# Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2012-16233 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** July 13, 2012 - **Citation:** 77 FR 41602 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249 [Release No. 34-67286; File No. S7-44-10] RIN 3235-AK87 Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: In accordance with Section 763(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the Securities and Exchange Commission (“Commission”) is adopting rules under the Securities Exchange Act of 1934 (“Exchange Act”) to specify the process for a registered clearing agency's submission for review of any security-based swap, or any group, category, type or class of security-based swaps, that the clearing agency plans to accept for clearing, the manner of notice the clearing agency must provide to its members of such submission and the procedure by which the Commission may stay the requirement that a security-based swap is subject to mandatory clearing while the clearing of the security-based swap is reviewed. The Commission also is adopting a rule to specify that when a security-based swap is required to be cleared, the submission of the security-based swap for clearing must be for central clearing to a clearing agency that functions as a central counterparty. In addition, the Commission is adopting rules to define and describe when notices of proposed changes to rules, procedures or operations are required to be filed by designated financial market utilities in accordance with Section 806(e) of Title VIII of the Dodd-Frank Act and to set forth the process for filing such notices with the Commission. Finally, the Commission is adopting rules to make conforming changes as required by the amendments to Section 19(b) of the Exchange Act contained in Section 916 of the Dodd-Frank Act. DATES: Effective Dates: August 13, 2012 for §§ 240.3Ca-1, 240.3Ca-2, and the amendments to 240.19b-4; December 10, 2012 for all amendments to § 249.819 and Form 19b-4. Compliance Dates: August 13, 2012 for §§ 240.3Ca-1, 240.3Ca-2, and the amendments to § 240.19b-4, except for the compliance date for § 240.19b-4(o), which is discussed in the section of the release titled “II.G. Effective and Compliance Dates”; December 10, 2012 for all amendments to § 249.819 and Form 19b-4. FOR FURTHER INFORMATION CONTACT: Catherine Moore, Senior Special Counsel, Kenneth Riitho, Special Counsel or Andrew Bernstein, Special Counsel, at (202) 551-5710; Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010. SUPPLEMENTARY INFORMATION: Table of Contents I. Background II. Discussion A. Security-Based Swap Submissions 1. Process for Making Security-Based Swap Submission to the Commission a. Substance of Security-Based Swap Submissions: Consistency With Section 17A of the Exchange Act b. Substance of Security-Based Swap Submissions: Quantitative and Qualitative Factors c. Substance of Security-Based Swap Submissions: Open Access d. Timing of Security-Based Swap Submissions e. Notice to Clearing Agency Members f. Submissions of a Group, Type or Class of Security-Based Swaps g. Other Issues Related to Security-Based Swap Submissions h. Additional Comments 2. Prevention of Evasion of the Clearing Requirement B. Stay of the Clearing Requirement and Review by the Commission C. Title VIII Notice Filing Requirements for Designated Clearing Agencies 1. Standards for Determining When Advance Notice Is Required 2. Providing Notice of the Matters Included in an Advance Notice to the Board and Interested Persons 3. Timing and Determination of Advance Notice Pursuant to Section 806(e) 4. Implementation of Proposed Changes and Emergency Changes Pursuant to Section 806(e) D. Amendments to Form 19b-4 E. Amendments to Rule 19b-4 Relating to Section 916 of the Dodd-Frank Act F. New Requirements Under Exchange Act Section 3C and Section 806(e) and the Existing Filing Requirements in Exchange Act Section 19(b) G. Effective and Compliance Dates III. Paperwork Reduction Act A. Summary of Collection of Information 1. Amendments to Rule 19b-4 and Form 19b-4 2. Stay of Clearing Requirement B. Use of Information 1. Amendments to Rule 19b-4 and Form 19b-4 2. Stay of Clearing Requirements C. Respondents 1. Amendments to Rule 19b-4 and Form 19b-4 2. Stay of Clearing Requirement D. Total Annual Reporting and Recordkeeping Burden 1. Background 2. Rule 19b-4 and Form 19b-4 a. Introduction b. Internal Policies and Procedures c. Proposed Rule Changes d. Security-Based Swap Submissions e. Advance Notices f. Summary 3. Posting of Security-Based Swap Submissions, Advance Notices and Proposed Rule Changes on Clearing Agency Web sites 4. Amendment To Conform to Section 916 of the Dodd-Frank Act 5. New Rule 3Ca-1 E. Retention Period of Recordkeeping Requirements F. Collection of Information Is Mandatory G. Responses to Collection of Information Will Not Be Kept Confidential IV. Economic Analysis A. Background 1. Dodd-Frank Act Requirements for Clearing Security-Based Swaps 2. Current Clearing Practices in the Security-Based Swap Market 3. Views on Clearing Requirements for Security-Based Swaps 4. Overview of Statutory Requirements B. Analysis of Final Procedural Rules 1. Analysis of Final Rules Related to Security-Based Swap Submissions 2. Analysis of Final Rules Related to the Process for Staying a Clearing Requirement While the Clearing of the Security-Based Swap Is Reviewed 3. Analysis of Final Rule Related to Preventing Evasion of the Clearing Requirement 4. Analysis of Final Rules Related to Advance Notices 5. Analysis of Final Rules To Amend Rule 19b-4 to Conform To the Requirements of Section 916 of the Dodd-Frank Act V. Regulatory Flexibility Certification A. Self-Regulatory Organizations B. Security-Based Swap Counterparties C. Certification VI. Statutory Authority I. Background On July 21, 2010, the President signed the Dodd-Frank Act into law. 1 The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of the United States by improving accountability and transparency in the financial system. 