------------------------
B. Dissemination of Pricing and Valuation Information by Security-Based
Swap Clearing Agencies That Perform Central Counterparty Services
The Commission is proposing new Rule 17Aj-1 which would require
every security-based swap clearing agency that performs CCP services to
make available to the public all end-of-day settlement prices and any
other prices with respect to security-based swaps that it may establish
to calculate mark-to-market \292\ margin requirements for its
participants. Proposed Rule 17Aj-1 would also require security-based
swap clearing agencies that perform CCP services to make available to
the public any other pricing or valuation information with respect to
security-based swaps that it otherwise publishes or makes available to
its participants. Under the proposed rule, this information is not
required to be made available to the public free of charge. Instead, it
must be provided to the public on terms that are fair, reasonable and
not unreasonably discriminatory.
---------------------------------------------------------------------------
\292\ See supra note 91 (explaining the specific meaning of
``mark-to-market'' in the context of the margin practices of
security-based swap clearing agency margin practices).
---------------------------------------------------------------------------
1. Benefits
Proposed Rule 17Aj-1 would provide a publicly available source of
pricing and valuation information for pricing and valuation in the
security-based swap markets. The Commission recognizes that other
market mechanism created under the Dodd-Frank Act, such as security-
based swap data repositories and security-based swap execution
facilities, will also generate security-based swap pricing data. Under
the Dodd-Frank Act, all security-based swap transactions are required
to be reported to a security-based swap data repository, or, if such
data repository does not exist, to the Commission.\293\ Consequently,
security-based swap data repositories would consolidate post-trade
information about security-based swaps that the Commission
preliminarily believes would be helpful for analyzing the security-
based swap market as a whole and identifying its risks.\294\ Similarly,
security-based swap execution facilities will provide important pre-
trade information about security-based swaps.
---------------------------------------------------------------------------
\293\ See Public Law 111-203, Sec. Sec. 763(i) and 766(a)
(adding Exchange Act Sections 13(m)(1)(G) and 13A(A)(1),
respectively). The Dodd-Frank Act amends the CEA to provide for a
similar regulatory framework with respect to transactions in swaps
regulated by the CFTC.
\294\ See Exchange Act Release No. 63347 (November 19, 2010), 75
FR 77306 (December 10, 2010) (discussing in Section II, Role,
Regulation, and Business Models of SDRs, that the enhanced
transparency provided by an SDR is important to help regulators and
others monitor the build-up and concentration of risk exposures in
the security-based swaps market).
---------------------------------------------------------------------------
However, the Commission preliminarily believes that pricing and
valuation information generated by clearing agencies would add value
beyond pre- and post-trade pricing information. Rather than basing risk
management of clearance and settlement on pre- or post- trade pricing
that may be stale, or may be inappropriate to facilitate a clearing
agency's risk management practices for other reasons, clearing agencies
frequently generate their own prices for security-based swaps, either
through consensus pricing or pricing models. Those prices are then used
to inform the clearing agency's margin requirements for its
participants and the risk management of the clearing facility.
End-of-day pricing information is pricing during the life of a
security-based swap that is not otherwise available from pre- and post-
trade market sources--for instance from a security-based swap execution
facility or security-based swap data repository. Therefore, the
Commission preliminarily believes public availability of the end-of-day
pricing information, as well as any other pricing information the
security-based swap clearing agency publishes or distributes with
respect to security-based swaps can provide helpful transparency to
market participants about the value of similar security-based swap
positions they may hold. Accordingly, the Commission preliminarily
believes that requiring the information to be made publicly available
on terms that are fair, reasonable and not unreasonably discriminatory
improves fairness, efficiency, and market competition by providing
availability to data that may otherwise be difficult for some market
participants to obtain.
2. Costs
The proposed rule requiring dissemination of pricing and valuation
information would impose initial and ongoing costs on security-based
swap clearing agencies. To establish the necessary pricing and
valuation infrastructure to satisfy Rule 17Aj-1, security-based swap
clearing agencies that perform CCP services would bear the cost of
establishing the applicable infrastructure capabilities. The Commission
notes that entities providing CCP services for security-based swaps are
currently required by the CDS Clearing Exemption Orders to disseminate
pricing and valuation information.
As noted above in section V.D.2., based on staff conversations with
industry representatives already subject to similar requirements under
the CDS Clearing Exemption Orders, the Commission preliminarily
estimates that the one-time burden for a security-based swap clearing
agency that performs CCP services to comply with the requirements of
proposed Rule 17Aj-1 would only involve adjustments to computing
systems required as part of registration. The Commission estimates that
for a clearing agency to adjust its systems beyond the specifications
associated with registration would impose a one-time cost of
approximately $37,680 on each respondent clearing agency, corresponding
to a total one-time aggregate cost imposed on all respondent clearing
agencies of approximately $226,080.\295\
---------------------------------------------------------------------------
\295\ This figure was calculated as follows: ((Chief Compliance
Officer for 40 hours at $423) + (Computer Operations Department
Manager for 40 hours at $367) + (Senior Programmer for 20 hours at
$304)) = $37,680 dollars x 6 respondent clearing agencies =
$226,080. See supra note 253.
---------------------------------------------------------------------------
To meet the requirements of the proposed rule, security-based swap
clearing agencies that perform CCP services would have a continuous
responsibility to make the relevant pricing and valuation information
available. The Commission estimates this imposes an ongoing annual
aggregate burden of $22,020 for each respondent, which corresponds to
an
[[Page 14531]]
ongoing aggregate annual cost of $132,120 for all respondent clearing
agencies.\296\
---------------------------------------------------------------------------
\296\ This figure was calculated as follows: Computer Operations
Department Manager for 60 hours at $367 dollars per hour = $22,020 x
6 security-based swap clearing agencies = $132,120. See supra note
254.
---------------------------------------------------------------------------
C. Clearing Agency Policies and Procedures To Protect the
Confidentiality of Trading Information of Clearing Agency Participants
Proposed Rule 17Ad-23 would require each registered clearing agency
to establish, maintain and enforce written policies and procedures
designed to protect the confidentiality of any and all transaction
information that the clearing agency receives. Such transaction
information may include, but is not limited to, trade data, position
data, and any non-public personal information about a clearing agency
member or participant or any of its members or participant's customers.
The proposed rule also provides that the required policies and
procedures shall include, but are not limited to, (a) limiting access
to confidential trading information of clearing members to those
employees of the clearing agency who are operating the system or
responsible for its compliance with any other applicable laws or rules
and (b) standards controlling employees and agents of the clearing
agency trading for their personal benefit or the benefit of others.
1. Benefits
The proposed standards are intended to promote implementation of
adequate measures taken by a clearing agency to safeguard data, which
can increase market participants' confidence in the safety and
reliability of a clearing agency. Trade data stored by a clearing
agency should be protected from loss, leakage, unauthorized access and
other processing risks. It is necessary for a clearing agency to apply
information security and system integrity objectives to its own
operations to protect trade data during transmission and dissemination.
These protections for trade data benefit participants by helping to
ensure, for instance, that participant trade data is not leaked to
other market participants who may attempt to use that information to
front run participant trades or misappropriate it in other ways.
