[Federal Register Volume 85, Number 17 (Monday, January 27, 2020)]
[Rules and Regulations]
[Pages 4800-4901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01065]
[[Page 4799]]
Vol. 85
Monday,
No. 17
January 27, 2020
Part II
Commodity Futures Trading Commission
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17 CFR Parts 1, 39, and 140
Derivatives Clearing Organization General Provisions and Core
Principles; Final Rule
Federal Register / Vol. 85 , No. 17 / Monday, January 27, 2020 /
Rules and Regulations
[[Page 4800]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 39, and 140
RIN 3038-AE66
Derivatives Clearing Organization General Provisions and Core
Principles
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
amending certain regulations applicable to registered derivatives
clearing organizations (DCOs). The amendments address certain risk
management and reporting obligations, clarify the meaning of certain
provisions, simplify processes for registration and reporting, and
codify existing staff relief and guidance, among other things. In
addition, the Commission is adopting technical amendments to certain
provisions, including certain delegation provisions, in other parts of
its regulations.
DATES: Effective date: The effective date for this final rule is
February 26, 2020.
Compliance date: DCOs must comply with the amendments to the rules
by January 27, 2021.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected]; Parisa Abadi, Associate Director, 202-
418-6620, [email protected]; Eileen R. Chotiner, Senior Compliance
Analyst, 202-418-5467, [email protected]; Brian Baum, Special Counsel,
202-418-5654, [email protected]; August A. Imholtz III, Special Counsel,
202-418-5140, [email protected]; Abigail S. Knauff, Special Counsel,
202-418-5123, [email protected]; Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581; Joe Opron, Special Counsel, 312-596-
0653, [email protected]; Division of Clearing and Risk, Commodity Futures
Trading Commission, 525 West Monroe Street, Suite 1100, Chicago, IL
60661.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Amendments to Part 1--General Regulations Under the Commodity
Exchange Act
A. Written Acknowledgment From Depositories--Sec. 1.20
B. Governance and Conflicts of Interest--Sec. Sec. 1.59, 1.63,
and 1.69
III. Amendments to Part 39--Subpart A--General Provisions Applicable
to DCOs
A. Definitions--Sec. 39.2
B. Procedures for Registration--Sec. 39.3
C. Procedures for Implementing DCO Rules and Clearing New
Products
IV. Amendments to Part 39--Subpart B--Compliance With Core
Principles
A. Fully Collateralized Positions
B. Compliance With Core Principles--Sec. 39.10
C. Financial Resources--Sec. 39.11
D. Participant and Product Eligibility--Sec. 39.12
E. Risk Management--Sec. 39.13
F. Treatment of Funds--Sec. 39.15
G. Default Rules and Procedures--Sec. 39.16
H. Rule Enforcement--Sec. 39.17
I. Reporting--Sec. 39.19
J. Public Information--Sec. 39.21
K. Governance Fitness Standards, Conflicts of Interest, and
Composition of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
L. Legal Risk--Sec. 39.27
V. Amendments to Part 39--Subpart C--Provisions Applicable to SIDCOs
and DCOs That Elect To Be Subject to the Provisions
A. Financial Resources for SIDCOs and Subpart C DCOs--Sec.
39.33
B. Risk Management for SIDCOs and Subpart C DCOs--Sec. 39.36
C. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec.
39.37
VI. Amendments to Appendix A to Part 39--Form DCO
VII. Amendments to Appendix B to Part 39--Subpart C Election Form
VIII. Amendments to Part 140--Organization, Functions, and
Procedures of the Commission
IX. Additional Comments
X. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
Section 5b(c)(2) of the Commodity Exchange Act (CEA) sets forth
core principles with which a DCO must comply in order to be registered
and to maintain registration as a DCO (DCO Core Principles),\1\ and
part 39 of the Commission's regulations implement the DCO Core
Principles. Subpart C of part 39 establishes additional standards for
compliance with the DCO Core Principles for those DCOs that have been
designated as systemically important (SIDCOs) by the Financial
Stability Oversight Council in accordance with Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act).\2\ The subpart C regulations are consistent with the Principles
for Financial Market Infrastructures (PFMIs), published by the
Committee on Payments and Market Infrastructures (CPMI) and the
Technical Committee of the International Organization of Securities
Commissions (IOSCO).\3\ Other DCOs may elect to opt-in to the subpart C
requirements (subpart C DCOs) in order to achieve status as a
qualifying central counterparty (QCCP).\4\
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\1\ 7 U.S.C. 7a-1.
\2\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376
(2010).
\3\ See CPMI-IOSCO, Principles for Financial Market
Infrastructures (Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
\4\ In July 2012, the Basel Committee on Banking Supervision,
the international body that sets standards for the regulation of
banks, published the ``Capital Requirements for Bank Exposures to
Central Counterparties'' (Basel CCP Capital Requirements), which
describes standards for capital charges arising from bank exposures
to central counterparties (CCPs) related to over-the-counter
derivatives, exchange-traded derivatives, and securities financing
transactions. The Basel CCP Capital Requirements create financial
incentives for banks, including their subsidiaries and affiliates,
to clear financial derivatives with CCPs that are prudentially
supervised in a jurisdiction where the relevant regulator has
adopted rules or regulations that are consistent with the standards
set forth in the PFMIs. Specifically, the Basel CCP Capital
Requirements introduce new capital charges based on counterparty
risk for banks conducting financial derivatives transactions through
a CCP. These incentives include (1) lower capital charges for
exposures arising from derivatives cleared through a QCCP, and (2)
significantly higher capital charges for exposures arising from
derivatives cleared through non-qualifying CCPs. A QCCP is defined
as an entity that (i) is licensed to operate as a CCP and is
permitted by the appropriate regulator to operate as such, and (ii)
is prudentially supervised in a jurisdiction where the relevant
regulator has established and publicly indicated that it applies to
the CCP, on an ongoing basis, domestic rules and regulations that
are consistent with the PFMIs. The failure of a CCP to achieve QCCP
status could result in significant costs to its bank customers.
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Since the part 39 regulations were adopted, Commission staff has
worked with DCOs to address questions regarding interpretation and
implementation of the requirements established in the regulations. In
May 2019, the Commission proposed certain changes to its part 39
regulations (Proposal) \5\ in order to enhance certain risk management
and reporting obligations, clarify the meaning of certain provisions,
simplify processes for registration and reporting, and codify staff
relief and guidance granted since the regulations were first adopted.
The Commission also proposed a few new requirements with respect to
default procedures and event-specific reporting.
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\5\ See Derivatives Clearing Organization General Provisions and
Core Principles, 84 FR 22226 (May 16, 2019).
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The Commission invited commenters to provide data and analysis
regarding any aspect of the proposed rulemaking and received a total of
14 substantive comment letters in response.\6\ After
[[Page 4801]]
considering the comments, the Commission is largely adopting the rules
as proposed, although there are a number of proposed changes that the
Commission has determined to either revise or decline to adopt. The
Commission believes that the rules it is adopting herein will provide
greater clarity and transparency for DCOs and DCO applicants and lead
to more effective DCO compliance and risk management generally.
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\6\ The Commission received comment letters submitted by the
following: Chris Barnard; Cboe Futures Exchange, LLC (CBOE); CME
Group, Inc. (CME); Eurex Clearing AG (Eurex); Futures Industry
Association (FIA) and International Swaps and Derivatives
Association (ISDA); Intercontinental Exchange, Inc. (ICE); LCH Group
(LCH); Managed Funds Association (MFA); Minneapolis Grain Exchange,
Inc. (MGEX); Nodal Clear, LLC (Nodal); North American Derivatives
Exchange, Inc. (Nadex); The Options Clearing Corporation (OCC);
Paolo Saguato, of the George Mason University Antonin Scalia Law
School; and Securities Industry and Financial Markets Association's
Asset Management Group (SIFMA AMG). All comments referred to herein
are available on the Commission's website, at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2985.
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In the discussion below, the Commission highlights topics of
particular interest to commenters and discusses comment letters that
are representative of the views expressed on those topics. The
discussion does not explicitly respond to every comment submitted;
rather, it addresses the most significant issues raised by the proposed
rulemaking and analyzes those issues in the context of specific
comments.
II. Amendments to Part 1--General Regulations Under the Commodity
Exchange Act
The Commission is adopting as proposed two amendments in part 1 of
its regulations in order to remove inapplicable provisions and to
clarify when certain requirements do not apply.
A. Written Acknowledgment From Depositories--Sec. 1.20
Regulation 1.20(d)(1) requires a futures commission merchant (FCM)
to obtain from each depository with which the FCM deposits futures
customer funds, a written acknowledgment that meets certain
requirements set forth in Sec. 1.20(d)(3) through (6). Regulation
1.20(d)(1) further provides, however, that an FCM is not required to
obtain a written acknowledgment from a DCO that has adopted rules that
provide for the segregation of customer funds in accordance with all
relevant provisions of the CEA and the Commission's rules and orders
thereunder. The Commission proposed to amend Sec. 1.20(d) to clarify
that the requirements listed in Sec. 1.20(d)(3) through (6) do not
apply to a DCO, or to an FCM that clears through that DCO, if the DCO
has adopted rules that provide for the segregation of customer funds.
The Commission also proposed to amend Sec. 1.20(d)(7) and (8) to
explicitly account for FCMs that deposit customer funds with a DCO and
thus are not required to obtain a written acknowledgment letter.
ICE, FIA, and ISDA supported the proposed changes, with FIA and
ISDA noting that clarifying the applicability of Sec. 1.20(d)(3)
through (6) avoids redundant information-sharing arrangements.
B. Governance and Conflicts of Interest--Sec. Sec. 1.59, 1.63, and
1.69
In 2011, the Commission removed and replaced Sec. 39.2, which
previously had exempted DCOs from all Commission regulations except for
those specified therein (Sec. 39.2 exemption).\7\ The Commission noted
that removal of the Sec. 39.2 exemption would subject DCOs to three
existing regulations (Sec. Sec. 1.59 (activities of self-regulatory
organization employees, governing board members, committee members, and
consultants); 1.63 (service on self-regulatory organization governing
boards or committees by persons with disciplinary histories); and 1.69
(voting by interested members of self-regulatory organization governing
boards and various committees)) that were expected to be superseded by
other regulations the Commission had proposed.\8\
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\7\ See Risk Management Requirements for Derivatives Clearing
Organizations, 76 FR 3698, 3714 (Jan. 20, 2011) (proposed rule). The
current Sec. 39.2 sets forth definitions of terms used in part 39.
\8\ Id.
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However, the Commission did not adopt those superseding
regulations, and Sec. Sec. 1.59, 1.63, and 1.69 became applicable to
DCOs with the removal of the Sec. 39.2 exemption. Therefore, the
Commission proposed to restore DCOs' exemption from Sec. Sec. 1.59,
1.63, and 1.69 by removing ``clearing organization'' from the
definition of ``self-regulatory organization'' in each of those
regulations. The Commission also proposed to amend Sec. 1.64 to remove
language that the amendments to the other provisions would render
unnecessary. The Commission did not receive any comments on the
proposed changes to Sec. Sec. 1.59, 1.63, 1.64, and 1.69.
III. Amendments to Part 39--Subpart A--General Provisions Applicable to
DCOs
A. Definitions--Sec. 39.2
Regulation 39.2 sets forth definitions applicable to terms used in
part 39 of the Commission's regulations. After Sec. 39.2 was adopted,
the Commission adopted definitions for some of the same terms that
apply in other Commission regulations. The Commission is adopting
changes to five definitions in Sec. 39.2 in order to maintain
consistency with terms defined elsewhere in Commission regulations and
to provide clarity with respect to the use of these terms.
1. Business Day
The Commission is removing Sec. 39.19(b)(3), which defines
``business day,'' and moving the definition of ``business day'' to
Sec. 39.2 to make clear that it applies wherever the term is used in
part 39. The Commission is also clarifying that the term ``Federal
holiday'' in the ``business day'' definition refers to the schedule of
U.S. federal holidays established under 5 U.S.C. 6103, and adding ``any
holiday on which a [DCO] and its domestic financial markets are
closed'' rather than ``foreign holiday,'' as originally proposed, to
the list of exceptions to the definition of ``business day.''
The Commission received two comments on the proposed changes to the
definition of ``business day.'' CME suggested substituting ``market
holiday'' for ``foreign holiday'' in the definition of ``business day''
to also recognize days that are not Federal holidays when U.S. markets
are closed. ICE supported the Commission defining ``foreign holiday''
and adding the term to the list of exceptions to the definition of
``business day,'' but also noted potential conflicts between the
proposed definition of ``business day'' in Sec. 39.2 and the
definition of ``business day'' in Sec. Sec. 1.3 and 39.19(b)(3).
The Commission agrees that any day on which markets are closed
should not be considered a business day, and therefore is adopting the
proposed definition of ``business day'' with the substitution of ``any
holiday on which a [DCO] and its domestic financial markets are
closed'' for ``foreign holiday,'' to encompass both foreign and U.S.
market holidays.
In proposing to define ``business day'' in Sec. 39.2, the
Commission also proposed to remove the definition in Sec. 39.19(b)(3),
to avoid any conflict between those provisions. The Commission is
removing the definition of ``business day'' from Sec. 39.19(b)(3). The
Commission recognizes that the definition of ``business day'' in Sec.
39.2 differs slightly from the definition of ``business day'' in Sec.
1.3, but notes that the definition in Sec. 39.2 is meant specifically
for application to part 39.
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2. Customer, and Customer Account or Customer Origin
The Commission is removing the definition of ``customer'' and
modifying the definition of ``customer account or customer origin'' in
Sec. 39.2 because those terms were defined in Sec. 1.3 after Sec.
39.2 was adopted.
ICE commented that, for DCOs organized outside of the United
States, references to customer accounts under the proposed definitions
do not distinguish appropriately between customer accounts carried by
FCM clearing members and customer accounts carried by non-FCM clearing
members, which may be subject to segregation and other requirements
under non-U.S. law rather than under the CEA. ICE therefore suggested
that the Commission clarify the application of the definitions to non-
U.S. DCOs. In response to ICE's comment, the Commission notes that
``customer'' is defined in Sec. 1.3 to mean ``any person who uses a
[FCM] . . . .''
3. Enterprise Risk Management
The Commission is adopting as proposed the definition of
``enterprise risk management'' because the term is used in Sec.
39.10(d), which is discussed below. The Commission did not receive any
comments on the proposed definition.
4. Fully Collateralized Position
The Commission is adopting the definition of ``fully collateralized
position'' in conjunction with proposed exceptions from several part 39
regulations for DCOs that clear fully collateralized positions, as
discussed below. Nadex requested clarification of the meaning of the
word ``counterparty'' in the definition of ``fully collateralized,''
and suggested replacing the word with ``party'' because
``counterparty'' implies that the DCO need only hold sufficient funds
to cover the maximum possible loss that the counterparty may sustain,
but to be fully collateralized the DCO must hold sufficient funds to
cover the maximum possible loss of each party. In response to Nadex's
comment, the Commission is including ``party,'' in addition to
``counterparty,'' in the definition of ``fully collateralized
position'' to make clear that the definition is intended to include
each party to a contract.
5. Key Personnel
The Commission is adding ``chief information security officer''
(CISO) to the list of positions identified in the definition of ``key
personnel'' in Sec. 39.2. Nadex requested clarification that it is
sufficient for a staff member to be assigned the responsibilities of a
CISO in addition to other responsibilities of their role. Nadex also
requested guidance confirming that the CISO may be employed by the DCO
or by an affiliate, and that, with respect to a DCO that is also a
designated contract market (DCM), an individual may fulfill the role of
CISO for both the DCM and DCO.
The Commission confirms that a DCO staff member may be assigned the
responsibilities of a CISO in addition to other responsibilities of
their role; the CISO may be employed by the DCO or by an affiliate;
and, for a DCO that is also a DCM, an individual may fulfill the role
of CISO for both the DCM and DCO.
B. Procedures for Registration--Sec. 39.3
1. Application Procedures--Sec. 39.3(a)
The Commission is adopting several changes to its procedures for
registration as a DCO generally as proposed. These changes include:
Revisions to Sec. 39.3(a)(1) to improve the clarity and consistency of
the text; revisions to Form DCO to correspond to other proposed
revisions to the part 39 regulations; providing greater flexibility in
Sec. 39.3(a)(3) for DCO applicants submitting supplemental
information; clarifying references in Sec. 39.3(a)(5) to the portion
of the Form DCO cover sheet and other application materials that will
be made public; and, in new Sec. 39.3(a)(6), permitting the Commission
to extend the 180-day review period for DCO applications for any period
of time to which the applicant agrees in writing. The Commission did
not receive any comments on these proposed changes.
2. Stay of Application Review--Sec. 39.3(b)
The Commission is adopting as proposed the change to Sec.
39.3(b)(2) to correct inaccurate language. In Sec. 39.3(b)(2), which
is the Commission's delegation of authority to the Director of the
Division of Clearing and Risk to stay an application for DCO
registration that is materially incomplete, the Commission is adopting
a change to replace the inaccurate ``designation'' with
``registration.'' The Commission did not receive any comments on this
change.
3. Request To Amend an Order of Registration--Sec. 39.3(a)(2), Sec.
39.(a)(4), and Sec. 39.3(d)
The Commission is adopting as proposed three changes to procedures
in Sec. 39.3(a)(2) for a registered DCO requesting an amended order of
registration, to reflect current Commission practice. The rule will no
longer require use of Form DCO to request an amended order of
registration under Sec. 39.3(a)(2), and an applicant will only need to
file amended exhibits and other information when filing a Form DCO to
update a pending application under Sec. 39.3(a)(4). The Commission
also is adopting new Sec. 39.3(d) to establish a separate process for
such requests.
ICE supported the proposal to eliminate using Form DCO to request
an amended registration order, and stated that it believes the
modification to Sec. 39.3(a)(2) will help streamline the process for a
DCO to file a request for an amended order.
4. Dormant Registration--Sec. 39.3(e)
Regulation Sec. 39.3(d) establishes the procedure for a dormant
DCO to reinstate its registration before it can begin ``listing or
relisting'' products for clearing. The Commission is adopting as
proposed changes to Sec. 39.3(d), renumbered as Sec. 39.3(e), to
correct inaccurate language. Specifically, the Commission is adopting
an amendment to replace ``listing or relisting'' with ``accepting'' to
more accurately describe a DCO's activities. The Commission did not
receive any comments on these proposed changes.
5. Vacation of Registration--Sec. 39.3(f)
The Commission is adopting as proposed changes to Sec. 39.3(e),
renumbered as Sec. 39.3(f), to codify requirements for a DCO
requesting vacation of its registration, and provide greater
transparency to any DCO that is considering vacating its
registration.\9\ The amendments renumber current Sec. 39.3(e) as Sec.
39.3(f)(1) and add provisions under Sec. 39.3(f)(1) regarding
procedures for a DCO seeking to vacate its registration. The Commission
is also adopting Sec. 39.3(f)(2) to specify that the requirement in
section 7 of the CEA that the Commission must ``forthwith send a copy''
of the notice that was filed with the Commission requesting vacation
and the order of vacation to all other registered entities will be met
by posting the required documents on the Commission's website. The
Commission did not receive any comments on the proposed changes.
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\9\ The Commission is also making a technical change to Sec.
39.3(f), to remove the term ``registered'' from ``registered
[DCO],'' for consistency with other provisions in part 39.
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6. Request for Transfer of Registration and Open Interest--Sec.
39.3(g)
The Commission is adopting changes to Sec. 39.3(f), renumbered as
Sec. 39.3(g), to simplify the requirements for a DCO to request a
transfer of open interest and to separate the process from the
procedures used to report a change to a
[[Page 4803]]
DCO's corporate structure or ownership. The Commission proposed changes
regarding procedures that a DCO must follow to request the transfer of
its DCO registration and positions comprising open interest for
clearing and settlement, in anticipation of a corporate change. The
changes simplify the requirements for requesting a transfer of open
interest and remove references to transfers of registration and
requirements regarding corporate changes, so that Sec. 39.3(g) would
only apply to instances in which a DCO requests to transfer its open
interest. Changes to the DCO's ownership would continue to be addressed
under Sec. 39.19(c)(4)(viii), renumbered as Sec. 39.19(c)(4)(ix). In
light of a comment from ICE discussed below, the Commission is further
modifying Sec. 39.3(g) to account for a transfer of foreign futures
positions by a DCO to a clearing organization permitted to clear for a
registered foreign board of trade pursuant to Sec. 48.7.
Under the amendments to Sec. 39.3(g), a DCO seeking to transfer
its open interest will be required to submit rules for Commission
approval pursuant to Sec. 40.5,\10\ rather than submitting a request
for an order at least three months prior to the anticipated transfer.
Regulation 39.3(g) also specifies certain information that the DCO
would be required to include in its submission pursuant to Sec. 40.5.
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\10\ The Commission reiterates that, as noted in the Proposal,
SIDCOs should consider whether the facts and circumstances of the
approval sought pursuant to a Sec. 40.5 filing also obligate a
SIDCO to file a Sec. 40.10 submission.
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CME and ICE generally supported the proposed changes to Sec.
39.3(g) regarding requests to transfer open interest. CME noted that a
DCO cannot unilaterally transfer to another DCO open interest
associated with contracts that are subject to the rules of a DCM, as
those transfers must be authorized by the DCM through rule amendment or
otherwise. CME referred to procedures under Sec. 38.3(d) for a DCM to
transfer open interest associated with contracts listed on a DCM to
another DCM, in connection with a change of registration. The
Commission agrees that where a DCO is requesting transfer of open
interest under Sec. 39.3(g) for contracts listed on a DCM, the DCM
also would be subject to applicable Commission regulations, including
part 38.
CME and ICE also supported use of the rule approval process under
Sec. 40.5 for submission of requests to transfer open interest. ICE
suggested that it may be appropriate for a transfer to take effect
pursuant to a self-certification under Sec. 40.6 where the transfer
does not raise any particular novel issues or concerns. ICE further
requested that the Commission clarify that it may, in appropriate
circumstances, take action on a transfer request in less than 45 days,
both in circumstances that do not raise particular concerns and in
exigent or distressed circumstances in which the full period may not be
necessary or feasible. The Commission declines to adopt ICE's
suggestion to permit a transfer of open interest to be made pursuant to
Sec. 40.6 and is adopting the requirement to submit such requests
under Sec. 40.5 as proposed. The Commission only has ten business days
to review rules submitted pursuant to Sec. 40.6, which the Commission
believes is not sufficient time to review rules related to transfers of
open interest. The Commission reviews transfers of open interest to
ensure that clearing members have sufficient notice of the transfer,
because there may be clearing members of the transferring DCO that are
not members of the receiving DCO. Such clearing members may need time
to become members of the receiving DCO or to close out their positions,
and if they are FCMs that clear for customers, to transfer their
customers to other FCMs if necessary. The Commission also reviews the
transfer plans (typically there is a transition agreement between the
DCOs) to make sure that the associated risks will be adequately
managed. The Commission confirms, however, that under Sec. 40.5(g), it
has the ability to expedite its approval of a request where
appropriate.
ICE also suggested clarification of procedures for transfers
between a registered DCO and a clearing organization that is not a
registered DCO (such as a foreign clearing organization that is either
an exempt DCO or otherwise not subject to DCO registration based on its
activities). As the Commission noted in the Proposal, under the
existing regulatory framework, all futures positions and U.S. customer
swap positions must be cleared by a registered DCO, while proprietary
swap positions of U.S. persons may be cleared by a registered or exempt
DCO.\11\ However, the proposed rule failed to contemplate a transfer of
foreign futures positions by a DCO to a clearing organization permitted
to clear for a registered foreign board of trade pursuant to Sec.
48.7. As noted above, the Commission is modifying the final rule to
broaden its applicability to account for such a transfer.
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\11\ See Derivatives Clearing Organization General Provisions
and Core Principles, 84 FR at 22230, n. 19.
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C. Procedures for Implementing DCO Rules and Clearing New Products
The Commission is adopting two non-substantive changes to its
procedures for implementing DCO rules and clearing new products in
Sec. 39.4, to remove or correct certain references. The Commission did
not receive any comments on the proposed amendments to Sec. 39.4 and
is adopting them as proposed.
1. Request for Approval of Rules--Sec. 39.4(a)
Regulation 39.4(a) specifies that an applicant for registration or
a registered DCO may request, pursuant to the procedures set forth in
Sec. 40.5, that the Commission approve any or all of its rules prior
to their implementation. In practice, the Commission's review of
applications for DCO registration includes review of the applicant's
rules, which are required to be submitted as Exhibit A-2 to Form DCO.
The Commission's issuance of an order of registration as a DCO
constitutes an approval of the applicant's rules that were submitted as
part of the application. Accordingly, the Commission is deleting the
reference in Sec. 39.4(a) to an applicant for registration, as it is
unnecessary for an applicant to separately request approval of its
rules.
2. Portfolio Margining--Sec. 39.4(e)
Regulation 39.4(e) establishes certain procedural requirements that
apply to a DCO seeking approval for a futures account portfolio
margining program. Under Sec. 39.4(e), a DCO seeking to provide a
portfolio margining program under which securities would be held in a
futures account is required to petition the Commission for an order
``under section 4d of the [CEA].'' To conform terminology to other
provisions in part 39 which distinguish between futures accounts
subject to section 4d(a) of the CEA and cleared swaps accounts subject
to section 4d(f) of the CEA, the Commission is substituting ``section
4d(a)'' for ``section 4d'' in Sec. 39.4(e).
IV. Amendments to Part 39--Subpart B--Compliance With Core Principles
A. Fully Collateralized Positions
The Commission is amending certain regulations in part 39 to
address fully collateralized positions, which do not pose the full
range of risks that the regulations are meant to address. As discussed
in the Proposal, fully collateralized positions do not expose DCOs to
many of the risks that traditionally margined products do, as
[[Page 4804]]
full collateralization prevents a DCO from being exposed to credit risk
stemming from the inability of a clearing member or customer of a
clearing member to meet a margin call or a call for additional
capital.\12\ This renders certain provisions of part 39 inapplicable or
unnecessary. As a result, the Division of Clearing and Risk has granted
relief from certain provisions of part 39 to DCOs that clear fully
collateralized positions.\13\ The Commission is amending certain
regulations consistent with that relief.\14\
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\12\ See id. at 22245.
\13\ See CFTC Letter No. 14-04 (Jan. 16, 2014) (granting
exemptive relief to Nadex); CFTC Letter No. 17-35 (July 24, 2017)
(granting exemptive relief to LedgerX).
\14\ The Division of Clearing and Risk also issued interpretive
guidance to Nadex for other provisions in part 39. CFTC Letter No.
14-05 (Jan. 16, 2014). The interpretive guidance may be relied on by
third parties, and is not impacted by this rulemaking.
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The amendments are based on an assessment of how the DCO Core
Principles and part 39 apply to fully collateralized positions, as well
as the relief previously granted to DCOs that clear such positions. The
Commission believes the amendments will not negatively impact prudent
risk management at any DCO, regardless of the types of products
cleared. The amendments to each provision are discussed in this
section, whereas specific comments are addressed in conjunction with
the discussion of those provisions further below.\15\
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\15\ To the extent there were comments on the changes to
regulations in part 39 that address DCOs that clear fully
collateralized positions, the Commission has addressed these
comments throughout. To the extent there were no comments, the
Commission is adopting the changes as proposed.
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1. Definition of ``Fully Collateralized Positions''--Sec. 39.2
As discussed above, the Commission is adopting a definition of
``fully collateralized position'' as a contract cleared by a DCO that
requires the DCO to hold, at all times, funds in the form of the
required payment sufficient to cover the maximum possible loss that a
party or counterparty could incur upon liquidation or expiration of the
contract.
2. Computation of Financial Resources Requirement--Sec. 39.11(c)(1)
Regulation 39.11(a)(1) requires a DCO to maintain financial
resources sufficient to meet its financial obligations to its clearing
members notwithstanding a default by the clearing member creating the
largest financial exposure for the DCO in extreme but plausible market
conditions. Regulation 39.11(c)(1) \16\ requires a DCO to perform
monthly stress testing in order to make a reasonable calculation of the
financial resources it would need in the event of such a default. The
Commission is amending Sec. 39.11(c)(1)(i) to clarify that a DCO does
not have to perform monthly stress tests on fully collateralized
positions. For fully collateralized positions, a DCO holds its maximum
possible loss on each contract at all times and does not face the risk
of a clearing member default. The monthly stress tests required by
Sec. 39.11(c)(1)(i) are therefore unnecessary for fully collateralized
positions.
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\16\ This paragraph is being renumbered as Sec. 39.11(c)(1)(i)
due to revisions discussed elsewhere in this rulemaking.
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3. Liquidity of Financial Resources--Sec. 39.11(e)(1)(ii)
Regulation 39.11(e)(1)(ii) requires that the financial resources
allocated by a DCO to meet the requirements of Sec. 39.11(a)(1) (i.e.,
its default resources) be sufficiently liquid to enable the DCO to
fulfill its obligations during a one-day settlement cycle. The
Commission is amending Sec. 39.11(e)(1)(iv) to clarify that DCOs do
not need to include fully collateralized positions in the calculation
required thereunder. The specific amount of liquid resources a DCO must
hold is based on the historical settlement pays of its clearing
members. A DCO maintains sufficient liquidity for fully collateralized
positions by requiring clearing members to post the full potential loss
of a position in the form of the potential obligation. Requiring
collateral to be in the form of the potential obligation eliminates the
risk that the DCO will not have sufficient liquidity to meet its
obligations and the need for daily mark-to-market settlements. Further,
if a DCO were to complete the calculation required by Sec.
39.11(e)(1)(ii), the amount would not change from day to day as the DCO
operates a fully collateralized model. As a result, the calculation
required in Sec. 39.11(e)(1)(ii) is inapplicable to fully
collateralized positions.
4. Periodic Reporting of Participant Eligibility--Sec. 39.12(a)(5)(i)
and (a)(5)(i)(B)
Regulation 39.12(a)(5)(i) requires a DCO to require its clearing
members to provide the DCO with periodic financial reports that allow
the DCO to assess whether participation requirements are being met on
an ongoing basis. Regulation 39.12(a)(5)(i)(B) \17\ requires a DCO to
make these reports available to the Commission at the Commission's
request.\18\ The Commission is adding new Sec. 39.12(a)(5)(v) to
exclude non-FCM clearing members that only clear fully collateralized
positions from the financial reporting requirements in Sec.
39.12(a)(5)(i) and (a)(5)(i)(B). The Commission's participant
eligibility requirements in Sec. 39.12(a) are intended to ensure that
DCO participants maintain sufficient financial resources and
operational capacity to meet the obligations arising from clearing at a
DCO.\19\ Clearing members that only clear fully collateralized
positions present no credit or default risk to the DCO because their
full potential loss is already held by the DCO. Thus, periodic
financial reports from non-FCM clearing members that only clear fully
collateralized positions do not provide any risk management benefit to
a DCO.
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\17\ This paragraph is being renumbered as Sec.
39.12(a)(5)(iii) due to revisions discussed elsewhere in this
rulemaking.
\18\ Regulation 39.12(a)(5)(i)(B) allows DCOs to either require
clearing members to make the reports available to the Commission or
to provide the reports to the Commission directly.
\19\ See Derivatives Clearing Organization General Provisions
and Core Principles, 76 FR 69334, 69352 (Nov. 8, 2011).
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5. Large Trader Stress Tests--Sec. 39.13(h)(3)
Regulation 39.13(h)(3) requires a DCO to conduct stress testing on
a daily basis with respect to each large trader who poses significant
risk to a clearing member or the DCO, and at least on a weekly basis
with respect to each clearing member account, by house origin and by
each customer origin. The Commission is adding new Sec.
39.13(h)(3)(iii) to exclude clearing member accounts that hold only
fully collateralized positions from the stress testing requirements in
Sec. 39.13(h)(3)(i) and (ii). As discussed above, DCOs hold, at all
times, the full potential loss of fully collateralized positions
cleared by the DCO, and a DCO does not face the risk of default from
accounts that only hold fully collateralized positions. As a result,
such stress tests would not provide DCOs new information on accounts
that only clear fully collateralized positions.
6. Default Rules and Procedures--Sec. 39.16(e)
Regulation 39.16(a) requires a DCO to have rules and procedures
designed to allow for the efficient, fair, and safe management of
events during which clearing members become insolvent or otherwise
default on their obligations to the DCO. Regulation 39.16(b) and (c)
[[Page 4805]]
require, among other things, a DCO to maintain a written default
management plan and procedures that would permit the DCO to take timely
action to contain losses and liquidity pressures in the event of a
default. In response to a request from Nadex,\20\ the Commission is
adopting new Sec. 39.16(e) to provide that a DCO may satisfy the
requirements of paragraphs (a), (b), and (c) of Sec. 39.16 by having
rules that permit it to clear only fully collateralized positions. This
rule was not included in the Proposal because relief had been provided
through a staff interpretative letter, as discussed below, but the
Commission believes it is appropriate to include it in the final rule
because it is consistent with other exceptions for fully collateralized
positions adopted herein.
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\20\ See discussion infra section IV.G.3.
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7. Daily Reporting--Sec. 39.19(c)(1)(i)
Regulation 39.19(c)(1)(i) requires a DCO to submit to the
Commission a daily report containing information on initial margin,
daily variation margin payments, other daily cash flows, and end-of-day
positions. The Commission is amending Sec. 39.19(c)(1)(i) such that
the enumerated daily reporting is not required with respect to fully
collateralized positions. Because fully collateralized positions do not
pose a credit risk to the DCO or other participants, the Commission
does not need daily reporting of this information with respect to fully
collateralized positions.
B. Compliance With Core Principles--Sec. 39.10
1. Chief Compliance Officer--Sec. 39.10(c)
The Commission is adopting several amendments to Sec. 39.10(c) to
permit greater flexibility in the reporting requirements applicable to
the Chief Compliance Officer (CCO) for DCOs engaged in substantial
activities not related to clearing. These amendments are intended to
make the process of preparing the CCO's annual report more efficient,
to improve clarity and consistency of the regulations, and to require
that the CCO's annual report describe the process by which the report
is provided to the board of directors or senior officer so that
compliance with existing regulations is evident outside the context of
an examination of the DCO's board of directors' meeting minutes or
other records. Unless stated otherwise below, the Commission did not
receive any comments on the proposed amendments to Sec. 39.10(c) and
is adopting them as proposed.
The Commission is amending Sec. 39.10(c)(1)(ii) to permit a DCO's
CCO to report to the senior officer responsible for the DCO's clearing
activities if the DCO engages in substantial activities not related to
clearing (for example, if the DCO is also a DCM). The Commission is
also amending Sec. 39.10(c)(4)(i) to permit the CCO to submit the
annual report to the same individual (or to the board of directors) for
internal review. CME supported these proposed amendments, noting that
the senior officer responsible for the DCO's clearing activities is
most familiar with the day-to-day operations of the DCO and its
personnel and is therefore generally best positioned to ensure that the
compliance program implemented by the CCO is appropriately designed to
ensure compliance with the CEA and Commission regulations.
The Commission is amending Sec. 39.10(c)(3)(i) to permit the CCO's
annual report to incorporate by reference the parts of its most recent
CCO annual report containing descriptions of the DCO's written policies
and procedures, to the extent that such policies and procedures have
not materially changed since they were most recently described in a
previously submitted CCO annual report submitted within the five-year
period prior to the date of the CCO annual report containing such
incorporation by reference. CME strongly supported these proposed
revisions, noting that they reduce the requirement to provide
duplicative information contained in previous reports and thus reduce
the administrative burden on both the DCO's compliance staff and
Commission staff. CME also commented that the five-year timeframe for
re-introducing materially unchanged policies is appropriate.
The Commission is amending Sec. 39.10(c)(3)(ii)(A), which requires
the CCO to prepare an annual report that reviews each ``core principle
and applicable Commission regulation,'' and with respect to each,
identifies the compliance policies and procedures that are designed to
ensure compliance ``with the core principle,'' to change the latter
language to ``with each core principle and applicable regulation.'' The
Commission is also amending Sec. 39.10(c)(3)(ii) to clarify that, for
SIDCOs and subpart C DCOs, this includes the Commission's regulations
in subpart C of part 39. In addition, the regulation now requires that
the compliance policies and procedures be identified ``by name, rule
number, or other identifier.''
The Commission is amending Sec. 39.10(c)(4)(i) to require that the
CCO's annual report describe the process by which it was submitted to
the board of directors or the senior officer. In response to a comment
described below, rather than requiring that the CCO's annual report
include the date on which it was submitted to the board of directors or
the senior officer, the Commission is further amending Sec.
39.10(c)(4)(i) to require that it be accompanied by a cover letter,
notice, or other document that specifies the date of submission.
Lastly, the Commission is amending Sec. 39.10(c)(4)(ii) to remove the
requirement that the annual report be submitted concurrently with the
DCO's fiscal year-end audited financial statement to be consistent with
a change to Sec. 39.19(c)(3)(iv) explained below.
CME stated that including within the annual report the date on
which the annual report was submitted to the board of directors or the
senior officer, per the proposed amendments to Sec. 39.10(c)(4)(i), is
problematic because the report would need to be prepared and
distributed ``well in advance'' of a board or committee meeting or
other intended date. CME noted that a change of meeting date or agenda
could render the date included in the report inaccurate. CME therefore
recommended that the CCO's annual report include the intended date of
submission, but that a cover sheet be added to the report after the
meeting that either confirms that the date within the report is correct
or provides an alternative date specifying when the report was actually
provided. The Commission agrees that the revisions, as proposed, could
cause the report to be inaccurate in the event of a delay or other
scheduling change. In light of CME's comments, the Commission is not
including in Sec. 39.10(c)(4)(i) the proposed requirement that the
CCO's annual report include the date of submission and is replacing it
with a requirement that the annual report be accompanied by a cover
letter, notice, or other document that specifies the date of
submission.
Nadex suggested that the Commission consider conforming the
language of the CCO's duties and annual report requirements in Sec.
39.10 with that of Sec. 3.3, which pertains to the CCOs of FCMs, swap
dealers, and major swap participants. The Commission is not adopting
this change, because recent amendments to Sec. 3.3 were largely
intended to more closely harmonize these requirements with
corresponding rules of the Securities and Exchange Commission (SEC) for
CCOs of security-based swap dealers and major security-
[[Page 4806]]
based swap participants, and are not applicable to DCOs. However, the
Commission may consider this in a future rulemaking.
2. Enterprise Risk Management--Sec. 39.10(d)
The Commission is adopting new Sec. 39.10(d), which requires a DCO
to have a program of enterprise risk management and to identify as its
enterprise risk officer an appropriate individual that exercises the
full responsibility and authority to manage the DCO's enterprise risk
management function.
ICE was generally supportive of Sec. 39.10(d) as proposed, and CME
agreed with several aspects of the proposal. MGEX recognized the value
that an enterprise risk management program provides in ensuring the
integrity of DCOs and the financial markets and agreed that a DCO
should assess and manage the broad array of risks identified in the
Proposal. MGEX requested that the Commission grant a longer time period
for compliance to allow DCOs adequate time to implement the program,
given the extensive nature of an enterprise risk management program and
the work that will be involved in developing such a program. The
Commission is giving DCOs one year to comply with the amendments to the
regulations.
The Commission did not receive any comments specifically on
Sec. Sec. 39.10(d)(1), (d)(2), or (d)(3), and is finalizing these
paragraphs as proposed.
The Commission received several responses to a request for comment
regarding whether the enterprise risk officer should be required to
report directly to the board of directors of the organization for which
the enterprise risk officer is responsible for managing the risks. OCC
stated that, generally, the enterprise risk officer should report
directly to the board of directors, or to an appropriate committee of
the board of directors, but also commented that a DCO should have the
discretion to determine whether the enterprise risk officer should
report directly to the board of directors, a committee of the board, or
the senior officer responsible for a DCO's clearing activities. CME
commented that the enterprise risk officer should have access to the
board of directors and its relevant committees and should provide
regular reports to the board or its relevant committees, but did not
believe it is necessary for the enterprise risk officer to have a
direct administrative reporting relationship to the board or its
committees. Nadex stated that the enterprise risk officer should not
report to the DCO's board of directors because the purpose of a board
of directors is to provide oversight and strategic guidance to the
organization, not management of specific individuals within the
organization. Nadex suggested that the enterprise risk officer provide
reports to the board but could report to the DCO's chief executive
officer, chief risk officer, or other appropriate officer of the DCO or
a parent company.
In light of the comments, the Commission has concluded that a DCO
should have the discretion to determine whether its enterprise risk
officer will report directly to the board of directors, to an
appropriate committee of the board of directors, or to the senior
officer responsible for the DCO's clearing activities. Regardless of
the formal reporting relationship, however, the Commission believes
that the enterprise risk officer should have access to the board of
directors to ensure that the board receives reports and information
from the enterprise risk officer. The Commission is therefore
finalizing proposed Sec. 39.10(d)(4) with additional language
requiring such access.
The Commission also requested comment as to whether a DCO's chief
risk officer should be permitted to also serve as its enterprise risk
officer, and commenters generally were supportive. Nadex noted that the
two positions ``do not have conflicting purposes.'' OCC noted that a
chief risk officer is typically the individual with the greatest
authority, independence, resources, expertise, and access to relevant
information necessary to fulfill the responsibilities of managing the
DCO's enterprise risk management function. CME commented that whether a
DCO's chief risk officer should also be permitted to serve as the
overall organization's enterprise risk officer depends on the
organizational structure related to the DCO and the structure of the
broader corporate group, while Nodal stated that a DCO should have
``complete discretion'' to identify the appropriate person to serve as
the enterprise risk officer, including whether that person may also be
the DCO's chief risk officer. MGEX noted that, due to existing chief
risk officer responsibilities of administering similar risk management
programs, the chief risk officer may be the most adept individual to
manage an enterprise-wide risk management framework. MGEX further
argued that allowing the same person to fill both roles would also
prevent fragmenting risk management oversight responsibilities while
being less time-consuming and less costly for smaller DCOs, adding that
it would be ``effectively impossible'' for smaller DCOs to have a fully
independent employee or officer, thereby furthering the need for
flexibility in who can fulfill such role. LCH recommended that the role
of the enterprise risk officer be included in the role and
responsibilities of the chief risk officer to reduce duplication of
responsibilities and benefit from efficiencies that can be derived from
combining ``these related roles.''
In response to the comments, the Commission believes that a DCO
should generally have the discretion to allow the DCO's enterprise risk
officer and its chief risk officer to be the same individual and,
therefore, is finalizing the regulation as proposed, without adding
language prohibiting this practice. However, the Commission notes that
Sec. 39.10(d)(4), as finalized, requires the enterprise risk officer
to have, among other things, the independence and resources necessary
to fulfill the responsibilities of the position. The Commission
believes that, for larger, more complex DCOs, it may be challenging to
meet this requirement if one individual performs the functions of both
roles.
In response to a request for clarification from Nadex, the
Commission confirms that the regulations, as finalized, do not require
that an individual be assigned the title of ``Enterprise Risk
Officer.'' It is sufficient that the DCO be able to identify the
individual assigned the responsibilities of the position and that the
other applicable requirements are satisfied.
Lastly, when the Commission adopted the requirement in Sec.
39.13(c) that a DCO have a chief risk officer, it stated that, given
the importance of the risk management function and the comprehensive
nature of the responsibilities of a DCO's CCO under Sec. 39.10, the
Commission expected that a DCO's chief risk officer and its CCO would
be two different individuals.\21\ Commission staff noted this in a
subsequent interpretation regarding the application of certain part 39
requirements to fully collateralized DCOs.\22\ However, the Commission
recognizes that, due to the limited risk profile of DCOs that clear
only fully collateralized positions, it would be possible for a single
individual to be both the CCO and the chief risk officer of such a DCO
if the individual possesses the qualifications for both roles.
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\21\ 76 FR 69334, 69363 (Nov. 8, 2011).
\22\ CFTC Letter No. 14-05 (Jan. 16, 2014).
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[[Page 4807]]
C. Financial Resources--Sec. 39.11
The Commission is adopting various changes to Sec. 39.11 to make
the language more closely match that of Core Principle B, address
inconsistencies in how DCOs treat excess collateral on deposit when
conducting stress tests, ensure that customer funds are properly
accounted for when a DCO is calculating its largest financial exposure,
require DCOs to provide certain information to aid the Commission's
review of their financial statements, and to clarify or conform a
number of provisions. Unless stated otherwise below, the Commission did
not receive any comments on the proposed amendments to Sec. 39.11 and
is adopting them as proposed.
1. Calculation of Largest Financial Exposure and Stress Tests--Sec.
39.11(a)(1), (b)(1), (c)(1), and (c)(2)
The Commission is revising the language in Sec. 39.11(a) to make
it more consistent with Core Principle B.
Regulation 39.11(a)(1) requires a DCO to maintain financial
resources sufficient to meet its financial obligations to its clearing
members notwithstanding a default by the clearing member creating the
largest financial exposure for the DCO in extreme but plausible market
conditions. The Commission is deleting Sec. 39.11(b)(1)(i), which
permits margin to be used to satisfy the requirements of Sec.
39.11(a)(1), because the required initial margin amount on deposit for
the clearing member will be applied before determining the largest
financial exposure for the DCO in extreme but plausible market
conditions. Therefore, the margin would not be available to also cover
the exposure.
OCC supported the removal of Sec. 39.11(b)(1)(i), under the
assumption that a DCO could also net other margin it requires a
clearing member to have on deposit when calculating its largest
financial exposure. OCC requested that, if the Commission does not
believe that a DCO should net such additional required margin on
deposit, the Commission interpret such additional required margin on
deposit as ``[a]ny other financial resource deemed acceptable by the
Commission'' under current Sec. 39.11(b)(1)(vi), proposed to be
renumbered Sec. 39.11(b)(1)(v).
The Commission is adopting additional minimum requirements that a
DCO will have to follow in determining its financial exposure in
accordance with Sec. 39.11(c)(1). In particular, the Commission is
adding Sec. 39.11(c)(2)(i)(A) to require a DCO to calculate its
largest financial exposure net of the clearing member's required
initial margin amount on deposit. In response to questions and requests
for clarification from OCC, ICE, FIA, and ISDA, the regulation
specifies that this required margin includes any add-ons, such as
concentration charges and liquidity charges, and only required margin
(including add-ons) may be considered. In other words, the DCO is not
permitted to take into account excess collateral on deposit.