2 Title VII and Title VIII of the Dodd-Frank Act, among other things, impose new requirements with respect to clearance and settlement systems. 1 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, H.R. 4173). 2 See Pub. L. 111-203, Preamble. Title VII of the Dodd-Frank Act (“Title VII”) provides the Commission and the Commodity Futures Trading Commission (“CFTC”) with authority to regulate certain over-the-counter (“OTC”) derivatives in response to the recent financial crisis. 3 The Dodd-Frank Act is intended to bolster the existing regulatory structure and provide regulatory tools to oversee the OTC derivatives market, which has grown exponentially in recent years. Title VII provides that the CFTC will regulate “swaps,” the Commission will regulate “security-based swaps,” and the CFTC and the Commission will jointly regulate “mixed swaps.” 4 3 See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 29 (2010) (stating that “[m]any factors led to the unraveling of this country's financial sector and the government intervention to correct it, but a major contributor to the financial crisis was the unregulated [OTC] derivatives market.”) 4 Section 712(d) of the Dodd-Frank Act provides that the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System (“Board”), shall further define the terms “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” “eligible contract participant,” and “security-based swap agreement.” The Commission and the CFTC jointly have proposed to further define the terms “swap,” “security-based swap,” and “security-based swap agreement.” See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement;” Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Securities Act Release No. 9204, Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011), corrected in Securities Act Release No. 9204A, Securities Exchange Act Release No. 64372A (June 1, 2011), 76 FR 32880 (June 7, 2011) (“Product Definition Proposing Release”). Further, the Commission and CFTC jointly have adopted rules to further define the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” and eligible contract participant,” See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, Securities Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012). Moreover, section 712(a)(8) of the Dodd-Frank Act provides that the Commission and the CFTC, after consultation with the Board, shall jointly promulgate such regulations regarding “mixed swaps” as may be necessary to carry out the purposes of Title VII. The Commission and the CFTC have jointly proposed such regulations. See Product Definition Proposing Release. Title VII was designed to provide greater certainty that, wherever possible and appropriate, swap and security-based swap contracts formerly traded exclusively in the OTC market are centrally cleared. 5 The swaps and security-based swaps markets traditionally have been characterized by privately negotiated transactions entered into by two counterparties, in which each assumes the credit risk of the other counterparty. 6 Clearing of swaps and security-based swaps was at the heart of Congressional reform of the derivatives markets in Title VII. 7 5 See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 34 (stating that “[s]ome parts of the OTC market may not be suitable for clearing and exchange trading due to individual business needs of certain users. Those users should retain the ability to engage in customized, uncleared contracts while bringing in as much of the OTC market under the centrally cleared and exchange-traded framework as possible.”). 6 See, e.g., Financial Stability Board, Implementing OTC Derivatives Market Reforms (Oct. 25, 2010), available at: http://www.financialstabilityboard.org/publications/r_101025.pdf. 7 As previously noted, the Dodd-Frank Act seeks to ensure that, wherever possible and appropriate, derivatives contracts formerly traded exclusively in the OTC market be cleared. See supra note 5; see also Letter from Christopher Dodd, Chairman, Committee on Banking, Housing and Urban Affairs, United States Senate and Blanche Lincoln, Chairman, Committee on Agriculture, Nutrition, and Forestry, United States Senate, to Barney Frank, Chairman, Financial Services Committee, United States House of Representatives and Colin Peterson, Chairman, Committee on Agriculture, United States House of Representatives (June 30, 2010) (on file with the United States Senate). Clearing agencies are broadly defined under the Exchange Act and undertake a variety of functions. 8 One such function is to act as a central counterparty (“CCP”), which is an entity that interposes itself between the counterparties to a trade. 