Protections for trade data by a clearing agency also generate the
benefit to participants of promoting the confidence among participants
and their customers that use of a clearing agency to clear and settle
trades will not result in economic or reputational harm to the clearing
agency's users. This, in turn, promotes overall marketplace confidence
in the clearance and settlement system for securities transactions.
2. Costs
Proposed Rule 17Ad-23 would impose costs on a clearing agency to
establish procedures to protect the confidentiality of trading
information of participants. However, the entities providing CCP
services for security-based swaps pursuant to the CDS Clearing
Exemption Orders already maintain and enforce safeguards to protect the
confidentiality of trading information of participants as part of those
orders. While the Commission notes that those respondents may not need
to make additional, one-time changes to meet the requirements of
proposed Rule 17Ad-23, the Commission is assuming for the purpose of
this cost-benefit analysis that proposed Rule 17Ad-23 would impose one-
time costs on them. As discussed above in section V.D.3., based on
staff discussions with industry representatives already subject to
similar requirements under the CDS Clearing Exemption Orders, the
Commission has estimated the burdens and related costs of these
requirements for clearing agencies.
The Commission does anticipate the rule would impose one-time costs
at the remaining six clearing agencies related to the coordinated
research and development costs between compliance, legal, operational,
and information technology staff. Protecting confidential information
in compliance with the requirements of the proposed rule would likely
necessitate drawing on expertise and knowledge from each of these
areas. The number of employees and number of employee hours required to
deliver the necessary information could vary slightly between clearing
agencies given that clearing agencies may divide the skill sets of
their employees differently. However, for a clearing agency to create
policies and procedures protecting the confidentiality of trading
information of participants, the Commission believes the rule would
impose a one-time cost on each clearing agency of approximately
$227,290, corresponding to an aggregate one-time cost to all respondent
clearing agencies of approximately $3,863,930.\297\
---------------------------------------------------------------------------
\297\ This figure was calculated as follows ((Chief Compliance
Officer for 210 hours at $423 per hour) + (Computer Operations
Department Manager for 180 hours at $367 per hour) + (Senior
Programmer for 180 hours at $304 per hour) + (Risk Management
Specialist for 40 hours at $192 per hour) + ($10,000 software
costs)) = $227,290 x 17 respondent clearing agencies = $3,863,930.
See supra note 256.
---------------------------------------------------------------------------
The rule would also impose ongoing costs associated with storing
confidential data in the form and manner prescribed by the clearing
agency's policies and procedures, which would be designed to control
access to that information. Such costs are likely to include monitoring
and testing of the integrity of the access controls on the data and
potentially updating those controls as new technology becomes available
or as the clearing agency modifies the safeguarding requirements within
the policies and procedures. The Commission believes these
responsibilities would impose an ongoing annual cost per clearing
agency of approximately $56,942, corresponding to an annual aggregate
cost to all clearing agencies of approximately $7,990,544.\298\
---------------------------------------------------------------------------
\298\ This figure was calculated as follows: Compliance Attorney
at 4 hours per business day x 260 business days per year = 1,040
hours per year at $423 per hour + ((Computer Operations Department
Manager for 40 hours per year at $367 per hour) + (Senior Programmer
for 40 hours per year at $304 per hour) + (Senior Risk Management
Specialist at 8 hours per year at $409 per hour)) = $470,032 x 17
respondent clearing agencies = $7,990,544. See supra note 258.
---------------------------------------------------------------------------
D. Exemption From Clearing Agency Definition
The Commission is proposing new Rule 17Ad-24 which would exempt
from the definition of clearing agency, as defined in Section
3(a)(23)(A) of the Exchange Act, certain registered security-based swap
dealers and security-based swap execution facilities.
1. Benefits
The proposed rule described in this section would provide for the
exclusion of certain registered security-based swap dealers and
registered security-based swap execution facilities from the definition
of a clearing agency. The proposed rule is intended to avoid subjecting
these entities, where appropriate, to multiple registrations when doing
so would impose overlapping or duplicative requirements with marginal
benefits or no benefits to safeguarding securities and funds and
protecting investors.
2. Costs
The Commission anticipates any costs associated with the proposed
rule are likely to be minimal. Registered security-based swap dealers
and registered security-based swap execution facilities that perform
certain limited clearing agency functions could rely on the proposed
exemption upon determining that their clearing agency
[[Page 14532]]
functions are within the scope of the rule.
E. Amendment of 17Ab2-1 Registration of Clearing Agencies
Proposed Rule 17Ab2-1 would provide for amendments to Section
17Ab2-1 of the Exchange Act and extends certain timeframes associated
with the registration of clearing agencies.
1. Benefits
A modernized temporary registration process can serve as a useful
tool by giving the Commission the option to examine a clearing agency
after it becomes operational, but in advance of its registration being
final. For example, a newly formed security-based swap clearing agency
may only be able to provide materials regarding its anticipated
activities when completing its CA-1 registration form. However, there
may be value in examining the security-based swap clearing agency once
it becomes operational. This has the benefit of informing the
Commission by observations made through examinations and/or monitoring
of active operations.
2. Costs
The amendments to the Rule 17Ab2-1 relate specifically to the
operations of the Commission and the timing of its ability to grant
temporary registrations for clearing agencies. As a result, the
Commission preliminarily believes that the proposed amendments to Rule
17Ab2-1 are unlikely to impose costs to clearing agencies other than
those that currently exist.
F. Procedures To Identify and Address Conflicts of Interest
Proposed Rule 17Ad-25 would require registered clearing agencies to
establish, implement, maintain and enforce written policies reasonably
designed to identify and address existing or potential conflicts of
interest and minimize conflicts of interest in decision-making at the
clearing agency.
1. Benefits
Requiring a clearing agency to create written policies and
procedures designed to identify conflicts of interest would help a
clearing agency evaluate its particular organization and activities and
determine areas that might undermine the clearing agency's core
business of clearing and settling securities transactions. A documented
plan provides a clear set of guidelines that can focus the clearing
agency's evaluation and ensure consistency in the way those evaluations
are performed. Similarly, if conflicts are identified, the policies and
procedures offer a standard method of approaching those conflicts to
make sure they are addressed. The procedures would also provide a
documented plan against which the Commission could evaluate a clearing
agency's efforts to mitigate conflicts and provide the Commission with
a better understanding of those areas of operation and organization
about which a clearing agency may be particularly concerned.
2. Costs
Creating written policies and procedures under proposed Rule 17Ad-
25 that are reasonably designed to identify and address conflicts of
interest would necessitate an evaluation by each clearing agency of the
areas in its operation that are likely to be susceptible to conflicts
of interest. This review is an exercise likely to require collaboration
between the board of directors of the clearing agency and senior
management given that many of the potential conflicts are likely to
revolve around the participant admissions and voting rights practices
of the clearing agency. After the review, the Commission anticipates
that the compliance or legal staff of the clearing agency would be
assigned to draft policies and procedures.