Additionally, the Commission is adopting Sec. 39.11(c)(2)(ii) to
require that when stress tests produce losses in both customer and
house accounts, a DCO must combine the customer and house stress test
losses of each clearing member using the same stress test scenario. New
Sec. 39.11(c)(2)(iii) allows a DCO to net gains in the house account
with losses in the customer account, if permitted by its rules, but
explicitly prohibits a DCO from netting losses in the house account
with gains in the customer account. New Sec. 39.11(c)(2)(iv), as
modified to address comments, allows a DCO, with respect to a clearing
member's cleared swaps customer account, to net customer gains against
customer losses only to the extent permitted by the DCO's rules. In
light of the comments, the Commission confirms that the purpose of
Sec. 39.11(c)(2)(iv) is to confirm that, while all customer positions
must be included in calculating largest net exposure, netting between
such positions must be done in a manner consistent with what is
permitted by the DCO's rules. The Commission is also specifying that
the requirements of Sec. 39.11(c) do not apply to fully collateralized
positions.
A number of commenters supported proposed Sec. 39.11(c)(2)(i)(A).
For example, SIFMA AMG stated that the various proposed revisions to
Sec. 39.11(c)(2) would require DCOs to make more prudent assumptions
when calculating default fund requirements, improve the process of
sizing the financial resources package, and standardize assumptions and
enable customers to make apples-to-apples comparisons between DCOs. Mr.
Barnard stated that proposed Sec. 39.11(c)(2)(i)(A) would prudently
focus a DCO's analysis on the resources that would actually be
available to it during times of stress, further enhance the financial
soundness of DCOs, and improve protection for market participants and
the public. He also noted that the proposal is consistent with the
PFMIs, which provide that central counterparties should not use
collateral beyond the margin requirement for purposes of calculating
their available resources,\23\ and should increase efficiencies for
industry while more prudently managing financial risk.
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\23\ See CPMI-IOSCO, Principles for Financial Market
Infrastructures (Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
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2. Assessments--Sec. 39.11(d)(2)
The Commission is amending Sec. 39.11(d)(2)(iv) by replacing the
phrase ``those obligations'' with ``the total amount required under
paragraph (a)(1) of this section.'' The Commission did not receive any
comments on this change.
The Commission did receive other comments on assessments. SIFMA AMG
stated that the Commission should not allow DCOs to count unfunded
liabilities, such as assessments, towards ``cover one'' and ``cover
two'' calculations because they are highly likely to be unreliable
during times of stress. Similarly, FIA and ISDA requested that the
Commission amend Sec. 39.11(d)(2) to prohibit the use of assessments
because assessments are unfunded resources. Because the Commission had
only proposed the clarifying change to Sec. 39.11(d)(2)(iv) noted
above and had not proposed to prohibit assessments entirely, the
Commission would need to consider this in a separate proposal.
Lastly, ICE questioned the impact on Sec. 39.11(d)(2)(iv) of the
Commission's clarification of how a DCO must calculate its largest
financial exposure under Sec. 39.11(a)(1). In response, the Commission
is further amending Sec. 39.11(d)(2)(iv) to clarify that the value of
the assessments may be determined by using the largest financial
exposure in extreme but plausible market conditions prior to netting
against required initial margin on deposit.
3. Liquidity of Financial Resources--Sec. 39.11(e)
Regulation 39.11(e)(1)(ii) requires that the financial resources
allocated by a DCO to meet the requirements of Sec. 39.11(a)(1) (i.e.,
its default resources) be sufficiently liquid to enable the DCO to
fulfill its obligations as a central counterparty during a one-day
settlement cycle. The Commission is adopting an amendment to change
references to ``daily settlement pay'' in Sec. 39.11(e)(1)(ii) to
``daily settlement variation pay'' in order to clarify that additional
calls for initial margin should not be included in the calculation. It
also is adopting clarifying changes to the text of Sec.
39.11(e)(1)(iii) and (e)(2), and adding Sec. 39.11(e)(1)(iv) to
provide that a DCO is not subject to
[[Page 4808]]
Sec. 39.11(e)(1)(ii) for fully collateralized positions.
Regulation 39.11(e)(1)(ii) further requires that those resources
include cash, U.S. Treasury obligations, or high quality, liquid,
general obligations of a sovereign nation (i.e., cash or cash
equivalents), in an amount greater than or equal to the average of its
clearing members' average pays over the last fiscal quarter. If that
amount is less than what a DCO needs to fulfill its obligations during
a one-day settlement cycle, Sec. 39.11(e)(1)(iii) permits a DCO to
take into account a committed line of credit for the purpose of meeting
the remainder of the requirement. The Commission is adopting new Sec.
39.11(e)(3) to clarify that a committed line of credit or similar
facility is a permitted default resource up to the amount provided for
in Sec. 39.11(e)(1)(ii), but that it may not be counted twice to meet
the requirements of both Sec. 39.11(e)(1)(ii) and Sec. 39.11(e)(2).
FIA and ISDA supported proposed Sec. 39.11(e)(3) because it explicitly
states the Commission's intention for a DCO to use a committed line of
credit or similar facility under these circumstances.
4. Reporting Requirements--Sec. 39.11(f)
Regulation 39.11(f) sets forth reporting requirements for DCOs
concerning the financial resources they are required to maintain
pursuant to Sec. 39.11(a). After Sec. 39.11(f) was adopted, the
Commission adopted Sec. Sec. 39.33(a) and 39.39(d), which set forth
financial resources requirements for SIDCOs and subpart C DCOs, and
financial resources requirements for the recovery and wind-down plans
of SIDCOs and subpart C DCOs, respectively. The Commission is amending
several provisions of Sec. 39.11(f) by adding the words ``and
Sec. Sec. 39.33(a) and 39.39(d), if applicable,'' to clarify that
financial resources reporting by SIDCOs and subpart C DCOs should
encompass all financial resources requirements applicable to them under
part 39.
5. Financial Statements--Sec. 39.11(f)(1)(ii)
The Commission is amending Sec. 39.11(f)(1)(ii) to require a DCO
to file with the Commission each fiscal quarter, or at any time upon
Commission request, a financial statement of the DCO, including the
balance sheet, income statement, and statement of cash flows. Prior to
this amendment, the regulation permitted the DCO to file the financial
statement of the DCO or its parent company. Some DCOs that are part of
a complex corporate structure file the financial statements of their
parent companies, which makes it difficult to accurately assess the
financial strength of the DCO.
The amendment to Sec. 39.11(f)(1)(ii) also requires a DCO to
prepare its financial statement in accordance with U.S. generally
accepted accounting principles (U.S. GAAP), except that a DCO that is
incorporated or organized under the laws of any foreign country may
prepare its financial statement in accordance with either U.S. GAAP or
the International Financial Reporting Standards issued by the
International Accounting Standards Board (IFRS).
However, in response to comments, the Commission is not adopting
the proposed amendments to Sec. 39.11(f)(1)(ii) and Sec.
39.11(f)(2)(i) that would have required the balance sheet to identify
any assets allocated to satisfy the requirements of Sec. 39.11(a)(1)
or Sec. 39.11(a)(2) as held for that purpose.
MGEX requested clarification regarding the application of the
proposed revisions to Sec. 39.11(f)(1)(ii) on an entity that is a DCO
and also has non-DCO operations. MGEX noted that it is both a DCO and a
DCM, and its financial statements show revenue and expenses from all
sources and activities, not just those pertaining to MGEX's activities
as a DCO. The Commission confirms that the revisions are intended to
address the case of a DCO that is a separate legal entity from its
parent company, in which case the Commission would expect to receive
financial statements for the DCO disaggregated from that of its parent.
In the case of a DCO with revenue and expenses from non-DCO activity,
such as if the same legal entity were also a DCM, the Commission would
not require or expect the entity to separate its clearing-related and
non-clearing-related financial information in its financial statements.
MGEX further suggested that the proposed revisions to Sec.
39.11(f)(1)(ii) requiring that the financial statement provided be that
of the DCO and not the parent company should only apply to DCOs that
are part of a complex corporate structure, and not to simple parent/
subsidiary structures. MGEX stated that compiling and submitting
separate financial statements for a simple parent/subsidiary structure
would result in increased expenses while providing no material benefit.
The Commission is declining to adopt this suggestion because the
Commission believes there is value in understanding the financial
condition of a DCO separate from that of its parent company, as
separate legal entities should be able to prepare separate financial
statements, and because there is no bright line distinguishing between
simple and complex corporate structures.
SIFMA AMG suggested that the Commission require DCOs to prepare
quarterly and annual reports as required by Sec. 39.11(f) in
accordance with U.S. GAAP. Eurex and LCH supported the proposal in
Sec. 39.11(f)(1)(ii) to allow non-U.S. DCOs to use either U.S. GAAP or
IFRS. LCH also recommended that the CFTC allow non-U.S. DCOs to report
in currencies other than the U.S. dollar, stating that this would allow
the quarterly reports to align with the reporting currency of the
entity's audited year-end financial statements and would simplify the
reconciliation process proposed in Sec. 39.11(f)(2). The Commission is
declining LCH's suggestion because if a DCO were to report in
currencies other than the U.S. dollar, Commission staff would need to
convert the currencies to U.S. dollars to properly analyze the reports,
which would require staff to make decisions about exchange rates. To
the extent that a DCO that does business in a foreign currency must
make conversions to U.S. dollars as part of preparing its financial
statements, it is more appropriate to permit the DCO to determine the
exchange rate it uses as long as the information is presented with
sufficient clarity to allow Commission staff to evaluate the
reasonableness of the decision.
CME supported the proposal in Sec. 39.11(f)(1)(ii) and Sec.
39.11(f)(2)(i) to identify assets required to meet the resource
requirements of Sec. 39.11(a)(1) and (2). However, CME stated that the
balance sheet may not be the most appropriate financial statement to
identify assets satisfying these requirements. CME noted certain
requirements of U.S. GAAP that may preclude a company from including
this information on its balance sheet. Eurex noted similar issues for
financial statements prepared in accordance with IFRS. Given these
concerns, the Commission is not adopting the proposed changes in this
regard. However, the Commission encourages DCOs to identify the assets
required to meet the resource requirements of Sec. 39.11(a)(1) and (2)
to the extent that they can, given applicable accounting standards. The
Commission notes that providing such information would facilitate its
review of DCOs' financial statements and potentially reduce the burden
on DCOs to respond to staff inquiries regarding their financial
statements and compliance with Sec. 39.11(a)(1) and (2).
[[Page 4809]]
6. Timing of Financial Statements--Sec. 39.11(f)(1)(iv)
The Commission is amending Sec. 39.11(f)(1)(iv) to incorporate the
language of current Sec. 39.11(f)(4), which requires a DCO to submit
its quarterly report no later than 17 business days after the end of
the DCO's fiscal quarter (or at a later time as permitted by the
Commission in its discretion in response to a DCO's request for an
extension).
The amendment does not incorporate changes suggested by commenters,
described below, because the reporting dates currently in effect are
the same as those for FCMs under the Commission's regulations. The
Commission believes that DCOs should be aligned with FCMs rather than
DCMs because FCMs, unlike DCMs, hold initial margin and default funds
and collect variation margin, which clearly and directly relate to the
financial resources available to DCOs. In addition, the timing of the
fourth quarter report allows Commission staff to verify the accuracy of
a DCO's quarterly financial reports; numerous differences between that
report and the year-end report may signal that the DCO has deficient
processes and procedures pertaining to preparation of financial
statements.
CME recommended that, for the first three quarters of the fiscal
year, the due dates for submitting the DCO quarterly financial resource
reports be aligned with the due dates for a DCM's submission of
financial resource reports pursuant to Sec. 38.1101(f)(4), which
requires the reports to be filed no later than 40 calendar days after
the end of the DCM's first three fiscal quarters. CME also recommended
that the due date to submit a DCO's financial resource report for the
fourth quarter of the fiscal year be aligned with the due date for
submitting audited year-end financial statements pursuant to current
Sec. 39.19(c)(3)(iv) and proposed Sec. 39.11(f)(2)(ii), which is not
more than 90 days after the end of the DCO's fiscal year end. CME
argued that the proposed requirement in Sec. 39.11(f)(2)(iii)(A) for a
DCO to submit a reconciliation where material differences exist between
the balance sheet in the audited year-end financial statement with the
balance sheet in the DCO's financial statement for the last quarter of
the fiscal year, discussed below, would be unnecessary if the
Commission harmonized the submission due date for a DCO's financial
resources report for the last quarter of the fiscal year with the
submission due date for the audited year-end financial statements.
7. Reconciliation--Sec. 39.11(f)(2)(iii)(A)
The Commission is amending Sec. 39.11(f)(2)(iii)(A) to require a
DCO to annually submit a reconciliation, including appropriate
explanations, of its balance sheet in the audited year-end financial
statement with the balance sheet in the DCO's financial statement for
the last quarter of the fiscal year when material differences exist or,
if no material differences exist, a statement so indicating. LCH
recommended defining ``material'' as 10 percent of either the (1) six-
month liquidity test, or (2) 12-month capital cost-based financial
resources test. The Commission believes that DCOs should retain
reasonable discretion to define ``material'' for these purposes and
therefore declines to include this suggestion.
8. Documentation Requirements--Sec. 39.11(f)(3)
Regulation 39.11(f)(3) requires a DCO to provide to the Commission
certain documentation related to its quarterly financial reporting.\24\
The Commission has determined that requiring this documentation each
quarter is unnecessary where there is no change from the prior
submission. Therefore, the Commission is revising Sec. 39.11(f)(3) to
clarify that a DCO must send the documentation to the Commission
required under current subparagraphs (i) and (ii) (proposed to be
renumbered as subparagraphs (i)(A) and (i)(B)) only upon the DCO's
first submission under Sec. 39.11(f)(1) and in the event of any change
thereafter.
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\24\ The documentation explains (1) the methodology used to
compute financial resources requirements, and (2) the basis for the
DCO's determinations regarding valuation and liquidity requirements.
---------------------------------------------------------------------------
The Commission also is renumbering Sec. 39.11(f)(3)(iii), which
concerns providing copies of agreements establishing or amending a
credit facility, insurance coverage, or other arrangement, as Sec.
39.11(f)(3)(ii), and adding language specifying that copies of the
agreements should evidence or support the DCO's ability to meet
applicable financial resources and liquidity resources requirements.
9. Certification--Sec. 39.11(f)(4)
After Sec. 39.11 was adopted, the Division of Clearing and Risk
advised DCOs that the quarterly financial report required under
paragraph (f) should be accompanied by a certification as to the
accuracy of the report signed by the person responsible for the
accuracy and completeness of the report.\25\ The Commission is
codifying the staff guidance by amending Sec. 39.11(f)(4) to require
the certification because the Commission believes that requiring the
person responsible to certify as to the accuracy of the report
encourages that person to review the report more carefully and
therefore reduces the likelihood of inaccuracies in the report.
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\25\ Memorandum to All Registered DCOs from Ananda
Radhakrishnan, Director, Division of Clearing and Risk, June 7,
2012.
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D. Participant and Product Eligibility--Sec. 39.12
Regulation 39.12 implements Core Principle C, which requires a DCO
to establish admission and continuing eligibility standards for its
members, as well as standards for determining the eligibility of
agreements, contracts, or transactions submitted to the DCO for
clearing. Several provisions in Sec. 39.12 require a DCO to ``adopt''
or ``establish'' rules. The Commission is amending those provisions to
require a DCO to ``have'' rules.\26\ In addition, the Commission is
amending Sec. 39.12(b)(2), which requires a DCO to adopt rules
providing that all swaps with the same terms and conditions are
economically equivalent within the DCO, so that it explicitly applies
only to those DCOs that clear swaps.
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\26\ The Commission also proposed to renumber paragraphs (i)(A),
(i)(B), and (ii) of Sec. 39.12(a)(5) as paragraphs (ii), (iii), and
(iv), respectively.
---------------------------------------------------------------------------
The Commission did not receive any comments on the proposed changes
to Sec. 39.12, and is adopting the changes as proposed.
E. Risk Management--Sec. 39.13
The Commission is adopting several changes to Sec. 39.13, which
sets out risk management requirements for DCOs. Unless stated otherwise
below, the Commission did not receive any comments on the proposed
amendments to Sec. 39.13 and is adopting them as proposed.
1. Risk Management Framework--Sec. 39.13(b)
Regulation 39.13(b) requires a DCO to establish and maintain
written policies, procedures, and controls, approved by its board of
directors, which establish an appropriate risk management framework.
The introductory heading to this provision states that it is a
``[d]ocumentation requirement.'' The Commission is replacing
``[d]ocumentation requirement'' with ``[r]isk management framework''
and the words ``establish and maintain'' with ``have and implement'' to
make it clear that a DCO is not only required to have a documented risk
management framework but to put it into action.
[[Page 4810]]
2. Limitation of Exposure to Potential Default Losses--Sec. 39.13(f)
Regulation 39.13(f) requires that a DCO, ``through margin
requirements and other risk control mechanisms, shall limit its
exposure to potential losses from defaults by its clearing members to
ensure that'' the DCO's operations would not be disrupted and non-
defaulting clearing members would not be exposed to unanticipated or
uncontrollable losses. Recognizing that a DCO cannot ensure protection
from that which it cannot anticipate, the Commission is revising Sec.
39.13(f) to require a DCO to ``limit its exposure to potential losses
from defaults by clearing members through margin requirements and other
risk control mechanisms reasonably designed to ensure that . . . .''
The Commission had proposed to change ``to ensure that'' to ``to
minimize the risk that.'' However, in this instance, the Commission has
decided to adopt language suggested by commenters because the
Commission believes that it better articulates the DCO's obligations.
ICE supported replacing ``ensure'' with ``minimize the risk'' in Sec.
39.13(f) and making conforming changes. However, FIA and ISDA expressed
concern that the change, if interpreted to alter a DCO's existing
obligations, would increase the potential for non-defaulting clearing
members to be exposed to uncapped liability. FIA and ISDA suggested
revising the language to instead require a DCO to ``limit its exposure
to potential losses from defaults by clearing members through margin
requirements and other risk control mechanisms reasonably designed to
ensure that . . . .'' In response to a comment from FIA and ISDA, the
Commission notes that this change clarifies, but does not alter, a
DCO's existing obligations under this provision.
3. Margin Requirements--Sec. 39.13(g)
a. Methodology and Coverage--Sec. 39.13(g)(2)
Regulation 39.13(g)(2)(i) requires that a DCO have initial margin
requirements that are commensurate with the risks of each product and
portfolio. The Commission is amending Sec. 39.13(g)(2)(i) to delete
the statement in the existing regulation that such risks ``includ[e]
but are not limited to jump-to-default risk or similar jump risk.'' The
Commission had proposed to amend the regulation to keep this statement
and add a statement that such risks also include ``concentration of
positions.'' However, upon considering comments on the proposal, the
Commission is concerned that including and adding to a list of examples
of types of risks might be interpreted to mean that a DCO does not have
to consider risks not mentioned. The Commission reiterates that a DCO
should consider a range of risks, including, for example, jump-to-
default risk, concentration risk, correlation risk, and other risks
associated with the particular products and portfolios it clears.
However, the Commission further notes that DCOs have discretion with
respect to how they identify, label, and address such risks; therefore,
the Commission is declining to define such terms.
LCH commented in support of the proposed revisions to Sec.
39.13(g)(2)(i). However, although FIA and ISDA agreed that a DCO should
consider concentration risk when establishing initial margin
requirements, they requested that the Commission define this term in a
re-proposed rule. FIA and ISDA further suggested that concentration
risk could be defined to include positions that cannot be closed in a
two-day period. Alternatively, they suggested that concentration risk
could be more broadly defined. FIA and ISDA recommended that initial
margin should cover concentration risk over the period that it would
take to liquidate a defaulting participant's positions, and that
initial margin requirements should consider the concentration risk of
open positions relative to product liquidity and percentage of open
interest. FIA and ISDA also recommended that a DCO's initial margin
requirements evaluate concentration risk at an account level. Finally,
FIA and ISDA requested that the Commission require in a re-proposal
that a DCO consider other risk factors, such as correlation and pro-
cyclicality, when determining its initial margin requirements. However,
as explained above, the Commission has determined that including in
Sec. 39.13(g)(2)(i) a list of examples of types of risks might be
interpreted to mean that a DCO does not have to consider risks not
mentioned. Instead, a DCO should consider a range of risks based on the
particular products and portfolios it clears, and it has discretion in
how it identifies and addresses such risks.
b. Independent Validation--Sec. 39.13(g)(3)
Regulation 39.13(g)(3) requires that a DCO's systems for generating
initial margin requirements, including its theoretical models, be
reviewed and validated by a qualified and independent party on a
regular basis. The provision further provides that the validation may
be conducted by independent contractors or employees of the DCO, as
long as they are not responsible for the development or operation of
the systems and models being tested. The Commission is adopting
proposed amendments to this provision to specify that ``on a regular
basis'' means annually and to also permit employees of an affiliate of
the DCO to conduct the validations, as long as the affiliate's
employees are not responsible for the development or operation of the
systems and models being tested. In addition, the Commission is further
modifying Sec. 39.13(g)(3) to specify that, where no material changes
have been made to a DCO's margin model, previous validations can be
reviewed and affirmed as part of the annual review process, as
recommended by several commenters. The Commission is adopting this
change because it agrees with commenters that it is unnecessarily
burdensome to require DCOs to revalidate models that have not changed
since the previous validation.
ICE expressed support for permitting employees of an affiliate of
the DCO to conduct initial margin model validations. LCH also supported
the proposed changes to Sec. 39.13(g)(3). Nodal argued that requiring
annual validations of a DCO's systems for generation of initial margin
requirements, even for theoretical models, is unnecessary because
theoretical models do not change from year to year. Nodal added that
annual validations would present an undue burden for certain DCOs due
to the significant cost and time involved in obtaining an independent
validation. Nodal requested that, if the Commission requires annual
validations as proposed, it exclude theoretical models from the annual
validation requirement to the extent that they have not materially
changed since the prior independent validation. CME commented that, in
revising Sec. 39.13(g)(3), the Commission should consider the
provisions of the Bank Holding Company Supervision Manual, which allows
banks to take varying approaches to model validations from year to
year.\27\ In particular, CME stated that, in some cases where no
material changes have occurred, the manual suggests that previous
validations could be reviewed and affirmed as part of the annual review
process.
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\27\ Board of Governors of the Federal Reserve System, Division
of Supervision and Regulation, Bank Holding Company Supervision
Manual--Model Risk Management, Section 2126.0.5 (Feb. 2019),
available at https://www.federalreserve.gov/publications/files/bhc.pdf.
---------------------------------------------------------------------------
FIA and ISDA supported the proposal to replace the requirement to
review and validate margin models on a ``regular basis'' with a
requirement to do so ``on
[[Page 4811]]
an annual basis.'' They also supported allowing a DCO to exercise
discretion concerning the extent of the annual validation process
depending, for example, on whether material changes have been made to
the margin model since the prior validation, and cited to the Bank
Holding Company Supervision Manual as well.
FIA and ISDA also requested that the Commission withdraw the
proposal to allow employees of an affiliate of a DCO to conduct an
initial margin model validation and instead require in a re-proposed
rule that a qualified and independent third party must conduct the
initial margin model validation. FIA and ISDA argued that employees who
validate an initial margin model used by more than one affiliated DCO
may fail to analyze whether a single model is appropriate for different
products cleared by different affiliated DCOs. FIA and ISDA further
suggested that the Commission re-propose several adjustments to a DCO's
initial margin model validation process to increase transparency. The
Commission believes it is appropriate to permit a DCO's employees or
employees of an affiliate of the DCO to conduct the validations,
provided they are not responsible for development or operation of the
systems and models being tested. Since Sec. 39.13(g)(3) has been in
place, the Commission has not encountered any issues with employees of
a DCO conducting the validations; therefore, the Commission believes it
is appropriate to permit employees of an affiliate of the DCO to
conduct the validations.
c. Spreads and Portfolio Margins--Sec. 39.13(g)(4)
To be consistent with other Commission regulations, the Commission
is amending Sec. 39.13(g)(4) to substitute the phrase ``conceptual
basis'' for the phrase ``theoretical basis'' in the discussion of
spread margin. LCH supported the proposed changes.
d. Back Tests--Sec. 39.13(g)(7)
The Commission is adopting new Sec. 39.13(g)(7)(iii) to clarify
that, in conducting back tests of initial margin requirements, a DCO
should compare portfolio losses only to those components of initial
margin that capture changes in market risk factors.
LCH supported the proposed changes to Sec. 39.13(g)(7)(iii). ICE
agreed that portfolio back testing of the statistical performance of
the core margin model should be solely based upon market risk factors
that can be directly measured and tested. However, ICE commented that,
when performing back testing to assess whether the DCO has collected
sufficient margin to meet its coverage requirement, the DCO should
include all of the margin model's charges and add-ons, ``in other
words, all of the margin resources available to mitigate the risk of
the position (excluding any voluntary excess posted by a clearing
member).'' In contrast, although SIFMA AMG agreed that clarification is
necessary in this regard, it suggested that margin add-ons, which it
noted are outside of the model framework, should not be included when
back testing a margin model. SIFMA AMG stated that excluding the impact
of these and other similar add-ons will reduce the likelihood of
misrepresenting the actual margin coverage produced by a DCO's models,
as their inclusion may result in margin breaches going undetected. In
addition, SIFMA AMG stated that margin add-ons are often calculated at
the sole discretion of the DCO and are not readily replicable by market
participants. SIFMA AMG further stated that DCOs should disclose these
back-testing results at the contract level, rather than the account
level, to increase transparency and facilitate enhanced risk monitoring
by all market participants.
In response to the comments, the Commission notes that comparing
portfolio losses only to components of initial margin that capture
changes in market risk factors reduces the likelihood of
misrepresenting the actual margin coverage produced by a DCO's models,
as the inclusion of other components may result in margin breaches
going undetected.
e. Gross Customer Margin--Sec. 39.13(g)(8)(i)
Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin
on a gross basis for each clearing member's customer account(s). The
Commission is revising Sec. 39.13(g)(8)(i) to clarify that initial
margin must be collected on a gross basis only at the end-of-day
settlement cycle.
OCC supported the proposed changes. The Commission also received
two comments specific to its statement in the Proposal that,
notwithstanding the proposed change to the rule text, a DCO should also
collect customer initial margin from its clearing members on a gross
basis during any intraday settlement cycle in which the DCO collects
customer initial margin if the DCO is able to calculate the margin
accurately.\28\ LCH stated that it supports the intraday collection of
customer initial margin on a gross basis because it supports the risk
management function of a DCO. By contrast, FIA and ISDA argued that the
Commission should not encourage a DCO to collect gross customer initial
margin during an intraday settlement cycle because it would create
significant operational problems.
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\28\ See Derivatives Clearing Organization General Provisions
and Core Principles, 84 FR 22236.
---------------------------------------------------------------------------
In response to the comment from FIA and ISDA, the Commission
reiterates that it recommends that a DCO should collect customer
initial margin from its clearing members on a gross basis during any
intraday settlement cycle in which the DCO collects customer initial
margin, but only if it is able to calculate the margin accurately. The
Commission further reiterates that it would not expect a DCO to collect
customer initial margin on an intraday basis if it would create
significant operational problems for the DCO or its clearing members.
Furthermore, the Commission is adopting amendments to Sec.
39.13(g)(8)(i)(B) to require a DCO to have rules that require its
clearing members to provide reports to the DCO each day setting forth
end-of-day gross positions of each individual customer account within
each customer origin of the clearing member. The Commission is
requiring that the daily reports specify positions of ``each individual
customer account'' instead of ``each beneficial owner,'' as originally
proposed, to be consistent with the information that DCOs must report
to the Commission pursuant to Sec. 39.19(c)(1), as discussed below.
OCC commented that the proposed changes to Sec. 39.13(g)(8)(i)(B)
would introduce a significant shift in the burden to maintain customer-
level records from FCMs and introducing brokers to a DCO. OCC stated
that virtually every FCM clears through multiple DCOs, so requiring a
DCO to collect and report this customer-level information to the
Commission does not in fact allow the Commission to appropriately
understand the risks associated with individual customers without
further aggregating the data that various DCOs receive from an
individual FCM. OCC represented that it and its clearing members would
need to make significant operational changes to obtain this information
and report it daily, and OCC would need to make corresponding rule
changes.
MGEX noted that while FCMs know and have a relationship with their
customers, clearing members do not necessarily have such a relationship
with the customers of FCMs for which they clear. Therefore, a rule
requiring clearing members to report customer level information is
impractical, and
[[Page 4812]]
attempting to apply this requirement at the FCM level would similarly
be problematic, as certain FCMs with omnibus accounts may not have a
relationship with the clearing member's DCO.
ICE supported the transparency associated with reporting of
additional customer level information, but noted that the Commission
should further consider the costs to clearing members and DCOs of
developing new operational systems and procedures that the proposal
would necessitate, and consider ways to phase in any new requirements
to allow for the necessary development of new operational systems and
procedures, at both the DCO and clearing member levels. ICE commented
that DCOs and market participants should also have the opportunity to
consider whether the changes could affect other longstanding practices,
such as the treatment by DCOs of the risk in the customer account on a
net basis, and encouraged the Commission to work with and consult the
industry as a whole to implement any changes to current practices.
f. Customer Initial Margin Requirements--Sec. 39.13(g)(8)(ii)
Regulation 39.13(g)(8)(ii) provides that a DCO must require its
clearing members to collect customer initial margin from their
customers, ``for non-hedge positions, at a level that is greater than
100 percent of the [DCO]'s initial margin requirements with respect to
each product and swap portfolio.'' Shortly after this provision was
first adopted, the Commission became aware that it was being
interpreted by DCOs in a way that would have significantly increased
margin requirements for customers in a way that the Commission did not
intend. This was addressed at the time through an interpretative letter
issued by the Division of Clearing and Risk that accurately reflected
the Commission's original intent.\29\ The Commission is now amending
the provision, consistent with the staff interpretation, to permit DCOs
to establish customer initial margin requirements based on the type of
customer account and by applying prudential standards that result in
FCMs collecting customer initial margin at levels commensurate with the
risk presented by each customer account.
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\29\ CFTC Letter No. 12-08 (Sept. 14, 2012); see also Letter
from Lisa Dunsky, Executive Director and Associate General Counsel,
Chicago Mercantile Exchange Inc., to Ananda Radhakrishnan, Director,
Division of Clearing and Risk (Aug. 29, 2012).
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The Commission received three comments in support of the proposed
changes to Sec. 39.13(g)(8)(ii) and one comment in opposition. OCC
supported the proposed changes and stated, in response to a specific
request for comment from the Commission, that further clarification on
what would be considered ``commensurate with the risk presented'' is
unnecessary. ICE supported the proposed changes to Sec.
39.13(g)(8)(ii) giving DCOs discretion in determining the percentage by
which customer initial margin requirements must exceed the DCO's
clearing initial margin requirements. CME supported codification of the
staff interpretation but was concerned that the proposed changes to
Sec. 39.13(g)(8)(ii) would shift the burden of determining the
appropriate level of additional customer margin from FCM clearing
members to DCOs. As a result, CME requested that Sec. 39.13(g)(8)(ii)
be further amended to state that ``the [DCO] shall have reasonable
discretion in determining clearing initial margin requirements for
products or portfolios and whether and by how much customer initial
margin requirements for categories of customers determined to have
heightened risk profiles by their clearing members must exceed, at a
minimum, the [DCO]'s clearing initial margin requirements by a
standardized amount.'' The Commission is adopting similar revisions, in
order to confirm that the changes to Sec. 39.13(g)(8)(ii) are not
intended to shift the burden of determining the appropriate level of
additional customer margin from clearing members to the DCO.
FIA and ISDA commented that the proposed change to customer initial
margin requirements may impose an operationally impractical regime for
clearing members to collect initial margin from customers, arguing that
the proposed amendments would give DCOs too much discretion and
encourage DCOs to apply differing measures to assess additional margin.
FIA and ISDA believe that clearing members would benefit from a common
approach to additional margin among DCOs. FIA and ISDA recommended
that, regardless of whether the Commission adopts the proposed change,
it should codify earlier no-action relief which clarifies that the
initial margin requirements in Sec. 39.13(g)(8)(ii) do not apply to
security futures positions.
With respect to the applicability of Sec. 39.13(g)(8)(ii) to
security futures positions, the Commission notes that the
interpretative guidance provided in CFTC Letter No. 12-08 is still in
effect. The Commission further notes that it has received similar
comments in connection with a recently proposed joint rulemaking issued
by the Commission and the SEC on this topic, and believes that it is
more appropriate to consider whether or not to codify this relief as
part of that rulemaking.\30\
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\30\ Customer Margin Rules Relating to Security Futures, 84 FR
36434 (July 26, 2019).
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g. Haircuts--Sec. 39.13(g)(12)
Regulation 39.13(g)(12) requires a DCO to apply ``haircuts'' to the
assets that it accepts in satisfaction of initial margin obligations,
and to evaluate the appropriateness of the haircuts on at least a
quarterly basis. Regulation 39.11(d)(1) requires a DCO to evaluate on a
monthly basis its haircuts for assets that are used to meet the DCO's
financial resources obligations set forth in Sec. 39.11(a) (i.e., its
``cover one'' default resources). The Commission is amending Sec.
39.13(g)(12) to align it with Sec. 39.11(d)(1) by requiring that a DCO
evaluate the appropriateness of the haircuts that it applies to assets
accepted in satisfaction of initial margin obligations on a monthly
basis. Given that initial margin is held for risk management purposes,
and the value of these assets may change frequently, the Commission
believes it is appropriate to assess haircuts more frequently.
The Commission received one comment in support of the proposal and
one comment in opposition. FIA and ISDA stated that the proposed change
is appropriate given the frequent changes in the value of assets held
for initial margin. LCH disagreed with the proposed change, stating
that, in normal market conditions, haircuts do not significantly
change, or may not change at all, from month to month. LCH suggested
that haircut reviews continue to be required on a quarterly basis, but
that the Commission enhance Sec. 39.13(g)(12) by mandating that DCOs
review haircuts more frequently in the event of specific scenarios,
such as breach of back testing or high market volatility, which would
affect the valuation and liquidity of eligible collateral.
4. Other Risk Control Mechanisms--Sec. 39.13(h)
a. Risk Limits--Sec. 39.13(h)(1)
Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the DCO's financial resources. The Commission
proposed to amend the provision to specify that risk limits
[[Page 4813]]
should also be imposed to address positions that may be difficult to
liquidate.
The Commission has determined not to adopt the proposed changes to
Sec. 39.13(h)(1) at this time, but will continue to consider this
issue further. The Commission remains concerned about positions that
may be difficult to liquidate, particularly concentrated positions. As
the Commission mentioned in the Proposal, recent events, including a
significant loss from a default at a central counterparty outside of
the Commission's jurisdiction, highlight the importance of addressing
such positions. However, the Commission believes that DCOs should
address difficult-to-liquidate positions using the DCO's margin
methodology and consider whether and what other measures may be
appropriate.
OCC opposed the proposed change, in favor of addressing difficult-
to-liquidate positions through a DCO's margin methodology. OCC argued
that margin requirements can more effectively account for the liquidity
risk associated with specific positions held by specific clearing
members, because margin requirements can be tailored to the risks and
particular attributes of each relevant product, portfolio, and market.
The margin requirements can then serve as one input a DCO uses in
determining the appropriate risk limits. FIA and ISDA noted that the
proposed imposition of hard risk limits on positions that may be
difficult to liquidate would be a significant departure from current
risk management practices for clearing members. FIA and ISDA suggested
that the Commission should withdraw the proposed change to Sec.
39.13(h)(1)(i) and consult with DCOs and clearing members about how to
best risk-manage positions that are difficult to liquidate. LCH agreed
that DCOs should have procedures in place to address clearing members
with large positions that may be difficult to liquidate in the event of
a default. However, LCH suggested that, rather than setting bright-line
limits on the maximum size of such positions, the Commission should
require DCOs to have measures in place, such as margin add-ons, to
address concentration risk. LCH stated that this would be an
appropriate approach because the mitigants against concentration risk
of certain positions in any one clearing member would be built into the
DCO's risk model. LCH further indicated that setting and maintaining
such hard limits may result in market fragmentation or artificial
limits that are not risk related and may inadvertently create
disincentives to clearing.
b. Clearing Members' Risk Management Policies and Procedures--Sec.
39.13(h)(5)
Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis,
review the risk management policies, procedures, and practices of each
of its clearing members, which address the risks that such clearing
members may pose to the DCO, and to document such reviews. The
Commission is adopting an amendment to this regulation to clarify that
DCOs should, having conducted such reviews, ``take appropriate actions
to address concerns identified in such reviews,'' and that the
documentation of the reviews should include ``the basis for determining
what action was appropriate to take.''
The Commission received one comment in support of the proposal and
two comments in opposition. LCH supported the proposed changes
regarding clearing member risk management policies and procedures. FIA
and ISDA stated that the proposed change that would require a DCO to
take appropriate actions to address concerns resulting from a review of
a clearing member's risk management policies and procedures is
unnecessary. ICE opposed requiring DCOs to supervise or impose changes
in the risk management policies of clearing members, and commented that
any such requirement would be more appropriate at the designated self-
regulatory organization (DSRO) level, rather than the DCO level.
In response to ICE's suggestion that clearing member risk reviews
should be conducted by a DSRO, the Commission notes that not all
clearing members are subject to the supervision of a DSRO. The
Commission disagrees with FIA and ISDA's comment that requiring a DCO
to take appropriate actions to address concerns resulting from a review
of a clearing member's risk management policies and procedures is
unnecessary. As the Commission stated in the Proposal, absent such
follow-up, the reviews would lack purpose.
5. Cross-Margining--Sec. 39.13(i)
The Commission is codifying its existing practices for evaluating
cross-margining programs in new Sec. 39.13(i), which requires a DCO
that seeks to implement or modify a cross-margining program with one or
more other clearing organizations to submit rules for Commission
approval pursuant to Sec. 40.5. However, the Commission is not
adopting the proposed requirement that a DCO provide, at a minimum,
specific information needed to facilitate the Commission's review of
the rule filing. Rather, the Commission is requiring that a DCO submit
information sufficient for the Commission to understand the risks that
would be posed by the program and the means by which the DCO would
address and mitigate those risks. The Commission believes that leaving
it to the discretion of the DCO to determine what information to
provide, yet giving the Commission the ability to request any
additional information it may need to conduct its review of a cross-
margining program, is appropriate given that cross-margining programs
can vary greatly, depending on the products, participants, and clearing
organizations involved. The Commission notes, however, there may be
instances where a cross-margining program would require approval beyond
the Sec. 40.5 submission. For example, a cross-margining program
between a registered DCO and a clearing organization that is not
registered with the Commission may require relief from section 4d of
the CEA for FCM customers to be eligible to participate.
The Commission received one comment in support of the proposal and
one comment in opposition. FIA and ISDA supported the proposal, stating
that it would increase transparency and improve the ability of clearing
members to manage the risks associated with positions subject to cross-
margining. They recommended that the Commission consider including in
its evaluation the credit and liquidity risk management, settlement,
and default management-related principles identified in the PFMIs. In
addition, FIA and ISDA suggested that the Commission should require
DCOs participating in a cross-margining arrangement to consult with
their respective clearing members.
OCC opposed the proposal to require a DCO to provide specific types
of information, arguing that it would reduce the Commission's
flexibility to determine what types of information are necessary for it
to review in specific circumstances. OCC suggested that a DCO should
not be required to provide each of the specified types of information
when it is requesting the Commission's approval to update an existing
cross-margining program, where analyzing factors unrelated to the
change for which it is requesting approval would create an unnecessary
burden. OCC suggested that instead the Commission should issue guidance
on what information it may require in its review of a cross-margining
program. OCC further requested that, should the Commission nonetheless
choose to require specific types of information in proposed Sec.
39.13(i), the information should only be required when the Commission
reviews a new cross-
[[Page 4814]]
margining program and not when the Commission reviews changes to an
existing cross-margining program. OCC also suggested that DCOs should
be able to submit a cross-margining program under either Sec. 40.5 or
Sec. 40.6(a), and requested that the Commission only apply the Sec.
40.5 review process to a new cross-margining program.
In response to FIA and ISDA's comment on consulting with clearing
members, the Commission notes that Sec. 40.5(a)(8) requires a DCO to
provide a brief explanation of any substantive opposing views expressed
by its members that were not incorporated into the rule, or a statement
that no such opposing views were expressed. The Commission recognizes
that Sec. 40.5(a)(8) does not require consultation with clearing
members. Because the Commission did not propose this requirement, it
cannot adopt it at this time but may consider it in conjunction with a
future rulemaking.
The Commission considered OCC's recommendation that a DCO be able
to submit cross-margining rules pursuant to Sec. 40.6,\31\ but has
determined to adopt the requirement to submit such rules under Sec.
40.5 as proposed to give the Commission sufficient time to consider
those rules. The Commission confirms, however, that it may expedite the
rule approval process under Sec. 40.5(g) where appropriate.
---------------------------------------------------------------------------
\31\ The Commission has approved prior cross-margining
arrangements pursuant to its rule approval process or by Commission
order. See Derivatives Clearing Organization General Provisions and
Core Principles, 84 FR 22238, n. 51 (discussing prior cross-
margining arrangements approved by the Commission). In the
discussion in the Proposal of prior cross-margining arrangements
approved by the Commission, the Commission referenced certain orders
that were amended to incorporate the provisions of Appendix B,
Framework 1 to the Commission's part 190 regulations. The Commission
notes that Framework 1 would no longer apply in this context, as
cross-margining arrangements would be approved pursuant to Sec.
40.5 rather than by Commission order.
---------------------------------------------------------------------------
F. Treatment of Funds--Sec. 39.15
The Commission is adopting as proposed amendments to Sec. 39.15,
which concerns a DCO's treatment of clearing member and customer funds.
Regulation 39.15(b)(2)(ii) is being amended to permit a DCO to file
rules for Commission approval pursuant to Sec. 40.5, rather than
request a Commission order, to allow the DCO and its clearing members
to commingle cleared swaps, foreign futures, or foreign options with
futures and options in an account subject to the requirements of
section 4d(a) of the CEA (i.e., the futures account). This is
consistent with the existing requirements for commingling futures with
cleared swaps in the cleared swaps customer account pursuant to Sec.
39.15(b)(2)(i) (which is also being amended to permit foreign futures
and foreign options to be held in the account). When Sec.
39.15(b)(2)(ii) was first promulgated, the Commission, in reference to
its decision to require an order rather than a rule approval to
commingle cleared swaps with futures in a futures account, stated ``at
this time, it is appropriate to provide these additional procedural
protections before exposing futures customers to the risks of swaps
that may be commingled in a futures account.'' \32\ The Commission,
however, acknowledged that ``as the Commission and the industry gain
more experience with cleared swaps, the Commission may revisit this
issue in the future.'' \33\ The Commission now believes that a request
for a rule approval that complies with Sec. 40.5 will provide the
Commission with sufficient means to determine whether customer funds
held in a futures account will be adequately protected if cleared
swaps, foreign futures, or foreign options are also held in the
account.
---------------------------------------------------------------------------
\32\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69392.
\33\ Id.
---------------------------------------------------------------------------
The Commission is also amending Sec. 39.15(d) to require the
``prompt,'' but not necessarily simultaneous, transfer of a customer's
positions and related funds from one clearing member to another
clearing member ``as necessary.'' The Commission had proposed this
change because, although a DCO may transfer positions from one clearing
member to another, the DCO does not generally transfer funds.
ICE generally supported the proposed amendments to Sec. 39.15,
including allowing commingling of swaps in a futures account pursuant
to rules submitted under Sec. 40.5 rather than pursuant to a separate
Commission order under section 4d of the CEA. LCH, FIA, and ISDA
supported the proposed amendment to Sec. 39.15(d) to require the
prompt, but not necessarily simultaneous, transfer of a customer's
positions and related funds. FIA and ISDA noted that clearing members
transfer positions before related collateral is transferred under
current market practice. LCH noted that proposed Sec. 39.15(d)
reflects how funds are transferred, especially where there is third-
party involvement and the simultaneous transfer of funds may not be
possible.
The Commission did not receive any comments on the proposed
technical changes to Sec. 39.15(b)(2)(iii) and (e) and is adopting
those changes as proposed.
G. Default Rules and Procedures--Sec. 39.16
1. Default Management Plan--Sec. 39.16(b)
Regulation 39.16(b) requires a DCO to have a default management
plan and, among other things, test the plan at least on an annual
basis. The Commission is adopting an amendment to Sec. 39.16(b), as
further modified in response to a comment from FIA and ISDA, to require
that the DCO include clearing members and participants in a test of its
default management plan on at least an annual basis to the extent the
plan relies on their participation. The Commission continues to
believe, as noted in the Proposal, that a DCO should ensure that a
sufficient portion of its clearing membership participates in such
testing.
OCC supported the proposed change but stated that a DCO should have
broad discretion to determine whether a ``sufficient portion'' of its
clearing membership is participating. OCC noted that the number of
clearing members that participate in a default management test is not
necessarily indicative of whether a DCO's default management plan has
been tested effectively, and that other factors must also be
considered.
FIA and ISDA generally supported the proposed change but
recommended that the rule refer to clearing members and
``participants'' so that, if a DCO's rules allow non-clearing members
to participate in an auction of a defaulting clearing member's
positions, a sufficient portion of such participants should be required
to participate in the testing of the DCO's default management plan. FIA
and ISDA further suggested that participation in testing should be tied
to asset classes so that only clearing members that carry positions, or
participants that trade, in a particular asset class are required to
participate in tests of a DCO's default management plan for that
particular asset class. Lastly, FIA and ISDA recommended that DCOs
should be required to coordinate the testing of their respective
default management plans so that the requirement to participate in
testing of the plan does not place an undue burden on clearing members.
Nodal commented that the requirement to include clearing members in
a test of a DCO's default management plan is not necessary for a DCO
that does not rely exclusively on clearing member auctions. Nodal
requested that the Commission limit the application of the proposed
rule, if adopted, to those DCOs that primarily rely on a clearing
member auction process in their default management
[[Page 4815]]
plans, rather than applying it to all DCOs.
As to FIA and ISDA's suggestion that participation in testing
should be tied to asset classes, the Commission believes that this
decision is in the DCO's discretion. Lastly, as to FIA and ISDA's
recommendation that DCOs should be required to coordinate the testing
of their respective default management plans, the Commission encourages
DCOs to coordinate the testing of their default management plans to the
extent possible to avoid placing an undue burden on clearing members
and participants.
2. Default Procedures--Sec. 39.16(c)
a. Default Committee--Sec. 39.16(c)(1)
Regulation 39.16(c) requires a DCO to adopt procedures that would
permit the DCO to take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
default by one of its clearing members. The Commission proposed to
amend Sec. 39.16(c)(1) to require a DCO to have a default committee
that would be convened in the event of a default involving substantial
or complex positions to help identify market issues with any action the
DCO is considering. The default committee would be required to include
clearing members and could include other participants to help the DCO
efficiently manage the house or customer positions of the defaulting
clearing member. In light of the strong divergence in the views
expressed in the comments received on this proposal, the Commission has
determined not to adopt the proposed changes to Sec. 39.16(c)(1) at
this time. The Commission wishes to give industry stakeholders some
time to come closer to consensus on this issue.