9 For example, when a security-based swap contract between two counterparties that are members of a CCP is executed and submitted for clearing, it is typically replaced by two new contracts—separate contracts between the CCP and each of the two original counterparties. At that point, the original counterparties are no longer counterparties to each other. Instead, each acquires the CCP as its counterparty, and the CCP assumes the counterparty credit risk of each of the original counterparties that are members of the CCP. 10 Structured and operated appropriately, CCPs may improve the management of counterparty risk and may provide additional benefits such as multilateral netting of trades. 11 8 Section 3(a)(23)(A) of the Exchange Act defines the term “clearing agency” to mean any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who provides facilities for the comparison of data regarding the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or the allocation of securities settlement responsibilities. Such term also means any person, such as a securities depository, who acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates. 15 U.S.C. 78c(a)(23)(A). 9 See id. An entity that acts as a CCP for securities transactions is a clearing agency as defined in the Exchange Act and is required to register with the Commission. 10 See Cecchetti, Gyntelberg and Hollanders, Central counterparties for over-the-counter derivatives, BIS Quarterly Review, Sept. 2009, available at: http://www.bis.org/publ/qtrpdf/r_qt0909f.pdf. 11 See id. at 46 (stating that the structure of a CCP “has three clear benefits. First, it improves the management of counterparty risk. Second, it allows the CCP to perform multilateral netting of exposures as well as payments. Third, it increases transparency by making information on market activity and exposures—both prices and quantities—available to regulators and the public”); see also Bank for International Settlements' Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions, Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs: Consultative report, (May 2010), available at: http://www.bis.org/publ/cpss89.pdf. One key way in which the Dodd-Frank Act promotes clearing of such contracts is by requiring a process by which the Commission would determine whether a security-based swap is required to be cleared. Section 3C of the Exchange Act, as added by Section 763(a) of the Dodd-Frank Act (“Exchange Act Section 3C”), 12 creates, among other things, a clearing requirement with respect to certain security-based swaps. Specifically, this section provides that “[i]t shall be unlawful for any person to engage in a security-based swap unless that person submits such security-based swap for clearing to a clearing agency that is registered under this Act or a clearing agency that is exempt from registration under this Act if the security-based swap is required to be cleared.” 13 Exchange Act Section 3C requires the Commission to adopt rules for a clearing agency's submission of security-based swaps, or any group, category, type or class of security-based swaps, that a clearing agency plans to accept for clearing (“Security-Based Swap Submission”) and to determine the manner of notice the clearing agency must provide to its members of such Security-Based Swap Submission. 14 12 15 U.S.C. 78c-3 et seq. 13 See 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of the Dodd-Frank Act). The requirement that a security-based swap be cleared will stem from the determination to be made by the Commission. Such determination may be made in connection with the review of a clearing agency's submission regarding a security-based swap, or any group, category, type or class of security-based swaps, that the clearing agency plans to accept for clearing. See 15 U.S.C. 78c-3(b)(2)(C)(ii) (as added by Section 763(a) of the Dodd-Frank Act) (“[t]he Commission shall * * * review each submission made under subparagraphs (A) and (B), and determine whether the security-based swap, or group, category, type, or class of security-based swaps, described in the submission is required to be cleared.”). In addition, Exchange Act Section 3C(b)(1) provides that “[t]he Commission on an ongoing basis shall review each security-based swap, or any group, category, type, or class of security-based swaps to make a determination that such security-based swap, or group, category, type, or class of security-based swaps should be required to be cleared.” 14 See 15 U.S.C. 78c-3(b)(2)(A) and (5) (as added by Section 763(a) of the Dodd-Frank Act). For purposes of the amendments to Rule 19b-4 and Form 19b-4 that the Commission is adopting today, and as generally used in this release, the term “Security-Based Swap Submission” means both the identifying information that clearing agencies are required to submit to the Commission pursuant to Exchange Act Section 3C(b)(2) for each security-based swap (or any group, category, type or class of security-based swaps) that such clearing agency plans to accept for clearing, and, in addition, the accompanying information that a clearing agency is required to provide pursuant to new Rule 19b-4(o)(3). Exchange Act Section 3C(b)(2)(C)(i) requires that the Commission make available to the public any submission received under Exchange Act Section 3C(b)(2)(A). 15 U.S.C. 78c3-1(b)(2)(C)(i) (as added by Section 763(a) of the Dodd-Frank Act). Also, the additional information that clearing agencies are required to provide pursuant to the amendments being adopted today with respect to Rule 19b-4 and Form 19b-4 in general will be published in the notice of the Security-Based Swap Submission and required to be posted on the clearing agency's Web site. The Commission notes, however, that a clearing agency may request confidential treatment of the additional information pursuant to Rule 24b-2 under the Exchange Act regarding information it desires be kept undisclosed. 