As discussed in section V.D.4., the Commission preliminarily
believes that there are analogous policies and procedures requirements
for Regulation NMS and in the proposed requirements for security-based
swap data repositories that are informative of the burdens and related
costs to clearing agencies under proposed Rule 17Ad-25. The Commission
believes that the one-time cost to research and create the policies and
procedures would be approximately $191,654 for each clearing agency,
corresponding to a one-time aggregate cost to all clearing agencies of
approximately $3,258,118.\299\ Costs would also be incurred by the
clearing agency to monitor and enforce the policies and procedures. The
Commission preliminarily believes this would impose an annual cost of
approximately $38,400 per clearing agency, corresponding to an annual
aggregate burden to all clearing agencies of approximately
$652,800.\300\
---------------------------------------------------------------------------
\299\ This figure was calculated as follows: ((Assistant General
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77
hours at $320 per hour) + (Computer Operations Department Manager
for 23 hours at $367 per hour) + (Senior Business Analyst for 23
hours at $232 per hour)) = $75,827 x 2 policies and procedures +
$40,000 in one-time outside legal costs = $191,654 x 17 respondent
clearing agencies = $3,258,118. See supra notes 261 and 262.
\300\ This figure was calculated as follows: Compliance Attorney
for 60 hours at $320 per hour = $19,200 x 2 policies and procedures
= $38,400 x 17 respondent clearing agencies = $652,800. See supra
note 263.
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G. Standards for Board or Board Committee Directors
Proposed Rule 17Ad-26 would set forth governance standards that
clearing agencies would be required to establish with respect to their
board members and board committee directors. These standards would
include at least the following areas: (i) A clear articulation of the
roles and responsibilities of directors serving the clearing agency's
board and any board committees; (ii) director qualifications providing
criteria for expertise in the securities industry, clearance and
settlement of securities transactions, and financial risk management;
(iii) disqualifying factors concerning serious legal misconduct,
including violations of the Federal securities laws; and (iv) policies
and procedures for the periodic review by the board or a board
committee of the performance of its individual members.
1. Benefits
Clearing agencies are at the heart of the settlement process.
Moreover, because their activities are subject to significant economies
of scale, many are sole providers of clearing and settlement services
to the market they serve. Therefore, their performance is a critical
determinant of the safety and efficiency of those markets. No single
set of governance arrangements is appropriate for all clearing agencies
within the various securities markets and regulatory schemes. However,
an effectively governed clearing agency should meet certain key minimum
requirements. Among these are delivering sound risk management;
ensuring a clear separation between reporting lines for risk management
and other clearing agency operations, meeting public interest
requirements, identifying those principally responsible for achieving
the clearing agencies governance objectives, and disclosing the extent
to which these objectives have been met.
Requiring registered clearing agencies to establish standards for
their board and board committee members helps to ensure that well-
qualified individuals contribute to effective governance of a clearing
agency. Board members who can provide guidance by drawing on expertise
in the securities industry, clearance and settlement, and risk
management are well positioned to
[[Page 14533]]
make decisions that account for the positions of the various
participants in the market the clearing agency serves as well as to
balance those perspectives with the goals of stability and efficiency
of the clearing agency. In the interest of promoting informed and
balanced decision making in governance, requiring each clearing agency
to establish governance standards that include disqualifying factors
concerning serious legal misconduct, including violations of the
Federal securities laws, would help clearing agencies evaluate whether
persons who have been found to have violated the securities laws, or
other similar laws or statutes, may not be fit to serve on the clearing
agency's board or board committees.
Proposed Rule 17Ad-26 would also benefit the clearing agency and
its participants by creating a degree of certainty in the role and
responsibility of each director and in defining instances appropriate
for removal of a director. The requirement for a clear articulation of
the role and responsibility of each director focuses the governance
resources of the clearing agency and provides commonly understood
boundaries with respect to what is expected of each director. Clearly
articulating those expectations can help the directors understand how
to make individual contributions to the governance of the clearing
agency as well as the ways in which they are expected to work with one
another to govern the clearing agency effectively.
Finally, requiring clearing agencies to establish policies and
procedures for the periodic review by the board or a board committee of
the performance of its individual members would support prompt and
accurate clearance and settlement because directors play a vital role
in the decision-making processes of the clearing agency. These reviews
would promote focused analysis on the contributions that directors make
to the clearing agency and how those contributions are particularly
valuable or could be adjusted or improved to better support the
clearing agency's ability to operate in effectively.
2. Costs
Proposed Rule 17Ad-26 would set forth governance standards
applicable to a clearing agency's board members and board committee
directors. The rule would require clearing agencies to adopt procedural
frameworks that inform the governance of the clearing agency.
Proposed Rule 17Ad-26 would require a clearing agency to incur
research and development costs associated with creating standards for
its board members and board committee members. The Commission
anticipates that there would likely need to be a coordinated effort
between different business units within a clearing agency to develop
these standards. As discussed in section V.D.5., the Commission
preliminarily believes that there are analogous policies and procedures
requirements for Regulation NMS and in the proposed requirements for
security-based swap data repositories that are informative of the
burdens and related costs for clearing agencies under proposed Rule
17Ad-26. The Commission believes that the one-time cost to a clearing
agency imposed by the rule would be approximately $95,827,
corresponding to a one-time aggregate cost to all clearing agencies of
approximately $1,629,059.\301\
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\301\ This figure was calculated as follows: ((Assistant General
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77
hours at $320 per hour) + (Computer Operations Department Manager
for 23 hours at $367 per hour) + (Senior Business Analyst for 23
hours at $232 per hour)) = $75,827 + $20,000 in one-time outside
legal costs = $95,827 x 17 respondent clearing agencies =
$1,629,059. See supra notes 266 and 267.
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Also involved would be the time of the clearing agency's employees
that would be devoted to maintaining application of the standards to
the incumbent directors, evaluating new directors and evaluating the
incumbent directors on an annual basis. For example, the Commission
preliminarily believes that a compliance attorney at a clearing agency
may be asked to update the clearing agency's standards to clearly
reflect the roles and responsibilities of the clearing agency's
directors. Similarly, time of a compliance attorney may be needed to
amend the standards with respect to director qualifications and
disqualifying factors for service if the clearing agency decides to
make changes to those aspects of its governance standards. The
Commission preliminarily believes that the annual cost to each clearing
agency would be approximately $19,200, corresponding to an annual
aggregate cost to all clearing agencies of approximately $326,000.\302\
In addition, the Commission preliminarily believes that third party
facilitation of the annual review of the incumbent board members would
also impose an ongoing annual cost of $6,000 for each respondent, which
corresponds to a total annual cost of $102,000 in the aggregate for all
respondent clearing agencies.\303\ An employee at the clearing agency
may be expected to help arrange and coordinate such a third-party
review of the clearing agency's board members, which would also factor
into the ongoing, annual cost to a clearing agency.
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\302\ This figure was calculated as follows: Compliance Attorney
for 60 hours at $320 per hour = $19,200 x 17 respondent clearing
agencies = $326,400. See supra note 268.
\303\ This figure was calculated as follows: One Consultant for
20 hours at $600 per hour = $12,000 x 17 respondent clearing
agencies = $204,000. See supra note 269.