Some comments generally supported the proposal. MFA supported the
proposal to allow non-clearing members to participate in a DCO's
default committee. MFA noted, however, that the proposal permits but
does not require customer participation, and requested that the
Commission affirmatively mandate customer involvement. MFA understands
that DCOs already have the authority to voluntarily include customers
in their default committees, but that they have chosen not to do so.
FIA and ISDA generally supported the proposed requirement that a
DCO have a standing default committee. They recommended, however, that,
absent exigent circumstances, the default committee convene whenever a
material default occurs, not only when a default involving substantial
or complex positions occurs. FIA and ISDA also supported the proposed
requirement that the default committee include clearing members, but
they recommended that clearing members be allowed to voluntarily
participate on default management committees.
Mr. Saguato supported the proposal to have clearing member and
customer participation on a DCO's default committee. Mr. Saguato
suggested that the Commission explore the costs and benefits of further
increasing and formalizing the role of clearing members and their
customers in the default process, as Mr. Saguato believes clearing
members should have a primary role in setting default procedures.
Furthermore, SIFMA AMG agreed that DCOs should have a standing
committee to address all defaults.
Other comments opposed the proposal. ICE did not believe that
requiring the use of a default committee that includes clearing members
and other participants is advisable. ICE noted that it is not clear
what criteria would be used to determine whether a default scenario is
``complex'' or ``substantial,'' or who would make the determination.
ICE commented that it is not feasible for these and other
considerations to be addressed in a rule, which therefore weighs
against mandating the use of a default committee.
MGEX urged the Commission to permit a DCO's pre-existing risk or
risk management committee to also serve as the default committee. MGEX
indicated that allowing this type of dual-purpose committee would offer
smaller entities with less complex product offerings a more immediate
and efficient implementation, while avoiding the potential difficulty
in finding sufficient clearing member interests to fill two separate
committees.
CME commented that the proposal to require a default committee and
clearing member participation on that committee risks unnecessarily
prolonging and overcomplicating the default management process. CME
also stated that a DCO's default management plan should account for the
risks from substantial and/or complex portfolios, and these types of
portfolios should be addressed in the design and testing phases of a
DCO's default management plan and its day-to-day risk management.
Lastly, CME noted that providing information on a defaulted clearing
member's portfolio to the clearing members on the DCO's default
committee, independent of their participation in subsequent liquidation
or auction processes, increases the risk of information leakage and
disadvantageous pricing.
Nodal commented that requiring a DCO to have a default committee
that includes clearing members or other participants is not likely to
assist in efficiently managing the positions of the defaulting member;
instead, it would add unnecessary complexity to what is already an
efficient process. Nodal further stated that having clearing members on
a default committee could create the potential for conflicts for any
clearing member or participant selected, as well as introduce an
element of self-interest or potential gaming within the decision-making
of the default procedure and response. Finally, OCC commented that
``substantial or complex positions'' should not include exchange-traded
products.
b. Declaration of Default--Sec. 39.16(c)(2)(ii)
The Commission is adopting an amendment to Sec. 39.16(c)(2)(ii) to
require that a DCO have default procedures that include public notice
on the DCO's website of a declaration of default. However, the final
rule differs from the proposal in that it does not require
``immediate'' public notice of a default. Instead, the final rule is
silent on the timing of the notice. The Commission believes that a DCO
should provide public notice as quickly as possible, taking into
account the potential negative impact that it might have on the DCO's
ability to manage the default.
The Commission had requested comment as to whether the timing of
the announcement would potentially impact the market or the DCO's
ability to manage the default. SIFMA AMG agreed with the proposal to
require a DCO's default procedures to include immediate public notice
on the DCO's website of a declaration of default. CME recommended that
the Commission permit DCOs to exercise discretion on the timing of a
public notice of a declaration of default where such notification could
negatively impact the ability of the DCO to manage the default. CME
noted that mandatory immediate public notification runs the risk of
causing disadvantageous pricing for liquidation or auctions, which
could increase the costs to the DCO of managing the clearing member
default, and if losses are incurred, could ultimately increase the risk
of mutualizing losses among its clearing members.
Mr. Saguato commented that requiring immediate public notice of a
declaration of default is unnecessary and potentially counterproductive
to an effective default management process
[[Page 4816]]
and should not be adopted as proposed. Mr. Saguato further stated that
markets should be notified only at the completion of the default
management process, to avoid the risk of spillovers.
OCC suggested that the Commission consider whether ``prompt''
public notice on the DCO's website would be more appropriate for
consistency with the timing of other activities a DCO must perform
pursuant to its default management plan and the responsibility of a
clearing member to provide the DCO with prompt notice if it becomes
insolvent. OCC noted that requiring immediate public notice may result
in a DCO notifying the public of a default before the DCO has complete
information about the default, which may trigger market panic before
the DCO is able to understand the circumstances giving rise to the
default and the market impact.
Eurex opposed the requirement to provide immediate public notice,
arguing that it could adversely affect the DCO's ability to manage a
default and may interfere with the DCO's existing notification
practices with respect to porting, for example. Nodal, FIA, and ISDA
noted that the timing of an announcement of a default could potentially
affect the market and the ability of the DCO, clearing members, and
customers to manage the risks and consequences of the default.
Therefore, Eurex, Nodal, FIA, and ISDA recommended that the Commission
allow a DCO to have flexibility in the manner and timing of these
notices. MGEX generally agreed that public notice of a default is vital
for promoting the integrity and stability of financial markets, but
suggested that the Commission give DCOs discretion with respect to the
timing of posting such notice, which would allow the DCO to consider
the nature of the default and any circumstances warranting flexibility.
ICE commented that, depending on the facts and circumstances of a
default, an immediate announcement could potentially impact the market
and the DCO's ability to manage the default. ICE therefore suggested
that DCOs should be required to provide public notice of a default ``as
soon as practicable under the circumstances.''
c. Allocation of Defaulting Clearing Member's Positions--Sec.
39.16(c)(2)(iii)(C)
Regulation 39.16(c)(2)(iii)(C) requires any allocation of a
defaulting clearing member's positions to be proportional to the size
of the participating or accepting clearing member's positions in the
same product class at the DCO. The Commission is adopting an amendment
to this provision to provide that the DCO shall not require a clearing
member to bid for a portion of, or accept an allocation of, the
defaulting clearing member's positions that is not proportional to the
size of the bidding or accepting clearing member's positions in the
same product class at the DCO. This amendment is intended to clarify
that a clearing member that wishes to voluntarily bid for or accept
more than its proportional share should be allowed to do so, provided
that the clearing member has the ability to manage the risk of the new
positions. It also clarifies that the provision applies to both
auctions and allocations.
The Commission had proposed to further amend Sec.
39.16(c)(2)(iii)(C) to provide that the size of the participating or
accepting clearing member's positions in the same product class at the
DCO should be measured by the clearing initial margin requirement for
those positions. The Commission requested comment as to whether the
Commission should require DCOs to take into consideration other
indicators of active participation in a market, such as open interest,
volume, and/or other criteria. All of the commenters opposed the
proposed change, arguing that there are many factors that should be
taken into consideration. The Commission found the comments persuasive
and therefore is not adopting the proposed change.
CME commented that initial margin required as the basis for
determining limits on potential bidding and allocation requirements
under proposed Sec. 39.16(c)(2)(iii)(C) may offer a poor approximation
for the risk management capacity, capital availability, and credit
quality of a clearing member. CME suggested that a given clearing
member's initial margin requirements at the time of a clearing member
default are a function of the size and directionality of the clearing
member's portfolio, the variance of which over time creates an
arbitrary standard by which to limit the ability of a DCO to require a
clearing member to bid on a defaulter's portfolio. Therefore, CME
suggested that, to the extent a limit on forced bidding or allocations
is imposed, it should be based on a clearing member's risk management
capacity, capital sufficiency, and credit quality, not solely its
initial margin requirement.
ICE disagreed that mandatory bidding, or other auction terms,
should be set by regulation; rather, they should be left to the DCO to
determine in its rules and procedures, subject to regulatory oversight.
ICE noted that there is no single approach to determining the level of
a mandatory bid, or other relevant terms of participation.
In response to the Commission's request for comment as to whether
it should require DCOs to take into consideration other indicators of
active participation in a market, MGEX observed that DCOs already have
ample tools to handle these situations, such as security deposits and
various forms of margin, which take different risk factors into
consideration. OCC stated that the amount of initial margin a clearing
member holds at a DCO for a given product or product class is not
always a good indicator of that member's qualification to bid on or
accept an allocation of certain products or product classes. OCC argued
that a DCO should be given discretion to consider several criteria,
including a clearing member's initial margin for a given product or
product class, open interest, volume, and risk management capabilities.
3. Fully Collateralized Positions--Sec. 39.16(e)
In response to a request from Nadex, the Commission is adopting new
Sec. 39.16(e) to provide that a DCO may satisfy the requirements of
paragraphs (a), (b), and (c) of Sec. 39.16 (which relate to a DCO's
default management plan and procedures) by having rules that permit it
to clear only fully collateralized positions. This rule was not
included in the Proposal, but the Commission believes it is appropriate
to include it in the final rule because it is consistent with other
exceptions for fully collateralized positions adopted herein.
Nadex requested that the Commission further amend Sec. 39.16 to
indicate that the requirements thereof do not apply to DCOs that clear
only fully collateralized contracts. Nadex noted that in 2014, in
response to its request for interpretative relief, the Division of
Clearing and Risk issued an interpretative letter stating that Nadex's
fully collateralized requirements satisfy the requirements of Sec.
39.16.\34\ The letter indicated that, because Nadex requires 100
percent of the funds necessary to fully collateralize a clearing
member's positions to be on deposit with Nadex before the trade is
executed, Nadex has eliminated the potential for a clearing member
default.
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\34\ See CFTC Letter No. 14-05 (Jan. 16, 2014).
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H. Rule Enforcement--Sec. 39.17
Regulation 39.17(a)(1) requires a DCO to maintain adequate
arrangements and resources for the effective monitoring and enforcement
of compliance with its rules and the resolution of disputes. The
Commission is adopting an amendment
[[Page 4817]]
to Sec. 39.17(a)(1), as proposed, to explicitly state that that this
applies to both the DCO's and its members' compliance with the DCO's
rules.
Regulation 39.17(b) permits a DCO's board of directors to delegate
its responsibility for compliance with the requirements of Sec.
39.17(a) to the DCO's risk management committee. The Commission is
amending Sec. 39.17(b) by replacing ``risk management committee'' with
``an appropriate committee.''
FIA and ISDA supported the proposed amendments on the assumption
that the Commission does not seek to impose any new obligations on
clearing members. ICE also supported the proposed amendments and
suggested that the Commission should consider permitting a DCO's board
to broaden the delegation of this responsibility to the president of
the DCO or an equivalent officer.
The Commission confirms that it is not seeking to impose any new
obligations on clearing members. Rather, the purpose of the amendment
is to remind DCOs of their obligation to comply with their own rules as
well as enforce them against their clearing members. The Commission,
however, declines to adopt ICE's suggestion regarding the scope of
permissible delegation at this time; the Commission may consider it in
a future proposal where comment could be sought.
I. Reporting--Sec. 39.19
Regulation 39.19 implements Core Principle J, which requires that
each DCO provide to the Commission all information that the Commission
determines to be necessary to conduct oversight of the DCO. The
Commission is amending Sec. 39.19 to clarify certain existing
requirements, and also to adopt multiple new reporting requirements.
These changes to Sec. 39.19 will enhance the Commission's ability to
conduct effective and efficient oversight of DCO compliance with the
DCO Core Principles and Commission regulations. The Commission received
comments on a number of the proposed changes to Sec. 39.19. As further
detailed below, the Commission modified several of the proposed
requirements in response to comments. Unless stated otherwise below,
the Commission did not receive any comments on the proposed amendments
to Sec. 39.19 and is adopting them as proposed.
1. General--Sec. 39.19(a)
The Commission is revising the text of Sec. 39.19(a) to match the
text of Core Principle J. The revisions are not meant to alter the
meaning of the provision.
2. Submission of Reports--Sec. 39.19(b)
Regulation 39.19(b)(1) requires a DCO to submit the information
required by the section to the Commission electronically and in a
format and manner specified by the Commission, unless otherwise
specified by the Commission or its designee. To simplify the text while
retaining the originally-intended flexibility, the Commission is
deleting the phrase ``[u]nless otherwise specified by the Commission or
its designee'' and the term ``electronically.'' The Commission is also
adding new Sec. 39.19(b)(2) to require that when making a submission
pursuant to the section, an employee of a DCO must certify that he or
she is duly authorized to make such a submission on behalf of the DCO.
This provision codifies existing practices with respect to the use of
the CFTC Portal for submissions pursuant to Sec. 39.19. Finally, the
Commission is removing existing Sec. 39.19(b)(3) and moving the
definition of ``business day'' to Sec. 39.2, as discussed above.
Existing Sec. 39.19(b)(2) is renumbered as Sec. 39.19(b)(3). The
Commission continues to believe, as noted in the Proposal, that it is
appropriate to codify existing practices with respect to the use of the
CFTC Portal for submissions pursuant to Sec. 39.19.
ICE opposed the proposal to codify the certification requirement in
Sec. 39.19(b)(2). ICE asserted that the requirement is unnecessary
because it is extraordinarily unlikely that unauthorized submissions
are being made by DCO personnel. ICE further argued that this
requirement creates an unnecessary compliance burden. Nadex requested
clarification regarding this requirement, asking whether a DCO would be
required to maintain separate documentation that identifies the
employees authorized to make submissions on behalf of the DCO. Nadex
also requested clarification regarding which DCO employees have the
authority to authorize other employees to make submissions for the DCO.
Lastly, Nadex requested clarification as to whether the certification
should be included in the text of the submission or if it will appear
in the CFTC Portal in the form of a confirmation statement.
In response to ICE's comment, the Commission notes that, although
they are not common, unauthorized submissions have occurred. In
response to Nadex's questions, the Commission notes that DCOs have
discretion to determine who is authorized to make submissions on their
behalf and, under the rule, they would not be required to maintain
separate documentation that identifies the employees authorized to make
submissions on behalf of the DCO. With respect to the location of the
certification, the Commission will incorporate the certification into
the section of the portal form where users certify as to the accuracy
and completeness of the submission. Completing this section of the
portal form will satisfy the certification requirements of Sec.
39.19(b)(2).
3. Daily Reporting of Information--Sec. 39.19(c)(1)(i)
Regulation 39.19(c)(1)(i) requires a DCO to report to the
Commission on a daily basis margin, cash flow, and position information
for each clearing member, by house origin and by each customer origin.
The Commission is amending Sec. 39.19(c)(1)(i) to require a DCO to
also report margin, cash flow, and position information by individual
customer account. This is information that DCOs currently provide in
accordance with the Part 39 Reporting Guidebook,\35\ which requests
that DCOs provide clearing members' customer information, but also
``acknowledges that customer level information may not be available to
all DCOs.'' \36\ Additionally, the Commission is specifying
``individual customer account,'' as individual customers may have
multiple accounts, which should be reported separately. The amendments
will also require DCOs provide any legal entity identifiers and
internally-generated identifiers within each customer origin for each
clearing member, to the extent that the DCO has this information.
Lastly, the amendments to Sec. 39.19(c)(1)(i)(D) specify that, with
respect to end-of-day positions, DCOs must report the positions
themselves (i.e., the long and short positions) as well as risk
[[Page 4818]]
sensitivities \37\ and valuation data \38\ that the DCO generates,
creates, or calculates in connection with managing the risks associated
with such positions.
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\35\ The U.S. Commodity Futures Trading Commission Part 39
Reporting Requirements for Derivatives Clearing Organizations,
Guidebook for Daily Reports, v.0.9.2, Dec. 2017 (Part 39 Reporting
Guidebook) provides instructions and technical specifications for
daily reporting under Sec. 39.19(c)(1)(i).
\36\ Part 39 Reporting Guidebook, Section 2.1.2.2, Client
Account Information, p. 5.
\37\ Risk-sensitivities are different measures of the impact of
changes in underlying factors on the value of the positions. For
example, an interest rate delta describes the theoretical profit or
loss (P&L) that results from a one basis point increase in a
currency's interest rate curve. A delta ladder describes a series of
sensitivities for different maturity points (tenors) where each
``rung'' represents an increasing maturity point or tenor along the
zero rate curve term structure. In the context of options, examples
of risk sensitivities would be the different Greeks--for example,
delta, gamma, vega, and theta.
\38\ Valuation data refer to variables and inputs that reflect
current market conditions, as well as expectations for the future.
In the case of credit default swaps, valuation models rely on, for
example, risk neutral default probabilities of swaps, forward credit
spreads for different maturities. For interest rate swaps, valuation
models require discount factors.
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The final rule differs from the proposal in order to clarify that
subparagraph (D) does not require a DCO to calculate risk sensitivities
on the Commission's behalf. Rather, the rule requires a DCO only to
report the risk sensitivities and valuation data for end-of-day
positions that the DCO generates, creates, or calculates in connection
with managing the risks associated with those end-of-day positions. The
final rule is also modified to provide that a DCO is required to
provide any legal entity identifiers and internally-generated
identifiers for each individual customer account only if the DCO has
this information associated with an account.
The Commission notes that the changes to Sec. 39.19(c)(1)(i) to
require reporting of information ``by each individual customer
account'' are meant to reflect the information that DCOs currently
report, to varying degrees, as explained above. The Commission notes
that the requirement to report information ``by each individual
customer account'' does not require a DCO to mandate that its clearing
members look through an omnibus account that the clearing member
carries for another registrant to ascertain the customers of that
registrant. Similarly, in addition to providing for reporting by
individual customer account, the daily reporting specifications have
for several years included fields for reporting certain risk
sensitivities, as well as reporting unique customer identifiers or
legal entity identifiers. Ultimately, the changes to Sec.
39.19(c)(1)(i) are not intended to require DCOs to report any
information that they do not currently have, or do not currently
report, subject to any operational or technological limitations that
have been discussed with Commission staff. When Commission staff
determines in the future that additional information regarding risk
sensitivities and valuation data is needed, staff will engage with the
DCOs, consistent with past practice, to facilitate efficient and
effective reporting of this data.
Several commenters appeared to have adopted the view that the
proposed amendment to Sec. 39.19(c)(1)(i) to include individual
customer account information would be a significant departure from
existing requirements, when in fact this change is not intended to
meaningfully alter the existing reporting structure, except to the
extent that, as clarified below, the information that DCOs already are
providing to the Commission is now subject to a mandatory reporting
requirement. MGEX, ICE, and OCC opposed the proposed amendments to
Sec. 39.19(c)(1)(i) to require DCOs to report the required information
by individual customer account. MGEX stated that reporting margin and
cash flows by individual customer account is problematic because some
DCOs currently do not calculate variation margin by individual customer
account, and therefore, are not in a position to provide that data.
MGEX stated that this is also problematic to the extent that the
proposal would require a DCO to impose rules on non-clearing member
FCMs that clear through an omnibus account at a clearing member FCM,
where the DCO does not have a direct relationship with the non-clearing
member FCM. Lastly, MGEX stated that complying with this proposed
requirement would require a significant undertaking by DCOs. MGEX
maintained that the current daily reporting structure strikes an
appropriate balance between providing the Commission with sufficient
information without being overly burdensome.
ICE asserted that, given that the Commission has not previously
required DCOs to report individual customer information for futures
positions, and given the substantial time and resources that DCOs will
need to expend related to such reporting, the Commission should consult
with industry further before adopting the proposed changes.
OCC asserted that if the Commission wishes to obtain information
regarding individual customers, the Commission should amend the
regulations governing FCMs and introducing brokers (IBs), rather than
obtaining that information from DCOs. OCC also stated that clearing
members may not have individual customer account information; for
example, when clearing members receive omnibus position data from IBs,
which do not include individual customer positions. OCC also suggested
that the Commission would face practical challenges in connecting
individual customer data from multiple sources--various FCMs and IBs--
across DCOs. OCC further stated that, while those DCOs that clear swaps
already report on a daily basis certain individual customer-level
information for swap transactions, a DCO such as OCC that does not
clear swap transactions does not currently have the infrastructure
necessary to collect and report customer-level information daily.
Additionally, OCC opposed the specific requirement that DCOs
calculate risk sensitivities on the Commission's behalf. OCC argued
that risk sensitivities may be calculated in a variety of ways
depending on the assumptions underlying the calculations and, under the
proposal, the Commission would have the raw data necessary to calculate
risk sensitivities based on its own assumptions and inputs. With
respect to the proposed requirement to report risk sensitivities and
valuation data, ICE requested that the Commission clarify what
information should be reported, on what basis, and with what
parameters.
Alternatively, OCC suggested that the Commission establish an
effective date for these requirements that adequately accounts for the
changes to systems, rules, and procedures that DCOs will need to make
to comply with the requirements. OCC also requested that the Commission
clarify how it would expect a DCO to calculate cash flows and valuation
data, and clarify the format in which such information must be
submitted. With respect to ``cash flows'' specifically, OCC requested
that the Commission clarify whether ``cash flows'' include customer-
level initial margin, mark-to-market value changes, changes in
collateral value, or other components.
OCC requested that the Commission clarify that, although proposed
Sec. 39.19(c)(1)(i)(D) would require a DCO to provide any legal entity
identifiers and internally-generated identifiers for individual
customer accounts, this requirement does not require a DCO to obtain
from its clearing members a legal entity identifier for each customer,
and does not require a DCO to independently validate this information.
CME suggested that proposed Sec. 39.19(c)(1)(i) be modified to require
that DCOs have rules that require clearing members to report individual
customer account information to the DCO, using legal entity identifiers
to identify the customers, and that the provision also specifically
require that DCOs report customer information by
[[Page 4819]]
``each individual account carried for a customer.'' CME asserted that
requiring legal entity identifiers will allow DCOs to aggregate
customer exposures across clearing members, and will allow the
Commission to use the reporting information to aggregate those
exposures across DCOs.
FIA and ISDA expressed concern regarding the burdens that proposed
Sec. 39.19(c)(1) may impose on clearing members. Specifically, FIA and
ISDA stated that the large trader position reporting requirements and
the ownership-and-control reporting requirements are based upon account
control, while the proposed daily reporting requirements are based upon
account ownership. FIA and ISDA stated that if clearing members will be
required to provide new information to the DCO so that the DCO can
comply with the new daily reporting requirement for individual customer
accounts, then the Commission should conduct a cost-benefit analysis of
this requirement as it pertains to clearing members and provide
clearing members an opportunity to comment on the proposed requirement.
ICE suggested that the Commission further modify Sec.
39.19(c)(1)(i) to move the reporting deadline from 10:00 a.m. to 12:00
p.m. ICE asserted that the current deadline provides insufficient time
for operational processes related to data finalization. ICE also
asserted that complying with the 10:00 a.m. deadline would become more
difficult if the additional reporting requirements discussed above are
added. LCH requested that the Commission delay the compliance date for
these changes until after the Commission has updated its Part 39
Reporting Guidebook to clarify the specific information to be reported
in relation to individual customer accounts.
4. Daily Reporting on Securities Positions--Sec. 39.19(c)(1)(ii)(C)
The Commission is adopting the changes to Sec. 39.19(c)(1)(ii)(C)
as proposed. Regulation 39.19(c)(1)(i) requires DCOs to submit certain
information to the Commission on a daily basis, e.g., initial margin
requirements, initial margin on deposit, daily variation margin, other
daily cash flows such as option premiums, and end-of day positions.
Paragraph (c)(1)(ii)(C) instructs DCOs to provide the required
information for all securities positions that are held in a customer
account subject to section 4d of the CEA or are subject to a cross-
margining agreement. To avoid ambiguity and more precisely articulate
the scope of paragraph (c)(1)(ii)(C), the Commission is inserting
subparagraph numbering between the clauses in paragraph (c)(1)(ii)(C)
which relate to securities positions held in a customer account or
subject to a cross-margining agreement. The Commission did not receive
any comments on this proposed change. In response to a request for
clarification from CME, the Commission confirms that, where both
participants in a cross-margining program are DCOs, the DCO clearing
the securities positions must provide the securities position
information.
5. Quarterly Reporting--Sec. 39.19(c)(2)
The Commission is adopting the changes to Sec. 39.19(c)(2) as
proposed. Regulation 39.19(c)(2) requires a DCO to submit to the
Commission the financial resources report required by Sec. 39.11(f).
The Commission adopted Sec. 39.19(c)(2) so that each DCO reporting
requirement would be included in Sec. 39.19. The Commission is
revising the text of Sec. 39.19(c)(2) to be more consistent with the
text of Sec. 39.11(f); i.e., a DCO must provide to the Commission each
fiscal quarter, or at any time upon Commission request, a report of the
DCO's financial resources as required by Sec. 39.11(f)(1). The
Commission did not receive any comments on this proposed change.
6. Audited Year-End Financial Statements--Sec. 39.19(c)(3)(ii)
The Commission is adopting the changes to Sec. 39.19(c)(3)(ii) as
proposed. Regulation 39.19(c)(3)(ii) requires a DCO to file with the
Commission its audited year-end financial statements or, if there are
no financial statements available for the DCO, the consolidated audited
year-end financial statements of the DCO's parent company. Consistent
with the goal of centralizing DCO reporting obligations in Sec. 39.19,
the purpose of this provision is to include in Sec. 39.19 the
requirement in Sec. 39.11(f)(2) that DCOs submit audited year-end
financial statements to the Commission. The Commission did not receive
any substantive comments on Sec. 39.19(c)(3)(ii).
7. Time of Report--Sec. 39.19(c)(3)(iv)
The Commission is adopting the changes to Sec. 39.19(c)(3)(iv) as
proposed. Regulation 39.19(c)(3)(iv) requires a DCO to submit
concurrently to the Commission all reports required by paragraph (c)(3)
within 90 days after the end of the DCO's fiscal year and only permits
the Commission to provide an extension of time if it determines that a
DCO's failure to submit the report on time ``could not be avoided
without unreasonable effort or expense.'' The Commission is eliminating
this requirement to provide itself with the flexibility to grant
extensions of time under additional circumstances when appropriate.
Additionally, the Commission is removing the requirement that reports
be submitted concurrently, which will provide DCOs with the flexibility
to submit reports required under Sec. 39.19(c)(3) as they are
completed. The Commission did not receive any comments on these
changes.
8. Decrease in Financial Resources--Sec. 39.19(c)(4)(i)
The Commission is adopting a technical amendment to Sec.
39.19(c)(4)(i), which concerns reporting of a decrease in a DCO's
financial resources. The amendment adds a reference to the financial
resources requirements of Sec. 39.33. The Commission also is
renumbering the subparagraphs for the sake of clarity. The Commission
did not receive any comments on these changes.
9. Decrease in Liquidity Resources--Sec. 39.19(c)(4)(ii)
The Commission is adopting new Sec. 39.19(c)(4)(ii) \39\ to
require that a DCO report a decrease of 25 percent or more in the total
value of the liquidity resources available to satisfy the requirements
under Sec. Sec. 39.11(e) and 39.33(c). Existing reporting requirements
under Sec. 39.11(f)(1)(ii) provide the Commission with notice of any
change in a DCO's liquidity resources over the course of a fiscal
quarter. In contrast, this new provision will provide the Commission
with notice if a DCO has a significant decrease in liquidity resources
either from the last quarterly report submitted under Sec. 39.11(f) or
from the value as of the close of the previous business day.
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\39\ The Commission is also renumbering existing Sec.
39.19(c)(4)(ii) and all subsequent paragraphs of Sec. 39.19(c)(4).
---------------------------------------------------------------------------
OCC supported proposed Sec. 39.19(c)(4)(ii) but suggested that,
when calculating liquidity resources to determine whether reporting is
required, the margin on deposit should not be included in the
calculation. OCC asserted that excluding margin on deposit from the
calculation will align this requirement with the proposed changes to
Sec. 39.11. OCC also indicated that including margin on deposit in
this calculation may skew the results of the calculation to create a
less accurate measure of the resources a DCO has to manage a potential
default. Alternatively, OCC suggested that, if margin on deposit is
included in the calculation, the DCO should compare the liquidity
resources of the clearing
[[Page 4820]]
member group with the highest projected stress test losses to the
liquidity resources of that same clearing member group as of the last
quarterly report or the previous business day. The Commission confirms
that, for purposes of calculating liquidity resources to determine
whether reporting is required under Sec. 39.19(c)(4)(ii), margin on
deposit is not included in the calculation, consistent with the
amendments to Sec. 39.11.
10. Request to Clearing Member To Reduce Positions--Sec.
39.19(c)(4)(vi)
The Commission is adopting the proposed changes to Sec.
39.19(c)(4)(v), which is being renumbered as Sec. 39.19(c)(4)(vi).
This provision requires a DCO to notify the Commission immediately when
the DCO requests that a clearing member reduce its positions. The
Commission is deleting from this provision the language limiting notice
to circumstances when ``the [DCO] has determined that the clearing
member has exceeded its exposure limit, has failed to meet an initial
or variation margin call, or has failed to fulfill any other financial
obligation to the [DCO].'' This change is necessary because the
Commission believes a DCO's request to a clearing member to reduce its
positions is a sufficiently significant step that the Commission should
be notified regardless of the reason for the request. The Commission
did not receive any comments on the proposed changes to this provision.
11. Change in Key Personnel--Sec. 39.19(c)(4)(x)
The Commission is adopting the proposed changes to Sec.
39.19(c)(4)(ix), and is renumbering it as Sec. 39.19(c)(4)(x). This
provision requires a DCO to report to the Commission no later than two
business days following the departure or addition of key personnel, as
defined in Sec. 39.2. The Commission is clarifying that the
notification requirement applies to both temporary and permanent
replacements, and must include contact information. The Commission
notes that the required contact information includes the individual's
name, title, office address, email address, and phone number. The
Commission did not receive any comments on the proposed changes to this
provision.
12. Change in Legal Name--Sec. 39.19(c)(4)(xi)
The Commission is adopting new Sec. 39.19(c)(4)(xi) to require a
DCO to report a change to the legal name under which it operates. As
the Commission noted in the Proposal, however, the DCO's registration
order (and any other orders the DCO received from the Commission) would
not need to be changed to reflect the legal name change. The Commission
did not receive any comments on the proposed changes to this provision.
13. Change in Liquidity Funding Arrangement--Sec. 39.19(c)(4)(xiii)
The Commission is adopting new Sec. 39.19(c)(4)(xiii) to require a
DCO to report a change in any liquidity funding arrangement it has in
place. The Commission believes that receiving this information will
assist it in overseeing the liquidity risk management of DCOs.
ICE opposed the new requirement on the grounds that reporting is
unnecessary, provided that the DCO continues to satisfy the liquidity
and other financial resource requirements, and provided that the
liquidity funding changes are consistent with the policies and
procedures of the DCO. CME and ICE suggested that the Commission
incorporate a materiality threshold into the new requirement.
Specifically, CME argued that, with respect to SIDCOs, the focus should
be on capturing and reporting material changes to liquidity funding
arrangements that allow for resources to be treated as qualifying
liquidity resources.
In response to commenters' requests that a materiality threshold be
incorporated into the reporting requirement, the Commission notes that
the requirement includes a materiality element, along with a non-
exclusive list of reportable events. Specifically, the rule requires
reporting for ``a change in provider, change in the size of the
facility, change in expiration date, or any other material changes or
conditions.'' In response to the comment that reporting changes in
liquidity funding arrangements is unnecessary, the Commission believes
that such reporting will not be burdensome because it does not expect
reportable changes to be frequent. The Commission is adopting Sec.
39.19(c)(4)(xiii) as proposed.
14. Change in Settlement Bank Arrangements--Sec. 39.19(c)(4)(xiv)
The Commission is adopting new Sec. 39.19(c)(4)(xiv) to require a
DCO to report a new relationship with, or termination of a relationship
with, any settlement bank used by the DCO or approved for use by the
DCO's clearing members. The new rule differs from the proposal in that
the reporting requirement only applies when a new settlement bank is
added or an existing settlement bank relationship is terminated, rather
than when the DCO changes its arrangements with a settlement bank.
Also, the rule requires reporting within three business days, as
opposed to one business day, as previously proposed. Consistent with
the observation of one commenter, the Commission believes that the
three-day requirement is properly aligned with the requirement in Sec.
1.20(g)(4) that DCOs file an acknowledgment letter within three
business days after opening a futures customer funds account at a
depository.
ICE opposed the proposed requirement. ICE argued that the purpose
of the requirement is unclear, noting that DCOs can have relationships
with multiple settlement banks and that those relationships can be
changed for commercial, operational, or other reasons in the ordinary
course of business. CME, ICE, and Eurex suggested that the Commission
incorporate a materiality threshold into the requirement that a DCO
report a change in its arrangements with any settlement bank.
Specifically, CME and OCC suggested that a DCO only be required to
report when it starts using a new settlement bank or ceases using an
existing settlement bank. Eurex stated that incorporating a materiality
threshold into this requirement would align it with the current
reporting requirement related to changes in credit facility funding
arrangements, and with the proposed reporting requirement related to
changes in liquidity funding arrangements. ICE suggested that reporting
be limited to defaults or significant failures by a settlement bank.
CME and OCC asserted that the reporting requirement should be designed
to avoid unnecessary reports of routine administrative or operational
changes, and similar immaterial changes, at settlement banks. CME also
suggested that DCOs be required to report changes in settlement bank
arrangements within three business days, to make the rule consistent
with the requirement that DCOs file acknowledgment letters within three
business days.
15. Settlement Bank Issues--Sec. 39.19(c)(4)(xv)
The Commission is adopting new Sec. 39.19(c)(4)(xv) to require a
DCO to report to the Commission no later than one business day after
learning of any material issues or concerns regarding the performance,
stability, liquidity, or financial resources of any settlement bank
used by the DCO or approved for use by the DCO's clearing members. ICE
opposed the proposed requirement, suggesting that DCOs should not be
required to report operational problems
[[Page 4821]]
that are resolved in the ordinary course of business. OCC suggested
that a DCO have ``broad discretion'' to determine whether a settlement
bank issue is ``material,'' and should therefore be reported. OCC
argued that a DCO should not be required to report routine operational
issues that do not affect the DCO's assessment of the performance,
stability, liquidity, or financial resources of the settlement bank.
The Commission agrees that a DCO should have broad discretion to
determine whether a settlement bank issue is a ``material'' issue and
should therefore be reported. The Commission further agrees that
routine operational issues that are resolved in the ordinary course of
business would not be ``material.''
16. Change in Depositories for Customer Funds--Sec. 39.19(c)(4)(xvi)
The Commission has determined not to adopt proposed Sec.
39.19(c)(4)(xvi) at this time.\40\ The proposed rule would have
required a DCO to report any change in its arrangements with any
depositories at which the DCO holds customer funds. CME and ICE opposed
this requirement. ICE argued that the purpose of this requirement is
unclear, noting that DCOs can have a relationship with a number of
depositories and that those relationships can be changed for
commercial, operational, or other reasons in the ordinary course of
business. CME, ICE, and Nodal argued that this requirement is
duplicative of the requirements in Sec. 1.20(g)(4), that a DCO obtain
written acknowledgment letters from depositories and file those letters
with the Commission. Eurex, ICE, and CME suggested that the Commission
incorporate into this requirement a materiality threshold. Eurex stated
that incorporating a materiality threshold would align it with the
current reporting requirement related to changes in credit facility
funding arrangements, and with the proposed reporting requirement
related to changes in liquidity funding arrangements. ICE suggested
that reporting should be limited to defaults or significant failures of
the depository. The Commission's intention was not to introduce
duplicative requirements, but rather, to aid the Commission in
monitoring a DCO's compliance with section 4d of the CEA and related
Commission regulations regarding the treatment of customer funds.
However, the Commission recognizes that this reporting may be
duplicative of the requirements in Sec. 1.20(g)(4), and is therefore
declining to adopt it at this time.
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\40\ All of the paragraphs of Sec. 39.19(c)(4) that follow
proposed Sec. 39.19(c)(4)(xvi) are being renumbered to account for
the fact that the Commission determined not to adopt paragraph
(xvi).
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17. Change in Fiscal Year--Sec. 39.19(c)(4)(xix)
The Commission is adopting new Sec. 39.19(c)(4)(xix) to require a
DCO to notify the Commission no later than two business days after any
change to the start and end dates of its fiscal year. The new rule
differs from the proposal in that notice is required within two
business days, rather than immediately, as previously proposed. This
change will better align the notice period with other requirements in
Sec. 39.19(c)(4). ICE agreed that notice of a change in fiscal year is
appropriate; however, ICE stated that it is unclear why such notice
needs to be immediate, on par with notice of a default and similar
events.
18. Change in Independent Accounting Firm--Sec. 39.19(c)(4)(xx)
The Commission is adopting new Sec. 39.19(c)(4)(xx) to require a
DCO to report to the Commission no later than 15 days after any change
in the DCO's independent public accounting firm. The Commission had
proposed to require that the change be reported within one business
day, but agrees with a comment from Nodal. Nodal opposed the
requirement that the change be reported to the Commission within one
business day, asserting that it places an undue burden on the DCO.
Nodal instead suggested that the change be reported within 15 business
days, arguing that 15 business days is more reasonable and consistent
with requirements of other financial regulators, specifically, a
regulation imposed by the Federal Deposit Insurance Corporation that
requires insured depository institutions to report a change in
independent accounting firm within 15 days.\41\
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\41\ 12 CFR 363.4(d).
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19. Major Decision of the Board of Directors--Sec. 39.19(c)(4)(xxi)
The Commission is adopting new Sec. 39.19(c)(4)(xxi) to codify in
Sec. 39.19 the requirement (currently in Sec. 39.32(a)(3)(i) and
adopted in this rulemaking in Sec. 39.24(a)(3)(i), as discussed
further below) that a DCO report to the Commission any major decision
of the DCO's board of directors. ICE opposed the proposed requirement,
asserting that board decisions are not necessarily categorized as major
or minor. ICE also noted that board decisions are routinely disclosed
to clearing members and other interested parties pursuant to Sec.
39.32(a)(3), and are disclosed to the Commission through a variety of
processes, including Sec. Sec. 40.5 and 40.6. ICE requested that the
Commission clarify specific categories of events that must be reported.
ICE also requested that DCOs not be required to report decisions before
they are implemented or announced publicly. Nadex requested
clarification as to what constitutes a ``major decision,'' whether the
DCO has discretion to determine which decisions qualify as major, and
regarding the scope of such discretion. Nadex further requested
clarification as to whether the DCO must provide an updated notice if
the original board decision is amended or withdrawn before being
implemented. Lastly, Nadex requested confirmation that the notice will
be confidential, the DCO will not be required to post the notice on its
website, and that the notice will not be posted on the Commission's
website.
In response to these comments, the Commission notes that existing
Sec. 39.32(a)(3)(i) (moved in this rulemaking to Sec. 39.24(a)(3)(i))
already requires that SIDCOs and subpart C DCOs disclose ``major
decisions of the board of directors'' to the Commission, and to
clearing members and other relevant stakeholders. The Commission
proposed Sec. 39.19(c)(4)(xxii) (renumbered as paragraph (xxi) in the
final) simply to include this existing obligation in Sec. 39.19 so
that all of a DCO's reporting obligations are set forth in one place.
The Commission further reiterates that DCOs have reasonable discretion
to determine whether a board decision is major, though DCOs should
develop and implement procedures to determine if a board decision is
major and therefore reportable. A DCO would have to provide an updated
notice if the original board decision is amended or withdrawn before
being implemented, otherwise the Commission will be misinformed in
relying on the original notice. Lastly, the Commission confirms that
the notice will be considered confidential, as are all submissions
received pursuant to Sec. 39.19, and will not be posted on the
Commission's website, nor required to be posted on the DCO's website.
20. Margin Model Issues--Sec. 39.19(c)(4)(xxiii)
The Commission is adopting new Sec. 39.19(c)(4)(xxiii) to require
a DCO to report to the Commission no later than one business day after
any issue occurs with a DCO's margin model, including margin models for
cross-margined portfolios, that materially affects the DCO's ability to
calculate or collect initial margin or variation margin. The final rule
differs from the proposal in
[[Page 4822]]
that the required reporting is limited to those margin model issues
that ``materially'' affect the DCO's ability to calculate or collect
initial margin or variation margin.
OCC, FIA, and ISDA supported the proposed requirement. OCC
requested clarification regarding the contents of the report,
specifically whether a DCO may comply with the requirement by supplying
the Commission with a copy of the margin model issue report that DCOs
also registered with the SEC must submit to the SEC pursuant to
Regulation Systems Compliance and Integrity.\42\ FIA and ISDA suggested
that DCOs also be required to notify clearing members of margin model
issues, and to notify the Commission and clearing members when the DCO
makes materially inaccurate margin calls, if the DCO incorrectly debits
a clearing member's account, for example.
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\42\ 17 CFR 242.1000 et seq.
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Nodal and ICE opposed the proposed requirement. Nodal argued that
the proposed requirement is prescriptive, overbroad, and vague,
especially to the extent that it requires reporting any issue,
irrespective of its materiality, when no actual positions are affected
by the issue. ICE argued that margin models face exceedances and other
circumstances that are addressed through established processes, and
that significant margin model problems are subject to existing
reporting requirements.
Several commenters suggested that the proposed regulation include a
materiality threshold. Nodal suggested that DCOs only be required to
report margin model issues that materially affect the DCO's ability to
calculate or collect variation or initial margin, and an actual
position is affected. CME and LCH made the same suggestion, although
CME suggested that an actual position must be materially impaired to
trigger the reporting requirement. LCH commented that limiting
reporting to material issues would minimize the reporting of immaterial
or non-significant information and thereby ensure that the Commission
focuses on those margin model issues that merit its attention. ICE
suggested that reporting should be limited to margin model issues that
are material to the operation of the DCO. LCH also noted that DCOs can
detect and resolve margin model issues during daily back testing.
The Commission agrees with commenters that reporting should be
limited to those margin model issues that ``materially'' affect the
DCO's ability to calculate or collect initial margin or variation
margin. The Commission believes that reporting only margin model issues
that materially affect the DCO's ability to calculate or collect
initial margin or variation margin, as opposed to all margin model
issues, strikes an appropriate balance between supplying the Commission
with information needed for effective oversight of DCOs, without
placing an undue burden on the DCOs. The Commission confirms that a DCO
may supply the Commission with a copy of the margin model issue report
that it submits to the SEC pursuant to Regulation Systems Compliance
and Integrity, but the DCO must supplement that report by providing the
Commission with an explanation of the cause of the issue with the
margin model.
21. Recovery and Wind-Down Plans--Sec. 39.19(c)(4)(xxiv)
The Commission is adopting new Sec. 39.19(c)(4)(xxiv) to require a
DCO that is required to maintain recovery and wind-down plans pursuant
to Sec. 39.39(b) to submit its plans to the Commission no later than
the date on which it is required to have the plans. The new rule also
permits a DCO that is not required to maintain recovery and wind-down
plans pursuant to Sec. 39.39(b), but which nonetheless maintains such
plans, to submit the plans to the Commission. If a DCO subsequently
revises its plans, the DCO will be required to submit the revised plans
to the Commission along with a description of the changes and the
reason for those changes. The Commission included this requirement
because Sec. 39.39(b) requires SIDCOs and subpart C DCOs to maintain
recovery and wind-down plans, but there is currently no explicit
requirement that the DCOs submit the plans to the Commission.
FIA and ISDA suggested that the Commission replace the requirement
that a DCO submit its recovery and wind-down plans no later than the
date on which it is required to have the plans with the actual date
that a DCO is required to have plans, because it is otherwise difficult
to discern exactly when a DCO must submit its plans. CME suggested that
DCOs be required to submit their recovery and wind-down plans to the
Commission annually, but that DCOs only be required to submit revised
or updated plans if the changes are material.
In response to FIA and ISDA's comment, the Commission notes that
the actual date by which a SIDCO or (new) subpart C DCO would be
required to maintain a recovery and wind-down plan depends upon (a)
when it is designated or elects subpart C status, (b) whether it
requests relief pursuant to Sec. 39.39(f), and (c) whether, and to
what extent, the Commission were to grant such relief. That date cannot
be ascertained in advance of a designation/election, potential request,
and/or decision on such a request. In response to CME's suggestion that
DCOs only be required to submit updated or revised plans when the
changes are material, the Commission believes that, given the
importance of recovery and wind-down plans to planning for and, in the
unlikely event, addressing the bankruptcy of, or executing the
resolution of, a DCO, it is important that the Commission have on hand,
on an ongoing basis, an accurate and current version of the DCO's
recovery and wind-down plans. The date of such a bankruptcy or
resolution (and the corresponding urgent need for current information)
cannot be determined in advance. For these reasons, the Commission is
adopting Sec. 39.19(c)(4)(xxv) as proposed (renumbered as Sec.
39.19(c)(4)(xxiv)).
22. New Product Accepted for Clearing--Sec. 39.19(c)(4)(xxvi)
The Commission has determined not to adopt proposed new Sec.
39.19(c)(4)(xxvi), which would have required a DCO to provide notice to
the Commission no later than 30 calendar days prior to accepting a new
product for clearing.
FIA and ISDA supported the proposed notice requirement for new
products accepted for clearing, but MGEX, Nodal, CBOE, OCC, ICE, and
CME opposed it. The commenters opposed to the proposed notice
requirement offered several interrelated and overlapping reasons for
their opposition, but the thrust of their arguments was that the
proposed requirement is unnecessary and would be burdensome and
inefficient because it needlessly duplicates and is inconsistent with
the existing, well-functioning self-certification regime in Sec. 40.2
for listing a new product for trading on a DCM or SEF. In addition, CME
argued that the proposed 30-day notice requirement is inconsistent with
section 5c(c) of the CEA. Lastly, commenters raised a number of
concerns regarding how the term ``new product'' might be defined. Due
to the many thoughtful and detailed comments addressing this provision,
the Commission wishes to give further consideration to this issue and
may address it in a separate rulemaking.
23. Requested Reporting--Sec. 39.19(c)(5)
The Commission is adopting the proposed changes to Sec.
39.19(c)(5), which requires a DCO to provide to the
[[Page 4823]]
Commission specific types of information upon request. The Commission
is amending paragraphs (i) through (iii) of Sec. 39.19(c)(5) to delete
the phrase ``in the format and manner specified, and within the time
provided, by the Commission in the request'' and to add introductory
language to subparagraph (c)(5) that requires a DCO to provide the
requested information ``within the time specified in the request.''
Regulation 39.19(b) already requires a DCO to provide the information
in the format and manner specified by the Commission, so it is
unnecessary to repeat that requirement in Sec. 39.19(c)(5). The
Commission is also removing Sec. 39.19(c)(5)(iii), which required a
DCO to report to the Commission upon request end of day gross positions
by each beneficial owner. To the extent that the Commission needs end-
of-day gross position information by beneficial owner, the Commission
retains the authority to request that information pursuant to Sec.
39.19(c)(5)(i). The Commission did not receive any comments on the
proposed changes to Sec. 39.19(c)(5).
J. Public Information--Sec. 39.21
1. Public Disclosure and Publication of Information--Sec. 39.21(c) and
(d)
The Commission is adopting changes to Sec. 39.21(c) and removing
Sec. 39.21(d) in order to clarify the information that a DCO must
publicly disclose on its website and to assist the public in locating
the information. Regulation 39.21(c) requires a DCO to disclose
publicly and to the Commission information concerning: (1) The terms
and conditions of each contract, agreement, and transaction cleared and
settled by the DCO; (2) each clearing and other fee that the DCO
charges its clearing members; (3) the margin-setting methodology; (4)
the size and composition of the financial resource package available in
the event of a clearing member default; (5) daily settlement prices,
volume, and open interest for each contract, agreement, or transaction
cleared or settled by the DCO; (6) the DCO's rules and procedures for
defaults in accordance with Sec. 39.16; and (7) any other matter that
is relevant to participation in the clearing and settlement activities
of the DCO. Regulation 39.21(d) requires the DCO to post all of this
information, as well as the DCO's rulebook and a list of its current
clearing members, on the DCO's website, unless otherwise permitted by
the Commission.
The Commission is removing Sec. 39.21(d) and incorporating its
requirements into Sec. 39.21(c). The Commission reiterates that, as it
clarified in the Proposal, a DCO must make each of the items of
information listed in Sec. 39.21(c) available separately on the DCO's
website and not just in the DCO's rulebook, to assist members of the
public in locating the relevant information, and potentially facilitate
greater uniformity across DCO websites.
FIA and ISDA supported the proposed requirement that a DCO make
certain information available on its website as opposed to in its
rulebook. Nadex noted that it does not object to moving the
requirements of Sec. 39.21(d) into Sec. 39.21(c), but requested
confirmation that the exemptive relief granted in CFTC Letter No. 14-
04,\43\ which exempted Nadex from Sec. 39.21(d) with respect to making
the names of its clearing members that are retail customers publicly
available on its website, will continue to apply. The Commission notes
the inclusion in Sec. 39.21(c) of the phrase ``unless otherwise
permitted by the Commission'' acknowledges that a DCO may seek or have
relief from these requirements.
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\43\ CFTC Letter No. 14-04 (Jan. 16, 2014).
---------------------------------------------------------------------------
2. Financial Resources--Sec. 39.21(c)(4)
Regulation 39.21(c)(4) requires a DCO to disclose publicly the size
and composition of its financial resource package available in the
event of a clearing member default. The Commission is amending Sec.
39.21(c)(4) by adding the words ``updated as of the end of the most
recent fiscal quarter or upon Commission request and posted as promptly
as practicable after submission of the report to the Commission under
Sec. 39.11(f)(1)(i)(A).'' This change makes the frequency of public
disclosure of a DCO's financial resources in the event of a clearing
member default consistent with Sec. 39.11(f)(1)(i)(A), which requires
a DCO to report this information to the Commission each fiscal quarter
or at any time upon Commission request. The Commission believes it is
reasonable to require a DCO to update this information publicly with
the same frequency. The final rule differs from the proposal, which
would have required that the update be posted ``concurrently'' with the
submission of the report.
ICE suggested changing the term ``concurrently'' in proposed Sec.
39.21(c)(4) to ``as promptly as practicable,'' because for DCOs that
are subsidiaries of public companies, it may not be feasible to make
such a public disclosure until relevant financial statements for the
public parent have been disclosed in accordance with all securities law
requirements. MGEX agreed that updating the financial resource
information on a quarterly basis seems reasonable, but noted that all
subpart C DCOs are already making this data available each quarter in
accordance with the CPMI-IOSCO Public Quantitative Disclosure Standards
for Central Counterparties \44\ (Quantitative Disclosure), as required
under proposed Sec. 39.37(c) (which the Commission is adopting
herein), and recommended that the Commission explicitly acknowledge
that a DCO's publication of its Quantitative Disclosure fulfills the
requirement of Sec. 39.21(c)(4). In commenting on the proposed changes
to Sec. 39.37, SIFMA AMG noted that the Quantitative Disclosures are
difficult to locate on DCOs' websites.
---------------------------------------------------------------------------
\44\ See CPMI-IOSCO, Public Quantitative Disclosure Standards
for Central Counterparties (Feb. 2015), available at https://www.bis.org/cpmi/publ/d125.pdf.
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The Commission is accepting ICE's suggestion to replace
``concurrently'' in proposed Sec. 39.21(c)(4) with ``as promptly as
practicable,'' to permit DCOs flexibility in situations in which
posting updated information concurrently would not be possible. In
response to MGEX's recommendation, the Commission notes that a DCO's
publication of its Quantitative Disclosure would not fulfill the
requirements of Sec. 39.21(c)(4), for the same reasons that it stated
in the Proposal that each of the disclosures required under Sec.
39.21(c)(4) must be presented separately on the DCO's website.
3. Daily Settlement Prices, Volume, and Open Interest--Sec.
39.21(c)(5)
Regulation 39.21(c)(5) requires a DCO to disclose publicly daily
settlement prices, volume, and open interest for each contract,
agreement, or transaction cleared or settled by the DCO. The Commission
is amending Sec. 39.21(c)(5) to clarify that DCOs are expected to
publicly disclose volume and open interest, as well as settlement
prices, on a daily basis in order to comply with Sec. 39.21(c)(5).
Although Sec. 39.21(c)(5) does not specify a period of time the
information must remain on the website as noted in the Proposal, the
Commission encourages DCOs to make several days' worth of information
available on their websites, as certain DCOs already do.
4. Swaps Required To Be Cleared--Sec. 39.21(c)(8)
The Commission is adopting new Sec. 39.21(c)(8) to include in the
list of required public disclosures the
[[Page 4824]]
information that DCOs make publicly available under Sec. 50.3(a).
Regulation 50.3(a) requires that a DCO make publicly available on its
website a list of all swaps that it will accept for clearing and
identify which swaps on the list are required to be cleared under
section 2(h)(1) of the CEA and part 50 of the Commission's regulations.
The Commission is adopting Sec. 39.21(c)(8) to add a cross-reference
to Sec. 50.3(a). The Commission did not receive any comments on this
proposal.
K. Governance Fitness Standards, Conflicts of Interest, and Composition
of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
The Commission is removing Sec. 39.32 in subpart C of part 39,
which set forth the requirements for governance arrangements for SIDCOs
and subpart C DCOs, and adopting new Sec. Sec. 39.24, 39.25, and 39.26
in subpart B consistent with Core Principles O, P, and Q, thereby
making these requirements applicable to all DCOs. Core Principle O
requires a DCO to establish governance arrangements that are
transparent to fulfill public interest requirements and to permit the
consideration of the views of owners and participants. Core Principle O
also requires a DCO to establish and enforce appropriate fitness
standards for directors, members of any disciplinary committee, members
of the DCO, any other individual or entity with direct access to the
settlement or clearing activities of the DCO, and any other party
affiliated with any of the foregoing individuals or entities. Core
Principle P requires a DCO to establish and enforce rules to minimize
conflicts of interest in the decision-making process of the DCO and
establish a process for resolving such conflicts of interest. Core
Principle Q requires a DCO to ensure that the composition of its
governing board or committee includes ``market participants.''
Consistent with Core Principle Q, new Sec. 39.26 requires that a
DCO include market participants and individuals who are not executives,
officers, or employees of the DCO or an affiliate thereof on the DCO's
governing board or board-level committee. The Commission interprets
``governing board or board-level committee'' to mean the group with the
ultimate decision-making authority. The Commission had proposed to
define ``market participant'' for purposes of Sec. 39.26 as ``any
clearing member of the [DCO] or customer of a clearing member, or an
employee, officer, or director of such entity.'' However, given
comments received, as discussed below, the Commission is declining to
adopt this definition at this time.
CME, SIFMA AMG, and Mr. Barnard agreed with the Commission's
proposal to codify the governance arrangements applicable to SIDCOs and
subpart C DCOs within proposed Sec. Sec. 39.24 through 39.26, and to
make them applicable to all DCOs. Mr. Barnard believed the standards
are clearly appropriate for all DCOs and will enhance risk management
and governance, thus further improving the protection for market
participants and the public.
CME agreed with the definition of market participant as set forth
in proposed Sec. 39.26. CME stated that it has benefited from having a
board of directors, oversight committee, and risk committees consisting
of a variety of market participants with differing views and expertise.
CME also appreciated that the Commission proposed a principles-based
approach by allowing each DCO to determine the best representation of
market participants for its governing board or committee for its risk
management governance purposes, while also allowing each DCO to
continue to comply with relevant state and securities laws.
SIFMA AMG and MFA supported the adoption of a definition of
``market participant'' to require that the composition of a DCO's
governing board or committee include ``market participants.'' SIFMA AMG
and MFA, however, both shared concerns that the definition of ``market
participant'' as proposed in Sec. 39.26 was a broad term that extends
beyond customers and could permit DCOs to choose only persons
associated with clearing members and/or DCO employees, officers, or
directors to serve on the DCO's board of directors. SIFMA AMG and MFA
requested that the Commission amend Sec. 39.26 to explicitly require
customer participation on DCOs' governing bodies, such as the board of
directors and advisory committees. SIFMA AMG suggested that, had
Congress intended for only clearing members to be on DCO governing
boards, Congress would have stated so specifically. However, Congress
chose to use the term ``market participants,'' which SIFMA AMG
suggested that the Commission correctly defined as including clearing
members and customers.
Mr. Saguato agreed with the benefits of multi-stakeholder
representation at the board level of a DCO and a more direct engagement
of market participants in the governance and supervision of a DCO. He
further suggested that the Commission consider requiring at least half
of the representatives of a DCO's risk committee be comprised of market
participants, in particular clearing members, to transform risk
committees from ``mere advisory committees'' to a committee with
decision-making power. Mr. Saguato also suggested that the Commission
consider requiring a DCO's board of directors to provide formal and
comprehensive explanations to market participants and the Commission
any time that the DCO dissents from the deliberations of the risk
committee.
Nodal agreed that a DCO needs to be responsive to its clearing
members and its customers. However, Nodal suggested that the Commission
further interpret ``governing board or committee'' within proposed
Sec. 39.26 to include the board of the DCO's parent company to the
extent it has relevant decision-making authority over the DCO.
ICE agreed that there might be benefits in some cases to having
market participants on a DCO's board or governing body. However, ICE
opposed requiring a DCO to include market participants on its board of
directors or other governing body. ICE suggested that the Commission's
approach is overly prescriptive and that the CEA, including Core
Principle Q, does not mandate any particular form of market
participation. ICE suggested that the Commission interpret ``governing
board or committee'' to allow market participation through risk or
other committees rather than the governing board itself. ICE suggested
that it is not uniformly necessary for clearing members or their
customers to participate on the board of directors or other governing
body of a DCO. Further, ICE suggested that requiring the same approach
for every DCO, regardless of differences in organizational structure,
membership, cleared products mix, business considerations, jurisdiction
of organization, and other relevant factors, is unnecessarily rigid and
could lead to risks and conflicts that the Commission has not
considered. For example, ICE argued that, depending on the corporate
structure of a DCO, participation on the board of directors or
governing body might bring fiduciary and other duties in favor of the
DCO, which might expose a participant to legal liability and pose
conflicts of interest with the participant's other activities. ICE
believes that, while exculpatory provisions, indemnifications, and
other rules might mitigate or cover some of these risks, it might not
be possible to do so completely or in all cases.
In addition, ICE disagreed with the Commission's suggestion to
allow non-voting representation by market
[[Page 4825]]
participants on the governing board, as ICE did not agree that such
representation is a viable or desirable approach in all cases. ICE
suggested that market participants might prefer representation on a
risk or similar committee to non-voting representation on a DCO's
governing board. ICE also suggested that non-voting representation
might raise other issues of corporate governance, confidentiality, and
duties to the DCO that a DCO would need to assess in light of its
particular circumstances.
Nadex suggested that fully collateralized, non-intermediated DCOs
be exempt from compliance with proposed Sec. Sec. 39.24 and 39.26 as
retail individuals, like those of Nadex's market participants, are not
industry professionals, are not familiar with the DCO's internal
operations in the same way that FCMs and other sophisticated members
are familiar with ``traditional'' DCOs' business and operations, do not
have an ownership interest or financial stake in the DCO or its default
waterfall, and therefore are not as substantially involved in the DCO's
governance. Nadex further suggested that solicitation of the views of
Nadex's market participants as to the governance of the DCO would not
likely provide significant value as compared with the burden and cost
of reviewing such responses and could hinder the efficient operation of
Nadex's board.
In response to the comments on Sec. 39.26, the Commission notes
that the requirement to include market participants on a DCO's
governing board or committee is a statutory requirement under Core
Principle Q, applicable to all DCOs regardless of whether it is
restated in the Commission's regulations. In response to ICE's
suggestion that the Commission interpret ``governing board or
committee'' to allow market participation through risk or other
committees rather than the governing board itself, the Commission
believes that this interpretation could permit a DCO to create a lower-
level committee that does not have the same decision-making authority
as its board or board-level committee, thereby preventing market
participation on the DCO's governing board or committee, which is
contrary to the statutory requirement of Core Principle Q. Further, the
Commission agrees with CME's comment that Sec. 39.26 takes a
principles-based approach that allows each DCO to determine the best
representation of market participants on its governing board or
committee for its risk management governance purposes, while also
allowing each DCO to continue to comply with relevant state and
securities laws. In response to Nodal's request that the Commission
further interpret ``governing board or committee'' to include the board
of the DCO's parent company to the extent that it has relevant
decision-making authority over the DCO, the Commission agrees that
market participant representation on the board of the DCO's parent
company may be appropriate where the DCO does not have its own board
and the board of the DCO's parent company serves as the ultimate
decision-making authority for the DCO.
While the Commission expects that a DCO clearing for the customers
of FCMs would generally have customer representation on the DCO's board
or board-level committee, the Commission is not revising Sec. 39.26 to
explicitly require that a DCO include a customer on its board or board-
level committee as requested by SIFMA AMG and MFA. The Commission
reiterates that Sec. 39.26 is designed to enhance risk management and
controls by promoting transparency of a DCO's governance arrangements
by taking into account the interests of a DCO's clearing members and,
where relevant, the clearing members' customers.\45\ The Commission
further reiterates that customers clearing trades through an FCM in a
particular market are exposed to the risks of the market, just as
clearing members are, and therefore have similar interests in the
decisions that govern the operation of the DCO.\46\
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\45\ Derivatives Clearing Organization General Provisions and
Core Principles, 84 FR 22244.
\46\ Id.
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The Commission is, however, sympathetic to Nadex's concerns that
the burden and cost of including market participants that are primarily
retail and not exposed to the risk of lost margin or the default of the
DCO's other customers may not be warranted for fully collateralized,
non-intermediated DCOs. In light of this and other comments in this
regard, the Commission wishes to give further consideration as to how
to define ``market participant'' and declines to define it at this
time.
The Commission notes that Mr. Saguato's suggestion that the
Commission should require that at least half of the representatives of
a DCO's risk committee be comprised of market participants is beyond
the scope of the proposal, as it prescribes the composition of a DCO's
risk committee rather than that of its governing body. Mr. Saguato's
suggestion that the Commission require a DCO's board to provide formal
and comprehensive explanations to market participants and the
Commission any time that the DCO dissents from the deliberations of the
risk committee is also beyond the scope of the proposal.
L. Legal Risk--Sec. 39.27
Regulation 39.27(c) requires a DCO that provides clearing services
outside the United States to identify and address conflict of law
issues, specify a choice of law, be able to demonstrate the
enforceability of its choice of law in relevant jurisdictions, and be
able to demonstrate that its rules, procedures, and contracts are
enforceable in all relevant jurisdictions. In addition, Form DCO
requires each applicant for DCO registration that provides or will
provide clearing services outside the United States to provide a
memorandum to the Commission that would, among other things, analyze
the insolvency issues in the jurisdiction where the applicant is based.
The Commission is amending Sec. 39.27(c) by adding paragraph (3),
which requires a DCO that provides clearing services outside the United
States to ensure on an ongoing basis that the memorandum required in
Exhibit R of Form DCO is accurate and up to date, and to submit an
updated memorandum to the Commission promptly following all material
changes to the analysis or content contained in the memorandum.
ICE suggested that, instead of on an ongoing basis, the memorandum
be reviewed and updated at regular intervals, such as every three
years, or within a defined timeframe after a material change to the
law. The Commission is declining ICE's suggestion because the purpose
of the requirement is to ensure the DCO's ongoing monitoring of
applicable legal requirements and prompt notification to the Commission
if material changes occur. In response to ICE's comment, the Commission
confirms that, while changes to the memorandum and filing of updates
are expected to occur infrequently, the DCO has a continuing obligation
to ensure that the information in the memorandum is current.
V. Amendments to Part 39--Subpart C--Provisions Applicable to SIDCOs
and DCOs That Elect To Be Subject to the Provisions
A. Financial Resources for SIDCOs and Subpart C DCOs--Sec. 39.33
Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is
systemically important in multiple jurisdictions, or that is involved
in activities with a more complex risk profile, to maintain financial
resources sufficient to enable it to meet its
[[Page 4826]]
financial obligations to its clearing members notwithstanding a default
by the two clearing members creating the largest combined loss in
extreme but plausible market conditions. The Commission is amending
Sec. 39.33(a)(1) by replacing the phrase ``largest combined loss''
with ``largest combined financial exposure'' in order to achieve
consistency with the relevant provisions of Commission regulations and
the CEA--specifically, Sec. 39.11(a)(1) and section 5b(c)(2)(B) of the
CEA regarding DCO financial resources requirements.
Regulation 39.33(c)(1) requires a SIDCO or subpart C DCO to
maintain eligible liquid resources sufficient to meet its obligations
to perform settlements with a high degree of confidence under a wide
range of stress scenarios that should include the default of the
clearing member creating the largest aggregate liquidity obligation for
the SIDCO or subpart C DCO. The Commission is amending Sec.
39.33(c)(1) by adding the phrase ``in all relevant currencies'' to
clarify that the ``largest aggregate liquidity obligation'' means the
total amount of cash, in each relevant currency, that the defaulted
clearing member would be required to pay to the DCO during the time it
would take to liquidate or auction the defaulted clearing member's
positions, as reasonably modeled by the DCO. When evaluating its
largest aggregate liquidity obligation on a day-to-day basis over a
multi-day period, a SIDCO or subpart C DCO may use its liquidity risk
management model.
Regulation 39.33(d) requires a SIDCO or a subpart C DCO to
undertake due diligence to confirm that each of its liquidity providers
has the capacity to perform its commitments to provide liquidity, and
to regularly test its own procedures for accessing its liquidity
resources. The Commission is amending the regulation to additionally
require a SIDCO with access to deposit accounts and related services at
a Federal Reserve Bank to use such services ``where practical.'' \47\
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\47\ Under section 806(a) of the Dodd-Frank Act, 12 U.S.C.
5465(a), the Board of Governors of the Federal Reserve System may
authorize a Federal Reserve Bank to establish and maintain an
account for a financial market utility (FMU), which includes a
SIDCO. A SIDCO with access to accounts and services at a Federal
Reserve Bank is required to comply with related rules published by
the Board of Governors of the Federal Reserve System. See generally
Financial Market Utilities, 78 FR 76973 (Dec. 20, 2013) (final rules
adopted by the Board of Governors to govern accounts held by
designated FMUs).
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MGEX agreed that proposed Sec. 39.33(d)(5) would further enhance a
SIDCO's financial integrity and management of liquidity risk. MGEX
further urged the Commission to advocate for other DCOs' ability to
have accounts at a Federal Reserve Bank, as allowing broader access
would not only lower the credit and liquidity risks faced by DCOs under
the Commission's jurisdiction, it would also advance the Commission's
goal of enhancing the protection of customer funds and help mitigate
the disparity or competitive disadvantage that otherwise results based
on a DCO's size or systemic importance. SIFMA AMG also supported
proposed Sec. 39.33(d)(5) and recommended that the Commission expand
the requirements to all DCOs.
CME recommended that the Commission revise proposed Sec.
39.33(d)(5) to clarify that a decision on whether the use of a Federal
Reserve Bank's accounts and services is ``practical'' should take into
account a SIDCO's ability to effectively manage its overall risk.
Specifically, CME urged that a SIDCO should have the flexibility to
strike the appropriate balance between using commercial banks (in their
capacities as custodians and cash depositories) and a Federal Reserve
Bank in order to allow a SIDCO to diversify its counterparty
relationships to holistically manage its liquidity and operational
risks. CME was of the view that, in the event of a clearing member
default, commercial banks may more efficiently monetize non-cash
collateral and can move collateral internally without the restraints of
the Federal Reserve Banks' operating timelines.
As to MGEX's suggestion that the Commission advocate for all DCOs
to have the ability to hold accounts at a Federal Reserve Bank, the
Commission reiterates its view that section 806(a) of the Dodd-Frank
Act supports Federal Reserve Banks acting as depositories for all
registered DCOs, not just SIDCOs.\48\ As to CME's suggestion that the
Commission clarify when the use of a Federal Reserve Bank's accounts
and services is ``practical,'' the Commission believes that this
standard is consistent with Key Consideration 8 of PFMI Principle 7
(Liquidity Risk), which provides that ``[a financial market utility]
with access to central bank accounts, payment services, or securities
services should use these services, where practical, to enhance its
management of liquidity risk.'' \49\ However, the Commission agrees
that a SIDCO's decision on whether the use of a Federal Reserve Bank's
accounts and services is ``practical'' should take into account the
SIDCO's ability to effectively manage its overall risk.
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\48\ See CFTC Order Exempting the Federal Reserve Banks from
Sections 4d and 22 of the Commodity Exchange Act, 81 FR 53467,
53470-53471 (Aug. 12, 2016).
\49\ See CPMI-IOSCO, Principles for Financial Market
Infrastructures, at Principle 7: Liquidity Risk, Key Consideration 8
(April 2012), available at https://www.bis.org/cpmi/publ/d101a.pdf.
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B. Risk Management for SIDCOs and Subpart C DCOs--Sec. 39.36
Regulation 39.36 requires a SIDCO or a subpart C DCO to conduct
stress tests of its financial and liquidity resources and to regularly
conduct sensitivity analyses of its margin models. The Commission is
amending Sec. 39.36(a)(6) to clarify that a SIDCO or subpart C DCO
that is subject to the minimum financial resources requirement set
forth in Sec. 39.11(a)(1), rather than Sec. 39.33(a), should use the
results of its stress tests to support compliance with that
requirement.
The Commission is also amending Sec. 39.36(b)(2)(ii) to replace
the words ``produce accurate results'' with ``react appropriately'' to
more accurately reflect that the purpose of a sensitivity analysis is
to assess whether the margin model will react appropriately to changes
of inputs, parameters, and assumptions. Furthermore, the Commission is
amending Sec. 39.36(d), which requires each SIDCO and subpart C DCO to
``regularly'' conduct an assessment of the theoretical and empirical
properties of its margin model for all products it clears, to clarify
that the assessment should be conducted ``on at least an annual basis
(or more frequently if there are material relevant market
developments).'' Lastly, the Commission is amending Sec. 39.36(e) by
adding the heading ``[i]ndependent validation'' to the provision. The
Commission did not receive comments on these changes.
C. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec. 39.37
Regulation 39.37(a) and (b) requires a SIDCO or a subpart C DCO to
publicly disclose its responses to the CPMI-IOSCO Disclosure Framework
(Disclosure Framework) \50\ and, in order to ensure the continued
accuracy and usefulness of its responses, to review and update them at
least every two years and following material changes to the SIDCO's or
subpart C DCO's system or environment in which it operates. The
Commission is amending Sec. 39.37(b) to additionally require that a
SIDCO or a subpart C DCO provide notice to the Commission of any such
updates to its responses following material changes to
[[Page 4827]]
its system or environment no later than ten business days after the
updates are made. Further, such notice will have to be accompanied by a
copy of the text of the responses, specifying the changes that were
made to the latest version of the responses.
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\50\ See CPMI-IOSCO, Principles for Financial Market
Infrastructures: Disclosure Framework and Assessment Methodology
(Dec. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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Regulation 39.37(c) requires a SIDCO or a subpart C DCO to
disclose, to the public and to the Commission, relevant basic data on
transaction volume and values. The Commission is amending Sec.
39.37(c) to explicitly state that a SIDCO or a subpart C DCO must
disclose relevant basic data on transaction volume and values that are
consistent with the standards set forth in the CPMI-IOSCO Public
Quantitative Disclosure Standards for Central Counterparties.
SIFMA AMG supported the proposed requirement in Sec. 39.37(b)(2)
to require a SIDCO or a subpart C DCO to show all deletions and
additions made to the immediately preceding version of the Disclosure
Framework, as SIFMA AMG believes it is extremely useful in
understanding the evolution of a SIDCO's or a subpart C DCO's
Disclosure Framework. SIFMA AMG recommended, however, that Sec.
39.37(b)(2) require a SIDCO or a subpart C DCO to provide the
Commission with notice of any changes, not only material ones, and
require a SIDCO or a subpart C DCO to concurrently post a redline of
any changes on its website when notifying the Commission. The
Commission notes that the materiality limitation in Sec. 39.37(b)(2)
reflects the requirements of Sec. 39.37(b)(1), which the Commission
did not propose to change. SIFMA AMG further suggested that the
Commission require a consistent format for SIDCOs' and subpart C DCOs'
Disclosure Framework, provide a deadline for publishing such
disclosures (i.e., 30 days after quarter end), and audit such
disclosures for material omissions.
As to SIFMA AMG's suggestion that the Commission require a
consistent format for SIDCOs' and subpart C DCOs' Disclosure Framework
and provide a deadline for publishing such disclosures, the Commission
believes it would be more appropriate for these changes to be made by
CPMI-IOSCO, and not the Commission, so that these changes would be
applicable to all central counterparties.
VI. Amendments to Appendix A to Part 39--Form DCO
To request registration as a DCO, Sec. 39.3(a)(2) requires an
applicant to file a complete Form DCO, which includes a cover sheet,
all applicable exhibits, and any supplemental materials, as provided in
appendix A to part 39.
The Commission proposed to amend Form DCO to better describe the
required exhibits in a manner that is consistent with the amendments to
the relevant regulations as described herein; the modifications to Form
DCO do not make any other substantive changes. The Commission did not
receive any comments on the proposed changes to Form DCO, and the
Commission is adopting it as proposed.
VII. Amendments to Appendix B to Part 39--Subpart C Election Form
The Commission proposed to amend the Subpart C Election Form to
better reflect the requirements in subpart C of part 39 and to more
closely align the format of the Subpart C Election Form with Form DCO
by specifying the information and/or documentation that must be
provided by a DCO as part of its petition for subpart C election. The
Commission did not receive any comments on the proposed changes to the
Subpart C Election Form, and the Commission is adopting it as proposed.
VIII. Amendments to Part 140--Organization, Functions, and Procedures
of the Commission
Regulation 140.94 includes delegation of authority from the
Commission to the Director of the Division of Clearing and Risk. The
Commission proposed to revise Sec. 140.94 to conform to the changes to
part 39 contained in the Proposal, without making any substantive
change to the scope of delegation. The Commission did not receive any
comments on these changes and is adopting them as proposed.
IX. Additional Comments
In addition to the comments discussed above, the Commission
received several general comments that addressed matters outside the
scope of the Proposal. The Commission appreciates the additional
feedback. Because these comments do not address proposed changes and
are therefore outside the scope of this rulemaking, the Commission may
take the comments under advisement for future rulemakings.
FIA and ISDA stated that the financial resources requirement that
the Commission imposes on DCOs under Sec. 39.11 should ensure that a
DCO's own capital contribution is set at an appropriate level to align
the interests of the DCO with those of its clearing members. They
argued that the DCO should be required to contribute an amount to the
default waterfall that is material to, and commensurate with the amount
of risk cleared by, the DCO. They also argued that having sufficient
``skin in the game'' relative to the aggregate default fund would
incentivize the DCO and its shareholders to engage in prudent risk
management prior to and during a stress event because they would share
in any resulting losses. They further argued that setting a DCO's
minimum financial resources based, in part, upon a DCO's capital
contribution would help to ensure the DCO's resiliency in variable
market conditions. SIFMA AMG agreed, stating that a DCO's ``skin in the
game'' is currently ``generally very low'' compared to the risk the DCO
is responsible for managing but should be ``meaningful'' to
appropriately incentivize the DCO's management and shareholders to
manage the risks brought into clearing. SIFMA AMG recommended that the
Commission lead an analytical study on ``the optimal level of [DCO]
capital and its specific allocation to [skin in the game] and provide a
robust capital framework and requirement for [skin in the game] to the
industry to further strengthen DCO resilience.'' Similarly, Mr. Saguato
encouraged the Commission to look into the ratios between
clearinghouses' own capital and members' guaranty fund deposits in the
default waterfall and to analyze the effects they have on
clearinghouses' risk profiles.
SIFMA AMG stated that DCOs should not be permitted to count
unfunded assessments towards resources available to the DCO pursuant to
Sec. 39.11(b)(1)(v), which is being renumbered as Sec.
39.11(b)(1)(iv).
SIFMA AMG suggested that the Commission require DCOs to make their
quarterly and annual reports required under Sec. 39.11(f) publicly
available concurrent with their submission to the Commission. In
addition, SIFMA AMG recommended that full financial statements be
prepared for each DCO at the DCO legal entity level and, where DCOs
have structured themselves with mechanisms to limit recovery to a
defined pool of assets, such DCOs should publicly disclose specific
information regarding the total available recourse assets, including,
but not limited to, the manner in which the assets are maintained and
whether the DCO's capital is funded or unfunded and the manner by which
it is segregated. The Commission encourages DCOs to make their
financial reports available to the public.
MFA expressed support for the fair and open access provisions of
Sec. 39.12, in particular with respect to increasing customers' access
to DCOs through direct membership. MFA noted that
[[Page 4828]]
currently, customers exclusively access central clearing and DCOs
indirectly through clearing members, rather than becoming direct DCO
members, for a variety of financial and operational reasons. However,
MFA pointed out that such indirect clearing relationships expose
customers to counterparty credit risk arising from their clearing
member, custodian, and DCO, and also may expose customers to fellow
customer risk arising from the pro rata sharing of losses resulting
from the default of a clearing member's other customers. To mitigate
those risks, some customers would like to become direct DCO clearing
members; however, MFA noted that barriers in DCO membership
requirements have limited customers' ability to do so.
ICE recommended that the Commission clarify in Sec. 39.13(g)(1),
which was not proposed to be amended, that the reference to ``on a
regular basis'' means annually.
FIA and ISDA suggested, with respect to Sec. 39.13(g)(8)(iii),
that the Commission should address in a re-proposed rule the initial
margin issues for separate accounts raised in CFTC Letter No. 19-
17.\51\
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\51\ The Commission notes that CFTC Letter 19-17 was issued
after the Proposal. The Commission's failure to amend Sec.
39.13(g)(8)(iii) in this release should not be construed as
superseding CFTC Letter 19-17 in any way.
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In connection with Sec. 39.15 generally, LCH suggested that the
Commission allow a DCO to use its own money, securities, or other
property to deposit additional collateral in a cleared swaps customer
account to prevent a shortfall without desegregating the account. LCH
was of the view that allowing DCOs to deposit their own resources as a
``buffer'' would be consistent with the FCM's ability to make such
deposits pursuant to part 22 of the Commission's regulations and
further the CFTC's policy objectives to ensure that customer accounts
remain segregated. LCH further stated that DCO ``buffer collateral''
supports strong risk management and could protect against customer
account shortfalls in possible instances of operational risk or error
at the DCO, which LCH believes FCMs' ``buffer collateral'' would not
address. LCH's suggestion is beyond the scope of Sec. 39.15 as well as
the amendments to Sec. 39.15 adopted herein.
With regard to the rule and product certification processes set
forth in part 40 of the Commission's regulations, SIFMA AMG suggested
that the Commission require a DCO to obtain market feedback prior to
filing any certification for a new or amended rule or product. SIFMA
AMG suggested that the Commission require all DCO submissions to: (1)
Certify that the DCO solicited market feedback and that the summary
provided includes all material supporting and opposing views; (2)
summarize all material supporting and opposing views received from a
DCO's advisory committee and other market participants within all such
submissions; and (3) delineate whether such views are from clearing
members or customers. The Commission did not propose to amend its part
40 regulations in this rulemaking.
X. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\52\ The final
rule adopted by the Commission will affect only DCOs. The Commission
has previously established certain definitions of ``small entities'' to
be used by the Commission in evaluating the impact of its regulations
on small entities in accordance with the RFA.\53\ The Commission has
previously determined that DCOs are not small entities for the purpose
of the RFA.\54\ Accordingly, the Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b) that the rule adopted
herein will not have a significant economic impact on a substantial
number of small entities.
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\52\ 5 U.S.C. 601 et seq.
\53\ 47 FR 18618 (Apr. 30, 1982).
\54\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
1. Background
The Paperwork Reduction Act of 1995 (PRA) \55\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring a collection of
information as defined by the PRA. The rule amendments adopted herein
would result in such a collection, as discussed below. A person is not
required to respond to a collection of information unless it displays a
currently valid control number issued by the Office of Management and
Budget (OMB). The rule amendments include a collection of information
for which the Commission has previously received control numbers from
OMB. As noted in the Proposal, the Commission sought to consolidate the
information collections under four existing control numbers applicable
to Part 39.\56\ The title for this collection of information is
``Requirements for Derivatives Clearing Organizations, OMB control
number 3038-0076.''
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\55\ 44 U.S.C. 3501 et seq.
\56\ The four collections are: OMB Control No. 3038-0066,
Financial Resources Requirements for Derivatives Clearing
Organizations; OMB Control No. 3038-0081, General Regulations and
Derivatives Clearing Organizations; OMB Control No. 3038-0069,
Information Management Requirements for Derivatives Clearing
Organizations; and OMB Control No. 3038-0076, Risk Management
Requirements for Derivatives Clearing Organizations. The Commission
also proposed to change the title of the collection under OMB
Control No. 3038-0076 to ``Requirements for Derivatives Clearing
Organizations.''
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The Commission did not receive any comments regarding its PRA
burden analysis in the preamble to the Proposal. The Commission is
revising collection 3038-0076 to reflect the adoption of amendments to
part 39, as discussed below, with changes to reflect adjustments that
were made to the final rules in response to comments on the Proposal.
The Commission does not believe the rule amendments as adopted impose
any other new collections of information that require approval of OMB
under the PRA.
2. Subpart A--General Requirements Applicable to DCOs
Subpart A establishes the procedures and information required for
applications for registration as a DCO, including submission of a
completed Form DCO accompanied by all applicable exhibits. The
Commission is adopting changes to Sec. 39.3(a)(2) that remove the
requirement that DCOs use Form DCO to request an amended order of
registration. In addition, the Commission is adopting changes that
would move governance requirements from Subpart C to Subpart A, and
making corresponding amendments to Form DCO to require that the
information be included in an application for registration as a DCO,
which the Commission previously estimated would move 22 burden hours
per respondent from the Subpart C Election Form to Form DCO.
Accordingly, the Commission's original burden estimate of two
respondents, with one response annually, has not changed.
The Commission is estimating that the change to 39.3(a)(2) to
eliminate the requirement for DCOs to use Form DCO to request an
amended order of DCO registration will result in a decrease of one
burden hour. The aggregate burden estimate for Form DCO is as follows:
Form DCO--Sec. 39.3(a)(2)
Estimated number of respondents: 2.
[[Page 4829]]
Estimated number of reports per respondent: 1.
Average number of hours per report: 421.
Estimated gross annual reporting burden: 842.
The Commission also is adopting as proposed the changes to Sec.
39.3 regarding requests for extension of the review of a DCO
application, vacation of a DCO's registration, and transfer of
positions. The Commission is adopting new Sec. 39.3(a)(6), which will
permit the Commission to extend the 180-day review period for DCO
applications specified in Sec. 39.3(a)(1) for any period of time to
which the applicant agrees in writing. The Commission estimates that
there would be two requests for extension of the DCO application per
year, one per respondent, and that it will take one hour per report.
The aggregate estimate for the agreement in writing to extend the
application review period pursuant to Sec. 39.3(a)(6) is as follows:
Estimated number of respondents: 2.
Estimated number of reports per respondent: 1.
Average number of hours per report: 1.
Estimated gross annual reporting burden: 2.
The Commission is adopting amendments to Sec. 39.3(e) to codify
statutory requirements regarding vacation of registration. The revised
regulation specifies information that a DCO must include in its request
to vacate, and requires a DCO to continue to maintain its books and
records after its registration has been vacated for the requisite
statutory and regulatory retention periods. The Commission estimated
that there would be one request to vacate every three years and that it
would take three hours per report. The annual aggregate reporting
burden for the request to vacate requirement has been divided to
reflect the estimate of one request to vacate a DCO registration
pursuant to Sec. 39.3(e)(1) every three years as follows:
Estimated number of respondents: 1.
Estimated number of reports per respondent: 0.33.
Average number of hours per report: 1.
Estimated gross annual reporting burden: 1.
For recordkeeping by a DCO that has requested to vacate its
registration, the Commission is adding this recordkeeping burden to OMB
control number 3038-0076, which currently includes 16 responses and 50
burden hours for the recordkeeping requirement of registered DCOs. The
Commission is also transferring the 100 recordkeeping burden hours
currently contained in OMB control number 3038-0069 to OMB control
number 3038-0076. The burden for the request to vacate requirement has
been divided to reflect the estimate of one record of the request to
vacate a DCO registration pursuant to Sec. 39.3(e)(1) every three
years. The combined annual aggregate recordkeeping burden estimate for
subparts A and B of part 39 under OMB control number 3038-0076 is as
follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 150.
Estimated number of respondents-request to vacate: 1.
Estimated number of reports per respondent-request to vacate: 0.33.
Average number of hours per report-request to vacate: 1.
Estimated gross annual recordkeeping burden: 2,401.\57\
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\57\ The total annual recordkeeping burden estimate reflects the
combined figures for 16 registered DCOs with an annual burden of one
response and 150 hours per response (16 x 1 x 150 = 2400), and one
vacated DCO registration every three years with an annual burden of
one hour.
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The Commission proposed changes to Sec. 39.3(f), to be renumbered
as Sec. 39.3(g), to simplify the requirements for requesting a
transfer of open interest. The rule submission filing is covered by OMB
control number 3038-0093, which reflects that there are 50 reports
annually and that it takes two hours per response. The Commission is of
the view that to the extent that the request to transfer open interest
would be submitted as part of a new rule or rule amendment filing
pursuant to Sec. 40.5, the proposed change is already covered by OMB
control number 3038-0093 and there is no change in the burden
estimates.
3. Subpart B--Requirements for Compliance With Core Principles
a. CCO Annual Reporting Requirements--Sec. 39.10(c)
Currently, Sec. 39.10(c)(3) requires the CCO of a DCO to prepare,
and to submit to the Commission and the DCO's board of directors, an
annual compliance report containing specified information regarding the
DCO's compliance with the core principles and Commission regulations.
The burden for CCO annual reports, which is currently covered by OMB
control number 3038-0081, is being moved to OMB control number 3038-
0076. OMB control number 3038-0081 reflects that there are 12
respondents that submit CCO annual reports annually and that it takes
80 hours to complete and submit the report, and 960 hours in the
aggregate. The number of respondents has been updated to 16 to reflect
the current number of registered DCOs. The Commission is adopting
changes that allow a DCO to incorporate by reference certain sections
of prior annual compliance reports. Specifically, if the sections of
the CCO annual report that describe the DCO's compliance policies and
procedures have not materially changed, the current report may
reference a prior year's report, provided that the referenced report
was filed within the prior five years. The Commission estimates that
this change will decrease the burden of preparing the CCO annual report
by ten hours per respondent, and 160 hours in aggregate, by not
requiring the report to repeat potentially lengthy descriptions of
policies and procedures that have already been adequately described in
a CCO annual report previously submitted to the Commission.
The Commission is adopting a requirement that the CCO annual report
must identify, by name, rule number, or other identifier, the policies
and procedures intended to comply with each core principle and
applicable regulation. The Commission estimates the change will add two
hours to the burden of preparing each report, and 32 hours in the
aggregate. Lastly, the Commission is adopting an amendment to Sec.
39.10(c)(4) to require that the CCO annual report describe the process
by which the report is submitted to the DCO's board or senior officer.
This requirement will require DCOs to memorialize in the report a
process they are already required to follow. Nonetheless, the
Commission anticipates an increase of one hour in the burden for each
report, and 16 hours in the aggregate due to this change. Overall, the
Commission estimates that the net impact of these increases and
reductions to the CCO annual report burden due to the changes is
expected to be a decrease of seven hours per respondent in the existing
information collection burden associated with the CCO annual
report.\58\ The aggregate
[[Page 4830]]
estimate for the CCO annual report is as follows:
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\58\ The existing burden estimate for the CCO annual report is
80 hours per response. For the new estimate, the Commission is
subtracting ten hours for the rule amendment that allows a DCO to
incorporate by reference certain sections of prior annual compliance
reports if the information has not changed from the prior report,
adding two hours for the requirement to reference rules and
policies, and one hour for the requirement that the report include
documentation of the process of providing the report to the board,
for a net burden per respondent of 73 hours. The recordkeeping
burden is covered by OMB Control No. 3038-0076 and it is not
affected by these requirements.
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Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 73.
Estimated gross annual reporting burden: 1,168.
b. Cross-Margining Programs
The Commission is adding Sec. 39.13(i), which sets forth the
procedure for DCOs to submit information related to their proposed
cross-margining programs with other DCOs (or other clearing
organizations). Regulation Sec. 39.13(i) requires that the DCO provide
this information as part of a rule filing submitted for Commission
approval pursuant to Sec. 40.5. The rule submission filing is covered
by OMB control number 3038-0093, which reflects that there are 50
reports annually and that it takes 2 hours per response. The Commission
is of the view that to the extent that the cross-margining program
would be submitted as part of a new rule or rule amendment filing
pursuant to Sec. 40.5, the proposed changes is already covered by OMB
control number 3038-0093 and there is no change in the burden
estimates.
c. Financial Resources Reporting
i. Annual Financial Reports
Existing Sec. 39.11(f) requires DCOs to provide to the Commission
quarterly reports of their financial resources, and Sec. 39.19(c)(3)
requires DCOs to prepare and submit audited annual financial
statements. The Commission is adding Sec. 39.11(f)(2), which
incorporates in Sec. 39.11 the annual reporting requirement that
currently exists in Sec. 39.19(c)(3). This change simply moves the
existing requirement to a different location, and does not alter the
existing information collection burden associated with this
requirement. Accordingly, the burden for annual financial reports is
being moved from OMB control number 3038-0069 to OMB control number
3038-0076, and the burden for quarterly financial reports is being
moved from OMB control number 3038-0066 to OMB control number 3038-
0076. The Commission is cancelling OMB control numbers 3038-0069 and
3038-0066.
The Commission is amending Sec. 39.11(f)(2) to require that,
concurrently with filing the required annual financial report, a DCO
also provide: (1) A reconciliation, including appropriate explanations,
of its balance sheet in the certified annual financial statements with
the DCO's most recent quarterly report when material differences exist
or, if no material differences exist, a statement so indicating, and
(2) such further information as may be necessary to make the required
statements not misleading. The Commission estimates that this change
will add an additional 20 hours per report, and 320 hours in the
aggregate, to the current burden of 2606 hours per respondent, and
41,696 hours in the aggregate, in OMB control number 3038-0069, which
as noted above, is being moved to OMB control number 3038-0076.
Finally, the Commission is not adopting proposed changes to Sec.
39.11(f)(2)(i) that would have required the annual report to identify
the DCO's own capital allocated to the DCO's compliance with Sec.
39.11(a)(1), and also identify each of the DCO's financial resources
allocated to the DCO's compliance with Sec. 39.11(a)(2). The
Commission previously estimated that the proposed change would add an
additional 14 hours per report and 224 hours in the aggregate to the
annual report burden, and has reduced its per report and total burden
estimates because this additional requirement will not be adopted. The
total annual burden hour estimate for this requirement, which is being
moved from OMB control number 3038-0069 to OMB control number 3038-
0076, is stated below.
The Commission estimates that the aggregate result of these changes
will be to increase the information collection burden associated with
annual financial reports from 2606 hours to 2626 hours for each DCO.
The revised estimated aggregate burden for the audited annual financial
statements is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 2,626.
Estimated gross annual reporting burden: 42,016.
ii. Quarterly Financial Reports
The Commission is removing from Sec. 39.11(f)(3) the requirement
that certain documentation be filed quarterly; instead, DCOs would only
need to include the information in their first quarterly report
submission and upon any subsequent change, for an expected reduction of
three hours per report. Proposed Sec. 39.11(f)(1)(v) would have
required a DCO to identify in its quarterly report the financial
resources allocated to meeting its obligations under Sec. 39.11(a)(1)
and (a)(2), with an expected increase of one hour per report. The
Commission has determined not to adopt this change and has reduced the
burden hour estimate by one hour per report. The Commission has
adjusted the burden hour estimate for quarterly reporting to reflect
these changes, which result in an overall reduction in burden of three
hours per report. The estimated aggregate burden for the quarterly
reports as amended is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 4.
Average number of hours per report: 7.
Estimated gross annual reporting burden: 448.
The Commission is adopting the amendment to Sec. 39.11(f)(1)(ii),
which required a DCO to file with the Commission a financial statement
of the DCO or of its parent company, to require that the financial
statement provided be that of the DCO and not the parent company. The
Commission is further adopting changes to the periodic financial
reporting requirements in Sec. 39.11(f)(1)(ii) and (f)(2)(i) to permit
quarterly and annual financial statements to be prepared in accordance
with U.S. GAAP for DCOs incorporated or organized under U.S. law and in
accordance with either U.S. GAAP or IFRS for DCOs incorporated or
organized under the laws of any foreign country. As the Commission
noted in the Proposal, these changes are not expected to affect the
burden.
d. Daily Reporting
The Commission proposed to amend Sec. 39.19(c)(1)(i)(A)-(C), which
requires a DCO to report margin, cash flow, and position information by
house origin and separately by customer origin, to report this
information by individual customer account as well. The Commission also
proposed to amend Sec. 39.19(c)(1)(i)(D) to specify that, with respect
to end-of-day position information, DCOs must report both unadjusted
and risk-adjusted position information. Although the Commission is
clarifying, in response to comments, that certain information is
required to be provided only where it is in the possession of the DCO,
these clarifications do not affect the Commission's prior burden
estimates. The burden associated with these changes is anticipated to
result in an increase from 0.1 to 0.5 hours per report, and 2000 in the
aggregate. The burden increase for daily financial reports is being
moved from OMB control number 3038-0069 to OMB control number 3038-
0076.