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H. Proposed Rule 3Cj-1 Designation of Chief Compliance Officer
Proposed Rule 3Cj-1 would incorporate the requirements of Section
3Cj of the Exchange Act and impose additional requirements. Proposed
Rule 3Cj-1 would require each registered clearing agency to designate a
CCO. Under proposed Rule 3Cj-1(b), the CCO would be responsible for,
among other matters, establishing policies and procedures for the
remediation of non-compliance issues identified by the CCO and
establishing and following appropriate procedures for the prompt
handling of management response, remediation, retesting, and closing of
non-compliance issues.
Under Proposed Rule 3Cj-1(c), the CCO would also be responsible for
preparing and signing an annual compliance report that contains a
description of (i) the compliance of the clearing agency with respect
to the Federal securities laws and the rules and regulations
thereunder, and (ii) each policy and procedure of the clearing agency
of the compliance officer (including the code of ethics and conflict of
interest policies of the registered clearing agency). This compliance
report must accompany each appropriate financial report of the clearing
agency that is required to be furnished to the Commission pursuant to
the Exchange Act and the rules thereunder and include a certification
that, under penalty of law, the compliance report is accurate and
complete.
Additionally, the compliance report would be required to: (i) Be
submitted to the board of directors and audit committee (or equivalent
bodies) of the clearing agency promptly after the date of execution of
the required certification and prior to filing of the report with the
Commission; (ii) be filed with the Commission in a tagged data format
in accordance with the instructions contained in the EDGAR Filer
Manual, as described in Rule 301 of Regulation S-T; and (iii) be filed
with the Commission within 60 days after the end of the fiscal year
covered by such report.
1. Benefits
Proposed Rule 3Cj-1 is designed to ensure that clearing agencies
comply with Federal securities laws, including the Exchange Act and the
rules and
[[Page 14534]]
regulations promulgated thereunder. Although entities currently
operating as clearing agencies already may have CCOs in place, Section
3C(j) of the Exchange Act and proposed Rule 3Cj-1 would make it a
required practice.
The designation of a CCO would help ensure that each clearing
agency complies with the written policies and procedures it adopts. The
Commission expects requiring this safeguard would in turn facilitate
accurate data reporting by clearing agencies to the Commission and
improve the Commission's understanding of operations across all the
clearing agencies it oversees.
Proposed Rule 3Cj-1 would focus on creating a compliance structure
that is transparent and minimizes conflicts. Section 3C(j) of the
Exchange Act provides flexibility in permitting the CCO to report
either to the clearing agency's board or to a senior officer. Because
the Commission is concerned that a clearing agency's commercial
interests might discourage a clearing agency's CCO from making
forthright disclosure about compliance failures of the clearing agency,
the proposed rule would insulate the CCO from management pressures by
preventing a senior officer of a clearing agency from removing the CCO
or determining the CCO's compensation without the approval of a
majority of the clearing agency's board. This would provide the benefit
of aligning the CCO's position within the clearing agency with having
the CCO serve as a mechanism that freely encourages compliance.
The reliability of clearance and settlement services depends on the
integrity of a clearing agency's operations. As a result of the
proposed rule, the accuracy, reliability, and integrity of the clearing
agency would be less likely to be harmed by violations of the
securities laws because experience has shown that strong internal
compliance programs lower the likelihood of securities laws violations
and enhance the likelihood that any violations that do occur will be
detected and corrected. The designation of a CCO, who will, among other
things, monitor the clearing agency's compliance with the Exchange Act
(including Section 17A) and the rules and regulations thereunder and
with the relevant clearing agency policies and procedures, will help
ensure that each clearing agency complies with the written policies and
procedures it adopts.
2. Costs
As discussed in section V.D.6., the Commission preliminarily
believes that there are analogous policies and procedures requirements
for Regulation NMS and in the proposed requirements for security-based
swap data repositories that are informative of the burdens and related
costs for clearing agencies under proposed Rule 3Cj-1.
The establishment of a designated CCO and compliance with the
accompanying responsibilities of a CCO would impose certain costs on
each clearing agency. The Commission estimates that the average initial
costs associated with establishing policies and procedures for the
remediation of non-compliance issues identified by the CCO and
establishing and following appropriate procedures for the handling,
management response, remediation, retesting, and closing of non-
compliance issues would require approximately 420 hours of employee
time and approximately $40,000 for each clearing agency, and the
average ongoing paperwork cost would be 120 hours for each clearing
agency. In addition, each clearing agency would be required to hire a
CCO to comply with the proposed rules, at an annual cost of
approximately $761,400 for each clearing agency.\304\ Therefore, the
aggregate initial estimated dollar cost per year to each clearing
agency would be approximately $191,654 for each respondent clearing
agency, corresponding to an aggregate initial estimated cost to all
respondent clearing agencies of approximately $3,258,118 \305\ and the
aggregate ongoing estimated dollar cost per year would be approximately
$13,596,600 \306\ to comply with the proposed rule.
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\304\ This figure was calculated as follows: Chief Compliance
Officer for 1,800 hours at $423 per hour = $761,400. See supra note
279 regarding hourly rates for professionals taken from SIFMA's
Management & Professional Earnings in the Securities Industry 2010,
and modified by the Commission's staff.
\305\ This figure was calculated as follows: ((Assistant General
Counsel for 87 hours at $430 per hour) + (Compliance Attorney for 77
hours at $320 per hour) + (Computer Operations Department Manager
for 23 hours at $367 per hour) + (Senior Business Analyst for 23
hours at $232 per hour)) = $75,827 x 2 policies and procedures +
$40,000 in one-time outside legal costs = $191,654 x 17 respondent
clearing agencies = $3,258,118. See supra notes 275 and 277.
\306\ This figure was calculated as follows: Compliance Attorney
for 60 hours at $320 per hour = $19,200 x 2 policies and procedures
= $38,400 + $761,400 for the annual salary of a Chief Compliance
Officer = $799,800 x 17 respondent clearing agencies = $13,596,600.
See supra notes 276 and 304.
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The Commission estimates that the average ongoing paperwork cost
associated with preparing, signing and submitting annual compliance
reports pursuant to proposed Rule 3Cj-1(c)(iii) and (iv) would be 54
hours for each respondent clearing agency, corresponding to an annual
cost of $17,036 for each clearing agency and an aggregate annual cost
of $289,612 for all respondent clearing agencies.\307\
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\307\ This figure was calculated as follows: ((Compliance
Attorney for 50 hours at $320 per hour) + (Senior Systems Analyst
for 4 hours at $259 per hour)) = $17,036 x 17 respondent clearing
agencies = $289,612. See supra note 278.
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The Commission believes that currently-existing clearing agencies
already maintain compliance programs that are overseen by a CCO or an
individual who effectively serves as a CCO. In addition, such clearing
agencies may prepare compliance reports presented to senior management
and/or the clearing agency's board and board committees as part of
their current business practice. Therefore, the Commission expects that
clearing agencies with substantial commitments to compliance would
probably incur only minimal costs in connection with the adoption of
the proposed rule. However, for a clearing agency that does not already
prepare these types of annual compliance reports as part of its
compliance program, the requirements under proposed Rule 3Cj-1 would
likely require the labor of clearing agency staff and impose direct
costs on the clearing agency as described above.
I. Request for Comment
The Commission solicits comments on the benefits and costs related
to proposed Rules 17Ad-22, 17Ad-23, 17Ad-24, 17Ad-25, 17Ad-26, 17Ab2-1,
3Cj-1 and 17j-1. The Commission specifically requests comments on the
initial and ongoing costs associated with these rules and the costs
associated with any personnel that may be necessary to support
compliance with the rules. Are there additional costs that the
Commission should consider? Are there alternatives that the Commission
should consider? Do the estimates accurately reflect the costs that are
discussed? Please describe and, to the extent practicable, quantify the
costs associated with any comments that are submitted.
The Commission requests data to quantify the costs and the value of
the benefits discussed above. The Commission seeks estimates of these
costs and benefits, as well as any costs and benefits not addressed,
which may result from the adoption of the proposed rules. Commenters
should provide analysis and empirical data to support their views.
[[Page 14535]]
VII. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
Section 23(a) of the Exchange Act \308\ requires the Commission,
when making rules and regulations under the Exchange Act, to consider
the effect a new rule would have on competition. Section 23(a)(2)
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\309\ Section 3(f) of the Exchange Act
\310\ requires the Commission, when engaging in rulemaking that
requires it to consider whether an action is necessary or appropriate
in the public interest, to consider, in addition to the protection of
investors, whether the action would promote efficiency, competition,
and capital formation.
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\308\ 15 U.S.C. 78w(a).
\309\ 15 U.S.C. 78w(a)(2).
\310\ 15 U.S.C. 78c(f).
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The economic effects of the proposed rules were discussed in detail
in the costs and benefits section.\311\ These effects encompassed
effects on economic efficiency, competition, and capital formation.
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\311\ See discussion supra at Section VI. Consideration of Costs
and Benefits and accompanying subsections A. through E.
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To reiterate, proposed Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1
and the proposed amendments to Rule 17Ab2-1 would set standards for the
operation and governance of registered clearing agencies. These
proposed rules are intended to further the purposes of the Exchange Act
and to promote transparency and accountability consistent with the
stated goals of the Dodd-Frank Act.\312\
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\312\ See supra note 2 and accompanying text.
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Evidence from the securities markets suggests that clearing
agencies over the long-run tend to converge to a small number of
entities or even a single entity. In part, the Commission preliminarily
believes that this is because clearing activities are characterized by
high start-up costs and low marginal costs so that there are large
economies of scale. For example, currently all trades executed on the
eight U.S. based options exchanges are cleared at The Options Clearing
Corporation, and trades executed on the U.S. equity markets, composed
of exchanges, alternative trading platforms, and OTC trading, are
cleared at National Securities Clearing Corporation. In this same way,
it is possible that a single security-based swap clearing agency may
prove itself through market forces to be the most-efficient mechanism
to serve all security-based swap clearing participants by delivering
the lowest-cost services.
As noted above, the current market structure for clearing agencies
includes four registered clearing agencies and four entities operating
pursuant to the CDS Clearing Exemption Orders that are eligible to
become registered security-based swap clearing agencies pursuant to the
Deemed Registered Provision of the Dodd-Frank Act. In addition, the
Commission preliminarily believes there may be entities using
instrumentalities of interstate commerce to perform collateral
management, trade matching, Tear Up Services or similar security-based
swap lifecycle event services that consequently may trigger the
clearing agency registration requirement.\313\
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\313\ See supra note 101 and accompanying text (noting that this
list of services that may trigger clearing agency registration is
not exhaustive and urging every security-based swap lifecycle event
service provider to consider whether their function places them
within the clearing agency definition).
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The intent of the proposed rules concerning standards for clearing
agency operations and governance standards of clearing agencies is to
promote the prompt and accurate clearance and settlement of securities
transactions, including security-based swap transactions, by requiring
certain minimum standards at clearing agencies. The Commission
preliminarily believes that these requirements would ensure resilient
and cost-effective clearing agency operations as well as promote
transparent and effective clearing agency governance that would
consequently support confidence among market participants in clearing
agencies' ability to serve as efficient mechanisms for clearance and
settlement and to facilitate capital formation.
Additionally, the Commission believes that proposed Rule 17Aj-1
would support efficiency and the capital formation process by promoting
security-based swap price transparency so that market participants have
access to more information to value their security-based swap
positions. Under the Dodd-Frank Act, all security-based swap
transactions are required to be reported to a security-based swap data
repository, or, if no such data repository exists, to the
Commission.\314\ Consequently, security-based swap data repositories
consolidate post-trade information about security-based swaps. The
Commission preliminarily believes this is helpful for analyzing the
security-based swap market as a whole and identifying its risks.\315\
Similarly, security-based swap execution facilities provide important
pre-trade information about security-based swaps. In addition, there
are also financial services information firms that provide certain
security-based swap pricing data.
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\314\ See Public Law 111-203, Sec. Sec. 763(i) and 766(a)
(adding Exchange Act Sections 13(m)(1)(G) and 13A(A)(1),
respectively). The Dodd-Frank Act amends the CEA to provide for a
similar regulatory framework with respect to transactions in swaps
regulated by the CFTC.
\315\ See Exchange Act Release No. 63347 (November 19, 2010), 75
FR 77306 (December 10, 2010) (discussing in Section II, Role,
Regulation, and Business Models of SDRs, that the enhanced
transparency provided by an SDR is important to help regulators and
others monitor the build-up and concentration of risk exposures in
the security-based swap market).
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However, the Commission preliminarily believes that the pricing and
valuation information generated by security-based swap clearing
agencies adds value beyond these pre- and post-trade pricing sources as
well as information that may be available from firms that provide
financial services data. This is because proposed Rule 17Aj-1 would
require a security-based swap clearing agency that performs CCP
services to produce end-of-day settlement prices for all security-based
swaps that it clears. This end-of-day pricing information represents
pricing during the life of a security-based swap that is unique because
it is not available from pre- and post-trade sources.
The Commission also preliminarily believes that this information is
distinct from pricing information made available by firms that sell
certain security-based swap pricing date, because each clearing
agency's prices are generated daily while pricing information available
through other sources may rely on various methods to derive a price--
for instance an average of the bid and ask for a particular security-
based swap or an executed trade price that would otherwise be stale but
that has been adjusted through certain modeling practices to estimate a
current price. Therefore, the Commission preliminarily believes that
the public availability of these end-of-day settlement prices, as well
as any other pricing information the security-based swap clearing
agency publishes or distributes with respect to security-based swaps
can provide helpful transparency to market participants about the
current value of their security-based swap positions. Accordingly, the
Commission preliminarily believes that requiring this information to be
made publicly available on terms that are fair, reasonable and not
unreasonably discriminatory improves fairness, efficiency, and market
competition by
[[Page 14536]]
providing availability to pricing information that may otherwise be
difficult for some market participants to obtain and that, among other
benefits, would allow those market participants to be better-informed
about the fair value of their security-based swap positions and to try
to more efficiently manage the utility of those positions within their
portfolio.