Separately, the Commission is adopting changes to Sec.
39.19(c)(1)(i) to codify relief previously granted to fully
[[Page 4831]]
collateralized DCOs that would reduce their daily reporting burden by
not requiring information on initial margin, daily variation margin
payments, other daily cash flows, and end-of-day positions. This change
will reduce the burden for fully collateralized DCOs, but does not
affect the burden for the majority of DCOs that are subject to daily
reporting requirements. The revised aggregate burden estimate for daily
reporting being transferred to OMB control number 3038-0076 is as
follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 250.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 2,000.
The Commission is adopting amendments to Sec. 39.13(g)(8)(i)(B) to
require a DCO to have rules requiring its FCM clearing members to
report customer information about futures (as well as swaps) to DCOs.
This is a new information collection that is not covered by an existing
OMB control number. The burden applicable to FCM clearing members is
estimated as follows:
Estimated number of respondents: 64.
Estimated number of reports per respondent: 250.
Average number of hours per report: 0.2.
Estimated gross annual reporting burden: 3,200.
e. Event-Specific Reporting
Regulations 39.18(g) and (h) require a DCO to provide notice
regarding certain exceptional events or planned changes related to a
DCO's automated systems. These notice requirements are adopted by
reference in Sec. 39.19(c)(4). Regulation 39.19(c)(4) also requires a
DCO to notify the Commission of the occurrence of other specified
events; for example, a decrease in financial resources or the default
of a clearing member. The information collection burden associated with
these notices required under Sec. 39.19(c)(4) is currently addressed
by OMB Control No. 3038-0069, but is being moved to OMB control number
3038-0076 and consolidated with the burden in OMB control number 3038-
0076 that is currently associated with Sec. 39.18(g) and (h). The
Commission is also amending Sec. 39.16(c)(2)(ii) to require that a DCO
provide public notice of a declaration of default on its website. The
estimated burden of Sec. 39.16(c)(2)(ii) is included in the estimate
for event-specific reporting because it is related to the requirement
under Sec. 39.19(c)(4)(vii) that a DCO provide immediate notice to the
Commission regarding the default of a clearing member. In addition, the
Commission is adding to Sec. 39.19(c)(4) several events for which DCOs
will be required to provide notification if such events occur.
The Commission determined not to adopt several proposed notice
requirements, and has reduced the burden estimate for event-specific
notice requirements by 6 responses annually, from 20 to 14. The
aggregate revised burden estimate of Sec. 39.19(c)(4) being
transferred to OMB control number 3038-0076 is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 14.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 112.
f. Public Information
The Commission is revising Sec. 39.21 to clarify that information
regarding the financial resource package available in the event of a
clearing member default, which a DCO is required to post on its website
pursuant to Sec. 39.21, should be updated at least quarterly,
consistent with the requirement in Sec. 39.11(f)(1)(i)(A) to report
this information to the Commission each fiscal quarter or at any time
upon Commission request. The Commission is also clarifying that other
information specified in Sec. 39.21 must be disclosed separately on
the DCO's website, and not provided solely in the DCO's posted
rulebook. This is a new information collection that is not covered by
an existing OMB control number. The changes are estimated to add an
average of two hours per response, and eight hours per respondent
annually (4 quarterly reports x 2 hours per report) to OMB control
number 3038-0076, for an aggregate estimated burden as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 4.
Average number of hours per report: 2.
Estimated gross annual reporting burden: 128.
g. Governance
As noted above, the Commission is incorporating governance
provisions from subpart C, which only applies to a limited subset of
DCOs, into subpart B, which is applicable to all DCOs. Therefore, the
information collection burden currently associated with the governance
standards of Sec. 39.32, which results from required disclosure of
major board decisions and governance arrangements, has been reallocated
to Sec. 39.24. The burden associated with subpart C governance
provisions, which is currently covered by OMB control number 3038-0081,
is being moved to OMB control number 3038-0076. The aggregate burden of
these requirements would increase because they will be applicable to
all registered DCOs. The aggregate burden estimate for Sec. 39.24 that
is associated with the required ongoing disclosure of major board
decisions and governance arrangements by registered DCOs, including
DCOs that are not currently subject to subpart C, is estimated as
follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 6.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 288.
h. Legal Risk
The Commission is adopting changes to Sec. 39.27 that will require
a DCO that provides clearing services outside the United States to
ensure that the legal opinion that a DCO must obtain to provide those
services is accurate and up to date. The new subsection also requires
the DCO to submit an updated legal memorandum to the Commission
following all material changes to the analysis or content contained in
the memorandum. This requirement will apply only to DCOs offering
clearing services outside the U.S. This is a new information collection
that is not covered by an existing OMB control number. The Commission
expects that circumstances necessitating submission of an updated legal
memorandum will occur infrequently, not more than once every three
years, and has estimated the aggregate burden as follows:
Estimated number of respondents: 1.
Estimated number of reports per respondent: 0.33.
Average number of hours per report: 20.
Estimated gross annual reporting burden: 6.6.
4. Subpart C--Provisions Applicable to SIDCOs and DCOs That Elect To Be
Subject to the Provisions of Subpart C
Because the Commission is removing and reserving Sec. 39.32 and
Exhibit B of the subpart C Election Form and moving the governance
requirements to Form DCO and Sec. 39.24, the corresponding information
collection burden under Sec. 39.32, currently covered by OMB control
number 3038-0081, will be eliminated and the burden under the subpart C
Election Form will be
[[Page 4832]]
reduced. Further, in consolidating the burden for subpart C, currently
in OMB control number 3038-0081, with OMB control number 3038-0076, the
Commission has reassessed the burden for the subpart C Election Form,
and is adjusting certain burden hour estimates and numbers of
respondents. Specifically, the Commission is reducing the number of
burden hours estimated for the certification portion of the subpart C
Election Form from 25 hours to 2 hours, because the prior estimate
overstated the burden necessary to prepare the one-page certification.
The burden that is currently estimated separately for the
certifications, exhibits, and supplements/amendments to the subpart C
Election Form have been combined because a DCO must provide all the
required information in order to submit a complete subpart C Election
Form.\59\
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\59\ The current burden for the subpart C Election Form exhibits
is 155 hours per response; 22 of these hours are being moved to the
Form DCO burden as discussed in the Form DCO section above, leaving
133 hours. Also, the Commission is reducing the burden currently
attributed to amendments to the subpart C Election Form and
consolidating it with the burden for supplemental information
because in practice, DCOs have not frequently filed amendments.
Consolidating the certification (2 hours), exhibits (133 hours), and
supplemental or amended information (45 hours) results in a burden
of 180 hours.
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Additionally, the Commission is updating the estimated numbers of
respondents for subpart C to reflect the current number of SIDCOs and
subpart C DCOs, and a reduction, from five to one, in the anticipated
number of DCOs newly electing to be subject to subpart C. The
Commission is also updating the number of responses for the rescission
notices that must be provided to clearing members based on an average
of the current number of clearing members at subpart C DCOs. The
Commission also is combining burden estimates that previously were
estimated separately for SIDCOs only and for all subpart C DCOs; that
distinction was made in the initial implementation of subpart C but is
no longer necessary since the subpart C rules have been in place for
several years. The revised estimated aggregate reporting burden related
to the subpart C Election Form, notices and disclosure being
transferred to OMB control number 3038-0076 is as follows:
Subpart C Election Form
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 180.
Estimated gross annual reporting burden: 180.
Subpart C Withdrawal Notice
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 2.
Estimated gross annual reporting burden: 2.
Subpart C Rescission Notice
Estimated number of respondents: 1.
Estimated number of reports per respondent: 16.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 48.
PFMI Disclosures
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 200.
Estimated gross annual reporting burden: 200.
Quantitative Disclosures
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 80.
Estimated gross annual reporting burden: 80.
Additionally, the Commission is adding to Sec. 39.37 a
notification requirement regarding changes to the PFMI disclosure
framework for SIDCOs and subpart C DCOs, which is expected to increase,
by one hour, the existing information collection burden of 80 hours per
response. The aggregate estimated burden for Sec. 39.37 is stated
below:
Subpart C Disclosure Framework Requirements--Sec. 39.37
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 81.
Estimated gross annual reporting burden: 729.
Because the Commission is moving all of the burden estimates for
subpart C from OMB control number 3038-0081 to OMB control number 3038-
0076 and cancelling information collection 3038-0081, the existing
burden estimates for Sec. Sec. 39.33, 39.36, 39.38, and 39.39, and
certain disclosures under Sec. 39.37, as updated to reflect the
current number of SIDCOs and subpart C DCOs, are restated below. In
addition, for the quantitative disclosures required under Sec. 39.37,
which may be updated as frequently as quarterly, the Commission has
updated the number of reports per respondent from one to four annually,
and has distributed the existing 35 burden hours among the four reports
(35/4=8.75, rounded to 9). The updated subpart C reporting burden
estimates for the changes to Subpart C--Provisions is as follows:
Subpart C Financial and Liquidity Resource Documentation--Sec. 39.33
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 120.
Estimated gross annual reporting burden: 1,080.
Subpart C Stress Test Results--Sec. 39.36
Estimated number of respondents: 9.
Estimated number of reports per respondent: 16.
Average number of hours per report: 14.
Estimated gross annual reporting burden: 2,016.
Subpart C Quantitative Disclosures--Sec. 39.37
Estimated number of respondents: 9.
Estimated number of reports per respondent: 4.
Average number of hours per report: 9.
Estimated gross annual reporting burden: 324.
Subpart C Transaction, Segregation and Portability Disclosures--Sec.
39.37
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 35.
Estimated gross annual reporting burden: 315.
Subpart C Efficiency and Effectiveness Review--Sec. 39.38
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 27.
Subpart C Recovery and Wind-Down Plan--Sec. 39.39
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 480.
Estimated gross annual reporting burden: 4,320.
[[Page 4833]]
With respect to the subpart C recordkeeping burden that the
Commission is moving from OMB control number 3038-0081 to OMB control
number 3038-0076, the Commission also has combined the burden estimates
for financial and liquidity resources, and liquidity resource due
diligence and testing because these requirements apply to the same set
of respondents. As noted above, the general recordkeeping requirements
that were previously estimated separately for SIDCOs and all subpart C
DCOs also have been combined. The updated subpart C recordkeeping
burden estimates are restated below:
Subpart C Recordkeeping--General
Estimated number of respondents: 9.
Estimated number of reports per respondent: 110.
Average number of hours per report: 10.
Estimated gross annual recordkeeping burden: 9,900.
Subpart C Recordkeeping--Financial and Liquidity Resources, Liquidity
Resource Due Diligence and Testing
Estimated number of respondents: 9.
Estimated number of reports per respondent: 8.
Average number of hours per report: 10.
Estimated gross annual recordkeeping burden: 720.
C. Cost-Benefit Considerations
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\60\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors below.\61\
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\60\ 7 U.S.C. 19(a).
\61\ The Commission has not identified any impact that the final
rule would have on price discovery.
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In the Proposal, the Commission established, based on the subject
matter of the proposals, that it did not consider any of the proposed
changes contained therein to have any significant impact on price
discovery. The Commission received no responses from commenters with
respect to its analysis regarding price discovery. For the remaining
areas, where the Commission believed the costs or benefits of the
Proposal were significant, the Commission addressed, section by
section, the qualitative costs or benefits associated with the
Proposal. Where reasonably possible, the Commission has endeavored to
estimate quantifiable costs and benefits. Where quantification is not
feasible, the Commission identifies and describes costs and benefits
qualitatively. The Commission requested comments on the costs and
benefits associated with the proposed rules. In particular, the
Commission requested that commenters provide data and any other
information or statistics that the commenters relied on to reach any
conclusions regarding the Commission's proposed considerations of costs
and benefits. The Commission received comments that indirectly address
the costs and benefits of the proposal. These comments are discussed as
relevant below.
The Commission notes that the consideration of costs and benefits
below is based on the understanding that the markets function
internationally, with many transactions involving U.S. firms taking
place across international boundaries; with some Commission registrants
being organized outside of the United States; with leading industry
members typically conducting operations both within and outside the
United States; and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of the
rules on all activity subject to the amended regulations, whether by
virtue of the activity's physical location in the United States or by
virtue of the activity's connection with or effect on U.S. commerce
under section 2(i) of the CEA.\62\ In particular, the Commission notes
that some entities affected by this rulemaking are located outside of
the United States. The Commission has carefully considered alternatives
suggested by commenters, and in a number of instances, for reasons
discussed in detail above, has adopted such alternatives or
modifications to the proposed rules where, in the Commission's
judgment, the alternative or modified standard accomplishes the same
regulatory objective in a more cost-effective manner. Where the
Commission declined to accept alternatives suggested by commenters, the
costs and benefits of the alternatives are discussed below.\63\
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\62\ 7 U.S.C. 2(i).
\63\ The Commission is not discussing the costs and benefits of
alternatives that would require a proposal prior to adoption. The
Commission will consider proposing such alternatives in the future
and will discuss their costs and benefits in any proposing release.
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2. Economic Baseline
The baseline for the Commission's consideration of the costs and
benefits of this rulemaking are the following requirements prior to
taking into account the final amendments being adopted herein: (1) The
DCO Core Principles set forth in section 5b(c)(2) of the CEA; (2) the
general provisions applicable to DCOs under subparts A and B of part 39
of the Commission's regulations; (3) the Commission's regulations in
subpart C of part 39, which establish additional standards for
compliance with the core principles for those DCOs that are designated
as SIDCOs or have elected to opt-in to the subpart C requirements in
order to achieve status as a qualified central counterparty (QCCP); (4)
Form DCO in Appendix A to part 39; (5) Subpart C Election Form in
Appendix B to part 39; and (6) Sec. Sec. 1.20(d) and 140.94.
The Commission notes that some of the rules codify existing no-
action relief and other guidance issued by Commission staff. To the
extent that market participants have relied upon such relief or staff
guidance, the actual costs and benefits of the rules, as discussed in
this section, may not be as significant.
3. Comments on Cost-Benefit Considerations Generally
ICE commented that the Commission insufficiently considered the
costs and benefits of those proposed rules not related to Project KISS
and that the Commission should re-propose those rules in a separate
rulemaking that more fully considers costs to DCOs. CME stated that the
proposed amendments, in aggregate, will increase, rather than reduce,
the regulatory burdens on DCOs and the markets they clear. The
Commission acknowledges these comments and, as discussed further below,
notes that it has modified or determined not to finalize many of the
proposed rules in light of specific comments related to costs.
4. Written Acknowledgment From Depositories--Sec. 1.20
Regulation 1.20(d)(1) requires an FCM to obtain a written
acknowledgment
[[Page 4834]]
from each depository with which the FCM deposits futures customer
funds. The regulation provides that an FCM is not required to obtain a
written acknowledgment from a DCO that has adopted rules providing for
the segregation of customer funds, but other provisions of Sec.
1.20(d) seem to suggest that a DCO must provide the written
acknowledgment regardless. The Commission is amending as proposed Sec.
1.20(d) to clarify the Commission's intent that the requirements listed
in Sec. 1.20(d)(3) through (6) do not apply to a DCO, or to an FCM
that clears through that DCO, if the DCO has adopted rules that provide
for the segregation of customer funds.
The Commission did not receive comments on the costs associated
with these amendments. As to the benefits, FIA and ISDA commented that
clarifying the applicability of Sec. 1.20(d)(3) through (6) avoids
redundant information-sharing arrangements.
The Commission believes the amendments to Sec. 1.20(d) will
benefit FCMs and DCOs by reducing uncertainty as to when an FCM must
obtain a written acknowledgment from a DCO.
The Commission does not believe the amendments would impose any
additional costs on DCOs or FCMs, as it is clarifying the circumstances
under which an acknowledgment letter would not be required.
As to the costs and benefits in light of the section 15(a) factors,
in consideration of section 15(a)(2)(B) of the CEA, the Commission
believes that the amendments to Sec. 1.20(d) would not negatively
impact the protection of market participants and the public, including
DCOs' clearing members and their customers, as the amendments merely
clarify the instances in which a DCO, or an FCM that clears through
that DCO, would not need to file an acknowledgment letter because the
DCO has adopted rules that provide for the segregation of customer
funds. The Commission believes that the amendments to Sec. 1.20(d)
will result in an incremental increase in efficiency for FCMs that
follows from reducing any previous uncertainty regarding when they must
obtain an acknowledgment letter. The Commission has considered the
other section 15(a) factors and believes that they are not implicated
by the amendments.
5. Definitions--Sec. 39.2
Regulation 39.2 sets forth definitions applicable to terms used in
part 39 of the Commission's regulations. The Commission proposed
amendments to the definition of ``business day,'' ``customer,''
``customer account or customer origin,'' and ``key personnel'' in Sec.
39.2 to maintain consistency with terms defined elsewhere in Commission
regulations and to provide clarity with respect to the use of these
terms. The Commission is also adding new definitions for ``enterprise
risk management'' and ``fully collateralized position'' to correspond
with amendments that the Commission proposed elsewhere in part 39.
The Commission did not receive comments on the costs or benefits
associated with these amendments. The Commission received comments from
CME, ICE, and Nadex that suggested clarifications to the proposed
definitions, and the Commission has incorporated these suggestions in
the final rule.
The amendments to Sec. 39.2 benefit DCOs by clarifying existing
part 39 requirements, such as what constitutes a Federal holiday for
purposes of applying the definition of ``business day.'' The new
definitions in Sec. 39.2 for ``enterprise risk management'' and
``fully collateralized position'' are necessary to understanding the
new rules for an enterprise risk management framework it is adopting in
Sec. 39.10(d) and exceptions from several requirements for fully
collateralized positions throughout part 39, and hence benefit DCOs by
helping them understand the new rules mentioned above. The amendments
to the definitions of ``customer'' and ``customer account or customer
origin'' also have the benefit of clarification as they help to avoid
conflicts with similar terms defined in Sec. 1.3.
The Commission does not believe the new and amended definitions in
Sec. 39.2 would impose additional costs on DCOs, as they are not
imposing additional requirements, but rather defining terms that are
used in other provisions.
In addition to the discussion above, the Commission evaluated the
costs and benefits in light of the specific considerations identified
in section 15(a) of the CEA. In consideration of section 15(a)(2)(B) of
the CEA, the Commission believes that, to the extent that the amended
definitions provide clarity, reduce any previous uncertainty, or help
to avoid conflicts with similar terms that are defined in different
sections, these effects, individually and in aggregate, may yield
increased efficiency for DCOs. After considering the other section
15(a) factors, the Commission believes they are not implicated by the
amendments.
6. Procedures for Registration--Sec. 39.3 and Form DCO
The Commission is adopting several changes to its procedures for
DCO registration, including: Application procedures--Sec. 39.3(a),
stay of application review--Sec. 39.3(b), request to amend an order of
registration--Sec. 39.3(a)(2) and Sec. 39.3(d), dormant
registration--Sec. 39.3(e), vacation of registration--Sec. 39.3(f),
and request for transfer of registration and open interest--Sec.
39.3(g).
The amendments to Sec. 39.3(a) improve clarity and consistency of
the rules, provide greater flexibility to DCO applicants submitting
supplemental information, clarify references to the portion of the Form
DCO cover sheet and other application materials that will be made
public; and, in new Sec. 39.3(a)(6), permit the Commission to extend
the 180-day review period for DCO applications for any period of time
to which the applicant agrees in writing. Furthermore, the Commission
is amending Sec. 39.3(a)(2) to eliminate the required use of Form DCO
to request an amended order of registration from the Commission.
In Sec. 39.3(b)(2), the Commission is clarifying the stay of the
application review process and adopting a change to replace the
inaccurate ``designation'' with ``registration.
In Sec. 39.3(d), the Commission is also adopting a new rule to
establish a separate process for requests to amend an order of
registration.
Regulation Sec. 39.3(e) establishes the procedure for a dormant
DCO to reinstate its registration before it can begin ``listing or
relisting'' products for clearing. The Commission is renumbering Sec.
39.3(d) as Sec. 39.3(e) and adding clarification and accuracy by
replacing ``listing or relisting'' with ``accepting.''
Amendments to Sec. 39.3(f) renumber current Sec. 39.3(e) as Sec.
39.3(f)(1) and add provisions under Sec. 39.3(f)(1) regarding
procedures for a DCO seeking to vacate its registration. The Commission
is also adopting Sec. 39.3(f)(2) to streamline the process of
notifying all registered entities of a vacation request filed with the
Commission by requiring the Commission to post the required documents
on its website.
In Sec. 39.3(f), which is renumbered as Sec. 39.3(g), the
Commission is simplifying the requirements for requesting a transfer of
open interest and removing references to transfers of registration and
requirements regarding corporate changes. Furthermore, the amendments
will require transfer requests to be submitted under Sec. 40.5.
[[Page 4835]]
In addition, the Commission is revising Form DCO to correspond with
amendments to part 39 and to reflect Commission staff's experience with
DCO applications. Finally, the Commission is revising the Subpart C
Election Form to better reflect the requirements in subpart C of part
39 and to more closely align the format of the Subpart C Election Form
with Form DCO by specifying the information and/or documentation that
must be provided by a DCO as part of its petition for subpart C
election.
The Commission did not receive comments on the costs associated
with these amendments.
The Commission believes the amendments to the DCO registration
procedures in Sec. 39.3, Form DCO, and the Subpart C Election Form
will make the procedures more transparent to applicants. This should
allow prospective DCO applicants to more efficiently prepare complete
applications, which should reduce the need for Commission staff to
request additional information after receiving the application and
therefore reduce the overall time needed to review an application. For
example, the Commission is modifying Form DCO to clarify the types of
information that are required and align the exhibits with the
amendments under part 39. Similarly, the Commission is modifying the
Subpart C Election Form to more closely align its format with Form DCO.
These amendments may reduce an applicant's time and resources used in
responding to staff inquiries during the application review process, as
DCO applicants would be better able to provide more complete, accurate,
and nuanced application materials. The amendments to Sec. 39.3 also
adapt certain language to better reflect terminology applicable to DCOs
in Sec. 39.3(a)(1) through (2) and (b), which could help to avoid
confusion for potential DCO applicants and existing DCOs. Furthermore,
the Commission is codifying its long-standing procedures for staying an
application in Sec. 39.3(a)(6) to provide DCO applicants with greater
transparency of the registration process.
The Commission is amending Sec. 39.3(a)(2) and Form DCO to
eliminate the required use of Form DCO to request an amended order of
registration from the Commission. This change better reflects current
practice, where a DCO is permitted to file a request for an amended
order with the Commission rather than submitting Form DCO. Similarly,
the Commission is specifying in Sec. 39.3(f) the types of information
that the Commission currently requests to determine whether to vacate
an order of registration, which will provide DCOs with more
transparency as to the types of information that are required as part
of a request to vacate an order of registration. The recordkeeping
requirements in Sec. 39.3(f)(1)(iii) through (iv), which require a
vacated DCO to continue to maintain the books and records that it would
otherwise be required to maintain as a registered DCO, provide the
benefit of ensuring that a DCO does not vacate its registration and
destroy its books and records in order to hinder or avoid Commission
action.
The Commission is also streamlining the procedures for requesting a
transfer of open interest by separating those procedures in existing
Sec. 39.3(g) from the procedures to notify the Commission of a DCO
corporate structure or ownership change. Under the amendments to Sec.
39.3(g), a DCO seeking to transfer its open interest will be required
to submit rules for Commission approval pursuant to Sec. 40.5, rather
than submitting a request for an order at least three months prior to
the anticipated transfer. This will simplify the existing requirements
and permit the transfer to take effect after a 45-day Commission review
period.
The Commission believes DCOs would not incur any additional costs
associated with the procedures to request an amended order of
registration in Sec. 39.3(d), as a DCO would incur the same costs if
requesting to amend its order of registration by using the current Form
DCO.\64\ In stating support for this amendment, ICE noted that it
believes this modification will help streamline the process for a DCO
to file a request for an amended order.
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\64\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section X.B.2 above.
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As to the procedures to vacate a DCO's registration in Sec.
39.3(f), the Commission believes the costs would not be substantial.
Any costs incurred by DCOs would more likely be due to the
recordkeeping requirements in Sec. 39.3(f)(1)(iii) through (iv), which
require a vacated DCO to continue to maintain the books and records
that it would otherwise be required to maintain as a registered DCO
pursuant to Sec. 1.31(b).
Finally, the Commission is amending Sec. 39.3(g) to permit a DCO
seeking to transfer its open interest to submit rules for Commission
approval pursuant to Sec. 40.5, rather than submitting a request for
an order at least three months prior to the anticipated transfer. The
Commission does not anticipate that DCOs would incur any additional
costs as a result of these procedural changes beyond the costs to
prepare a Sec. 40.5 rule submission, which are likely to be similar to
the costs of requesting an order approving the transfer. Additionally,
the information requested in Sec. 39.3(g) reflects information that
DCOs are already required to provide in order to transfer their open
interest.
As an alternative, ICE suggested that it may be appropriate for a
transfer to take effect pursuant to a rule self-certification under
Sec. 40.6 where the transfer does not raise any particular novel
issues or concerns. ICE further requested that the Commission clarify
that it may, in appropriate circumstances, take action on a transfer
request in less than 45 days, both in circumstances that do not raise
particular concerns and in exigent or distressed circumstances in which
the full period may not be necessary or feasible. The Commission
considered ICE's suggestions but still believes that the 45-day review
period under Sec. 40.5, rather than the 10 business day review period
under Sec. 40.6(a), is necessary in order to determine whether any
concerns exist. However, the Commission notes that the same outcome--a
shorter review period where circumstances allow--can be achieved by the
Commission acting on a transfer request in less than 45 days as
permitted by Sec. 40.5(g).
The Commission does not believe DCOs would incur additional costs
from any of the other amendments to the DCO registration procedures in
Sec. 39.3. In addition to the discussion above, the Commission
evaluated the costs and benefits in light of the specific
considerations identified in section 15(a) of the CEA. The Commission
believes that the changes to the registration procedures will maintain
the protection of market participants and the public by ensuring that
DCOs are in compliance with the DCO Core Principles and Commission
regulations. The changes will also increase efficiency by making the
registration process more transparent. This will enable DCOs and DCO
applicants to provide more complete documentation in a more concise
manner, thereby reducing the time and resources needed to comply with
such procedures. To the extent that the changes to the registration
procedures act to streamline the application process, as well as to
establish the process for vacating a DCO's registration, those changes
will result in a more efficient process for registering as a DCO and
for vacating that registration.
Additionally, the Commission believes that the amendments to
[[Page 4836]]
Sec. 39.3(g), which addresses a request to transfer a DCO's open
interest, will result in increased efficiency because the amendments
streamline and improve the existing process, as DCOs would be able to
use the existing process under Sec. 40.5, with which DCOs are already
familiar a`nd which requires a shorter review period. As a result, DCOs
may obtain approval to transfer their open interest in a timelier
manner, which may benefit their operational and business needs. To that
end, the Commission believes that these changes will have a beneficial
effect on the risk management practices of DCOs, inasmuch as the
changes may modestly reduce the risks that may accompany the transfer
of open interest to another DCO. Moreover, the recordkeeping
requirements for vacated DCOs will protect market participants and the
public by ensuring that a DCO does not vacate its registration and
destroy its books and records in order to hinder or avoid Commission
action. The Commission has considered the other section 15(a) factors
and believes that they are not implicated by the amendments.
7. Fully Collateralized Positions
The Commission is amending certain regulations in part 39 to
address fully collateralized positions, which do not pose the same
risks that the regulations are meant to address. As discussed in above,
fully collateralized positions do not expose DCOs to many of the risks
that traditionally margined products do, as full collateralization
prevents a DCO from being exposed to credit risk stemming from the
inability of a clearing member or customer of a clearing member to meet
a margin call or a call for additional capital. This limited exposure
and full collateralization of that exposure renders certain provisions
of part 39 inapplicable or unnecessary. As a result, the Division of
Clearing and Risk has granted relief from certain provisions of part 39
to DCOs that clear fully collateralized positions.\65\ The Commission
is amending certain regulations consistent with that relief.\66\
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\65\ See CFTC Letter No. 14-04 (January 16, 2014) (granting
exemptive relief to the North American Derivatives Exchange, Inc.
(Nadex)); CFTC Letter No. 17-35 (July 24, 2017) (granting exemptive
relief to LedgerX).
\66\ The Division also issued interpretive guidance to Nadex for
other provisions in part 39. CFTC Letter No. 14-05 (January 16,
2014). The interpretive guidance may be relied on by third parties,
and is not impacted by this rulemaking.
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The amendments are based on an assessment of how the DCO Core
Principles and part 39 apply to fully collateralized positions, as well
as the relief previously granted to DCOs that clear such positions. The
Commission believes the amendments will not negatively impact prudent
risk management at any DCO, regardless of the types of products
cleared. The costs and benefits of these changes are discussed in
conjunction with the discussion of the related provisions below.
8. DCO Chief Compliance Officer--Sec. 39.10(c)
The Commission is amending Sec. 39.10(c) as proposed. These
amendments will allow a DCO to have its CCO report to the senior
officer responsible for the DCO's clearing activities. This would
provide DCOs with flexibility to structure the management and oversight
of the CCO based on the DCO's particular corporate structure, size, and
complexity. This may increase efficiency, reduce costs, and improve the
quality of the oversight of the CCO, as the senior officer overseeing
the DCO's clearing activities would be better positioned to provide
day-to-day oversight of the CCO. The Commission believes that this
amendment will not increase costs to DCOs since it does not require any
change in their practices.
The Commission is also amending certain requirements in Sec.
39.10(c) relating to the CCO annual report to permit DCOs to
incorporate by reference, for up to five years, any descriptions of
written policies and procedures that have not materially changed since
they were described within the most recent CCO annual report. CME noted
that these revisions would reduce the requirement to provide
duplicative information contained in previous reports and thus reduce
the administrative burden on the DCO's compliance staff. The Commission
agrees with CME's comment.
The Commission is amending Sec. 39.10(c) to require that a DCO
identify its compliance policies and procedures by name, rule number,
or other identifier; describe the process by which the annual report
was submitted to the board of directors or senior officer; and allow
incorporation by reference in limited circumstances. The Commission
notes that a number of DCOs already provide this information.
Therefore, the Commission expects that the changes to Sec. 39.10(c)
would not impose additional costs on those DCOs, but would impose
additional costs on DCOs that do not currently provide this
information. The Commission did not receive comments on the costs
associated with this amendment.
Furthermore, Nadex suggested that the Commission consider
conforming the language of the CCO's duties and annual report
requirements in Sec. 39.10 with that of Sec. 3.3, which pertains to
the CCOs of FCMs, swap dealers, and major swap participants. The
Commission may consider this in a separate proposal.
As to the costs and benefits in light of the section 15(a) factors,
the Commission believes that certain of the changes to Sec. 39.10(c)
will enhance the protection of market participants and the public.
Specifically, the changes to a CCO's reporting lines, along with the
added clarity regarding proper identification of the compliance
policies and procedures in the CCO annual report, is anticipated to
enhance the compliance function at DCOs, which may have the
corresponding effect of improving the protections for market
participants and the public. Additionally, in consideration of section
15(a)(2)(B) of the CEA, the amendment to permit incorporation by
reference in the CCO annual report will increase efficiency in
preparing that report. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the
amendments.
9. Enterprise Risk Management--Sec. 39.10(d)
The Commission is adopting Sec. 39.10(d) to require a DCO to have
a program of enterprise risk management that identifies and assesses
sources of risk and their potential impact on the operations and
services of the DCO and identify an enterprise risk officer. The
Commission believes that requiring DCOs to establish and maintain an
enterprise risk management program may encourage DCOs to strengthen
their existing programs, especially if a DCO lacks an enterprise risk
management program that is commensurate with industry best practices.
This may benefit the resiliency of individual DCOs' operations by
requiring DCOs to proactively identify potential risks on an
enterprise-wide basis beyond those that a DCO might otherwise identify
pursuant to its compliance with specific requirements in part 39.
Compliance with Sec. 39.10(d) by DCOs who are affiliated with other
registered entities such as DCMs, SEFs, and swap data repositories may
also benefit the financial markets more broadly, as risks identified
and addressed by the DCO may also apply to their affiliates within the
derivatives markets.
The Commission has found that DCOs that proactively identify and
manage foreseeable risks have generally
[[Page 4837]]
implemented enterprise risk management frameworks, in whole or in part,
to identify, assess, and manage sources of risk in a manner similar to
the requirements adopted in Sec. 39.10(d)(1) through (4). Therefore,
the Commission believes that any additional costs associated with these
requirements will be minimal relative to existing industry practice for
those DCOs whose enterprise risk management programs are commensurate
with industry best practices. The regulation will impose additional
costs on DCOs that need to change their practices to comply with the
regulation, but the extent of the costs will depend on the extent of
the changes required. In addition, as DCOs would be able to comply with
this requirement by including the DCO in the enterprise risk management
program administered by the DCO's parent company or affiliate, the
Commission believes any additional costs to comply with proposed Sec.
39.10(d) could be reduced if the DCO is able to share the costs of
compliance with its parent or affiliates.
MGEX expressed concern regarding the burdens of developing an
enterprise risk management program and also raised the possibility that
procedures developed as part of the enterprise risk management program
might conflict with other risk management procedures. The Commission
notes that it has sought to avoid requiring specific standards and
methodologies with respect to enterprise risk management, preferring
instead that DCOs develop a program based on the specific
characteristics of that DCO. Regulation 39.10(d)(3), as adopted,
requires a DCO to follow generally accepted standards and industry best
practices in the development and review of its enterprise risk
management framework, assessment of the performance of its enterprise
risk management program, and management and mitigation of risk to the
derivatives clearing organization. In the interests of offering
guidance, the Commission specified in the Proposal two industry
standards as examples of the types of standards that would reasonably
be considered in the development of an enterprise risk management
program.\67\ Although the Commission expects that a DCO will analyze
its risks through an enterprise risk management framework and develop
and modify its program accordingly, the Commission would also expect
that a DCO in good standing would be able to build upon at least some
elements of its current risk management framework, thus reducing the
costs of developing an enterprise risk management program relative to
creating an entirely new structure from scratch.
---------------------------------------------------------------------------
\67\ See Derivatives Clearing Organization General Provisions
and Core Principles, 84 FR 22232, n. 24.
---------------------------------------------------------------------------
LCH, in responding to a request for comment regarding whether the
same individual should be permitted to serve as both the chief risk
officer and the enterprise risk officer, suggested that requiring
separate individuals to serve the two roles would be duplicative and
inefficient. The Commission has finalized Sec. 39.10(d) without adding
language prohibiting the same individual from serving both roles,
although it has noted that the nature and structure of the organization
could be such that it will not be possible for one individual to do so
without violating the requirements of the position.
The Commission has added additional language to Sec. 39.10(d)(4)
requiring that the enterprise risk officer have access to the board of
directors to ensure that the board receives reports and information
from the enterprise risk officer, regardless of the formal reporting
relationship. The Commission believes that such access will improve
governance by ensuring that issues or concerns regarding enterprise
risk management will be conveyed to the board. The Commission does not
believe that requiring such access will impose any material costs.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(D) of the CEA, the Commission believes that the proposal to
require a DCO to have a formal enterprise risk management program will
improve DCO risk management practices by ensuring that DCOs have a
process for identifying and assessing potential risks to the DCO on an
enterprise-wide basis, thereby enhancing protection of market
participants and the public and the financial integrity of the
derivatives markets. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the
amendments.
10. Financial Resources--Sec. 39.11
The Commission is amending Sec. 39.11 to, among other things: Make
it more consistent with Core Principle B; clarify certain items
including how a DCO's largest financial exposure should be calculated
in Sec. 39.11(c); require that the financial statements submitted each
quarter be that of the DCO and not the parent company; require that
financial statements be prepared in accordance with U.S. GAAP or, for a
DCO that is incorporated or organized under the laws of any foreign
country, IFRS; and require a DCO to annually submit a reconciliation of
its balance sheet in the audited year-end financial statement with the
balance sheet in the DCO's financial statement for the last quarter of
the fiscal year when material differences exist. Except where noted
below, the Commission is amending Sec. 39.11 as proposed.
The Commission is finalizing additional minimum requirements that a
DCO will have to follow in determining its financial exposure in
accordance with Sec. 39.11(c)(1). In particular, the Commission is
requiring a DCO to calculate its largest financial exposure net of the
clearing member's required initial margin amount on deposit.
Additionally, the Commission is requiring that when stress tests
produce losses in both customer and house accounts, a DCO must combine
the customer and house stress test losses of each clearing member using
the same stress test scenario. New Sec. 39.11(c)(2)(iii) allows a DCO
to net gains in the house account with losses in the customer account,
if permitted by its rules, but explicitly prohibits a DCO from netting
losses in the house account with gains in the customer account. New
Sec. 39.11(c)(2)(iv) allows a DCO, with respect to a clearing member's
cleared swaps customer account, to net customer gains against customer
losses only to the extent permitted by the DCO's rules. The Commission
also is amending the requirements of Sec. 39.11(c) to state that they
do not apply to fully collateralized positions.
Commenters generally supported the proposed amendments to Sec.
39.11(c) and there were no comments related to costs. In response to
questions and requests for clarification, the Commission is modifying
proposed Sec. 39.11(c)(2)(i) to clarify that, for purposes thereof,
required margin includes any add-ons, such as concentration charges and
liquidity charges, and that only required margin (including add-ons)
may be considered.
The Commission believes these adjustments to the methodology used
to calculate a DCO's financial resources requirement in Sec. 39.11(c)
will focus a DCO's analysis on the resources that would actually be
available to it during times of stress. This approach is consistent
with guidance issued by CPMI-IOSCO suggesting that, when assessing the
adequacy of their financial resources, central counterparties should
take into account only prefunded
[[Page 4838]]
financial resources and ignore voluntary excess contributions. Central
counterparties that wish to be considered QCCPs are expected to follow
this guidance, so having Commission requirements that are consistent
with the guidance should improve efficiencies for the industry while
more prudently managing financial risk. The clarification that required
margin includes any add-ons should also increase efficiencies for the
industry while more prudently managing financial risk.
Several changes made to Sec. 39.11, such as amending Sec.
39.11(d)(2) to replace the phrase ``those obligations'' with ``the
total amount required under paragraph (a)(1) of this section'' and the
amendments to Sec. 39.11(e)(1)(iii) and Sec. 39.11(e)(3) to clarify
that a DCO may use a committed line of credit or similar facility to
satisfy Sec. 39.11(e)(1)(ii) or Sec. 39.11(e)(2) as long as it is not
counted twice, are clarifications that do not impose additional burdens
but have the benefit of more clearly articulating what is required. The
Commission is finalizing these rules as proposed. The Commission is
amending Sec. 39.11(f)(1)(ii) to require that the financial statement
provided be that of the DCO and not the parent company in order to
better and more accurately assess the financial strength of the DCO.
The Commission believes it would also benefit the DCO to be able to
assess its compliance with Core Principle B and Sec. 39.11 and its
financial health separately from that of its parent. MGEX suggested
that the proposed revisions to Sec. 39.11(f)(1)(ii) requiring that the
financial statement provided be that of the DCO and not the parent
company should only apply to DCOs that are part of a complex corporate
structure, and not to simple parent/subsidiary structures. MGEX stated
that compiling and submitting separate financial statements for a
simple parent/subsidiary structure would result in increased expenses
while providing no material benefit. The Commission is declining to
adopt this suggestion because the Commission believes it will benefit
from understanding the financial condition of a DCO separately from
that of its parent company and will be better equipped to protect
market participants and the public with this additional information.
Moreover, separate legal entities should be able to prepare separate
financial statements, and there is no bright line distinguishing
between simple and complex corporate structures. The Commission
acknowledges that the rule may be more costly for certain DCOs relative
to MGEX's suggested alternative, but the Commission does not believe
that these additional costs will be large.
The Commission is not adopting its proposed changes to Sec.
39.11(f)(1)(ii) and Sec. 39.11(f)(2)(i) that would have required DCOs
to identify assets required to meet the resource requirements of Sec.
39.11(a)(1) and (2). The Commission is persuaded by comments from CME
and Eurex that certain requirements of U.S. GAAP and IFRS,
respectively, may preclude a company from including this information on
its balance sheet. Instead, the Commission is encouraging DCOs to
identify the assets required to meet the resource requirements of Sec.
39.11(a)(1) and (2) to the extent that they can, given applicable
accounting standards. The Commission notes that providing such
information would facilitate its review of DCOs' financial statements
and potentially reduce the burden on DCOs to respond to staff inquiries
regarding their financial statements and compliance with Sec.
39.11(a)(1) and (2). The Commission is amending the periodic financial
reporting requirements in Sec. 39.11(f)(1)(ii) and (f)(2)(i) to permit
quarterly and annual financial statements to be prepared in accordance
with U.S. GAAP for DCOs incorporated or organized under U.S. law and in
accordance with either U.S. GAAP or IFRS for DCOs incorporated or
organized under the laws of any foreign country. These amendments will
retain flexibility for non-U.S. DCOs and provide greater transparency
to DCOs and DCO applicants of the financial reporting requirements. The
Commission is also requiring in Sec. 39.11(f)(2) that, in addition to
its audited year-end financial statement, a DCO submit a
reconciliation, including appropriate explanations, of its balance
sheet when material differences exist between it and the balance sheet
in the DCO's financial statement for the last quarter of the fiscal
year or, if no material differences exist, a statement so indicating.
Without such an explanation, Commission staff may be under the
impression that the representations are false or incorrect. This
requirement gives DCOs the opportunity to correct any discrepancies and
avoid unnecessary follow-up questions from Commission staff.
The Commission is amending Sec. 39.11(f)(1)(iv) to incorporate the
language of current Sec. 39.11(f)(4), which requires a DCO to submit
its quarterly report no later than 17 business days after the end of
the DCO's fiscal quarter (or at a later time as permitted by the
Commission in its discretion in response to a DCO's request for an
extension). CME recommended that, for the first three quarters of the
fiscal year, the due dates for submitting the DCO quarterly financial
resource reports be aligned with the due dates for a DCM's submission
of financial resource reports pursuant to Sec. 38.1101(f)(4), which
requires the reports to be filed no later than 40 calendar days after
the end of the DCM's first three fiscal quarters. The Commission is
declining to take CME's recommendation because the reporting dates
currently in effect are the same as those for FCMs and broker/dealers
reporting dates under the Commission's regulations. The Commission
believes that DCO financial report filings should be aligned with FCMs
rather than with DCMs because FCMs, unlike DCMs, hold initial margin
and default funds and collect variation margin, which clearly and
directly relate to the financial resources available to DCOs. The
Commission acknowledges that Sec. 39.11(f)(1)(iv) may be more costly
for CME and other DCOs that are affiliated with DCMs relative to CME's
suggested alternative, but the Commission does not believe that these
additional costs will be large.
DCOs could incur initial costs to recalibrate the method by which
they compute their financial resources to comply with Sec. 39.11(c).
If a DCO does not have financial resources sufficient to comply with
Sec. 39.11(a)(1) based on its computation pursuant to Sec. 39.11(c),
the DCO would have to procure additional financial resources. Because
DCOs vary in terms of their size and level of clearing activity, the
Commission believes they are better positioned to provide cost
estimates in this regard.
DCOs may incur costs to prepare their own financial statements (as
opposed to being included in the financial statements of the parent
company) in accordance with Sec. 39.11(f)(1)(ii). For DCOs that
already prepare their own financial statements, the Commission believes
that incremental costs will be minimal. Had the Commission adopted
MGEX's suggestion to apply the requirement that the financial statement
provided be that of the DCO and not the parent company only to DCOs
that are part of a complex corporate structure, DCOs that are part of a
simple parent/subsidiary structure would have avoided the additional
costs of preparing their own financial statements, but at the cost of
first analyzing whether the corporate structure was simple or complex
for purposes of triggering the requirement and potentially needing to
justify that analysis to the Commission. Additionally, DCOs may incur
minimal costs to prepare a reconciliation of their
[[Page 4839]]
balance sheet when material differences exist as compared to the DCO's
financial statement for the last quarter of the fiscal year.
Had the Commission adopted LCH's suggestion that non-U.S. DCOs be
allowed to submit financial reports using currencies other than the
U.S. dollar, such DCOs may have experienced reduced costs in preparing
their financial reports, but the Commission believes that staff will be
better able to protect the financial integrity of markets if it has all
financial reports in U.S. dollars. Adopting LCH's suggestion would have
required Commission staff to convert such currencies to U.S. dollars to
complete its analysis, which would have required staff to make
decisions about exchange rates. This, in turn, could have led to staff
determining that the DCO failed to comply with one or more financial
resources requirements even if a reasonable exchange rate used by the
DCO would have demonstrated compliance with such requirements. Such a
determination could potentially cost the DCO in terms of the time and
effort to address staff's determination and potentially taking remedial
action for failing to comply with requirements.
The Commission is revising Sec. 39.11(f)(3) to clarify that a DCO
must send the documentation to the Commission required under paragraphs
(i)(A) and (i)(B) of that section only upon the DCO's first submission
under Sec. 39.11(f)(1) and in the event of any change thereafter. Not
requiring that this documentation be prepared and sent to the
Commission every quarter may reduce DCOs' reporting costs.
LCH also suggested defining ``material'' for the purposes of annual
reporting requirements as 10 percent of either the (1) six-month
liquidity test, or (2) 12-month capital cost-based financial resources
test. The Commission believes that DCOs should retain discretion to
define ``material'' for these purposes and therefore declines to
include this suggestion. Providing DCOs with additional discretion
should not impose significant costs on DCOs.
The Commission believes DCOs may incur additional costs associated
with complying with the certification requirements in Sec.
39.11(f)(4). These costs may be reduced for DCOs that already provide
them. The Commission recognizes that a DCO may have to develop a
process in certifying its financial reports; however, the Commission
believes that these costs may be reduced for DCOs to the extent that
they already have this process in place.\68\
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\68\ See 17 CFR 228, 229, 232, 240, 249, 270 and 274.
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The Commission has evaluated the costs and benefits in light of the
specific considerations identified in section 15(a) of the CEA. In
consideration of section 15(a)(2)(A) of the CEA, the Commission
believes that the amendments to Sec. 39.11 will result in improved
protections for market participants and the public. Specifically, the
adjustments to the methodology used to calculate a DCO's financial
resources requirement in Sec. 39.11(c) and the corresponding
improvements to a DCO's stress testing results are expected to enhance
the safety and soundness of DCOs and their ability to manage their
risks, thereby better protecting DCOs' clearing members and their
customers, market participants, and the public. Additionally, in
further consideration of section 15(a)(2)(A) of the CEA, the proposal
to require in Sec. 39.11(f)(1)(ii) the financial statement of the DCO
and not that of its parent company, is expected to better and more
accurately assess the financial strength of the DCO, which will
ultimately serve to protect market participants and the public and
further the financial integrity of derivatives markets. In
consideration of section 15(a)(2)(B) of the CEA, the Commission
believes that, to the extent that the amendments to Sec. 39.11 will
result in increased clarity or transparency, those changes are
anticipated to result in an incremental increase in efficiency. In
consideration of section 15(a)(2)(D) of the CEA, the Commission
believes the adjustments to the methodology used to calculate a DCO's
financial resources requirement in Sec. 39.11(c) would focus a DCO's
analysis on the resources that would actually be available to it during
times of stress, thereby improving the DCO's risk management practices.