The Commission requests comment on the possible effects of proposed
Rules 17Ad-22, 17Ad-23, 17Ad-24, 17Ad-25, 17Ad-26, 17Aj-1, 3Cj-1 and
the amendments to Rule 17Ab2-1 on efficiency, competition, and capital
formation. The Commission requests that commenters provide views and
supporting information regarding any such effects. The Commission
recognizes that such effects may be difficult to quantify. The
Commission seeks comment on possible anti-competitive effects of the
proposed rules not already identified. The Commission also requests
comments regarding the competitive effects of pursuing alternative
regulatory approaches that are consistent with Sections 763 and 805 of
the Dodd-Frank Act and Section 17A of the Exchange Act. In addition,
the Commission requests comment on how the other provisions of the
Dodd-Frank Act for which Commission rulemaking is required will
interact with and influence the competitive effects of the proposed
rules under proposed Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 and
the amendments to Rule 17Ab2-1.
VIII. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\316\, the Commission must advise the OMB as
to whether the proposed rule constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in: (i) An annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (ii)
a major increase in costs or prices for consumers or individual
industries; or (iii) significant adverse effect on competition,
investment or innovation. If a rule is ``major,'' its effectiveness
will generally be delayed for sixty days pending Congressional review.
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\316\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
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The Commission requests comment on the potential impact of proposed
Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 and the amendments to Rule
17Ab2-1 on the economy on an annual basis, any potential increase in
costs or prices for consumers or individual industries, and any
potential effect on competition, investment or innovation. Commenters
are requested to provide empirical data and other factual support for
their view to the extent possible.
IX. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \317\ requires the
Commission, in promulgating rules, to consider the impact of those
rules on small entities. Section 603(a) \318\ of the Administrative
Procedure Act,\319\ as amended by the RFA, generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules to determine the impact of such rulemaking on ``small
entities.'' \320\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule which, if adopted,
would not have a significant economic impact on a substantial number of
small entities.\321\
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\317\ 5 U.S.C. 601 et seq.
\318\ 5 U.S.C. 603(a).
\319\ 5 U.S.C. 551 et seq.
\320\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' The Commission has
adopted definitions for the term ``small entity'' for the purposes
of rulemaking in accordance with the RFA. These definitions, as
relevant to this proposed rulemaking, are set forth in Rule 0-10, 17
CFR 240.0-10.
\321\ See 5 U.S.C. 605(b).
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A. Registered Clearing Agencies
Proposed Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 and amended
Rule 17Ab2-1 would apply to all registered clearing agencies and set
standards for the operation and governance of such clearing agencies.
For the purposes of Commission rulemaking and as applicable to proposed
Rules 17Ad-22 through 17Ad-26, 17Aj-1, 3Cj-1 and amended Rule 17Ab2-1,
a small entity includes, when used with reference to a clearing agency,
a clearing agency that (i) compared, cleared and settled less than $500
million in securities transactions during the preceding fiscal year,
(ii) had less than $200 million of funds and securities in its custody
or control at all times during the preceding fiscal year (or at any
time that it has been in business, if shorter) and (iii) is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\322\ Under the standards adopted
by the Small Business Administration, small entities in the finance
industry include the following: (i) For entities engaged in investment
banking, securities dealing and securities brokerage activities,
entities with $6.5 million or less in annual receipts; (ii) for
entities engaged in trust, fiduciary and custody activities, entities
with $6.5 million or less in annual receipts; and (iii) funds, trusts
and other financial vehicles with $6.5 million or less in annual
receipts.\323\
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\322\ 17 CFR 240.0-10(d).
\323\ 13 CFR 121.201, Section 52.
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Based on the Commission's existing information about the clearing
agencies currently registered with the Commission and the four entities
clearing security-based swaps pursuant to the CDS Clearing Exemption
Orders,\324\ the Commission preliminarily believes that such entities
exceed the thresholds defining ``small entities'' set out above. While
other clearing agencies may emerge and become eligible to operate as
clearing agencies and while other security-based swap lifecycle event
service providers may be required to register as clearing agencies, the
Commission preliminarily does not believe that any such entities would
be ``small entities'' as defined in Exchange Act Rule 0-10.\325\
Furthermore, we believe it is unlikely that any clearing agencies,
security-based swap clearing agencies or security-based swap lifecycle
event services providers would have annual receipts of less than $6.5
million. Accordingly, the Commission believes that any registered
clearing agencies will exceed the thresholds for ``small entities'' set
forth in Exchange Act Rule 0-12.
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\324\ As of July 21, 2010, the following four clearing agencies
are eligible to clear security-based swaps as a result of having
been granted temporary exemptive orders to operate as clearing
agencies for CDS: CME, Eurex, ICE Trust and ICE Clear Europe.
\325\ See 17 CFR 240.0-10(d). The Commission based this
determination on its review of public sources of financial
information about existing CCPs serving the OTC derivatives market
and lifecycle event service providers.
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B. Certification
In the Commission's preliminary view, proposed Rules 17Ad-22
through 17Ad-26, 17Aj-1, 3Cj-1 and amended Rule 17Ab2-1 would not have
a significant economic impact on a substantial number of small entities
for the purposes of the RFA. For the reasons described above, the
Commission certifies that the proposed rules would not have a
significant economic impact on a substantial number of small entities.
The Commission requests comment regarding this certification. The
Commission requests that commenters describe the nature of any impact
on small entities, including clearing agencies, other counterparties to
security-based swap transactions and
[[Page 14537]]
security-based swap lifecycle event service providers, and provide
empirical data to support the extent of the impact.
X. Statutory Basis and Proposed Rule Text
Pursuant to the Exchange Act, particularly, Sections 17A(d)
thereof, 15 U.S.C. 78q-1(d), Sections 17A(i), 17A(j) and 3C(j) thereof,
Public Law 111-203, Sec. 763, 124 Stat. 1841 (2010), and Sections
30(b) and 30(c) thereof, 15 U.S.C. 78dd(b) and (c), and Section
805(a)(2) of the Clearing Supervision Act, 12 U.S.C. 5464(a)(2), the
Commission proposes: (1) New Rules 17Ad-22(a), 17Ad-22(d), 17Ad-23,
17Ad-24, 17Ad-25, 17Ad-26 and 3Cj-1, which would govern clearing
agencies; (2) new Rules 17Ad-22(b) and (c), which would govern clearing
agencies that perform central counterparty services; (3) new Rule 17Aj-
1, which would govern security-based swap clearing agencies that
provide central counterparty services; and (4) to amend Rule 17Ab2-1.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE
1. The authority citation for Part 240 is amended by adding the
following citations in numerical order to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-4, 78p, 78q, 78q-1,
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350; and 12
U.S.C. 5221(e)(3), unless otherwise noted.
* * * * *
Section 240.3Cj-1 is also issued under Pub. L. 111-203, Sec.
763, 124 Stat. 1841 (2010).