The Commission has considered the other section 15(a) factors and
believes that they are not implicated by the amendments.
SIFMA AMG stated that DCOs should not be permitted to count
unfunded assessments towards resources available to the DCO pursuant to
current Sec. 39.11(b)(1)(v), which is being renumbered Sec.
39.11(b)(1)(iv). Similarly, FIA and ISDA requested that the Commission
amend Sec. 39.11(d)(2) to prohibit the use of assessments because
assessments are unfunded resources. In contrast, ICE suggested that the
Commission clarify that in applying the 20 percent limitation on the
use of assessments per proposed Sec. 39.11(d)(2), the calculation
should be based on the exposure prior to netting against initial
margin. The Commission may consider these suggestions in future
proposals.
11. Participant and Product Eligibility--Sec. 39.12
Regulation 39.12(b)(2) provides that a DCO shall adopt rules
providing that all swaps with the same terms and conditions are
economically equivalent within the DCO. As it was not the intention of
the Commission to require DCOs that do not clear swaps to adopt the
rules required under this provision, the Commission is revising Sec.
39.12(b)(2) so that it explicitly applies only to DCOs that clear
swaps.
The Commission did not receive any comments on the benefits or
costs associated with the changes to Sec. 39.12.
Amendments to Sec. 39.12 would reduce rulebook drafting costs for
future DCO applicants that do not intend to accept swaps for clearing.
The Commission believes the amendments to Sec. 39.12 would not
impose costs on DCOs or swaps market participants, as they would not be
clearing swaps through a DCO that does not accept swaps for clearing.
The Commission has considered the section 15(a) factors and
believes that they are not implicated by these amendments.
12. Risk Management--Sec. 39.13
Regulation 39.13(b) requires a DCO to establish and maintain
written policies, procedures, and controls, approved by its board of
directors, which establish an appropriate risk management framework.
The introductory heading to this provision states that it is a
``[d]ocumentation requirement.'' The Commission is replacing
``[d]ocumentation requirement'' with ``[r]isk management framework''
and replacing the words ``establish and maintain'' with ``have and
implement.'' This has the benefit of making clear the existing
requirement that a DCO is not only required to have a documented risk
management framework but to put it into action. The Commission did not
receive any comments on these changes. The Commission does not believe
the amendments will impose any additional costs on DCOs, as it simply
clarifies the existing requirement.
Regulation 39.13(f) requires a DCO to limit its exposure to
potential losses from clearing member defaults to ``ensure'' that the
DCO's operations would not be disrupted and non-defaulting clearing
members would not be exposed to unanticipated or uncontrollable losses.
Recognizing that
[[Page 4840]]
a DCO cannot ensure protection from that which it cannot anticipate,
the Commission is amending Sec. 39.13(f) by replacing ``ensure'' with
``reasonably designed to ensure,'' as suggested by commenters.
Specifically, FIA and ISDA requested that the Commission retain the
original language because they stated that changing ``ensure'' to
``minimize the risk'' would increase the potential for non-defaulting
clearing members to be exposed to uncapped liability. FIA and ISDA
suggested revising the language to require that ``[a] derivatives
clearing organization shall limit its exposure to potential losses from
defaults by clearing members through margin requirements and other risk
control mechanisms reasonably designed to ensure that . . . .''
The Commission notes that the change in Sec. 39.13(f) clarifies,
but does not alter a DCO's existing obligations under this provision.
Therefore, the Commission believes that the amendments will not impose
any additional costs on DCOs and will facilitate DCOs' compliance with
the rule.
Regulation 39.13(g)(2)(i) requires that a DCO have initial margin
requirements that are commensurate with the risks of each product and
portfolio, including any unusual characteristics of, or risks
associated with, particular products or portfolios. The regulation
currently notes that such risks include but are not limited to jump-to-
default risk or similar jump risk. The Commission proposed to amend
Sec. 39.13(g)(2)(i) to note that such risks also include
``concentration of positions.''
The Commission is amending Sec. 39.13(g)(2)(i) to delete the
existing requirement that such risks ``includ[e] but are not limited to
jump-to-default risk or similar jump risk,'' and to remove the proposed
reference to ``concentration of positions.'' The Commission is
concerned that including and adding to a list of examples of types of
risks might be interpreted to mean that a DCO does not have to consider
risks not mentioned. The Commission reiterates that a DCO should
consider a range of risks, including, for example, jump-to-default
risk, concentration risk, correlation risk, and other risks associated
with the particular products and portfolios it clears. The Commission
notes that, by not enumerating the risks that should be considered,
DCOs are given greater discretion with respect to how they identify,
label, and address such risks. The Commission believes that this
flexibility will benefit DCOs in complying with this provision, and
notes that this change clarifies, but does not alter a DCO's existing
obligations under this provision. Therefore, the Commission does not
believe the amendments will impose additional costs on DCOs. To the
extent that Sec. 39.13(g)(2)(i) no longer includes a list of types of
risks to be considered, a DCO may incur higher costs in accurately
determining the types of risks that should be considered. The
Commission did not receive comments on the costs associated with these
amendments.
Regulation 39.13(g)(3) requires a DCO to have its systems for
initial margin requirements reviewed and validated by a qualified and
independent party on a regular basis. The Commission is revising this
regulation to change ``on a regular basis'' to ``an annual basis.''
Additionally, Sec. 39.13(g)(3) provides that an employee of the DCO
may conduct such independent validations as long as they are not
responsible for the development or operation of the systems and models
being tested. The Commission is amending Sec. 39.13(g)(3) to expand
the pool of eligible employees to include employees of an affiliate of
the DCO, which will provide DCOs with greater flexibility in selecting
appropriate staff to conduct the validations. In addition, in response
to commenters' suggestions, the Commission is amending Sec.
39.13(g)(3) to specify that, where no material changes to the margin
model have occurred, previous validations can be reviewed and affirmed
as part of the annual review process.
The Commission believes that this amendment will benefit DCOs by
providing greater flexibility and reducing their costs in obtaining an
independent validation, while maintaining the independence of the
validation and not otherwise reducing the benefits associated with the
independent validation.
ICE expressed support for permitting employees of an affiliate of
the DCO to conduct initial margin model validations. FIA and ISDA,
however, requested that the Commission withdraw this proposal and
instead require in a re-proposed rule that a qualified and independent
third party conduct the validations. FIA and ISDA stated that employees
that validate an initial margin model used by more than one affiliated
DCO may not independently analyze whether the same model is appropriate
for different products cleared by the affiliated DCOs. FIA and ISDA
also noted that, to the extent that the inherent conflict of interest
in model validation results in a compromised margin model, there will
be costs to the clearing members, as well as the markets. The
Commission believes it is appropriate to permit a DCO's employees or
employees of an affiliate of the DCO to conduct the validations,
provided they are not responsible for development or operation of the
systems and models being tested (as required under Sec. 39.13(g)(3)).
Since Sec. 39.13(g)(3) has been in place, the Commission has not
encountered any issues with employees of a DCO conducting the
validations; therefore, the Commission believes it is appropriate to
permit employees of an affiliate of the DCO to conduct the validations.
Having a third party conduct the validations may be more costly than
having a DCO's employees or employees of an affiliate of the DCO
conduct the validations.
Nodal commented that if the proposal requires annual validations of
theoretical models, it would place an undue burden on certain DCOs due
to the significant cost and time that would be involved in obtaining an
independent validation for models that do not change from year-to-year.
In response to Nodal's comment and similar suggestions by CME, FIA, and
ISDA, the Commission is specifying in the final rule that where no
material changes to the margin model have occurred, previous
validations can be reviewed and affirmed as part of the annual review
process. The Commission believes that this modification addresses
Nodal's concerns about costs while ensuring the benefits of requiring
DCOs to validate their margin models on an annual basis.
To be consistent with terminology used in other Commission
regulations, the Commission in Sec. 39.13(g)(4) is substituting the
phrase ``conceptual basis'' for the phrase ``theoretical basis'' in the
discussion of spread margin. The Commission received one comment in
support of the proposed change, but did not otherwise receive comments
on the costs associated with the change. The Commission does not
believe the amendment will impose additional costs on DCOs, as it
simply clarifies the existing requirement and does not alter the
meaning of the rule.
The Commission is adopting new Sec. 39.13(g)(7)(iii) to clarify
that, in conducting back tests of initial margin requirements, a DCO
should compare portfolio losses only to those components of initial
margin that capture changes in market risk factors. This change is
expected to ensure that back testing of a DCO's initial margin model is
more appropriately calibrated.
The Commission did not receive any comments on the costs associated
with the proposal. Commenters disagreed with which elements should be
[[Page 4841]]
included when back testing initial margin requirements. ICE commented
that all margin model charges and add-ons should be included, whereas
SIFMA AMG supported the proposal, stating that margin add-ons should
not be included when back testing. The Commission considered the costs
and benefits between these two alternatives. The Commission believes
that DCOs and the markets they serve benefit from accurate back
testing, as it helps to ensure that a DCO has collected sufficient
margin to meet its coverage requirement, and that comparing portfolio
losses only to components of initial margin that capture changes in
market risk factors reduces the likelihood of misrepresenting the
actual margin coverage produced by a DCO's models, as the inclusion of
other components may result in margin breaches going undetected.
Moreover, the Commission notes that back testing without charges and
add-ons is also easier and more time- and cost-effective.
Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin
on a gross basis for each clearing member's customer account(s). The
Commission is amending Sec. 39.13(g)(8)(i) to permit a DCO to collect
customer initial margin from its clearing members on a gross basis only
during its end-of-day settlement cycle. The Commission did not receive
any comments on the costs associated with the proposal, and does not
believe the amendments would impose any additional costs on DCOs. The
Commission believes that DCOs will benefit from the amendment because
it clarifies when a DCO is required to collect customer initial margin,
and it provides DCOs with more flexibility in meeting the requirements
in light of the operational issues that may arise intraday.
The Commission is adopting amendments to Sec. 39.13(g)(8)(i)(B) to
require a DCO to have rules that require its clearing members to
provide reports to the DCO each day setting forth end-of-day gross
positions of each individual customer account within each customer
origin of the clearing member. In response to an industry comment about
the burden of DCOs maintaining customer-level records, the final rule
requires that the daily reports specify positions of ``each individual
customer account'' instead of ``each beneficial owner,'' as originally
proposed. In addition, the Commission is clarifying that a DCO shall
have rules that require only its clearing members to provide the
specified reports to the DCO.
The Commission received two comments on the costs and benefits
associated with the proposed amendments. ICE noted the benefit of
additional transparency associated with reporting customer-level
information, but asked that the Commission consider the costs to
clearing members and DCOs of developing new operational systems and
procedures that the proposal would necessitate, and consider ways to
phase in any new requirements to allow for the necessary development of
new operational systems and procedures, at both the DCO and clearing
member levels. OCC stated that the proposal would introduce a
significant shift in the burden to maintain customer-level records from
FCMs and introducing brokers to a DCO. OCC also questioned the benefits
of the proposal, stating that, because virtually every FCM clears
through multiple DCOs, requiring a DCO to collect and report customer-
level information to the Commission does not in fact allow the
Commission to appropriately understand the risks associated with
individual customers without further aggregating the data that various
DCOs receive from an individual FCM. OCC represented that it and its
clearing members would need to make significant operational changes to
obtain this information and report it daily, and OCC would need to make
corresponding rule changes.
The Commission believes that these changes provide additional
transparency, as identified by ICE, and the Commission has further
modified Sec. 39.13(g)(8)(i)(B) to address the costs identified in the
comments received by the Commission.
Regulation 39.13(g)(8)(ii) provides that a DCO must require its
clearing members to collect customer initial margin from their
customers, for non-hedge positions, at a level that is greater than 100
percent of the DCO's initial margin requirements with respect to each
product and swap portfolio. Consistent with the Division of Clearing
and Risk's 2012 interpretation on customer margining, the Commission is
adopting revisions to Sec. 39.13(g)(8)(ii) to permit DCOs to continue
the practice of establishing customer initial margin requirements based
on the type of customer account and by applying prudential standards
that result in FCMs collecting customer initial margin at levels
commensurate with the risk presented by each customer account. The
Commission is also adopting additional clarifying revisions to state
that the DCO shall have reasonable discretion in determining clearing
initial margin requirements for products or portfolios and whether and
by how much customer initial margin requirements for categories of
customers determined to have heightened risk profiles by their clearing
members must exceed, at a minimum, the DCO's clearing initial margin
requirements by a standardized amount, because the Commission believes
that this better articulates the DCO's obligations. The Commission
further confirms that the changes to Sec. 39.13(g)(8)(ii) are not
intended to shift the burden of determining the appropriate level of
additional customer margin from clearing members to the DCO, but
instead, are intended to clarify existing requirements. To the extent
that the changes clarify existing requirements, the Commission believes
that it will not impose additional costs on DCOs, but that DCOs will
benefit from regulatory clarity.
OCC and ICE supported the proposed changes to Sec.
39.13(g)(8)(ii), noting that DCOs will benefit from additional
discretion in determining the percentage by which customer initial
margin requirements must exceed the DCO's clearing initial margin
requirements. CME supported codification of the 2012 interpretation on
customer margining, but was concerned that the proposed changes to
Sec. 39.13(g)(8)(ii) would shift the burden of determining the
appropriate level of additional customer margin from FCM clearing
members to DCOs, and proposed edits to address the issue. FIA and ISDA
commented that the proposed change to customer initial margin
requirements may impose an operationally impractical regime for
clearing members to collect initial margin from customers.
Regulation 39.13(g)(12) requires a DCO to apply appropriate
reductions in value to reflect credit, market, and liquidity risks
(haircuts), to the assets that it accepts in satisfaction of initial
margin obligations. This provision also requires a DCO to evaluate the
appropriateness of the haircuts ``on at least a quarterly basis.''
Regulation 39.11(d)(1) requires that haircuts be evaluated on a monthly
basis for assets that are used to meet the DCO's financial resources
obligations set forth in Sec. 39.11(a). The Commission is adopting
amendments to Sec. 39.13(g)(12) to align it with Sec. 39.11(d)(1) by
requiring that DCOs evaluate the appropriateness of the haircuts that
they apply to assets accepted in satisfaction of initial margin
obligations on a monthly basis.
While LCH questioned the benefit of the proposal, suggesting that
haircuts may not significantly change on a monthly basis, FIA and ISDA
disagreed, noting that the value of assets held for initial margin can
change frequently. In addition, the changes will align the Sec.
39.13(g)(12) requirement with the Sec. 39.11(d)(1) standard that DCOs
are
[[Page 4842]]
required to use to meet their financial resources obligations. The
Commission believes that this harmonization will reduce the cost of
regulatory compliance and that DCOs will benefit from an enhanced
ability to risk manage with more frequently calibrated haircuts.
Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the DCO's financial resources. The Commission
proposed to clarify that such risk limits should also be imposed to
address positions that may be difficult to liquidate.
The Commission has determined not to adopt the proposed changes to
Sec. 39.13(h)(1) at this time, but will continue to consider this
issue further. The Commission remains concerned about positions that
may be difficult to liquidate, particularly concentrated positions.
However, the Commission believes that DCOs should address difficult-to-
liquidate positions using the DCO's margin methodology and consider
whether and what other measures may be appropriate. The comments
received from OCC, FIA, ISDA, and LCH in this regard have contributed
to the Commission's decision.
Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis,
review the risk management policies, procedures, and practices of each
of its clearing members, which address the risks that such clearing
members may pose to the DCO, and to document such reviews. The
Commission is adopting an amendment to Sec. 39.13(h)(5)(ii) to clarify
that DCOs should, having conducted such reviews, take appropriate
actions to address concerns identified in such reviews, and that the
documentation of the reviews should include the basis for determining
what action was appropriate to take.
The Commission did not receive any comments on the costs associated
with the proposed amendments. However, ICE, FIA, and ISDA questioned
the benefits of the rule, while LCH supported the change. FIA and ISDA
stated that the proposal is unnecessary, and ICE suggested that such
supervision should instead be conducted at the DSRO level.
The Commission believes that there may be incremental costs
associated with requiring DCOs to address concerns identified in
reviews of their clearing members' risk management policies. In
response to ICE's suggestion that clearing member risk reviews should
be conducted by a DSRO, the Commission notes that not all clearing
members are subject to the supervision of a DSRO. Finally, the
Commission disagrees with FIA and ISDA's comment that the proposed
amendments are unnecessary. As the Commission stated in the Proposal,
absent such follow-up, the reviews would lack purpose.
The Commission is codifying its existing practices for evaluating
cross-margining programs in new Sec. 39.13(i), which requires a DCO
that seeks to implement or modify a cross-margining program with one or
more other clearing organizations to submit rules for Commission
approval pursuant to Sec. 40.5. However, the Commission is not
adopting the proposed requirement that a DCO provide, at a minimum,
specific information needed to facilitate the Commission's review of
the rule filing. Rather, the Commission is requiring that a DCO submit
information sufficient for the Commission to understand the risks that
would be posed by the program and the means by which the DCO would
address and mitigate those risks. The Commission believes that leaving
it to the discretion of the DCO to determine what information to
provide, yet giving the Commission the ability to request any
additional information it may need to conduct its review of a cross-
margining program, is appropriate given that cross-margining programs
can vary greatly, depending on the products, participants, and clearing
organizations involved.
The Commission received comments on the costs and benefits
associated with the proposed amendments from OCC, FIA, and ISDA. OCC
opposed the proposal to require a DCO to provide specific types of
information, arguing that it would reduce the Commission's flexibility
to determine what types of information are necessary for it to review
in specific circumstances. OCC suggested that a DCO should not be
required to provide each of the specified types of information when it
is requesting the Commission's approval to update an existing cross-
margining program, where analyzing factors unrelated to the change for
which it is requesting approval would create an unnecessary burden. OCC
suggested that instead the Commission should issue guidance on what
information it may require in its review of a cross-margining program.
OCC further requested that, should the Commission nonetheless choose to
require specific types of information in proposed Sec. 39.13(i), the
information should only be required when the Commission reviews a new
cross-margining program and not when the Commission reviews changes to
an existing cross-margining program. OCC also suggested that DCOs
should be able to submit a cross-margining program under either Sec.
40.5 or Sec. 40.6(a), and requested that the Commission only apply the
Sec. 40.5 review process to a new cross-margining program.
FIA and ISDA recommended that the Commission consider including in
its evaluation the credit and liquidity risk management, and settlement
and default management-related principles identified in the PFMIs to
increase transparency and improve the ability of clearing members to
manage the risks associated with positions subject to cross-margining.
Because the Commission did not propose this requirement, it cannot
adopt it at this time but may consider it in conjunction with a future
rulemaking.
In response to OCC's comment about the costs associated with DCOs
including specified information in a Sec. 40.5 in this regard, the
Commission is modifying the rule text to remove the specific
information that should be included, but is retaining the rule text
stating that the Commission may request additional information in
support of a rule submission filed under Sec. 39.13(i), and may
approve such rules in accordance with Sec. 40.5. The Commission is
declining to take OCC's recommendation to include the specified
information as guidance. The Commission believes that the information
that a DCO should submit is dependent on the facts and circumstances
and that the specified information as proposed may be inadequate. The
Commission also acknowledges OCC's observation that some of the
specified information may not be necessary in some situations. Were the
Commission to adopt instead OCC's suggestion to include the specified
information as guidance, DCOs might rely upon the guidance to their
detriment and incur costs associated with preparing unnecessary
information to include in their request for approval under Sec. 40.5.
The Commission is also declining to permit DCOs to submit cross-
margining programs or modifications to cross-margining programs under
Sec. 40.6. Because cross-margining programs involve two or more
clearing organizations' rules and operations, they are too complex to
be evaluated within the 10 business days provided under Sec. 40.6,
which is why they historically required approval by the Commission. The
Commission also believes that a rule submission for an existing cross-
margining program can raise as many
[[Page 4843]]
issues as a rule for a new cross-margining program. Had the Commission
adopted OCC's suggestion to permit DCOs to file under Sec. 40.6, DCOs
would not have experienced any increase in costs. However, the
Commission believes that the approval process provides some assurance
to market participants that a DCO is adequately managing its risks with
a cross-margining program. The Commission also believes that the Sec.
40.5 process would not necessarily place additional costs on DCOs due
to the longer review period. The Commission may expedite a Sec. 40.5
review period and, in contrast, may stay a Sec. 40.6 self-
certification for a 90-day period. For the reasons discussed above, the
Commission is also declining to add the specified information FIA and
ISDA suggested.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the amendments to
Sec. 39.13 will aid in the protection of market participants and the
public by enhancing certain risk management requirements of DCOs. For
example, amendments to Sec. 39.13(g)(12) will require DCOs to increase
the frequency by which they evaluate the appropriateness of haircuts
that they apply to initial margin collateral. Given that initial margin
is held for risk management purposes, assessing haircuts more
frequently would enhance a DCO's ability to manage its risks. In
addition, the amendments to Sec. 39.13 will help preserve the
efficiency and financial integrity of the derivatives markets by
enhancing certain risk management requirements of DCOs. For example,
the amendments to Sec. 39.13(g)(7)(iii), which clarify that in
conducting back tests of initial margin requirements, a DCO should
compare portfolio losses only to those components of initial margin
that capture changes in market risk factors, may help to ensure that a
DCO can more accurately confirm that it is collecting sufficient margin
to meet its coverage requirements. The Commission also believes that
the amendments to Sec. 39.13 will strengthen and promote sound risk
management practices across DCOs, their clearing members, and clearing
members' customers. Specifically, the amendments enhance, clarify, and
provide flexibility in complying with several DCO risk management
requirements, which will aid DCOs in efficiently allocating their risk
management attention and resources. Finally, in consideration of
section 15(a)(2)(E) of the CEA, the Commission notes the public
interest in promoting and protecting public confidence in the safety
and security of the financial markets. DCOs are essential to risk
management in the financial markets, both systemically and on an
individual firm level. The amendments, by enhancing, clarifying, and
providing flexibility beyond current requirements, promote the ability
of DCOs to perform these risk management functions. The Commission has
considered the other section 15(a) factors and believes that they are
not implicated by the amendments.
13. Treatment of Funds--Sec. 39.15
The Commission is amending Sec. 39.15(b)(1) to clarify that
``funds and assets'' are equivalent to ``money, securities, and
property,'' to better align the language of Sec. 39.15(b)(1) with the
language in the CEA. Furthermore, Sec. 39.15(b)(2)(ii) requires a DCO
to file a petition for an order pursuant to section 4d(a) of the CEA in
order for the DCO and its clearing members to commingle customer
positions in futures, options, and swaps in a futures customer account
subject to section 4d(a) of the CEA.
The Commission is amending Sec. 39.15(b)(2)(ii) to permit a DCO to
file rules for Commission approval pursuant to Sec. 40.5 in order for
the DCO and its clearing members to commingle such positions. This
better aligns the requirements of Sec. 39.15(b)(2)(ii) with Sec.
39.15(b)(2)(i), which requires a DCO that wants to commingle futures,
options, and swaps in a cleared swaps customer account to file rules
for Commission approval.
Regulation 39.15(d) requires a DCO to have rules providing for the
prompt transfer of all or a portion of a customer's portfolio of
positions and related funds at the same time from the carrying clearing
member to another clearing member, without requiring the close-out and
re-booking of the positions prior to the requested transfer. Based on
feedback received from DCOs, the Commission is amending Sec. 39.15(d)
to delete the words ``at the same time,'' thus requiring the
``prompt,'' but not necessarily simultaneous, transfer of a customer's
positions and related funds. The Commission is further amending this
provision to require the transfer of related funds ``as necessary,''
recognizing that the transfer of customer positions will not always
require the transfer of funds.
The Commission is amending Sec. 39.15(e), which relates to
permitted investments of customer funds, to clarify that the regulation
applies to any investment of customer funds or assets, including
cleared swaps customer collateral, as defined in Sec. 22.1. At the
time Sec. 39.15(e) was adopted, the Commission had not yet adopted
regulations concerning cleared swaps customer funds but intended for
Sec. 39.15(e) to also apply to those funds. This change ensures that
cleared swaps customer collateral will receive the same safekeeping as
other funds and assets invested by DCOs and would reflect the
Commission's intent.
The Commission did not receive any comments on the costs and
benefits of the proposed changes.
This approach will reduce the burden on DCOs while providing the
Commission with sufficient means to determine whether the customer
funds will be adequately protected. The Commission believes the
amendments to Sec. 39.15(b)(2)(ii) will streamline the procedures for
a request to commingle customer funds. As discussed above, the
amendment may potentially reduce costs for DCOs that would otherwise
have to petition the Commission for an order providing relief from
section 4d of the CEA in order to commingle such customer funds.
Amendments to Sec. 39.15(d) were meant to reflect common practice
and provide greater flexibility to DCOs in transferring positions and
funds. The Commission also notes that simultaneous transfer of funds
may not be possible when a third party is involved, hence bringing
further clarification to the rule. Amendments to Sec. 39.15(e) also
benefits customers as, under the new rules, their collateral will
receive the same safekeeping as other funds and assets invested by
DCOs.
The Commission expects costs related to amendments to Sec. 39.15
to be de minimis. To the extent that amendments to Sec.
39.15(b)(2)(ii), which requires a DCO to file rules for Commission
approval pursuant to Sec. 40.5, is more costly than what DCOs are
currently required to file, there might be additional costs to DCOs.
The Commission does not believe these additional costs will be
significant.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the amendments to
Sec. 39.15 will aid in the protection of market participants and the
public, specifically customers of clearing members, by providing
clarity on several requirements related to the
[[Page 4844]]
treatment of customer funds, including with respect to the transfer of
customer positions and funds under Sec. 39.15(d). The Commission notes
that amendments to Sec. 39.15(e) also make sure that customers'
collateral will receive the same safekeeping as other funds and assets
invested by DCOs, again furthering protection of market participants
and the public. Moreover, the amendments will promote efficiency in the
derivatives markets by streamlining the procedures for a request to
commingle customer funds, as DCOs will be able to file rules for
Commission approval whether requesting to commingle customer funds in a
futures or cleared swaps customer account. The Commission has
considered the other section 15(a) factors and believes that they are
not implicated by the amendments.
14. Default Rules and Procedures--Sec. 39.16
The Commission is amending Sec. 39.16(b) to require a DCO to
include clearing members and participants in an annual test of its
default management plan to the extent the plan relies on their
participation. Although the Commission did not receive comments
specifically addressing the costs or benefits associated with these
amendments, commenters generally suggested that DCOs should be given
greater flexibility and discretion in the extent to which clearing
members participate in tests of a DCO's default management plan. As a
result, the Commission is modifying the language in the final
regulation to require participation of clearing members and
participants to add the phrase ``to the extent the plan relies on their
participation.'' This change is intended to provide greater flexibility
to DCOs while promoting participation in testing and ensuring that
clearing members and participants are prepared in the event of a
default. To comply with this requirement, a DCO may incur costs to
coordinate clearing members' participation. However, the Commission
believes that many DCOs already involve clearing members in their tests
as a matter of best practice. The Commission believes that greater
flexibility in this regard would have no detrimental impact on the
benefits anticipated from, and may alleviate some of the costs
associated with, clearing member participation in testing of a DCO's
default management plan.
The Commission has determined not to finalize at this time a
proposal to amend Sec. 39.16(c)(1) to require a DCO to establish a
default committee, but may re-propose the rule in the future. The
default committee would have been required to include clearing members
and could have included other participants, and would be convened in
the event of a default involving substantial or complex positions to
help identify any market issues that the DCO is considering.
Commenters' views were mixed, with several commenters opposing the
proposal and others supporting it. Opposing comments noted costs
associated with reduced efficiency of the default management process.
For example, CME believes the proposal to require a default
committee and clearing member participation on that committee risks
unnecessarily prolonging and overcomplicating the default management
process. CME further indicated that the proposed requirements could
trigger resource scarcity at clearing members precisely when trading
expertise is most needed--i.e., in a stress event surrounding a
clearing member default. FIA and ISDA supported the proposal but
recommended that clearing member participation on default management
committees be voluntary (with the decision on whether to participate
being left to each clearing member) rather than mandatory. Nodal
commented that requiring a DCO to have a default committee that
includes clearing members or other participants is not likely to assist
in efficiently managing the positions of the defaulting member;
instead, it would add unnecessary complexity to what is already an
efficient process. Nodal further believes that clearing members on a
default committee could create the potential for conflicts for any
clearing member or participant selected, as well as introduce an
element of self-interest or potential gaming within the decision-making
of the default procedure and response.
Mr. Saguato supported the proposal to have clearing member and
customer participation on a DCO's default committee. Mr. Saguato
suggested that the Commission explore the costs and benefits of further
increasing and formalizing the role of clearing members and their
customers in the default process, as Mr. Saguato believes clearing
members should have a primary role in setting default procedures. In
light of the strong divergence in the views expressed in the comments
received, the Commission has determined to forego adopting the proposed
changes to Sec. 39.16(c)(1) at this time. The Commission wishes to
give industry stakeholders holding these divergent views time to come
closer to consensus on this issue.
As to Mr. Saguato's suggestion, the Commission will explore such
costs and benefits if it moves forward with another proposed rulemaking
on this issue. As to CME's comment that the proposal to require a
default committee and clearing member participation on that committee
risks unnecessarily prolonging and overcomplicating the default
management process, the Commission notes that the proposed rule would
have had the benefit of helping to ensure that clearing members and
participants have input into the default management process and that
the interests of clearing members and participants are considered in
default management decisions.
Furthermore, the Commission is requiring in Sec. 39.16(c)(2)(ii)
that a DCO's default procedures include public notice on the DCO's
website of a declaration of default. The Commission believes that such
notice should occur as quickly as possible, taking into account the
potential negative impact that it might have on the ability of the DCO
to manage the default, but did not specify timing in the final rule.
The Commission's proposal would have required immediate public notice
of a default, but the Commission modified the proposal in light of
comments in opposition to the requirement that such notice be immediate
and suggestions by commenters that DCOs have flexibility in the manner
and timing of these notices. Commenters did generally support providing
public notice of a clearing member's default with that modification.
For example, MGEX generally agreed that public notice of a default is
vital for promoting the integrity and stability of financial markets;
however, MGEX suggested that the Commission give DCOs some discretion
with respect to the timing of posting such notice, which would allow
DCOs to take into consideration the nature of the default and any
circumstances warranting flexibility. CME believes mandatory immediate
public notification runs the risk of causing disadvantageous pricing
for liquidation or auctions, which could increase the costs to the DCO
of managing the clearing member default, and if losses are incurred,
could ultimately increase the risk of mutualizing losses among its
clearing members. OCC, ICE, FIA, ISDA, Eurex, and Nodal indicated that
immediate public notice could potentially impact the market and the
DCO's ability to manage the default. Similarly, Mr. Saguato added that
requiring immediate public notice of a declaration of default is
unnecessary and potentially
[[Page 4845]]
counterproductive to an effective default management process and should
not be adopted as proposed.
The Commission believes that providing public notice of a default
will help to promote the integrity and stability of financial markets
at little cost to DCOs and will avoid the potential costs described by
commenters associated with immediate public notice.
Lastly, Sec. 39.16(c)(2)(iii)(C) requires any allocation of a
defaulting clearing member's positions to be proportional to the size
of the participating or accepting clearing member's positions in the
same product class at the DCO. The Commission is amending this
provision to clarify that a DCO may not require a clearing member to
bid for a portion of, or accept an allocation of, the defaulting
clearing member's positions that is not proportional to the size of the
bidding or accepting clearing member's positions in the same product
class at the DCO. The Commission did not receive comments on the costs
or benefits of the proposed changes. The Commission did receive,
however, comments that were opposed to the aspect of the proposed rule
that would have required DCOs to use initial margin requirement as the
basis for determining limits on potential bidding and allocation
requirements. Therefore, the Commission is modifying the proposed
change to not require the use of initial margin requirement as the
metric in this regard. The final rule will ensure that clearing members
have the flexibility, but not the requirement, to participate in
auctions and allocations beyond the proportional size of their
respective positions, while providing DCOs with discretion in measuring
the size of clearing members' portfolios for purposes of determining
limits on potential bidding and allocation requirements. The Commission
has not identified any costs associated with this change.
As to the costs and benefits in light of the section 15(a) factors,
in consideration of section 15(a)(2)(A) of the CEA, the Commission
believes that the amendments to Sec. 39.16(c)(2)(ii) to require that a
DCO have default procedures that include public notice on the DCO's
website of a declaration of default will aid in the protection of
market participants and the public by ensuring public notice of a
default. In further consideration of section 15(a)(2)(A) of the CEA,
the Commission believes the amendments to Sec. 39.16(c)(2)(iii)(C)
regarding the allocation of a defaulting clearing member's positions
will protect clearing members from involuntarily having to bid on or
accept defaulting positions that are not in proportion to the size of
their positions in the relevant product class, while also providing
clearing members with the flexibility to voluntarily bid on or accept
more than a proportional share of the defaulting positions if that
clearing member has the ability to manage the risk of those new
positions. In consideration of section 15(a)(2)(B) and (D) of the CEA,
the Commission believes the amendments to Sec. 39.16(b) support the
financial integrity of the derivatives markets and promote sound risk
management practices by requiring DCOs to have greater clearing member
participation in a test of their default management plans to the extent
appropriate and ensure that clearing members are permitted, but not
required, to bid on or accept defaulting positions that are not in
proportion to the size of their positions in the relevant product
class. The Commission has considered the other section 15(a) factors
and believes that they are not implicated by the amendments.
15. Rule Enforcement--Sec. 39.17
Regulation 39.17(a) codifies Core Principle H, which requires a DCO
to maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance with its rules and dispute
resolution. The Commission is making a technical change to Sec.
39.17(a)(1) to emphasize that a DCO is required to monitor and enforce
compliance by both itself and its members with the DCO's rules. The
Commission also is amending Sec. 39.17(b), which permits a DCO's board
of directors to delegate its responsibility for compliance with the
requirements of Sec. 39.17(a) to the DCO's risk management committee,
to allow a DCO to delegate such responsibility to a committee other
than the risk management committee. While ICE supported the proposed
amendments, there were no comments related to the costs or benefits of
these changes. The Commission is adopting the amendments as proposed.
The amendment to Sec. 39.17(a)(1) will help clarify DCOs'
responsibilities but is otherwise non-substantive, while the amendment
to Sec. 39.17(b) will allow DCOs more discretion in delegating the
compliance function to the most appropriate committee.
The Commission does not believe the amendments to Sec. 39.17(a)(1)
or (b) will impose any additional costs on DCOs or their members
because the changes are technical in nature.
ICE suggested that the Commission should consider permitting a
DCO's board to broaden the delegation of this responsibility to the
president of the DCO or an equivalent officer. The Commission declines
to adopt ICE's suggestion at this time; the Commission may consider it
in a future proposal where comment could be sought and the costs and
benefits could be considered.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(D) of the CEA, the Commission believes that the amendments to
Sec. 39.17 will promote sound risk management practices by emphasizing
the importance of compliance with DCO rules and by providing DCOs with
additional flexibility in structuring their governance arrangements.
The Commission has considered the other section 15(a) factors and
believes that they are not implicated by the amendments.
16. Reporting--Sec. 39.19
Regulation 39.19 implements Core Principle J, which requires that
each DCO provide to the Commission all information that the Commission
determines to be necessary to conduct oversight of the DCO. The
Commission is adopting several amendments to Sec. 39.19 to add new
requirements, clarify certain existing requirements, and incorporate
other changes to part 39 via updated cross-references and other
technical amendments. The purpose of the amendments to Sec. 39.19 is
to assist DCOs by centralizing many of their ongoing reporting
requirements into Sec. 39.19, and by providing additional detail with
respect to certain requirements. The Commission also is adopting
additional reporting requirements to enhance Commission oversight of
DCOs' compliance with the Core Principles and Commission regulations.
The amendments to Sec. 39.19 may be divided into two groups to
facilitate consideration of the costs and benefits associated with
these changes. The first group of changes consists of the changes to
Sec. 39.19 that clarify existing reporting requirements and, in
certain instances, incorporate into Sec. 39.19 reporting requirements
previously contained elsewhere within part 39. The Commission believes
that the costs and benefits associated with this group of changes are
minimal because, as noted above, these changes do not alter the
substantive reporting obligations of DCOs. The second group of changes
consist of new requirements under the daily reporting requirements in
[[Page 4846]]
Sec. 39.19(c)(1)(i) and event-specific reporting requirements in Sec.
39.19(c)(4).
The Commission is amending the daily reporting requirements of
Sec. 39.19(c)(1)(i)(A) through (C) to require that DCOs report margin,
cash flow, and position information by individual customer account, in
addition to the existing requirement that DCOs report this information
by house origin and customer origin. The Commission also is amending
Sec. 39.19(c)(1)(i)(D) to require that, with respect to end-of-day
position information, DCOs must report the positions themselves (i.e.,
the long and short positions) as well as risk sensitivities and
valuation data for these positions.\69\ Lastly, the Commission is
amending Sec. 39.19(c)(1)(i)(D) to require DCOs to provide any legal
entity identifiers and internally-generated identifiers associated with
individual customer accounts, to the extent that the DCO possesses such
information.
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\69\ The Commission estimates for PRA purposes that there would
be an increase in the burden incurred by DCOs, as discussed in
section X.B.2 above.
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This information, individually and in aggregate, will assist the
Commission in identifying customer positions across clearing members
and DCOs. Analyzing positions at the customer level is a crucial
element of an effective risk surveillance program, and incorporating
risk sensitivities and valuation data into position information better
informs Commission staff of the assumptions embedded in the position
information. Identifying customers whose positions create the most risk
to a DCO's clearing members assists the Commission in determining
whether adequate measures are in place to address those risks and
whether the Commission needs to take proactive steps to see that those
risks are mitigated, thereby enhancing the protections afforded to the
markets generally. The Commission believes that enhancing the
supervision of DCOs and clearing members, especially identifying and
mitigating the risks that individual customers and clearing members may
present to a single DCO or to multiple DCOs, will result in increased
safety and soundness of the markets, which will benefit DCOs, clearing
members, and market participants.
The Commission believes DCOs may incur costs associated with these
amendments, although not substantial costs. Several commenters
expressed concern regarding the burden associated with reporting this
information. All of the concerns were of a general nature; no commenter
provided quantification of the additional burdens that this requirement
would impose. In fact, as noted above, DCOs already are reporting this
information, subject to existing technological and operational
limitations. In response to comments, the Commission modified the rule
text to clarify that it is not requiring DCOs to calculate risk
sensitivities or valuation data on behalf of the Commission, or to
obtain legal entity identifiers from clearing members. Lastly, with
respect to daily reporting requirements, as explained above, DCOs
already report most of this information. Because staff guidance
regarding the format and manner of this reporting is periodically
updated, there may be costs associated with making technical changes to
accommodate these updates. The Commission notes that any costs
associated with complying with new or modified technical specifications
for data intake would be borne by the DCOs irrespective of the amended
daily reporting requirements.
The other set of new reporting requirements are the event-specific
reporting requirements that the Commission is adding to Sec.
39.19(c)(4), including: a decrease in liquidity resources in Sec.
39.19(c)(4)(ii); a legal name change in Sec. 39.19(c)(4)(xi); a change
in any liquidity funding arrangement in Sec. 39.19(c)(4)(xiii); a
change in settlement bank arrangements in Sec. 39.19(c)(4)(xiv); a
change in the DCO's fiscal year in Sec. 39.19(c)(4)(xix); a change in
the DCO's accounting firm in Sec. 39.19(c)(4)(xx); major decisions of
the DCO's board in Sec. 39.19(c)(4)(xxi); and issues with a DCO's
margin model in Sec. 39.19(c)(4)(xxiii) or settlement bank in Sec.
39.19(c)(4)(xv). The Commission believes it is important for it to be
notified of these events due to their potential impact on a DCO's
operations.
The Commission expects that the cost burden associated with the
changes to the event-specific reporting requirements under Sec.
39.19(c)(4) will not be substantial. First, the events that would
trigger such reporting do not occur very often. Additionally, where
reporting is required under Sec. 39.19(c)(4), the level of detail a
DCO is required to provide is limited to a brief notice with only the
pertinent details of the incident or event. Although commenters
expressed the view generally that the event-specific reporting
requirements were unnecessarily burdensome, especially with regard to
the anticipated frequency of certain reportable events, no commenter
quantified any burdens associated with any of the new event-specific
reporting requirements. Nevertheless, as explained above, the
Commission modified several of the event-specific reporting
requirements to address commenters' concerns. These modifications
include, for example, limiting reporting of margin model issues to
those that are ``material,'' limiting instances that would require
notification to the Commission regarding settlement bank arrangements,
and extending the deadline to report changes to a DCOs independent
accounting firm.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) and (D) of the CEA, the Commission believes that the
amendments to Sec. 39.19 promote the protection of market participants
and the public and contribute to sound risk management practices by
providing the Commission with timely information that is critical to
its risk surveillance efforts. Also, in consideration of section
15(a)(2)(D) of the CEA, the Commission believes that requiring DCOs to
provide notice to the Commission of certain additional events under
Sec. 39.19, such as a decrease in liquidity resources, settlement bank
issues, and margin model issues, could further incentivize DCOs to
avoid those risks, or to mitigate them more effectively if they do
occur. Additionally, event-specific reporting will enhance the
Commission's ability to identify trends or changes in market
conditions, whether within the operations of a particular DCO, across
DCOs, or in the marketplace generally, and to develop an appropriate
supervisory response. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the
amendments.
17. Public Information--Sec. 39.21
The Commission is amending the public reporting requirements of
Sec. 39.21 to require that DCOs make each of the items of information
listed in proposed Sec. 39.21(c) \70\ available separately on the
DCO's website instead of merely including them in the DCO's rulebook.
This would assist DCOs' current and prospective clearing members and
the general public in locating the relevant
[[Page 4847]]
information. Furthermore, Sec. 39.21(c)(4) requires a DCO to publicly
disclose the size and composition of its financial resource package
available in the event of a clearing member default. To address
questions concerning how often this information must be updated, the
Commission is amending Sec. 39.21(c)(4) to clarify that it should be
updated quarterly, consistent with Sec. 39.11(f)(1)(i)(A), which
requires a DCO to report this information to the Commission each fiscal
quarter. This change will assist DCOs in complying with this
requirement, while ensuring consistent and timely disclosure to the
public. The Commission noted in the Proposal that because the proposed
amendments to Sec. 39.21 merely require a DCO to separately make
public information that would otherwise be made public in its rulebook,
the Commission anticipated any additional costs to DCOs would be
minimal.
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\70\ Regulation 39.21(c) requires a DCO to disclose publicly and
to the Commission information concerning: (1) The terms and
conditions of each contract, agreement, and transaction cleared and
settled by the DCO; (2) each clearing and other fee that the DCO
charges its clearing members; (3) the margin-setting methodology;
(4) the size and composition of the financial resource package
available in the event of a clearing member default; (5) daily
settlement prices, volume, and open interest for each contract,
agreement, or transaction cleared or settled by the DCO; (6) the
DCO's rules and procedures for defaults in accordance with Sec.
39.16; and (7) any other matter that is relevant to participation in
the clearing and settlement activities of the DCO.
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The Commission did not receive any comments on the costs of the
amendments to Sec. 39.21. One commenter, MGEX, recommended that the
Commission explicitly acknowledge that a DCO's publication of its
Quantitative Disclosure, which subpart C DCOs are already required by
Sec. 39.37 to make available each quarter, fulfills the requirement of
Sec. 39.21(c)(4). The Commission is adopting Sec. 39.21(c)(4) and is
not adopting MGEX's suggestion. The Commission believes that the cost
of separately disclosing information on the DCO's financial resources
in the event of a default is minimal.
The Commission believes that the amendments to Sec. 39.21 will
benefit market participants and the public by making sure that
important information regarding DCOs' operations is up-to-date,
complete and easily accessible.
The Commission believes costs associated with the amendments to
Sec. 39.21 to be minimal because the amendments require a DCO to
separately make public information that would otherwise be made public
in its rulebook. The Commission also believes that the cost of
separately disclosing information on the DCO's financial resources in
the event of a default is minimal.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A), (B), and (D) of the CEA, the Commission believes that the
amendments to Sec. 39.21 would enhance existing protection of market
participants and the public; promote the efficiency and financial
integrity of the derivatives markets; and aid in sound risk management
practices by ensuring that key public information about the DCO's
operations is readily accessible, complete, and current. The Commission
has considered the other section 15(a) factors and believes that they
are not implicated by the amendments.
18. Governance Fitness Standards, Conflicts of Interest, and
Composition of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
The Commission is removing Sec. 39.32, which sets forth
requirements for governance arrangements for SIDCOs and subpart C DCOs,
and adopting new Sec. Sec. 39.24, 39.25, and 39.26, which incorporates
all of the requirements of Sec. 39.32. Therefore, all DCOs, including
SIDCOs and subpart C DCOs, are subject to the same governance fitness
standards, conflict of interest requirements, and board composition
requirements, which most DCOs already meet in order to be considered a
QCCP. This gives DCOs clear direction on how to comply with Core
Principles O, P, and Q,\71\ the only DCO Core Principles for which the
Commission has yet to adopt implementing regulations. Further,
consistent with Core Principle Q, new Sec. 39.26 requires a DCO's
governing board or board-level committee to include market
participants. The Commission is specifying that market participants'
inclusion is required on the DCO's governing board or governing
committee, i.e., the group with the ultimate decision-making authority.
This avoids ambiguity and provides DCOs with greater clarity.
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\71\ Core Principles O, P, and Q respectively address governance
arrangements, conflicts of interest, and composition of governing
boards.
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CME commented that it has benefited from having a board of
directors, oversight committee, and risk committees consisting of a
variety of market participants with differing views and expertise. CME
also appreciated the Commission taking a principles-based approach by
allowing each DCO to determine the best representation of market
participants for its governing board or committee for its risk
management governance purposes, while also allowing each DCO to
continue to comply with relevant state and securities laws. Mr. Barnard
said the governance standards in Sec. Sec. 39.24, 39.25, and 39.26
will enhance risk management and governance, thus further improving the
protection for market participants and the public. Mr. Saguato agreed
with the benefits of a multi-stakeholder representation at the board
level of a DCO and a more direct engagement of market participants in
the governance and supervision of DCOs.
Incorporating the requirements of Sec. 39.32 to new Sec. Sec.
39.24, 39.25, and 39.26 ensures that all DCOs, including SIDCOs and
subpart C DCOs, will be subject to the same governance fitness
standards, conflict of interest requirements, and board composition
requirements. To the extent some DCOs were not already meeting these
standards, this change benefits markets and market participants by
improving the governance fitness standards and avoiding conflicts of
interest for DCOs operating in those markets. This change also benefits
DCOs by giving them clear direction on how to comply with Core
Principles O, P, and Q. Furthermore, Sec. 39.26 will require that a
DCO's governing board or committee include market participants, which
will benefit DCOs and markets by enhancing risk management and
governance decisions through inclusion of various stakeholders in a
DCO's governing board or governing committee.
The Commission believes that DCOs may incur costs to comply with
the requirements in Sec. Sec. 39.24, 39.25, and 39.26, to the extent
they are not already doing so. However, the Commission notes that some
DCOs must already comply with these standards and will not face
incremental costs. The Commission further believes that non-U.S. DCOs
that are neither SIDCOs nor subpart C DCOs are generally held to
similar requirements by their home country regulators and would also
not incur additional costs.
As an alternative, ICE suggested that DCOs should have the
flexibility to consider the means for providing market participant
representation best suited to its business. Nadex commented that fully
collateralized, non-intermediated DCOs should be exempt from compliance
with proposed Sec. Sec. 39.24 and 39.26 as the solicitation of retail
individuals, like those of Nadex's market participants, would not
likely provide significant value as compared with the burden and cost
of reviewing such responses and could hinder the efficient operation of
Nadex's board. Nadex noted that its market participants are not
industry professionals, are not familiar with the DCO's internal
operations in the same way that FCMs and other sophisticated members
are familiar with ``traditional'' DCOs' business and operations, do not
have an ownership interest or financial stake in the DCO or its default
waterfall, and therefore, are not as substantially involved in the
DCO's governance.
[[Page 4848]]
The Commission has considered the alternative suggested by
commenters and notes that the requirement to include market
participants on a DCO's governing board or committee is a statutory
requirement under Core Principle Q. Additionally, the Commission
believes that the alternatives suggested by commenters could permit a
DCO to create a lower-level committee that does not have the same
decision-making authority as its board or board-level committee, which
would weaken the benefits described herein.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. Although the Commission
believes that most, if not all, DCOs already comply with these
requirements, to the extent they do not, the Commission believes the
adoption of Sec. Sec. 39.24, 39.25, and 39.26 would improve DCO risk
management practices by promoting transparency of governance
arrangements and making sure that the interests of a DCO's clearing
members and, where relevant, their customers are taken into account.
This would further enhance the protection of market participants and
the public and the financial integrity of the derivatives markets. The
Commission also believes that the required inclusion of market
participants will enhance a DCO's sound risk management practices, as
the inclusion of the DCO's market participants could provide a DCO's
board of directors or board-level committee with additional derivatives
product knowledge and risk management expertise. The Commission further
believes that this amendment would benefit market participants, as well
as improve the integrity of financial markets, by mitigating any
potential conflict of interest that could arise if a DCO's board of
directors or board-level committee is composed solely of DCO
executives. The Commission acknowledges that DCOs that are not already
complying with these requirements might incur additional costs to do
so, but the Commission expects that this includes only a few DCOs.
19. Legal Risk--Sec. 39.27
The Commission is amending Sec. 39.27(c) to require a DCO that
provides clearing services outside the United States to ensure that the
memorandum required in Exhibit R of Form DCO remains accurate and up-
to-date. This will ensure that the DCO remains aware of any potential
choice of law issues that may impact the enforceability of the DCO's
rules, procedures, and contracts in all relevant jurisdictions. The
Commission did not receive any comments related to the costs or
benefits of amendments to Sec. 39.27(c).
The Commission believes that amendments to Sec. 39.27(c) will
benefit the integrity of derivatives markets by making sure that the
DCO remains aware of any potential choice of law issues that may impact
the enforceability of the DCO's rules, procedures, and contracts in all
relevant jurisdictions.
The Commission believes this requirement will not impose additional
costs on DCOs that already maintain compliance with Sec. 39.27(c), as
DCOs with prudent risk management practices should continuously assess
their rules, procedures, and policies against the laws and regulations
of the jurisdictions in which they operate.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. The Commission believes that
the amendments to Sec. 39.27(c) will improve the integrity of
derivatives markets while not imposing any additional costs.
20. Provisions Applicable to SIDCOs and DCOs That Elect To Be Subject
to the Provisions--Sec. Sec. 39.33, 39.36, 39.37, and Subpart C
Election Form
a. Financial Resources for SIDCOs and Subpart C DCOs--Sec. 39.33
Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is
systemically important in multiple jurisdictions, or that is involved
in activities with a more complex risk profile, to maintain financial
resources sufficient to enable it to meet its financial obligations to
its clearing members notwithstanding a default by the two clearing
members creating the largest combined loss in extreme but plausible
market conditions. The Commission is amending Sec. 39.33(a)(1) by
replacing the phrase ``largest combined loss'' with ``largest combined
financial exposure'' in order to be consistent with Core Principle B
and Sec. 39.11(a)(1) regarding DCO financial resources requirements.
The Commission is also amending Sec. 39.33(c)(1) to clarify that the
``largest aggregate liquidity obligation'' means the total amount of
cash, in each relevant currency, that the defaulted clearing member
would be required to pay to the DCO.
Furthermore, the Commission is amending Sec. 39.33(d) to require
that a SIDCO use available Federal Reserve Bank accounts and services
where practical. This requirement would further enhance a SIDCO's
financial integrity and management of liquidity risk, thereby promoting
the financial integrity of the derivatives markets, while permitting
SIDCOs to consider lower cost alternatives where appropriate.
The Commission did not receive any comments on the costs or
benefits associated with these changes.
The Commission believes that the amendment to Sec. 39.33(a)(1)
makes the requirement more consistent with Core Principle B and Sec.
39.11(a)(1) regarding DCO financial resources requirements and benefits
DCOs by bringing added uniformity and clarification. Furthermore, the
Commission believes the changes to Sec. 39.33(c)(1) will reduce
currency risk for SIDCOs and subpart C DCOs by ensuring that these DCOs
have sufficient liquidity in the relevant currency of corresponding
obligations during the time it would take to liquidate or auction a
defaulted clearing member's positions. This requirement improves the
financial stability of markets. Additionally, amendments to Sec.
39.33(d) will also enhance the financial integrity of derivatives
markets and reduce potential costs for SIDCOs by allowing them to use
lower cost alternatives if practical.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(D) of the CEA, the Commission believes the amendments to Sec.
39.33(c)(1) will promote sound risk management policies by reducing
currency risk for SIDCOs and subpart C DCOs by ensuring that these DCOs
have sufficient liquidity in the relevant currency of corresponding
obligations during the time it would take to liquidate or auction a
defaulted clearing member's positions. The Commission also believes
that the amendments to Sec. 39.33(d)(5) will promote sound risk
management practices by requiring SIDCOs with access to accounts and
services at a Federal Reserve Bank to use those accounts and services
where practical, thereby reducing investment risk as compared to
holding funds at a commercial bank. The Commission has considered the
other section 15(a) factors and believes that they are not implicated
by the amendments.
b. Risk Management for SIDCOs and Subpart C DCOs--Sec. 39.36
Regulation 39.36 requires a SIDCO or a subpart C DCO to conduct
stress tests
[[Page 4849]]
of its financial and liquidity resources and to regularly conduct
sensitivity analyses of its margin models. The Commission is amending
Sec. 39.36(a)(6) to clarify that a SIDCO or subpart C DCO that is
subject to the minimum financial resources requirement set forth in
Sec. 39.11(a)(1), rather than Sec. 39.33(a), should use the results
of its stress tests to support compliance with that requirement.
The Commission also is amending Sec. 39.36(b)(2)(ii) to replace
the words ``produce accurate results'' with ``react appropriately'' to
more accurately reflect that the purpose of a sensitivity analysis is
to assess whether the margin model will react appropriately to changes
of inputs, parameters, and assumptions. The Commission is further
amending Sec. 39.36(d), which requires each SIDCO and subpart C DCO to
``regularly'' conduct an assessment of the theoretical and empirical
properties of its margin model for all products it clears, to clarify
that the assessment should be conducted on at least an annual basis (or
more frequently if there are material relevant market developments).
Lastly, the Commission is amending Sec. 39.36(e) by adding the heading
``[i]ndependent validation'' to the provision. Because these changes
are meant to clarify existing requirements, the Commission does not
expect SIDCOs and subpart C DCOs to incur additional costs. The
Commission did not receive any comments on the costs or benefits
associated with these changes.
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) and (B) of the CEA, respectively, the Commission believes
that the amendments will protect market participants and the public,
and promote the financial integrity of SIDCOs and the derivatives
markets by, for example, ensuring that SIDCOs continue to test their
margin models with sufficient frequency. The Commission has considered
the other section 15(a) factors and believes that they are not
implicated by the amendments.
c. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec. 39.37
Under Sec. 39.37, a SIDCO or a subpart C DCO is required to
publicly disclose its responses to the CPMI-IOSCO Disclosure Framework
\72\ and, in order to ensure the continued accuracy and usefulness of
its responses, to review and update them at least every two years and
following material changes to the SIDCO's or subpart C DCO's system or
environment in which it operates. The Commission is amending Sec.
39.37(b)(2) to additionally require that a SIDCO or a subpart C DCO
notify the Commission no later than ten business days after any updates
to its responses to the CPMI-IOSCO Disclosure Framework to reflect
material changes to the DCO's system or environment. The notice would
need to identify changes made since the latest version of the
responses. The Commission is also amending Sec. 39.37(c) to explicitly
state that a SIDCO or a subpart C DCO must disclose relevant basic data
on transaction volume and values that are consistent with the standards
set forth in the CPMI-IOSCO Public Quantitative Disclosure Standards
for Central Counterparties. These amendments are consistent with
SIDCOs' and subpart C DCOs' existing CPMI-IOSCO obligations. SIFMA AMG
supported the proposed requirement in Sec. 39.37(b)(2) as SIFMA AMG
believes it is extremely useful in understanding the evolution of a
SIDCO's or a subpart C DCO's Disclosure Framework. The Commission did
not receive any comments on the costs of the proposed changes.
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\72\ See CMPI-IOSCO, Principles for Financial Market
Infrastructures: Disclosure Framework and Assessment Methodology
(Dec. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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The Commission believes that amendments to Sec. 39.37(b)(2) will
help the Commission understand any material changes to the DCO's system
or environment, allowing the Commission to more effectively improve the
safety and financial integrity of the marketplace. Amendments to Sec.
39.37(c) will improve public disclosure of relevant basic data on
transaction volume and values, which can help promote competition and
market integrity.
The Commission notes that most of the amendments to subpart C of
part 39 clarify existing requirements and, as a result, the Commission
does not expect that SIDCOs and subpart C DCOs would incur additional
costs. The Commission believes any cost associated with the required
reporting notice within amended Sec. 39.37(b) would be nominal for
SIDCOs and subpart C DCOs, as they already are required to periodically
update the information publicly.
The Commission has evaluated the costs and benefits in light of the
specific considerations identified in section 15(a) of the CEA. In
consideration of section 15(a)(2)(D) of the CEA, the Commission
believes that the amendments will enhance the sound risk practices of
centralized clearing by providing clearing members and their customers
with more timely and transparent notice of a DCO's changes to its
Disclosure Framework, thereby allowing these market participants,
prospective DCO market participants, the Commission, and the public to
more easily identify and analyze changes made since the DCO's last
posted Disclosure Framework. The Commission has considered the other
section 15(a) factors and believes that they are not implicated by the
amendments.
21. Part 140--Organization, Functions, and Procedures of the Commission
The Commission is amending Sec. 140.94 to provide the Director of
the Division of Clearing and Risk with delegated authority to review
DCO registration applications, determine whether an application is
materially complete, request additional information in support of an
application, stay the running of the 180-day review period for an
application, and request additional information in support of a rule
submission. The Commission believes that DCOs will benefit from the
delegation of authority, as it will promote a more efficient process to
address these aspects of registration and rule certification. The
Commission has not identified any costs on DCOs or their members
associated with the amendments to Sec. 140.94. The Commission did not
receive any comments on the costs or benefits of these changes. The
Commission has considered the section 15(a) factors and believes that
they are not implicated by these changes.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\73\
---------------------------------------------------------------------------
\73\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission believes that the public interest to be protected by
the antitrust laws is generally the promotion of competition. In the
Proposal, the Commission requested comment on whether: (1) The proposed
rulemaking implicates any other specific public interest to be
protected by the antitrust laws; (2) the proposed rulemaking is
anticompetitive and, if it is, what the anticompetitive effects are;
and (3) there are less anticompetitive means of achieving the relevant
purposes of the
[[Page 4850]]
CEA that would otherwise be served by adopting the proposed rules. The
Commission did not receive any comments in this regard.
The Commission has considered the rulemaking to determine whether
it is anticompetitive and has identified no anticompetitive effects.
Because the Commission has determined that the rules are not
anticompetitive and have no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Definitions,
Reporting and recordkeeping requirements, Swaps.
17 CFR Part 39
Application form, Business and industry, Commodity futures,
Consumer protection, Default rules and procedures, Definitions,
Enforcement authority, Participant and product eligibility, Reporting
and recordkeeping requirements, Risk management, Settlement procedures,
Swaps, Treatment of funds.
17 CFR Part 140
Authority delegations (Government agencies), Conflict of interests,
Organization and functions (Government agencies).
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24
(2012).
0
2. In Sec. 1.20, revise paragraphs (d)(1) and (7) and (d)(8)
introductory text to read as follows:
Sec. 1.20 Futures customer funds to be segregated and separately
accounted for.
* * * * *
(d) * * *
(1) A futures commission merchant must obtain a written
acknowledgment from each bank, trust company, derivatives clearing
organization, or futures commission merchant prior to or
contemporaneously with the opening of an account by the futures
commission merchant with such depositories; provided, however, that a
written acknowledgment need not be obtained from a derivatives clearing
organization that has adopted and submitted to the Commission rules
that provide for the segregation of futures customer funds in
accordance with all relevant provisions of the Act and the rules in
this chapter, and orders promulgated thereunder, and in such cases, the
requirements set forth in paragraphs (d)(3) through (6) of this section
shall not apply to the futures commission merchant.
* * * * *
(7) Where a written acknowledgment is required, the futures
commission merchant shall promptly file a copy of the written
acknowledgment with the Commission in the format and manner specified
by the Commission no later than three business days after the opening
of the account or the execution of a new written acknowledgment for an
existing account, as applicable.
(8) Where a written acknowledgment is required, a futures
commission merchant shall obtain a new written acknowledgment within
120 days of any changes in the following:
* * * * *
0
3. In Sec. 1.59, revise paragraph (a)(1) to read as follows:
Sec. 1.59 Activities of self-regulatory organization employees,
governing board members, committee members, and consultants.
(a) * * *
(1) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3.
* * * * *
0
4. In Sec. 1.63, revise paragraph (a)(1) to read as follows:
Sec. 1.63 Service on self-regulatory organization governing boards
or committees by persons with disciplinary histories.
(a) * * *
(1) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3, except as defined in paragraph
(b)(6) of this section.
* * * * *
0
5. In Sec. 1.64, revise paragraph (a)(1) to read as follows:
Sec. 1.64 Composition of various self-regulatory organization
governing boards and major disciplinary committees.
(a) * * *
(1) Self-regulatory organization means ``self-regulatory
organization,'' as defined in Sec. 1.3.
* * * * *
0
6. In Sec. 1.69, revise paragraph (a)(7) to read as follows:
Sec. 1.69 Voting by interested members of self-regulatory
organization governing boards and various committees.
(a) * * *
(7) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3, but excludes registered
futures associations for the purposes of paragraph (b)(2) of this
section.
* * * * *
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
7. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.
8325.
0
8. Revise Sec. 39.2 to read as follows:
Sec. 39.2 Definitions.
For the purposes of this part:
Activity with a more complex risk profile includes:
(1) Clearing credit default swaps, credit default futures, or
derivatives that reference either credit default swaps or credit
default futures and
(2) Any other activity designated as such by the Commission
pursuant to Sec. 39.33(a)(3).
Back test means a test that compares a derivatives clearing
organization's initial margin requirements with historical price
changes to determine the extent of actual margin coverage.
Business day means the intraday period of time starting at the
business hour of 8:15 a.m. and ending at the business hour of 4:45
p.m., on all days except Saturdays, Sundays, and any holiday on which a
derivatives clearing organization and its domestic financial markets
are closed, including a Federal holiday in the United States, as
established under 5 U.S.C. 6103.
Customer account or customer origin means ``customer account'' as
defined in Sec. 1.3 of this chapter.
Depository institution has the meaning set forth in section
19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).
Enterprise risk management means an enterprise-wide strategic
business process intended to identify potential events that may affect
the enterprise and to manage the probability or impact of those events
on the enterprise as a whole, such that the overall risk remains within
the enterprise's risk appetite and provides reasonable assurance that
the derivatives clearing organization can continue to achieve its
objectives.
Fully collateralized position means a contract cleared by a
derivatives clearing organization that requires the derivatives
clearing organization to
[[Page 4851]]
hold, at all times, funds in the form of the required payment
sufficient to cover the maximum possible loss that a party or
counterparty could incur upon liquidation or expiration of the
contract.
House account or house origin means a clearing member account which
is not subject to section 4d(a) or 4d(f) of the Act.
Key personnel means derivatives clearing organization personnel who
play a significant role in the operations of the derivatives clearing
organization, the provision of clearing and settlement services, risk
management, or oversight of compliance with the Act and Commission
regulations in this chapter, and orders promulgated thereunder. Key
personnel include, but are not limited to, those persons who are or
perform the functions of any of the following: Chief executive officer;
president; chief compliance officer; chief operating officer; chief
risk officer; chief financial officer; chief technology officer; chief
information security officer; and emergency contacts or persons who are
responsible for business continuity or disaster recovery planning or
program execution.
Stress test means a test that compares the impact of potential
extreme price moves, changes in option volatility, and/or changes in
other inputs that affect the value of a position, to the financial
resources of a derivatives clearing organization, clearing member, or
large trader, to determine the adequacy of the financial resources of
such entities.
Subpart C derivatives clearing organization means any derivatives
clearing organization, as defined in section 1a(15) of the Act and
Sec. 1.3 of this chapter, which:
(1) Is registered as a derivatives clearing organization under
section 5b of the Act;
(2) Is not a systemically important derivatives clearing
organization; and
(3) Has become subject to the provisions of subpart C of this part,
pursuant to Sec. 39.31.
Systemically important derivatives clearing organization means a
financial market utility that is a derivatives clearing organization
registered under section 5b of the Act, which is currently designated
by the Financial Stability Oversight Council to be systemically
important and for which the Commission acts as the Supervisory Agency
pursuant to 12 U.S.C. 5462(8).
Trust company means a trust company that is a member of the Federal
Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C.
221), but that does not meet the definition of depository institution
as set out in this section.
U.S. branch or agency of a foreign banking organization means the
U.S. branch or agency of a foreign banking organization as defined in
section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
0
9. In Sec. 39.3, revise paragraphs (a), (b)(2)(i), and (c) through (f)
and add paragraph (g) to read as follows:
Sec. 39.3 Procedures for registration.
(a) Application for registration--(1) General procedure. An entity
seeking to register as a derivatives clearing organization shall file
an application for registration with the Secretary of the Commission in
the format and manner specified by the Commission. The Commission will
review the application for registration as a derivatives clearing
organization pursuant to the 180-day timeframe and procedures specified
in section 6(a) of the Act, and may approve or deny the application. If
the Commission approves the application, the Commission will register
the applicant as a derivatives clearing organization subject to
conditions as appropriate.
(2) Application. Any entity seeking to register as a derivatives
clearing organization shall submit to the Commission a completed Form
DCO, which shall include a cover sheet, all applicable exhibits, and
any supplemental materials, as provided in appendix A to this part
(application). The Commission will not commence processing an
application unless the applicant has filed the application as required
by this section. Failure to file a completed application will preclude
the Commission from determining that an application is materially
complete, as provided in section 6(a) of the Act. Upon its own
initiative, an applicant may file with its completed application
additional information that may be necessary or helpful to the
Commission in processing the application.
(3) Submission of supplemental information. The filing of a
completed application is a minimum requirement and does not create a
presumption that the application is materially complete or that
supplemental information will not be required. At any time during the
application review process, the Commission may request that the
applicant provide supplemental information in order for the Commission
to process the application. The applicant shall provide supplemental
information in the format and manner specified by the Commission.
(4) Application amendments. An applicant shall promptly amend its
application if it discovers a material omission or error, or if there
is a material change in the information provided to the Commission in
the application or other information provided in connection with the
application. An applicant is only required to submit exhibits and other
information that are relevant to the application amendment when filing
a Form DCO for the purpose of amending its pending application.
(5) Public information. The following sections of all applications
to become a registered derivatives clearing organization will be
public: First page of the Form DCO cover sheet (up to and including the
General Information section), Exhibit A-1 (regulatory compliance
chart), Exhibit A-2 (proposed rulebook), Exhibit A-3 (narrative summary
of proposed clearing activities), Exhibit A-7 (documents setting forth
the applicant's corporate organizational structure), Exhibit A-8
(documents establishing the applicant's legal status and certificate(s)
of good standing or its equivalent), and any other part of the
application not covered by a request for confidential treatment,
subject to Sec. 145.9 of this chapter.
(6) Extension of time for review. The Commission may further extend
the review period in paragraph (a)(1) of this section for any period of
time to which the applicant agrees in writing.
(b) * * *
(2) * * *
(i) The Commission hereby delegates, until it orders otherwise, to
the Director of the Division of Clearing and Risk or the Director's
designee, with the concurrence of the General Counsel or the General
Counsel's designee, the authority to notify an applicant seeking
registration as a derivatives clearing organization that the
application is materially incomplete and the running of the 180-day
period under section 6(a) of the Act is stayed.
* * * * *
(c) Withdrawal of application for registration. An applicant for
registration may withdraw its application submitted pursuant to
paragraph (a) of this section by filing such a request with the
Secretary of the Commission in the format and manner specified by the
Commission. Withdrawal of an application for registration shall not
affect any action taken or to be taken by the Commission based upon
actions, activities, or events occurring during the time that the
application for registration was pending with the Commission.
(d) Amendment of an order of registration. (1) A derivatives
clearing
[[Page 4852]]
organization requesting an amendment to an order of registration shall
file the request with the Secretary of the Commission in the form and
manner specified by the Commission.
(2) A derivatives clearing organization shall provide to the
Commission, upon the Commission's request, any additional information
and documentation necessary to review a request to amend an order of
registration.
(3) The Commission shall issue an amended order of registration
upon a Commission determination, in its own discretion, that the
derivatives clearing organization would maintain compliance with the
Act and the Commission's regulations in this chapter upon amendment to
the order. If deemed appropriate, the Commission may issue an amended
order of registration subject to conditions.
(4) The Commission may decline to issue an amended order based upon
a Commission determination, in its own discretion, that the derivatives
clearing organization would not continue to maintain compliance with
the Act and the Commission's regulations in this chapter upon amendment
to the order.
(e) Reinstatement of dormant registration. Before accepting
products for clearing, a dormant derivatives clearing organization as
defined in Sec. 40.1 of this chapter must reinstate its registration
under the procedures of paragraph (a) of this section; provided,
however, that an application for reinstatement may rely upon previously
submitted materials that still pertain to, and accurately describe,
current conditions.
(f) Vacation of registration--(1) Request. A derivatives clearing
organization may have its registration vacated pursuant to section 7 of
the Act by submitting a request to the Secretary of the Commission in
the format and manner specified by the Commission. A vacation of
registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities or events occurring during
the time that the derivatives clearing organization was registered with
the Commission. The request shall include:
(i) The date that the vacation should take effect, which must be at
least ninety days after the request was submitted;
(ii) A description of how the derivatives clearing organization
intends to transfer or otherwise unwind all open positions at the
derivatives clearing organization and how such actions reflect the
interests of affected clearing members and their customers;
(iii) A statement that the derivatives clearing organization will
continue to maintain its books and records for the requisite statutory
and regulatory retention periods after its registration has been
vacated; and
(iv) A statement that the derivatives clearing organization will
continue to make its books and records available for inspection by any
representative of the Commission or the United States Department of
Justice after its registration has been vacated, as required by Sec.
1.31 of this chapter.
(2) Notice to registered entities. The Commission shall fulfill its
obligation to send a copy of the request and the order of vacation to
all other registered entities by posting the documents on the
Commission website.
(g) Request for transfer of open interest--(1) Submission. A
derivatives clearing organization seeking to transfer its positions
comprising open interest for clearing and settlement to another
clearing organization shall submit rules for Commission approval
pursuant to Sec. 40.5 of this chapter.
(2) Required information. The rule submission shall include, at a
minimum, the following:
(i) The underlying agreement that governs the transfer;
(ii) A description of the transfer, including the reason for the
transfer and the impact of the transfer on the rights and obligations
of clearing members and market participants holding the positions that
comprise the derivatives clearing organization's open interest;
(iii) A discussion of the transferee's ability to comply with the
Act, including the core principles applicable to derivatives clearing
organizations, and the Commission's regulations in this chapter, as
applicable;
(iv) The transferee's rules marked to show changes that would
result from acceptance of the transferred positions;
(v) A list of products for which the derivatives clearing
organization requests transfer of open interest; and
(vi) A representation by the transferee that it is in and will
maintain compliance with any applicable provisions of the Act,
including the core principles applicable to derivatives clearing
organizations, and the Commission's regulations upon the transfer of
the open interest.
(3) Commission action. The Commission may request additional
information in support of a rule submission filed under paragraph
(g)(1) of this section, and may grant approval of the rules in
accordance with Sec. 40.5 of this chapter.
0
10. In Sec. 39.4, revise paragraphs (a) and (e) to read as follows:
Sec. 39.4 Procedures for implementing derivatives clearing
organization rules and clearing new products.
(a) Request for approval of rules. A registered derivatives
clearing organization may request, pursuant to the procedures of Sec.
40.5 of this chapter, that the Commission approve any or all of its
rules and subsequent amendments thereto, including operational rules,
prior to their implementation or, notwithstanding the provisions of
section 5c(c)(2) of the Act, at any time thereafter, under the
procedures of Sec. 40.5 of this chapter. A derivatives clearing
organization may label as ``approved by the Commission'' only those
rules that have been so approved.
* * * * *
(e) Holding securities in a futures portfolio margining account. A
derivatives clearing organization seeking to provide a portfolio
margining program under which securities would be held in a futures
account as defined in Sec. 1.3 of this chapter, shall submit rules to
implement such portfolio margining program for Commission approval in
accordance with Sec. 40.5 of this chapter. Concurrent with the
submission of such rules for Commission approval, the derivatives
clearing organization shall petition the Commission for an order under
section 4d(a) of the Act.
0
11. In Sec. 39.10, revise paragraphs (c)(1)(ii) and (iv), (c)(3)
introductory text, (c)(3)(i), (c)(3)(ii) introductory text,
(c)(3)(ii)(A), (c)(3)(v), and (c)(4)(i) and (ii) and add paragraph (d)
to read as follows:
Sec. 39.10 Compliance with core principles.
* * * * *
(c) * * *
(1) * * *
(ii) The chief compliance officer shall report to the board of
directors or the senior officer of the derivatives clearing
organization or, if the derivatives clearing organization engages in
substantial activities not related to clearing, the senior officer
responsible for the derivatives clearing organization's clearing
activities. The board of directors or the senior officer shall approve
the compensation of the chief compliance officer.
* * * * *
(iv) A change in the designation of the individual serving as the
chief compliance officer of the derivatives clearing organization shall
be reported to the Commission in accordance with the requirements of
Sec. 39.19(c)(4)(x).
* * * * *
(3) Annual report. The chief compliance officer shall, not less
than
[[Page 4853]]
annually, prepare and sign a written report that covers the most
recently completed fiscal year of the derivatives clearing
organization. The annual report shall, at a minimum:
(i) Contain a description of the derivatives clearing
organization's written policies and procedures, including the code of
ethics and conflict of interest policies; provided that, to the extent
that the derivatives clearing organization's written policies and
procedures have not materially changed since they were most recently
described in an annual report to the Commission, and if the annual
report containing the most recent description was submitted within the
last five years, the annual report may instead incorporate by reference
the relevant descriptions from the most recent annual report containing
the description;
(ii) Review each core principle and applicable Commission
regulation in this chapter including, in the case of systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations, regulations in subpart C of this part, and with
respect to each:
(A) Identify, by name, rule number, or other identifier, the
compliance policies and procedures that are designed to ensure
compliance with each core principle and applicable regulation in this
chapter;
* * * * *
(v) Describe any material compliance matters, including incidents
of noncompliance, since the date of the last annual report, and
describe the corresponding action taken.
(4) * * *
(i) Prior to submitting the annual report to the Commission, the
chief compliance officer shall provide the annual report to the board
of directors or the senior officer of the derivatives clearing
organization or, if the derivatives clearing organization engages in
substantial activities not related to clearing, the senior officer
responsible for the derivatives clearing organization's clearing
activities, for review. Submission of the report to the board of
directors or the senior officer shall be recorded in the board minutes
or otherwise, as evidence of compliance with the requirement in this
paragraph (c)(4)(i). The annual report shall describe the process by
which it was submitted to the board of directors or the senior officer.
When submitted to the Commission, the annual report shall be
accompanied by a cover letter, notice, or other document that specifies
the date on which it was submitted to the board of directors or the
senior officer.
(ii) The annual report shall be submitted to the Secretary of the
Commission in the format and manner specified by the Commission not
more than 90 days after the end of the derivatives clearing
organization's fiscal year. The report shall include a certification by
the chief compliance officer that, to the best of his or her knowledge
and reasonable belief, and under penalty of law, the annual report is
accurate and complete.
* * * * *
(d) Enterprise risk management--(1) General. A derivatives clearing
organization shall have an enterprise risk management program that
identifies and assesses sources of risk and their potential impact on
the operations and services of the derivatives clearing organization.
The derivatives clearing organization shall measure, monitor, and
manage identified sources of risk on an ongoing basis, including
through the development and use of appropriate information systems. The
derivatives clearing organization shall test the effectiveness of any
mitigating controls employed to reduce identified sources of risk to
ensure that the risks are properly mitigated.
(2) Enterprise risk management framework. A derivatives clearing
organization shall establish and maintain written policies and
procedures, approved by its board of directors or a committee of the
board of directors that establish an appropriate enterprise risk
management framework. The framework shall be reviewed at least annually
by the board of directors or committee of the board of directors and
updated as necessary.
(3) Standards for enterprise risk management framework. A
derivatives clearing organization shall follow generally accepted
standards and industry best practices in the development and review of
its enterprise risk management framework, assessment of the performance
of its enterprise risk management program, and management and
mitigation of risk to the derivatives clearing organization.
(4) Enterprise risk officer. A derivatives clearing organization
shall identify as its enterprise risk officer an appropriate individual
that exercises the full responsibility and authority to manage the
enterprise risk management program of the derivatives clearing
organization. The enterprise risk officer shall have the authority,
independence, resources, expertise, and access to relevant information
necessary to fulfill the responsibilities of the position, including
access to the board of directors of the organization for which the
enterprise risk officer is responsible for managing the risks or an
appropriate committee thereof, consistent with the requirements of this
section.
0
12. In Sec. 39.11:
0
a. Revise paragraphs (a) introductory text, (a)(2), (b)(1) introductory
text, (b)(1)(i) through (v), (c), (d)(2)(iv), (e)(1)(ii)(A) through
(C), and (e)(1)(iii);
0
b. Add paragraph (e)(1)(iv);
0
c. Revise paragraphs (e)(2) and (3), (e)(4)(i), (f)(1) introductory
text, (f)(1)(i)(A), and (f)(1)(ii) and (iii);
0
d. Add paragraph (f)(1)(iv); and
0
e. Revise paragraphs (f)(2) through (4).
The revisions and additions read as follows:
Sec. 39.11 Financial resources.
(a) General. A derivatives clearing organization shall have
adequate financial, operational, and managerial resources, as
determined by the Commission, to discharge each responsibility of the
derivatives clearing organization. A derivatives clearing organization
shall maintain sufficient financial resources to cover its exposures
with a high degree of confidence. At a minimum, each derivatives
clearing organization shall possess financial resources that exceed the
total amount that would:
* * * * *
(2) Enable the derivatives clearing organization to cover its
operating costs for a period of at least one year, calculated on a
rolling basis. A derivatives clearing organization shall identify and
adequately manage its general business risks and hold sufficient liquid
resources to cover potential business losses that are not related to
clearing members' defaults, so that the derivatives clearing
organization can continue to provide services as a going concern.
(b) * * *
(1) Financial resources available to satisfy the requirements of
paragraph (a)(1) of this section may include:
(i) The derivatives clearing organization's own capital;
(ii) Guaranty fund deposits;
(iii) Default insurance;
(iv) Potential assessments for additional guaranty fund
contributions, if permitted by the derivatives clearing organization's
rules; and
(v) Any other financial resource deemed acceptable by the
Commission.
* * * * *
(c) Calculation of financial resources requirements. (1) A
derivatives clearing organization shall, on a monthly basis, perform
stress tests that will allow it to make a reasonable calculation of the
financial resources needed to meet the
[[Page 4854]]
requirements of paragraph (a)(1) of this section. The derivatives
clearing organization shall have reasonable discretion in determining
the methodology used to calculate the requirements, subject to the
limitations identified in paragraph (c)(2) of this section, and
provided that the methodology must take into account both historical
data and hypothetical scenarios. The Commission may review the
methodology and require changes as appropriate. The requirements of
this paragraph (c) do not apply to fully collateralized positions.
(2) When calculating its largest financial exposure, a derivatives
clearing organization:
(i) In netting its exposure against the clearing member's initial
margin, shall:
(A) Use only that portion of the margin amount on deposit
(including initial margin and any add-ons) that is required; and
(B) Use customer margin (including initial margin and any add-ons)
only to the extent permitted by parts 1 and 22 of this chapter, as
applicable;
(ii) Shall combine the customer and house stress test losses of
each clearing member using the same stress test scenarios;
(iii) May net any gains in the house account with losses in the
customer account, if permitted by the derivatives clearing
organization's rules, but shall not net losses in the house account
with gains in the customer account; and
(iv) With respect to a clearing member's cleared swaps customer
account, may net customer gains against customer losses only to the
extent permitted by the derivatives clearing organization's rules.
(3) A derivatives clearing organization shall, on a monthly basis,
make a reasonable calculation of its projected operating costs over a
12-month period in order to determine the amount needed to meet the
requirements of paragraph (a)(2) of this section. The derivatives
clearing organization shall have reasonable discretion in determining
the methodology used to compute such projected operating costs. The
Commission may review the methodology and require changes as
appropriate.
(d) * * *
(2) * * *
(iv) The derivatives clearing organization shall only count the
value of assessments, after the haircut, to meet up to 20 percent of
the total amount required under paragraph (a)(1) of this section. The
value of the assessments may be determined by using the largest
financial exposure in extreme but plausible market conditions prior to
netting against required initial margin on deposit.
(e) * * *
(1) * * *
(ii) * * *
(A) Calculate the average daily settlement variation pay for each
clearing member over the last fiscal quarter;
(B) Calculate the sum of those average daily settlement variation
pays; and
(C) Using that sum, calculate the average of its clearing members'
average daily settlement variation pays.
(iii) If the total amount of the financial resources required
pursuant to the calculation set forth in paragraph (e)(1)(ii) of this
section is insufficient to enable the derivatives clearing organization
to fulfill its obligations during a one-day settlement cycle, the
derivatives clearing organization may take into account a committed
line of credit or similar facility for the purpose of meeting the
remainder of the requirement of this paragraph (e) (subject to the
limitation in paragraph (e)(3) of this section).
(iv) A derivatives clearing organization is not subject to
paragraph (e)(1)(ii) of this section for fully collateralized
positions.
(2) The financial resources allocated by the derivatives clearing
organization to meet the requirements of paragraph (a)(2) of this
section must include unencumbered, liquid financial assets (i.e., cash
and/or highly liquid securities) sufficient to enable the derivatives
clearing organization to cover its operating costs for a period of at
least six months. If the financial resources allocated to meet the
requirements of paragraph (a)(2) of this section do not include such
assets in a sufficient amount, the derivatives clearing organization
may take into account a committed line of credit or similar facility
for the purpose of meeting the requirements of this paragraph (subject
to the limitation in paragraph (e)(3) of this section).
(3) A committed line of credit or similar facility may be
allocated, in whole or in part, to satisfy the requirements of either
paragraph (e)(1)(ii) or (e)(2) of this section, but not both
paragraphs.
(4)(i) Assets in a guaranty fund shall have minimal credit, market,
and liquidity risks and shall be readily accessible on a same-day
basis;
* * * * *
(f) * * *
(1) Quarterly reporting. Each fiscal quarter, or at any time upon
Commission request, a derivatives clearing organization shall:
(i) * * *
(A) The amount of financial resources necessary to meet the
requirements of paragraph (a) of this section and Sec. Sec. 39.33(a)
and 39.39(d), if applicable;
* * * * *
(ii) Provide the Commission with a financial statement, including
the balance sheet, income statement, and statement of cash flows,
prepared in accordance with U.S. generally accepted accounting
principles, of the derivatives clearing organization; provided,
however, that for a derivatives clearing organization that is
incorporated or organized under the laws of any foreign country, the
financial statement may be prepared in accordance with either U.S.
generally accepted accounting principles or the International Financial
Reporting Standards issued by the International Accounting Standards
Board; and
(iii) Report to the Commission the value of each individual
clearing member's guaranty fund deposit, if the derivatives clearing
organization reports having guaranty fund deposits as a financial
resource available to satisfy the requirements of paragraph (a)(1) of
this section and Sec. Sec. 39.33(a) and 39.39(d), if applicable.
(iv) The calculations required by this paragraph (f) shall be made
as of the last business day of the derivatives clearing organization's
fiscal quarter. The report shall be submitted not later than 17
business days after the end of the derivatives clearing organization's
fiscal quarter, or at such later time as the Commission may permit, in
its discretion, upon request by the derivatives clearing organization.
(2) Annual reporting. (i) A derivatives clearing organization shall
submit to the Commission an audited year-end financial statement of the
derivatives clearing organization calculated in accordance with U.S.
generally accepted accounting principles; provided, however, that for a
derivatives clearing organization that is incorporated or organized
under the laws of any foreign country, the financial statement may be
prepared in accordance with either U.S. generally accepted accounting
principles or the International Financial Reporting Standards issued by
the International Accounting Standards Board.
(ii) The report required by paragraph (f)(2)(i) of this section
shall be submitted not later than 90 days after the end of the
derivatives clearing organization's fiscal year, or at such later time
as the Commission may permit, in its discretion, upon request by the
derivatives clearing organization.
[[Page 4855]]
(iii) A derivatives clearing organization shall submit concurrently
with the audited year-end financial statement required by paragraph
(f)(2)(i) of this section:
(A) A reconciliation, including appropriate explanations, of its
balance sheet in the audited year-end financial statement with the
balance sheet in the derivatives clearing organization's financial
statement for the last quarter of the fiscal year when material
differences exist or, if no material differences exist, a statement so
indicating; and
(B) Such further information as may be necessary to make the
statements not misleading.
(3) Other reporting. (i) A derivatives clearing organization shall
provide to the Commission as part of its first report under paragraph
(f)(1) of this section, and in the event of any change thereafter:
(A) Sufficient documentation explaining the methodology used to
compute its financial resources requirements under paragraph (a) of
this section and Sec. Sec. 39.33(a) and 39.39(d), if applicable; and
(B) Sufficient documentation explaining the basis for its
determinations regarding the valuation and liquidity requirements set
forth in paragraphs (d) and (e) of this section.
(ii) A derivatives clearing organization shall provide to the
Commission copies of any agreements establishing or amending a credit
facility, insurance coverage, or other arrangement evidencing or
otherwise supporting the derivatives clearing organization's
conclusions regarding its:
(A) Financial resources available to satisfy the requirements of
paragraph (a) of this section and Sec. Sec. 39.33(a) and 39.39(d), if
applicable; and
(B) Liquidity resources available to satisfy the requirements of
paragraph (e) of this section and Sec. 39.33(c), if applicable.
(4) Certification. A derivatives clearing organization shall
provide with each report submitted pursuant to this section a
certification by the person responsible for the accuracy and
completeness of the report that, to the best of his or her knowledge
and reasonable belief, and under penalty of law, the information
contained in the report is accurate and complete.
0
13. In Sec. 39.12, revise paragraphs (a) introductory text, (a)(1)(i),
(a)(4) through (6), (b)(1) introductory text, and (b)(2) to read as
follows:
Sec. 39.12 Participant and product eligibility.
(a) Participant eligibility. A derivatives clearing organization
shall have appropriate admission and continuing participation
requirements for clearing members of the derivatives clearing
organization that are objective, publicly disclosed, and risk-based.
(1) * * *
(i) A derivatives clearing organization shall not have restrictive
clearing member standards if less restrictive requirements that achieve
the same objective and that would not materially increase risk to the
derivatives clearing organization or clearing members could be adopted;
* * * * *
(4) Monitoring. A derivatives clearing organization shall have
procedures to verify, on an ongoing basis, the compliance of each
clearing member with each participation requirement of the derivatives
clearing organization.
(5) Reporting. (i) A derivatives clearing organization shall
require all clearing members, including non-futures commission
merchants, to provide to the derivatives clearing organization periodic
financial reports that contain any financial information that the
derivatives clearing organization determines is necessary to assess
whether participation requirements are being met on an ongoing basis.
(ii) A derivatives clearing organization shall require clearing
members that are futures commission merchants to provide the financial
reports that are specified in Sec. 1.10 of this chapter to the
derivatives clearing organization.
(iii) A derivatives clearing organization shall require clearing
members that are not futures commission merchants to make the periodic
financial reports provided pursuant to paragraph (a)(5)(i) of this
section available to the Commission upon the Commission's request or,
in lieu of imposing the requirement in this paragraph (a)(5)(iii), a
derivatives clearing organization may provide such financial reports
directly to the Commission upon the Commission's request.
(iv) A derivatives clearing organization shall have rules that
require clearing members to provide to the derivatives clearing
organization, in a timely manner, information that concerns any
financial or business developments that may materially affect the
clearing members' ability to continue to comply with participation
requirements under this section.
(v) The requirements in paragraphs (a)(5)(i) and (iii) of this
section shall not apply with respect to non-futures commission merchant
clearing members of a derivatives clearing organization that only clear
fully collateralized positions.
(6) Enforcement. A derivatives clearing organization shall have the
ability to enforce compliance with its participation requirements and
shall have procedures for the suspension and orderly removal of
clearing members that no longer meet the requirements.
(b) * * *
(1) A derivatives clearing organization shall have appropriate
requirements for determining the eligibility of agreements, contracts,
or transactions submitted to the derivatives clearing organization for
clearing, taking into account the derivatives clearing organization's
ability to manage the risks associated with such agreements, contracts,
or transactions. Factors to be considered in determining product
eligibility include, but are not limited to:
* * * * *
(2) A derivatives clearing organization that clears swaps shall
have rules providing that all swaps with the same terms and conditions,
as defined by product specifications established under derivatives
clearing organization rules, submitted to the derivatives clearing
organization for clearing are economically equivalent within the
derivatives clearing organization and may be offset with each other
within the derivatives clearing organization.
* * * * *
0
14. In Sec. 39.13:
0
a. Revise paragraphs (b), (f), (g)(2)(i), (g)(3), and (g)(4)(i)
introductory text;
0
b. Add paragraph (g)(7)(iii)
0
c. Revise paragraphs (g)(8) and (12) and (h)(1)(i) introductory text;
0
d. Add paragraph (h)(3)(iii);
0
e. Revise paragraphs (h)(5)(i) introductory text and (h)(5)(ii); and
0
f. Add paragraph (i).
The revisions and additions read as follows:
Sec. 39.13 Risk management.
* * * * *
(b) Risk management framework. A derivatives clearing organization
shall have and implement written policies, procedures, and controls,
approved by its board of directors, that establish an appropriate risk
management framework that, at a minimum, clearly identifies and
documents the range of risks to which the derivatives clearing
organization is exposed, addresses the monitoring and management of the
entirety of those risks, and provides a mechanism for internal audit.
The risk management framework shall be regularly reviewed and updated
as necessary.
* * * * *
(f) Limitation of exposure to potential losses from defaults. A
derivatives
[[Page 4856]]
clearing organization shall limit its exposure to potential losses from
defaults by its clearing members through margin requirements and other
risk control mechanisms reasonably designed to ensure that:
(1) The operations of the derivatives clearing organization would
not be disrupted; and
(2) Non-defaulting clearing members would not be exposed to losses
that non-defaulting clearing members cannot anticipate or control.
(g) * * *
(2) * * *
(i) A derivatives clearing organization shall have initial margin
requirements that are commensurate with the risks of each product and
portfolio, including any unusual characteristics of, or risks
associated with, particular products or portfolios.
* * * * *
(3) Independent validation. A derivatives clearing organization
shall have its systems for generating initial margin requirements,
including its theoretical models, reviewed and validated by a qualified
and independent party on an annual basis. Where no material changes to
the margin model have occurred, previous validations can be reviewed
and affirmed as part of the annual review process. Qualified and
independent parties may be independent contractors or employees of the
derivatives clearing organization, or of an affiliate of the
derivatives clearing organization, but shall not be persons responsible
for development or operation of the systems and models being tested.
(4) * * *
(i) A derivatives clearing organization may allow reductions in
initial margin requirements for related positions if the price risks
with respect to such positions are significantly and reliably
correlated. The price risks of different positions will only be
considered to be reliably correlated if there is a conceptual basis for
the correlation in addition to an exhibited statistical correlation.
That conceptual basis may include, but is not limited to, the
following:
* * * * *
(7) * * *
(iii) In conducting back tests of initial margin requirements, a
derivatives clearing organization shall compare portfolio losses only
to those components of initial margin that capture changes in market
risk factors.
(8) Customer margin--(i) Gross margin. (A) During the end-of-day
settlement cycle, a derivatives clearing organization shall collect
initial margin on a gross basis for each clearing member's customer
account(s) equal to the sum of the initial margin amounts that would be
required by the derivatives clearing organization for each individual
customer within that account if each individual customer were a
clearing member.
(B) For purposes of calculating the gross initial margin
requirement for each clearing member's customer account(s), a
derivatives clearing organization shall have rules that require its
clearing members to provide to the derivatives clearing organization
reports each day setting forth end-of-day gross positions of each
individual customer account within each customer origin of the clearing
member.
(C) A derivatives clearing organization may not, and may not permit
its clearing members to, net positions of different customers against
one another.