* * * * *
Sections 240.17Ad-22 through 240.17Ad-26 are also issued under
12 U.S.C. 5464(a)(2).
* * * * *
2. Section 240.3Cj-1 is added to read as follows:
Sec. 240.3Cj-1 Designation of chief compliance officer.
(a) In general. Each clearing agency shall designate a chief
compliance officer. The compensation and removal of the chief
compliance officer shall require the approval of a majority of the
clearing agency's board.
(b) Duties. The chief compliance officer shall:
(1) Report directly to the board of directors or to the senior
officer of the clearing agency;
(2) In consultation with its board, a body performing a function
similar thereto, or the senior officer of the registered clearing
agency, resolve any conflicts of interest that may arise;
(3) Be responsible for administering each policy and procedure that
is required to be established pursuant to section 3C of the Act (15
U.S.C. 78c-3) and the rules and regulations thereunder;
(4) Ensure compliance with the Act and the rules and regulations
thereunder;
(5) Establish policies and procedures for the prompt remediation of
any non-compliance issues identified by the chief compliance officer;
and
(6) Establish and follow appropriate procedures for the prompt
handling, management response, remediation, retesting, and closing of
non-compliance issues.
(c) Annual Reports--(1) In general. The chief compliance officer
shall annually prepare and sign a report that contains a description
of:
(i) The compliance of the clearing agency with respect to the
Federal securities laws and the rules and regulations thereunder; and
(ii) Each policy and procedure of the clearing agency of the
compliance officer (including the code of ethics and conflict of
interest policies of the registered clearing agency).
(2) Requirements. An annual compliance report under this section
shall:
(i) Accompany each appropriate financial report of the clearing
agency that is required to be furnished to the Commission pursuant to
the Act and the rules thereunder;
(ii) Include a certification that, under penalty of law, the
compliance report is accurate and complete;
(iii) Be submitted to the board of directors and audit committee
(or equivalent bodies) of the clearing agency promptly after the date
of execution of the required certification and prior to filing of the
report with the Commission; and
(iv) Be filed with the Commission in a tagged data format in
accordance with the instructions contained in the EDGAR Filer Manual,
as described in Rule 301 of Regulation S-T (17 CFR 232.301).
(v) Be filed with the Commission within 60 days after the end of
the fiscal year covered by such report.
(d) For purposes of this section, references to senior officer
shall include the chief executive officer, or other equivalent officer.
3. Section 240.17Ab2-1 is amended by revising paragraph (c) to read
as follows:
Sec. 240.17Ab2-1 Registration of clearing agencies.
* * * * *
(c)(1) The Commission, upon the request of a clearing agency or
upon the election of the Commission, may grant registration of the
clearing agency in accordance with sections 17A(b) and 19(a)(1) of the
Act for a specific period of time and may exempt, other than for
purposes of section 17A(g) of the Act, the registrant from one or more
of the requirements as to which the Commission is directed to make a
determination pursuant to paragraphs (A) through (I) of section
17A(b)(3) of the Act, provided that any such registration shall be
effective only for twenty-four months from the date the registration is
made effective (or such longer period as the Commission may provide by
order).
(2) In the case of any clearing agency registered in accordance
with paragraph (c)(1) of this section, not later than fifteen months
from the date such registration is made effective (or such longer
period as the Commission may provide by order) the Commission either
will grant registration in accordance with sections 17A(b) and 19(a)(1)
of the Act, without, as applicable, exempting the registrant from one
or more of the requirements as to which the Commission is directed to
make a determination pursuant to subparagraphs (A) through (I) of
section 17A(b)(3) of the Act or without limiting the duration of the
registration, or will institute proceedings in accordance with section
19(a)(1)(B) of the Act to determine whether registration should be
denied at the expiration of the registration granted in accordance with
paragraph (c)(1) of this section.
4. Section 240.17Ad-22 is added to read as follows:
Sec. 240.17Ad-22 Standards for clearing agencies.
(a) Definitions--(1) Central counterparty means a clearing agency
that interposes itself between the counterparties to securities
transactions, acting functionally as the buyer to every seller and the
seller to every buyer.
(2) Central securities depository services means services of a
clearing agency that is a securities depository as described in section
3(a)(23) of the Act.
[[Page 14538]]
(3) Participant as used in paragraphs (b)(3) and (d)(14) of this
section means that if a participant controls another participant or is
under common control with another participant then the affiliated
participants shall be collectively deemed to be a single participant
for purposes of that subparagraph.
(4) Normal market conditions as used in paragraphs (b)(1) and (2)
of this section means conditions in which the expected movement of the
price of cleared securities would produce changes in a clearing
agency's exposures to its participants that would be expected to breach
margin requirements or other risk control mechanisms only one percent
of the time.
(5) Net capital as used in paragraph (b)(7) of this section means
net capital as defined in Rule 15c3-1 under the Act for broker-dealers
or any similar risk adjusted capital calculation for all other
prospective clearing members.
(b) A clearing agency that performs central counterparty services
shall establish, implement, maintain and enforce written policies and
procedures reasonably designed to:
(1) Measure its credit exposures to its participants at least once
a day and limit its exposures to potential losses from defaults by its
participants in normal market conditions so that the operations of the
clearing agency would not be disrupted and non-defaulting participants
would not be exposed to losses that they cannot anticipate or control.
(2) Use margin requirements to limit its credit exposures to
participants in normal market conditions and use risk-based models and
parameters to set margin requirements and review them at least monthly.
(3) Maintain sufficient financial resources to withstand, at a
minimum, a default by the participant to which it has the largest
exposure in extreme but plausible market conditions; provided that a
security-based swap clearing agency shall maintain sufficient financial
resources to withstand, at a minimum, a default by the two participants
to which it has the largest exposures in extreme but plausible market
conditions.
(4) Provide for an annual model validation consisting of evaluating
the performance of the clearing agency's margin models and the related
parameters and assumptions associated with such models by a qualified
person who does not perform functions associated with the clearing
agency's margin models (except as part of the annual model validation)
and does not report to a person who performs these functions.
(5) Provide the opportunity for a person that does not perform any
dealer or security-based swap dealer services to obtain membership at
the clearing agency to clear securities for itself or on behalf of
other persons.
(6) Have membership standards that do not require that participants
maintain a portfolio of any minimum size or that participants maintain
a minimum transaction volume.
(7) Provide a person that maintains net capital equal to or greater
than $50 million with the ability to obtain membership at the clearing
agency, with any net capital requirements being scalable so that they
are proportional to the risks posed by the participant's activities to
the clearing agency; provided, however, that the clearing agency may
provide for a higher net capital requirement as a condition for
membership at the clearing agency if the clearing agency demonstrates
to the Commission that such a requirement is necessary to mitigate
risks that could not otherwise be effectively managed by other measures
and the Commission approves the higher net capital requirement as part
of a rule filing or clearing agency registration application.
(c) Record of financial resources and annual audited financial
report. (1) Each fiscal quarter (based on calculations made as of the
last business day of the clearing agency's fiscal quarter), or at any
time upon Commission request, a clearing agency that performs central
counterparty services shall calculate and maintain a record, in
accordance with Sec. 240.17a-1 of this chapter, of the financial
resources necessary to meet the requirements of paragraph (b)(3) of
this rule and sufficient documentation to explain the methodology it
uses to compute such financial resource requirement.