(D) A derivatives clearing organization may collect initial margin
for its clearing members' house accounts on a net basis.
(ii) Customer initial margin requirements. A derivatives clearing
organization shall require its clearing members to collect customer
initial margin at a level that is not less than 100 percent of the
derivatives clearing organization's clearing initial margin
requirements with respect to each product and portfolio and
commensurate with the risk presented by each customer account. The
derivatives clearing organization shall have reasonable discretion in
determining clearing initial margin requirements for products or
portfolios. The derivatives clearing organization shall also have
reasonable discretion in determining whether and by how much customer
initial margin requirements shall, at a minimum, exceed clearing
initial margin requirements for categories of customers determined by
the clearing member to have heightened risk profiles. The Commission
may review such customer initial margin levels and require different
levels if the Commission deems the levels insufficient to protect the
financial integrity of the derivatives clearing organization or its
clearing members.
* * * * *
(12) Haircuts. A derivatives clearing organization shall apply
appropriate reductions in value to reflect credit, market, and
liquidity risks (haircuts), to the assets that it accepts in
satisfaction of initial margin obligations, taking into consideration
stressed market conditions, and shall evaluate the appropriateness of
the haircuts on at least a monthly basis.
* * * * *
(h) * * *
(1) * * *
(i) A derivatives clearing organization shall impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the derivatives clearing organization's
financial resources. The derivatives clearing organization shall have
reasonable discretion in determining:
* * * * *
(3) * * *
(iii) The requirements in paragraphs (h)(3)(i) and (ii) of this
section do not apply with respect to clearing member accounts that hold
only fully collateralized positions.
* * * * *
(5) * * *
(i) A derivatives clearing organization shall have rules that:
* * * * *
(ii) A derivatives clearing organization shall review the risk
management policies, procedures, and practices of each of its clearing
members, which address the risks that such clearing members may pose to
the derivatives clearing organization, on a periodic basis, take
appropriate action to address concerns identified in such reviews, and
document such reviews and the basis for determining what action was
appropriate to take.
* * * * *
(i) Cross-margining. (1) A derivatives clearing organization that
seeks to implement or modify a cross-margining program with one or more
clearing organizations shall submit rules for Commission approval
pursuant to Sec. 40.5 of this chapter. The submission shall include
information sufficient for the Commission to understand the risks that
would be posed by the program and the means by which the derivatives
clearing organization would address and mitigate those risks.
(2) The Commission may request additional information in support of
a rule submission filed under this paragraph (i), and may approve such
rules in accordance with Sec. 40.5 of this chapter.
0
15. In Sec. 39.15, revise the paragraph (b) subject heading, paragraph
(b)(1), the paragraph (b)(2) subject heading, and paragraphs (b)(2)(i)
introductory text, (b)(2)(i)(A), (D), (F), and (H) through (L),
(b)(2)(ii) and (iii), (d) introductory text, and (e) to read as
follows:
[[Page 4857]]
Sec. 39.15 Treatment of funds.
* * * * *
(b) Customer funds--(1) Segregation. A derivatives clearing
organization shall comply with the applicable segregation requirements
of section 4d of the Act and Commission regulations in this part, or
any other applicable Commission regulation in this chapter or order
requiring that customer funds and assets, including money, securities,
and property, be segregated, set aside, or held in a separate account.
(2) Commingling--(i) Cleared swaps account. In order for a
derivatives clearing organization and its clearing members to commingle
customer positions in futures, options, foreign futures, foreign
options, and swaps, or any combination thereof, and any money,
securities, or property received to margin, guarantee or secure such
positions, in an account subject to the requirements of section 4d(f)
of the Act, the derivatives clearing organization shall file rules for
Commission approval pursuant to Sec. 40.5 of this chapter. Such rule
submission shall include, at a minimum, the following:
(A) Identification of the products that would be commingled,
including product specifications or the criteria that would be used to
define eligible products;
* * * * *
(D) Analysis of the liquidity of the respective markets for the
eligible products, the ability of clearing members and the derivatives
clearing organization to offset or mitigate the risk of such eligible
products in a timely manner, without compromising the financial
integrity of the account, and, as appropriate, proposed means for
addressing insufficient liquidity;
* * * * *
(F) A description of the financial, operational, and managerial
standards or requirements for clearing members that would be permitted
to commingle eligible products;
* * * * *
(H) A description of the financial resources of the derivatives
clearing organization, including the composition and availability of a
guaranty fund with respect to the eligible products that would be
commingled;
(I) A description and analysis of the margin methodology that would
be applied to the commingled eligible products, including any margin
reduction applied to correlated positions, and any applicable margin
rules with respect to both clearing members and customers;
(J) An analysis of the ability of the derivatives clearing
organization to manage a potential default with respect to any of the
eligible products that would be commingled;
(K) A discussion of the procedures that the derivatives clearing
organization would follow if a clearing member defaulted, and the
procedures that a clearing member would follow if a customer defaulted,
with respect to any of the commingled eligible products in the account;
and
(L) A description of the arrangements for obtaining daily position
data with respect to eligible products in the account.
(ii) Futures account. In order for a derivatives clearing
organization and its clearing members to commingle customer positions
in futures, options, foreign futures, foreign options, and swaps, or
any combination thereof, and any money, securities, or property
received to margin, guarantee or secure such positions, in an account
subject to the requirements of section 4d(a) of the Act, the
derivatives clearing organization shall file rules for Commission
approval pursuant to Sec. 40.5 of this chapter. Such rule submission
shall include, at a minimum, the information required under paragraph
(b)(2)(i) of this section.
(iii) Commission action. The Commission may request additional
information in support of a rule submission filed under paragraph
(b)(2)(i) or (ii) of this section, and may approve such rules in
accordance with Sec. 40.5 of this chapter.
* * * * *
(d) Transfer of customer positions. A derivatives clearing
organization shall have rules providing that the derivatives clearing
organization will promptly transfer all or a portion of a customer's
portfolio of positions, and related funds as necessary, from the
carrying clearing member of the derivatives clearing organization to
another clearing member of the derivatives clearing organization,
without requiring the close-out and re-booking of the positions prior
to the requested transfer, subject to the following conditions:
* * * * *
(e) Permitted investments. Funds and assets belonging to clearing
members and their customers that are invested by a derivatives clearing
organization shall be held in instruments with minimal credit, market,
and liquidity risks. Any investment of customer funds or assets,
including cleared swaps customer collateral, as defined in Sec. 22.1
of this chapter, by a derivatives clearing organization shall comply
with Sec. 1.25 of this chapter.
0
16. In Sec. 39.16, revise paragraphs (a), (b), (c)(1), (c)(2)
introductory text, (c)(2)(ii), (c)(2)(iii)(C), and (d)(1) and add
paragraph (e) to read as follows:
Sec. 39.16 Default rules and procedures.
(a) General. A derivatives clearing organization shall have rules
and procedures designed to allow for the efficient, fair, and safe
management of events during which clearing members become insolvent or
default on the obligations of such clearing members to the derivatives
clearing organization.
(b) Default management plan. A derivatives clearing organization
shall maintain a current written default management plan that
delineates the roles and responsibilities of its board of directors,
its risk management committee, any other committee that a derivatives
clearing organization may have that has responsibilities for default
management, and the derivatives clearing organization's management, in
addressing a default, including any necessary coordination with, or
notification of, other entities and regulators. Such plan shall address
any differences in procedures with respect to highly liquid products
and less liquid products. A derivatives clearing organization shall
conduct and document a test of its default management plan at least on
an annual basis. The derivatives clearing organization shall include
clearing members and participants in a test of its default management
plan at least on an annual basis to the extent the plan relies on their
participation.
(c) * * *
(1) A derivatives clearing organization shall have procedures that
would permit the derivatives clearing organization to take timely
action to contain losses and liquidity pressures and to continue
meeting its obligations in the event of a default on the obligations of
a clearing member to the derivatives clearing organization.
(2) A derivatives clearing organization shall have rules that set
forth its default procedures, including:
* * * * *
(ii) The actions that the derivatives clearing organization may
take upon a default, which shall include public notice of a declaration
of default on its website and the prompt transfer, liquidation, or
hedging of the customer or house positions of the defaulting clearing
member, as applicable, and which may include, in the discretion of the
derivatives clearing organization, the auctioning or allocation of such
positions to other clearing members;
(iii) * * *
[[Page 4858]]
(C) The derivatives clearing organization shall not require a
clearing member to bid for a portion of, or accept an allocation of,
the defaulting clearing member's positions that is not proportional to
the size of the bidding or accepting clearing member's positions in the
same product class at the derivatives clearing organization;
* * * * *
(d) * * *
(1) A derivatives clearing organization shall have rules that
require a clearing member to provide prompt notice to the derivatives
clearing organization if it becomes the subject of a bankruptcy
petition, receivership proceeding, or the equivalent;
* * * * *
(e) Fully collateralized positions. A derivatives clearing
organization may satisfy the requirements of paragraphs (a), (b), and
(c) of this section by having rules that permit it to clear only fully
collateralized positions.
0
17. In Sec. 39.17, revise paragraphs (a) introductory text, (a)(1) and
(3), and (b) to read as follows:
Sec. 39.17 Rule enforcement.
(a) General. A derivatives clearing organization shall:
(1) Maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance (by itself and its clearing
members) with the rules of the derivatives clearing organization and
the resolution of disputes;
* * * * *
(3) Report to the Commission regarding rule enforcement activities
and sanctions imposed against clearing members as provided in paragraph
(a)(2) of this section, in accordance with Sec. 39.19(c)(4)(xvi).
(b) Authority to enforce rules. The board of directors of the
derivatives clearing organization may delegate responsibility for
compliance with the requirements of paragraph (a) of this section to an
appropriate committee, unless the responsibilities are otherwise
required to be carried out by the chief compliance officer pursuant to
the Act or this part.
0
18. In Sec. 39.19, revise paragraphs (a), (b), (c) introductory text,
the paragraph (c)(1) subject heading, and paragraphs (c)(1)(i),
(c)(1)(ii) introductory text, (c)(1)(ii)(C), and (c)(2) through (5) to
read as follows:
Sec. 39.19 Reporting.
(a) General. A derivatives clearing organization shall provide to
the Commission the information specified in this section and any other
information that the Commission determines to be necessary to conduct
oversight of the derivatives clearing organization.
(b) Submission of reports--(1) General requirement. A derivatives
clearing organization shall submit the information required by this
section to the Commission in a format and manner specified by the
Commission.
(2) Certification. When making a submission pursuant to this
section, an employee of the derivatives clearing organization must
certify that he or she is duly authorized to make such a submission on
behalf of the derivatives clearing organization.
(3) Time zones. Unless otherwise specified by the Commission or its
designee, any stated time in this section is Central time for
information concerning derivatives clearing organizations located in
that time zone, and Eastern time for information concerning all other
derivatives clearing organizations.
(c) Reporting requirements. Each registered derivatives clearing
organization shall provide to the Commission or other person as may be
required or permitted by this paragraph (c) the information specified
as follows:
(1) Daily reporting. (i) A derivatives clearing organization shall
compile as of the end of each trading day, and submit to the Commission
by 10:00 a.m. on the next business day, a report containing the
following information related to all positions other than fully
collateralized positions:
(A) Initial margin requirements and initial margin on deposit for
each clearing member, by house origin and by each customer origin, and
by each individual customer account;
(B) Daily variation margin, separately listing the mark-to-market
amount collected from or paid to each clearing member, by house origin
and by each customer origin, and by each individual customer account;
(C) All other daily cash flows relating to clearing and settlement
including, but not limited to, option premiums and payments related to
swaps such as coupon amounts, collected from or paid to each clearing
member, by house origin and by each customer origin, and by each
individual customer account; and
(D) End-of-day positions, including as appropriate the risk
sensitivities and valuation data that the derivatives clearing
organization generates, creates, or calculates in connection with
managing the risks associated with such positions, for each clearing
member, by house origin and by each customer origin, and by each
individual customer account. The derivatives clearing organization
shall identify each individual customer account using both a legal
entity identifier and any internally-generated identifier, where
available, within each customer origin for each clearing member.
(ii) The report shall contain the information required by
paragraphs (c)(1)(i)(A) through (D) of this section for:
* * * * *
(C) All securities positions that are:
(1) Held in a customer account subject to section 4d of the Act; or
(2) Subject to a cross-margining agreement.
(2) Quarterly reporting. A derivatives clearing organization shall
provide to the Commission each fiscal quarter, or at any time upon
Commission request, a report of the derivatives clearing organization's
financial resources as required by Sec. 39.11(f)(1).
(3) Annual reporting. A derivatives clearing organization shall
provide to the Commission each year:
(i) The annual report of the chief compliance officer required by
Sec. 39.10; and
(ii) Audited year-end financial statements of the derivatives
clearing organization as required by Sec. 39.11(f)(2).
(iii) [Reserved]
(iv) The reports required by this paragraph (c)(3) shall be filed
not later than 90 days after the end of the derivatives clearing
organization's fiscal year, or at such later time as the Commission may
permit, in its discretion, upon request by the derivatives clearing
organization.
(4) Event-specific reporting--(i) Decrease in financial resources.
If there is a decrease of 25 percent or more in the total value of the
financial resources available to satisfy the requirements under Sec.
39.11(a)(1) or Sec. 39.33(a), as applicable, either from the last
quarterly report submitted under Sec. 39.11(f) or from the value as of
the close of the previous business day, a derivatives clearing
organization shall report such decrease to the Commission no later than
one business day following the day the 25 percent threshold was
reached. The report shall include:
(A) The total value of the financial resources as of the close of
business the day the 25 percent threshold was reached;
(B) If reporting a decrease in value from the previous business
day, the total value of the financial resources immediately prior to
the 25 percent decline;
(C) A breakdown of the value of each financial resource reported in
each of
[[Page 4859]]
paragraphs (c)(4)(i)(A) and (B) of this section, calculated in
accordance with the requirements of Sec. 39.11(d) or Sec. 39.33(b),
as applicable, including the value of each individual clearing member's
guaranty fund deposit if the derivatives clearing organization reports
guaranty fund deposits as a financial resource; and
(D) A detailed explanation for the decrease.
(ii) Decrease in liquidity resources. If there is a decrease of 25
percent or more in the total value of the liquidity resources available
to satisfy the requirements under Sec. 39.11(e) or Sec. 39.33(c), as
applicable, either from the last quarterly report submitted under Sec.
39.11(f) or from the value as of the close of the previous business
day, a derivatives clearing organization shall report such decrease to
the Commission no later than one business day following the day the 25
percent threshold was reached. The report shall include:
(A) The total value of the liquidity resources as of the close of
business the day the 25 percent threshold was reached;
(B) If reporting a decrease in value from the previous business
day, the total value of the liquidity resources immediately prior to
the 25 percent decline;
(C) A breakdown of the value of each liquidity resource reported in
each of paragraphs (c)(4)(ii)(A) and (B) of this section, calculated in
accordance with the requirements of Sec. 39.11(e) or Sec. 39.33(c),
as applicable, including the value of each individual clearing member's
guaranty fund deposit if the derivatives clearing organization reports
guaranty fund deposits as a liquidity resource; and
(D) A detailed explanation for the decrease.
(iii) Decrease in ownership equity. A derivatives clearing
organization shall report to the Commission no later than two business
days prior to an event which the derivatives clearing organization
knows or reasonably should know will cause a decrease of 20 percent or
more in ownership equity from the last reported ownership equity
balance as reported on a quarterly or audited financial statement
required to be submitted by paragraph (c)(2) or (c)(3)(ii),
respectively, of this section; but in any event no later than two
business days after such decrease in ownership equity for events that
caused the decrease about which the derivatives clearing organization
did not know and reasonably could not have known prior to the event.
The report shall include:
(A) Pro forma financial statements reflecting the derivatives
clearing organization's estimated future financial condition following
the anticipated decrease for reports submitted prior to the anticipated
decrease and current financial statements for reports submitted after
such a decrease; and
(B) A detailed explanation for the decrease or anticipated decrease
in the balance.
(iv) Six-month liquid asset requirement. A derivatives clearing
organization shall notify the Commission immediately when the
derivatives clearing organization knows or reasonably should know of a
deficit in the six-month liquid asset requirement of Sec. 39.11(e)(2).
(v) Change in current assets. A derivatives clearing organization
shall notify the Commission no later than two business days after the
derivatives clearing organization's current liabilities exceed its
current assets. The notice shall include a balance sheet that reflects
the derivatives clearing organization's current assets and current
liabilities and an explanation as to the reason for the negative
balance.
(vi) Request to clearing member to reduce its positions. A
derivatives clearing organization shall notify the Commission
immediately of a request by the derivatives clearing organization to
one of its clearing members to reduce the clearing member's positions.
The notice shall include:
(A) The name of the clearing member;
(B) The time the clearing member was contacted;
(C) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, by which the
derivatives clearing organization requested the reduction;
(D) All products that are the subject of the request; and
(E) The reason for the request.
(vii) Determination to transfer or liquidate positions. A
derivatives clearing organization shall notify the Commission
immediately of a determination by the derivatives clearing organization
that a position it carries for one of its clearing members must be
liquidated immediately or transferred immediately, or that the trading
of any account of a clearing member shall be only for the purpose of
liquidation because that clearing member has failed to meet an initial
or variation margin call or has failed to fulfill any other financial
obligation to the derivatives clearing organization. The notice shall
include:
(A) The name of the clearing member;
(B) The time the clearing member was contacted;
(C) The products that are subject to the determination;
(D) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, that are subject
to the determination; and
(E) The reason for the determination.
(viii) Default of a clearing member. A derivatives clearing
organization shall notify the Commission immediately of the default of
a clearing member. An event of default shall be determined in
accordance with the rules of the derivatives clearing organization. The
notice of default shall include:
(A) The name of the clearing member;
(B) The products the clearing member defaulted upon;
(C) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, the clearing
member defaulted upon; and
(D) The amount of the financial obligation.
(ix) Change in ownership or corporate or organizational structure--
(A) Reporting requirement. A derivatives clearing organization shall
report to the Commission any anticipated change in the ownership or
corporate or organizational structure of the derivatives clearing
organization or its parent(s) that would:
(1) Result in at least a 10 percent change of ownership of the
derivatives clearing organization;
(2) Create a new subsidiary or eliminate a current subsidiary of
the derivatives clearing organization; or
(3) Result in the transfer of all or substantially all of the
assets of the derivatives clearing organization to another legal
entity.
(B) Required information. The report shall include: A chart
outlining the new ownership or corporate or organizational structure; a
brief description of the purpose and impact of the change; and any
relevant agreements effecting the change and corporate documents such
as articles of incorporation and bylaws.
(C) Time of report. The report shall be submitted to the Commission
no later than three months prior to the anticipated change, provided
that the derivatives clearing organization may report the anticipated
change to the Commission later than three months prior to the
anticipated change if the derivatives clearing organization does not
know and reasonably could not have known of the anticipated change
three months prior to the anticipated change. In such event, the
derivatives clearing
[[Page 4860]]
organization shall immediately report such change to the Commission as
soon as it knows of such change.
(D) Confirmation of change report. The derivatives clearing
organization shall report to the Commission the consummation of the
change no later than two business days following the effective date of
the change.
(x) Change in key personnel. A derivatives clearing organization
shall report to the Commission no later than two business days
following the departure or addition of persons who are key personnel as
defined in Sec. 39.2. The report shall include, as applicable, the
name and contact information of the person who will assume the duties
of the position permanently or the person who will assume the duties on
a temporary basis until a permanent replacement fills the position.
(xi) Change in legal name. A derivatives clearing organization
shall report to the Commission no later than two business days
following a legal name change of the derivatives clearing organization.
(xii) Change in credit facility funding arrangement. A derivatives
clearing organization shall report to the Commission no later than one
business day after the derivatives clearing organization changes a
credit facility funding arrangement it has in place, or is notified
that such arrangement has changed, including but not limited to a
change in lender, change in the size of the facility, change in
expiration date, or any other material changes or conditions.
(xiii) Change in liquidity funding arrangement. A derivatives
clearing organization shall report to the Commission no later than one
business day after the derivatives clearing organization changes a
liquidity funding arrangement it has in place, or is notified that such
arrangement has changed, including but not limited to a change in
provider, change in the size of the facility, change in expiration
date, or any other material changes or conditions.
(xiv) Change in settlement bank arrangements. A derivatives
clearing organization shall report to the Commission no later than
three business days after the derivatives clearing organization enters
into a new relationship with, or terminates a relationship with, any
settlement bank used by the derivatives clearing organization or
approved for use by the derivatives clearing organization's clearing
members.
(xv) Settlement bank issues. A derivatives clearing organization
shall report to the Commission no later than one business day after any
material issues or concerns arise regarding the performance, stability,
liquidity, or financial resources of any settlement bank used by the
derivatives clearing organization or approved for use by the
derivatives clearing organization's clearing members.
(xvi) Sanctions against a clearing member. A derivatives clearing
organization shall provide notice to the Commission no later than two
business days after the derivatives clearing organization imposes
sanctions against a clearing member.
(xvii) Financial condition and events. A derivatives clearing
organization shall provide to the Commission immediate notice after the
derivatives clearing organization knows or reasonably should have known
of:
(A) The institution of any legal proceedings which may have a
material adverse financial impact on the derivatives clearing
organization;
(B) Any event, circumstance or situation that materially impedes
the derivatives clearing organization's ability to comply with this
part and is not otherwise required to be reported under this section;
or
(C) A material adverse change in the financial condition of any
clearing member that is not otherwise required to be reported under
this section.
(xviii) Financial statements material inadequacies. A derivatives
clearing organization shall provide notice to the Commission within 24
hours if the derivatives clearing organization discovers or is notified
by an independent public accountant of the existence of any material
inadequacy in a financial statement, and within 48 hours after giving
such notice provide a written report stating what steps have been and
are being taken to correct the material inadequacy.
(xix) Change in fiscal year. A derivatives clearing organization
shall report to the Commission no later than two business days after
any change to the start and end dates of its fiscal year.
(xx) Change in independent accounting firm. A derivatives clearing
organization shall report to the Commission no later than 15 days after
any change in the derivatives clearing organization's independent
public accounting firm. The report shall include the date of such
change, the name and contact information of the new firm, and the
reason for the change.
(xxi) Major decision of the board of directors. A derivatives
clearing organization shall report to the Commission any major decision
of the derivatives clearing organization's board of directors as
required by Sec. 39.24(a)(3)(i).
(xxii) System safeguards. A derivatives clearing organization shall
report to the Commission:
(A) Exceptional events as required by Sec. 39.18(g); or
(B) Planned changes as required by Sec. 39.18(h).
(xxiii) Margin model issues. A derivatives clearing organization
shall report to the Commission no later than one business day after any
issue occurs with a DCO's margin model, including margin models for
cross-margined portfolios, that materially affects the DCO's ability to
calculate or collect initial margin or variation margin.
(xxiv) Recovery and wind-down plans. A derivatives clearing
organization that is required to maintain recovery and wind-down plans
pursuant to Sec. 39.39(b) shall submit its plans to the Commission no
later than the date on which the derivatives clearing organization is
required to have the plans. A derivatives clearing organization that is
not required to maintain recovery and wind-down plans pursuant to Sec.
39.39(b), but which nonetheless maintains such plans, may choose to
submit its plans to the Commission. A derivatives clearing organization
that has submitted its recovery and wind-down plans to the Commission
shall, upon making any revisions to the plans, submit the revised plans
to the Commission along with a description of the changes and the
reason for those changes.
(5) Requested reporting. A derivatives clearing organization shall
provide upon request by the Commission and within the time specified in
the request:
(i) Any information related to its business as a clearing
organization, including information relating to trade and clearing
details.
(ii) A written demonstration, containing supporting data,
information and documents, that the derivatives clearing organization
is in compliance with one or more core principles and relevant
provisions of this part.
0
19. In Sec. 39.20, revise paragraphs (a) introductory text and (b)(2)
to read as follows:
Sec. 39.20 Recordkeeping.
(a) Requirement to maintain information. A derivatives clearing
organization shall maintain records of all activities related to its
business as a derivatives clearing organization. Such records shall
include, but are not limited to, records of:
* * * * *
(b) * * *
[[Page 4861]]
(2) Exception for swap data. A derivatives clearing organization
that clears swaps must maintain swap data in accordance with the
requirements of part 45 of this chapter.
0
20. In Sec. 39.21:
0
a. Revise paragraphs (a), (b), (c) introductory text, and (c)(3)
through (7);
0
b. Add paragraphs (c)(8) and (9); and
0
c. Remove paragraph (d).
The revisions and additions read as follows:
Sec. 39.21 Public information.
(a) General. A derivatives clearing organization shall provide to
market participants sufficient information to enable the market
participants to identify and evaluate accurately the risks and costs
associated with using the services of the derivatives clearing
organization. In furtherance of the objective in this paragraph (a), a
derivatives clearing organization shall have clear and comprehensive
rules and procedures.
(b) Availability of information. A derivatives clearing
organization shall make information concerning the rules and the
operating and default procedures governing the clearing and settlement
systems of the derivatives clearing organization available to market
participants.
(c) Public disclosure. A derivatives clearing organization shall
make the following information readily available to the general public,
in a timely manner, by posting such information on the derivatives
clearing organization's website, unless otherwise permitted by the
Commission:
* * * * *
(3) Information concerning its margin-setting methodology;
(4) The size and composition of the financial resource package
available in the event of a clearing member default, updated as of the
end of the most recent fiscal quarter or upon Commission request and
posted as promptly as practicable after submission of the report to the
Commission under Sec. 39.11(f)(1)(i)(A);
(5) Daily settlement prices, volume, and open interest for each
contract, agreement, or transaction cleared or settled by the
derivatives clearing organization, posted no later than the business
day following the day to which the information pertains;
(6) The derivatives clearing organization's rulebook, including
rules and procedures for defaults in accordance with Sec. 39.16;
(7) A current list of all clearing members;
(8) A list of all swaps that the derivatives clearing organization
will accept for clearing that identifies which swaps on the list are
required to be cleared, in accordance with Sec. 50.3(a) of this
chapter; and
(9) Any other information that is relevant to participation in the
clearing and settlement activities of the derivatives clearing
organization.
0
21. Revise Sec. 39.22 to read as follows:
Sec. 39.22 Information sharing.
A derivatives clearing organization shall enter into, and abide by
the terms of, each appropriate and applicable domestic and
international information-sharing agreement, and shall use relevant
information obtained from each such agreement in carrying out the risk
management program of the derivatives clearing organization.
0
22. Add Sec. 39.24 to read as follows:
Sec. 39.24 Governance.
(a) General. (1) A derivatives clearing organization shall have
governance arrangements that:
(i) Are written;
(ii) Are clear and transparent;
(iii) Place a high priority on the safety and efficiency of the
derivatives clearing organization; and
(iv) Explicitly support the stability of the broader financial
system and other relevant public interest considerations of clearing
members, customers of clearing members, and other relevant
stakeholders.
(2) The board of directors shall make certain that the derivatives
clearing organization's design, rules, overall strategy, and major
decisions appropriately reflect the legitimate interests of clearing
members, customers of clearing members, and other relevant
stakeholders.
(3) To the extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure:
(i) Major decisions of the board of directors shall be clearly
disclosed to clearing members, other relevant stakeholders, and to the
Commission; and
(ii) Major decisions of the board of directors having a broad
market impact shall be clearly disclosed to the public.
(b) Governance arrangement requirements. A derivatives clearing
organization shall have governance arrangements that:
(1) Are clear and documented;
(2) To an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure, are disclosed, as
appropriate, to the Commission, other relevant authorities, clearing
members, customers of clearing members, owners of the derivatives
clearing organization, and to the public;
(3) Describe the structure pursuant to which the board of
directors, committees, and management operate;
(4) Include clear and direct lines of responsibility and
accountability;
(5) Clearly specify the roles and responsibilities of the board of
directors and its committees, including the establishment of a clear
and documented risk management framework;
(6) Clearly specify the roles and responsibilities of management;
(7) Describe procedures pursuant to which the board of directors
oversees the chief risk officer, risk management committee, and
material risk decisions;
(8) Provide risk management and internal control personnel with
sufficient independence, authority, resources, and access to the board
of directors so that the operations of the derivatives clearing
organization are consistent with the risk management framework
established by the board of directors;
(9) Assign responsibility and accountability for risk decisions,
including in crises and emergencies; and
(10) Assign responsibility for implementing the:
(i) Default rules and procedures required by Sec. Sec. 39.16 and
39.35, as applicable;
(ii) System safeguard rules and procedures required by Sec. Sec.
39.18 and 39.34, as applicable; and
(iii) Recovery and wind-down plans required by Sec. 39.39, as
applicable.
(c) Fitness standards. (1) A derivatives clearing organization
shall establish and enforce appropriate fitness standards for:
(i) Directors;
(ii) Members of any disciplinary committee;
(iii) Members of the derivatives clearing organization;
(iv) Any other individual or entity with direct access to the
settlement or clearing activities of the derivatives clearing
organization; and
(v) Any other party affiliated with any individual or entity
described in this paragraph.
(2) A derivatives clearing organization shall maintain policies to
make certain that:
(i) The board of directors consists of suitable individuals having
appropriate skills and incentives;
(ii) The performance of the board of directors and the performance
of individual directors is reviewed on a regular basis; and
(iii) Managers have the appropriate experience, skills, and
integrity necessary to discharge operational and risk management
responsibilities.
[[Page 4862]]
0
23. Add Sec. 39.25 to read as follows:
Sec. 39.25 Conflicts of interest.
A derivatives clearing organization shall:
(a) Establish and enforce rules to minimize conflicts of interest
in the decision-making process of the derivatives clearing
organization;
(b) Establish a process for resolving such conflicts of interest;
and
(c) Describe procedures for identifying, addressing, and managing
conflicts of interest involving members of the board of directors.
0
24. Add Sec. 39.26 to read as follows:
Sec. 39.26 Composition of governing boards.
A derivatives clearing organization shall ensure that the
composition of the governing board or board-level committee of the
derivatives clearing organization includes market participants and
individuals who are not executives, officers, or employees of the
derivatives clearing organization or an affiliate thereof.
0
25. In Sec. 39.27, add paragraph (c)(3) to read as follows:
Sec. 39.27 Legal risk considerations.
* * * * *
(c) * * *
(3) The derivatives clearing organization shall ensure on an
ongoing basis that the memorandum required in paragraph (b) of Exhibit
R to appendix A to this part is accurate and up to date and shall
submit an updated memorandum to the Commission promptly following all
material changes to the analysis or content contained in the
memorandum.
Sec. 39.32 [Removed and Reserved]
0
26. Remove and reserve Sec. 39.32.
0
27. In Sec. 39.33, revise paragraphs (a)(1) and (c)(1)(i) and add
paragraph (d)(5) to read as follows:
Sec. 39.33 Financial resources requirements for systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations.
(a) * * *
(1) Notwithstanding the requirements of Sec. 39.11(a)(1), each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization that, in either case, is systemically
important in multiple jurisdictions or is involved in activities with a
more complex risk profile shall maintain financial resources sufficient
to enable it to meet its financial obligations to its clearing members
notwithstanding a default by the two clearing members creating the
largest combined financial exposure to the derivatives clearing
organization in extreme but plausible market conditions.
* * * * *
(c) * * *
(1) * * *
(i) Notwithstanding the provisions of Sec. 39.11(e)(1)(ii), each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain eligible liquidity
resources, in all relevant currencies, that, at a minimum, will enable
it to meet its intraday, same-day, and multiday obligations to perform
settlements, as defined in Sec. 39.14(a)(1), with a high degree of
confidence under a wide range of stress scenarios that should include,
but not be limited to, a default by the clearing member creating the
largest aggregate liquidity obligation for the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization in extreme but plausible market conditions.
* * * * *
(d) * * *
(5) A systemically important derivatives clearing organization with
access to accounts and services at a Federal Reserve Bank, pursuant to
section 806(a) of the Dodd-Frank Act, 12 U.S.C. 5465(a), shall use such
accounts and services where practical.
* * * * *
0
28. In Sec. 39.36, revise paragraphs (a)(5)(ii), (a)(6), (b)(2)(ii),
(d), and (e) to read as follows:
Sec. 39.36 Risk management for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
(a) * * *
(5) * * *
(ii) Using the results to assess the adequacy of, and to adjust,
its total amount of financial resources; and
(6) Use the results of stress tests to support compliance with the
minimum financial resources requirement set forth in Sec. 39.11(a)(1)
or Sec. 39.33(a), as applicable.
(b) * * *
(2) * * *
(ii) Testing of the ability of the models or model components to
react appropriately using actual or hypothetical datasets and assessing
the impact of different model parameter settings.
* * * * *
(d) Margin model assessment. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall conduct, on at least an annual basis (or more
frequently if there are material relevant market developments), an
assessment of the theoretical and empirical properties of its margin
model for all products it clears.
(e) Independent validation. Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
shall perform, on an annual basis, a full validation of its financial
risk management model and its liquidity risk management model.
* * * * *
0
29. In Sec. 39.37, revise paragraphs (b) and (c) to read as follows:
Sec. 39.37 Additional disclosure for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
* * * * *
(b)(1) Review and update its responses disclosed as required by
paragraph (a) of this section at least every two years and following
material changes to the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's system
or the environment in which it operates. A material change to the
systemically important derivatives clearing organization's or subpart C
derivatives clearing organization's system or the environment in which
it operates is a change that would significantly change the accuracy
and usefulness of the existing responses; and
(2) Provide notice to the Commission of updates to its responses
required by paragraph (b)(1) of this section following material changes
no later than ten business days after the updates are made. Such notice
shall be accompanied by a copy of the text of the responses that shows
all deletions and additions made to the immediately preceding version
of the responses;
(c) Disclose, publicly and to the Commission, relevant basic data
on transaction volume and values consistent with the standards set
forth in the Public Quantitative Disclosure Standards for Central
Counterparties published by the Committee on Payments and Market
Infrastructures and the International Organization of Securities
Commissions;
* * * * *
0
30. In Sec. 39.39, revise paragraph (a)(2) to read as follows:
Sec. 39.39 Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
(a) * * *
[[Page 4863]]
(2) Wind-down means the actions of a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to effect the permanent cessation or sale or transfer of
one or more services.
* * * * *
0
31. Revise Appendix A to part 39 to read as follows:
Appendix A to Part 39--Form DCO Derivatives Clearing Organization
Application for Registration
BILLING CODE 6351-01-P
[[Page 4864]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.000
[[Page 4865]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.001
[[Page 4866]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.002
[[Page 4867]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.003
[[Page 4868]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.004
[[Page 4869]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.005
[[Page 4870]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.006
[[Page 4871]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.007
[[Page 4872]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.008
[[Page 4873]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.009
[[Page 4874]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.010
[[Page 4875]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.011
[[Page 4876]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.012
[[Page 4877]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.013
[[Page 4878]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.014
[[Page 4879]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.015
[[Page 4880]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.016
[[Page 4881]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.017
[[Page 4882]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.018
[[Page 4883]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.019
[[Page 4884]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.020
[[Page 4885]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.021
[[Page 4886]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.022
[[Page 4887]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.023
[[Page 4888]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.024
[[Page 4889]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.025
[[Page 4890]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.026
[[Page 4891]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.027
0
32. Revise Appendix B to part 39 to read as follows:
Appendix B to Part 39--Subpart C Election Form
[[Page 4892]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.028
[[Page 4893]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.029
[[Page 4894]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.030
[[Page 4895]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.031
[[Page 4896]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.032
[[Page 4897]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.033
[[Page 4898]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.034
[[Page 4899]]
[GRAPHIC] [TIFF OMITTED] TR27JA20.035
[[Page 4900]]
BILLING CODE 6351-01-C
PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
0
33. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and
16(b).
0
34. In Sec. 140.94, revise paragraphs (c)(1) and (c)(4) through (13)
to read as follows:
Sec. 140.94 Delegation of authority to the Director of the Division
of Swap Dealer and Intermediary Oversight and the Director of the
Division of Clearing and Risk.
* * * * *
(c) * * *
(1) The authority to review applications for registration as a
derivatives clearing organization filed with the Commission under Sec.
39.3(a)(1) of this chapter, to determine that an application is
materially complete pursuant to Sec. 39.3(a)(2) of this chapter, to
request additional information in support of an application pursuant to
Sec. 39.3(a)(3) of this chapter, to extend the review period for an
application pursuant to Sec. 39.3(a)(6) of this chapter, to stay the
running of the 180-day review period if an application is incomplete
pursuant to Sec. 39.3(b)(1) of this chapter, to review requests for
amendments to orders of registration filed with the Commission under
Sec. 39.3(d)(1) of this chapter, to request additional information in
support of a request for an amendment to an order of registration
pursuant to Sec. 39.3(d)(2) of this chapter, and to request additional
information in support of a rule submission pursuant to Sec.
39.3(g)(3) of this chapter;
* * * * *
(4) All functions reserved to the Commission in Sec.
39.10(c)(4)(iv) of this chapter;
(5) All functions reserved to the Commission in Sec.
39.11(b)(1)(v), (b)(2)(ii), (c)(1) and (3), and (f)(1), and (2) of this
chapter;
(6) All functions reserved to the Commission in Sec.
39.12(a)(5)(iii) of this chapter;
(7) All functions reserved to the Commission in Sec.
39.13(g)(8)(ii), (h)(1)(i)(C), (h)(1)(ii), (h)(3)(i) and (ii), and
(h)(5)(i)(C) of this chapter;
(8) The authority to request additional information in support of a
rule submission under Sec. Sec. 39.13(i)(2) and 39.15(b)(2)(iii) of
this chapter;
(9) All functions reserved to the Commission in Sec. 39.19(c)(2),
(c)(3)(iv), and (c)(5) of this chapter;
(10) All functions reserved to the Commission in Sec. 39.20(a)(5)
of this chapter;
(11) All functions reserved to the Commission in Sec. 39.21(c) of
this chapter;
(12) All functions reserved to the Commission in Sec. 39.31 of
this chapter; and
(13) The authority to approve the requests described in Sec. Sec.
39.34(d) and 39.39(f) of this chapter.
* * * * *
Issued in Washington, DC, on December 20, 2019, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Derivatives Clearing Organization General Provisions and
Core Principles--Commission Voting Summary, Chairman's Statement, and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Heath P. Tarbert
Clearinghouses--often called central counterparties or CCPs--are
what make our futures, options, and much of our swaps markets work.
Once a buyer and seller enter into a derivatives trade, the CCP
takes on each party's credit risk for the duration of the contract.
Hundreds of thousands of trades occur in the United States because
market participants never need to worry about counterparties not
making good on their payment obligations. The entire risk of an
exchange or even several exchanges is centralized within a given
CCP. As a consequence, CCPs are the ``risk controllers'' \1\ that
stand at the very epicenter of our markets.
---------------------------------------------------------------------------
\1\ See Peter Norman, The Risk Controllers: Central Counterparty
Clearing in Globalized Financial Markets, John Wiley and Sons, Ltd.
(2011).
---------------------------------------------------------------------------
As Chairman, I have emphasized that one of the most critical
responsibilities of the CFTC is supervising CCPs on a daily
basis.\2\ When the term ``prudential regulators'' is thrown around
in Washington, the CFTC is usually excluded from the list. Nothing
could be more misleading. The CFTC's role as the nation's prudential
regulator for derivatives clearinghouses is part of the reason
American CCPs are undoubtedly the strongest and most resilient in
the world.\3\
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\2\ See Chairman Heath P. Tarbert, ``Why the CFTC is the most
important regulator you've never heard of,'' Fox Business (July 29,
2019), available at: https://www.foxbusiness.com/financials/why-the-cftc-is-the-most-important-regulator-youve-never-heard-of.
\3\ Id.
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Part 39 of our regulations implements our statutory principles-
based framework for the supervision and regulation of derivatives
clearinghouses.\4\ Our framework focuses on all key aspects of CCP
operations, including financial resources, member eligibility, risk
management, and system safeguards. It is incumbent upon us to revise
Part 39 at regular intervals to ensure it remains up-to-date as
technology and other market-driven changes come to the fore.
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\4\ 17 CFR part 39.
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I am therefore pleased to support the final amendments to Part
39 before the Commission today. The final amendments \5\ represent
the codification of close to a decade of best practices and
procedures adopted by CCPs in accordance with our core principles.
In promulgating these amendments, we are also making good on our
promise to strengthen the regulation of CCPs and to make our
regulations more transparent to all market participants.
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\5\ As important as these amendments are, they do not address a
number of emergent issues relating to CCP risk, governance, and
default procedures. Many of these important issues will soon be
taken up by the CCP Risk and Governance Subcommittee of our Market
Risk Advisory Committee. I look forward to their consideration and
the public discussion that it will foster.
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Appendix 3--Statement of Commissioner Brian D. Quintenz
I am pleased to support today's final rule that amends the
Commission's regulations governing derivatives clearing
organizations (DCOs).\1\
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\1\ The CFTC's regulations for DCOs are codified in part 39 (17
CFR part 39).
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Before highlighting aspects of the final rule, I would like to
review the importance of central clearing, DCOs, and the
Commission's oversight over these institutions. DCOs play a truly
crucial role in the futures and swap markets by serving as a central
counterparty to every transaction that they clear. When a
transaction is cleared, the DCO guarantees performance of the
contract until final settlement so that market participants do not
bear counterparty credit risk to each other. The DCO sets collateral
and daily-mark-to-market requirements, according to rules enforced
by the CFTC, and otherwise maintains the financial integrity of
cleared transactions, under CFTC-supervision. The CFTC's Division of
Clearing and Risk (DCR) regularly examines DCOs for compliance with
the Commission's regulations; reviews new DCO rules; and assesses
how DCOs manage market and liquidity risks.
Central clearing has long been a hallmark of the futures market,
dating back to the 1920s and functioning extremely well since then.
Following Congress' 2010 amendments to the Commodity Exchange Act
(CEA),\2\ CFTC-regulated DCOs began clearing interest rate swaps and
credit default swaps pursuant to revised statutory core principles
\3\ and revised CFTC DCO regulations.\4\ Sixteen
[[Page 4901]]
DCOs, located in the U.S., Canada, the U.K, France, Germany, and
Singapore, are currently registered with the Commission to clear a
diverse set of derivatives ranging from agricultural, energy, and
Bitcoin futures, to overnight index swaps, to foreign exchange
options.\5\ Every day, these sixteen DCOs settle over $10 billion in
daily mark-to-market obligations and hold over $450 billion in
initial margin collateral.\6\ Financial institutions, commercial
end-users, and retail investors rely on the continued success of
DCOs in order to ensure the integrity of their risk management
transactions. The public also relies on the CFTC to ensure that DCOs
are subject to meaningful regulations that prevent undue risk, while
also providing DCOs with sufficient discretion to manage aspects of
their operations that they are best equipped to handle without
unnecessary government intervention. Today's final version of
revised regulations for DCOs includes carefully considered
enhancements which the Commission believes DCOs can fulfill without
incurring overly burdensome compliance costs.
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\2\ Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010).
\3\ Sec. 5b of the CEA.
\4\ The current version of the CFTC's DCO regulations was
promulgated in 2011 (DCO General Provisions and Core Principles, 76
FR 69334 (Nov. 8, 2011)).
\5\ The list of registered DCOs is available on the CFTC's
website at, https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations.
\6\ These figures represent daily averages over the past month
and concern only products within the Commission's jurisdiction.
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I am proud that the CFTC is one of only a few authorities around
the world to have issued DCO rules that are consistent with the
internationally-recognized CPMI-IOSCO Principles for Financial
Market Infrastructures (PFMIs).\7\ The Commission was a leader in
both the development of the PFMIs as well as adopting rules
consistent with the PFMIs, having done so in 2013.\8\ The CFTC's
rules for DCOs were augmented again in 2016 to include industry-
accepted best practices for cybersecurity, business continuity, and
disaster recovery.\9\
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\7\ The PFMIs are available at, https://www.bis.org/cpmi/info_pfmi.htm.
\8\ DCOs and International Standards, 78 FR 72476 (Dec. 2,
2013).
\9\ System Safeguards Testing Requirements for DCOs, 81 FR 64322
(Sept. 19, 2016). In 2016, the Commission also instituted similar
requirements for DCMs, SEFs and SDRs (81 FR 64272 (Sept. 19, 2016)).
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The amendments set forth in today's final rule include new
requirements for: Governance; reporting clearing members' positions
to the Commission; reporting changes in liquidity funding and
settlement bank arrangements; determining initial margin
requirements; default management procedures; enterprise risk
management; reviewing haircuts on assets submitted as initial
margin; exemptions for DCOs clearing only fully-collateralized
contracts; cross-margining programs; transfers of open interest; and
public disclosures issued in response to an CPMI-IOSCO
initiative.\10\
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\10\ Revised and new regulations 39.3(g); 39.10(d); 39.11(c) and
(e); 39.13(f), (g)(3), (g)(8), and (i); 39.16(c), 39.19(c); 39.26;
and 39.37(c).
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I would like to highlight some of the provisions of the final
rule. Regarding reporting to the Commission, a DCO will be required
to report daily the amounts of initial and variation margin for
``individual customer accounts'' held within each futures commission
merchant (FCM)-clearing member's overall ``customer account.'' \11\
Such individual customer accounts include individual funds sponsored
by an asset manager and an asset manager's separate accounts for
institutional investors. DCR can use this information to more
precisely assess the risks and exposures of a DCO's clearing
members. In adopting this new requirement, the Commission noted that
much of this information is already reported, meaning the burden to
comply with the revised rule should be minimal. Regarding default
management, the final rule requires a DCO to include clearing
members in annual tests of its default management plan.\12\ Finally,
I note that while the proposal would have required a DCO to file a
new report with the Commission 30 days in advance of clearing a new
product,\13\ the final rule eliminates this requirement, noting that
both designated contract markets (DCMs) and swap execution
facilities (SEFs) already file notices of new product offerings with
the Commission under the ``self-certification'' process.
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\11\ Revised regulation 39.19(c)(1)(i).
\12\ Revised regulation 39.16(b).
\13\ Proposed regulation 39.19(c)(4)(xxvi).
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In conclusion, I am pleased that in finalizing these new rules,
the Commission has genuinely taken the public's comments into
account, reviewing input not only from the DCOs themselves, but also
from the market participants that clear their trades at DCOs,
including investment funds, futures commission merchants, and other
financial institutions. I recognize that commenters raised important
issues that are beyond the scope of, or not included in, today's
rulemaking concerning the relationship between a DCO and its
members. While the Commission will continue to consider the public's
views on these issues, the Commission is focused on ensuring DCOs
comply with the CEA's core principles. I hope that the DCOs, their
members, and their members' customers can continue working in good
faith to find constructive solutions to other issues not included
here.
[FR Doc. 2020-01065 Filed 1-24-20; 8:45 am]
BILLING CODE 6351-01-P