(2) Each clearing agency shall post on its Web site an annual
audited financial report. Each financial report shall:
(i) Be a complete set of financial statements of the clearing
agency for the most recent two fiscal years of the clearing agency and
be prepared in accordance with U.S. generally accepted accounting
principles, except that for a clearing agency that is a corporation or
other organization incorporated or organized under the laws of any
foreign country the financial statements may be prepared in accordance
with U.S. generally accepted accounting principles or International
Financial Reporting Standards as issued by the International Accounting
Standards Board;
(ii) Be audited in accordance with standards of the Public Company
Accounting Oversight Board by a registered public accounting firm that
is qualified and independent in accordance with Rule 2-01 of Regulation
S-X (17 CFR 210.2-01); and
(iii) Include a report of the registered public accounting firm
that complies with paragraphs (a) through (d) of Rule 2-02 of
Regulation S-X (17 CFR 210.2-02).
(d) Each clearing agency shall establish, implement, maintain and
enforce written policies and procedures reasonably designed to, as
applicable:
(1) Provide for a well founded, transparent, and enforceable legal
framework for each aspect of its activities in all relevant
jurisdictions.
(2) Require participants to have sufficient financial resources and
robust operational capacity to meet obligations arising from
participation in the clearing agency; have procedures in place to
monitor that participation requirements are met on an ongoing basis;
and have participation requirements that are objective, publicly
disclosed, and permit fair and open access.
(3) Hold assets in a manner whereby risk of loss or of delay in its
access to them is minimized; and invest assets in instruments with
minimal credit, market and liquidity risks.
(4) Identify sources of operational risk and minimize them through
the development of appropriate systems, controls, and procedures;
implement systems that are reliable, resilient and secure, and have
adequate, scalable capacity; and have business continuity plans that
allow for timely recovery of operations and fulfillment of a clearing
agency's obligations.
(5) Employ money settlement arrangements that eliminate or strictly
limit the clearing agency's settlement bank risks, that is, its credit
and liquidity risks from the use of banks to effect money settlements
with its participants; and require funds transfers to the clearing
agency to be final when effected.
(6) Be cost-effective in meeting the requirements of participants
while maintaining safe and secure operations.
(7) Evaluate the potential sources of risks that can arise when the
clearing agency establishes links either cross-border or domestically
to clear trades, and ensure that the risks are managed prudently on an
ongoing basis.
(8) Have governance arrangements that are clear and transparent to
fulfill the public interest requirements in section 17A of the Act
applicable to clearing agencies, to support the objectives of owners
and participants,
[[Page 14539]]
and to promote the effectiveness of the clearing agency's risk
management procedures.
(9) Provide market participants with sufficient information for
them to identify and evaluate the risks and costs associated with using
its services.
(10) Immobilize or dematerialize securities certificates and
transfer them by book entry to the greatest extent possible when the
clearing agency provides central securities depository services.
(11) Make key aspects of the clearing agency's default procedures
publicly available and establish default procedures that ensure that
the clearing agency can take timely action to contain losses and
liquidity pressures and to continue meeting its obligations in the
event of a participant default.
(12) Ensure that final settlement occurs no later than the end of
the settlement day; and require that intraday or real-time finality-be
provided where necessary to reduce risks.
(13) Eliminate principal risk by linking securities transfers to
funds transfers in a way that achieves delivery versus payment.
(14) Institute risk controls, including collateral requirements and
limits to cover the clearing agency's credit exposure to each
participant exposure fully, that ensure timely settlement in the event
that the participant with the largest payment obligation is unable to
settle when the clearing agency provides central securities depository
services and extends intraday credit to participants.
(15) State to its participants the clearing agency's obligations
with respect to physical deliveries and identify and manage the risks
from these obligations.
5. Section 240.17Ad-23 is added to read as follows:
Sec. 240.17Ad-23 Clearing agency policies and procedures to protect
the confidentiality of trading information of clearing agency
participants.
Each clearing agency shall establish, implement, maintain, and
enforce written policies and procedures reasonably designed to protect
the confidentiality of any and all transaction information that the
clearing agency receives. Such policies and procedures shall include,
but are not limited to:
(a) Limiting access to confidential trading information of clearing
members to those employees of the clearing agency who are operating the
system or responsible for its compliance with any other applicable laws
or rules; and
(b) Standards controlling employees and agents of the clearing
agency trading for their personal benefit or the benefit of others.
6. Section 240.17Ad-24 is added to read as follows:
Sec. 240.17Ad-24 Exemption from clearing agency definition for
certain registered securities based swap dealers and registered
security-based swap execution facilities.
A registered security-based swap dealer and a registered security-
based swap execution facility shall be exempt from inclusion in the
term clearing agency, as defined in section 3(a)(23)(A) of the Act,
where such registered security-based swap dealer or registered
security-based swap execution facility would be deemed to be a clearing
agency solely by reason of functions performed by such institution as
part of customary dealing activities or providing facilities for
comparison of data respecting the terms of settlement of securities
transactions effected on such registered security-based swap execution
facility, respectively, or solely by reason of acting on behalf of a
clearing agency or participant therein in connection with the
furnishing by the clearing agency of services to its participants or
the use of services of the clearing agency by its participants.
7. Section 240.17Ad-25 is added to read as follows:
Sec. 240.17Ad-25 Clearing agency procedures to identify and address
conflicts of interest.
Each clearing agency shall establish, implement, maintain and
enforce written policies and procedures reasonably designed to identify
and address existing or potential conflicts of interest. Such policies
and procedures must also be reasonably designed to minimize conflicts
of interest in decision making by the clearing agency.
8. Section 240.17Ad-26 is added to read as follows:
Sec. 240.17Ad-26 Standards for board or board committee members.
(a) Each clearing agency shall establish governance standards for
its board members and board committee members.
(b) Such standards shall address at least the following areas:
(1) A clear articulation of the roles and responsibilities of
directors serving on the clearing agency's board and any board
committees;
(2) Director qualifications providing criteria for expertise in the
securities industry, clearance and settlement of securities
transactions, and financial risk management;
(3) Disqualifying factors concerning serious legal misconduct,
including violations of the Federal securities laws; and
(4) Policies and procedures for the periodic review by the board or
a board committee of the performance of its individual members.
9. Section 240.17Aj-1 is added to read as follows:
Sec. 240.17Aj-1 Dissemination of pricing and valuation information by
security-based swap clearing agencies that perform services as a
central counterparty.
Each security-based swap clearing agency that performs services as
a central counterparty shall make available to the public, on terms
that are fair and reasonable and not unreasonably discriminatory, all
end-of-day settlement prices and any other prices with respect to
security-based swaps that the clearing agency may establish to
calculate mark-to-market margin requirements for its participants and
any other pricing or valuation information with respect to security-
based swaps as is published or distributed by the clearing agency to is
participants.
Dated: March 3, 2011.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-5182 Filed 3-15-11; 8:45 am]
BILLING CODE 8011-01-P