17 CFR 240.24b-2. If the Commission makes a determination that a security-based swap is required to be cleared, then parties may not engage in such security-based swap without submitting it for clearing to a clearing agency that is either registered with the Commission (or exempt from registration) unless an exception to the clearing requirement applies. 15 If the Commission determines that a security-based swap is not required to be cleared, such security-based swap may still be cleared on a non-mandatory basis by the clearing agency if the clearing agency has rules that permit it to clear such security-based swap. In addition, Exchange Act Section 3C(b)(1) provides that “[t]he Commission on an ongoing basis shall review each security-based swap, or any group, category, type, or class of security-based swaps to make a determination that such security-based swap, or group, category, type, or class of security-based swaps should be required to be cleared” (“Commission-initiated Review”). 16 15 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of the Dodd-Frank Act). 16 See 15 U.S.C. 78c-3(b)(1) (as added by Section 763(a) of the Dodd-Frank Act). The Dodd-Frank Act does not require rulemaking with respect to Commission-initiated Reviews. Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act” or “Title VIII”), provides for enhanced regulation of financial market utilities, such as clearing agencies, that manage or operate a multilateral system for the purpose of transferring, clearing or settling payments, securities or other financial transactions among financial institutions or between financial institutions and the financial market utility. 17 The regulatory regime in Title VIII will only apply, however, to financial market utilities that the Financial Stability Oversight Council (“Council”) designates as systemically important (or likely to become systemically important) in accordance with Section 804 of the Clearing Supervision Act. 18 Among other requirements prescribed under Title VIII, Section 806(e) of the Clearing Supervision Act (“Section 806(e)”) requires any financial market utility designated by the Council as systemically important to file 60 days advance notice of changes to its rules, procedures or operations that could materially affect the nature or level of risk presented by the financial market utility (“Advance Notice”). 19 In addition, Section 806(e) requires each Supervisory Agency 20 to adopt rules, in consultation with the Board, that define and describe when a designated financial market utility is required to file an Advance Notice with its Supervisory Agency. 21 17 The definition of “financial market utility” in Section 803(6) of the Clearing Supervision Act contains a number of exclusions that include, but are not limited to, certain designated contract markets, registered futures associations, swap data repositories, swap execution facilities, national securities exchanges, national securities associations, alternative trading systems, security-based swap data repositories, security-based swap execution facilities, brokers, dealers, transfer agents, investment companies and futures commission merchants. 12 U.S.C. 5462(6)(B) (as added by Title VIII). 18 Pursuant to Section 803(9) of the Clearing Supervision Act, a financial market utility is systemically important if the failure of or a disruption to the functioning of such financial market utility could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the financial system of the United States. 12 U.S.C. 5462(9) (as added by Title VIII). Under Section 804 of the Clearing Supervision Act, the Council has the authority, on a non-delegable basis and by a vote of not fewer than two-thirds of the members then serving, including the affirmative vote of its chairperson, to designate those financial market utilities that the Council determines are, or are likely to become, systemically important. The Council may, using the same procedures as discussed above, rescind such designation if it determines that the financial market utility no longer meets the standards for systemic importance. Before making either determination, the Council is required to consult with the Board and the relevant Supervisory Agency (as determined in accordance with Section 803(8) of the Clearing Supervision Act). Finally, Section 804 of the Clearing Supervision Act sets forth the procedures for giving entities a 30-day notice and the opportunity for a hearing prior to a designation or rescission of the designation of systemic importance. 12 U.S.C. 5463 (as added by Title VIII). On July 18, 2011, the Council adopted final rules describing the criteria that will inform and the processes and procedures established under the Clearing Supervision Act for the Council's designation of financial market utilities as systemically important. See Authority to Designate Financial Market Utilities as Systemically Important, 76 FR 44763 (July 27, 2011). 19 See 12 U.S.C. 5465(e)(1)(A) (as added by Title VIII). 20 Section 803(8) of the Clearing Supervision Act defines the term “Supervisory Agency” in reference to the primary regulatory authority for the financial market utility. For example, Section 803(8) of the Clearing Supervision Act provides that the Commission is the Supervisory Agency for any financial market utility that is a Commission-registered clearing agency. See 12 U.S.C. 5462(8) (as added by Title VIII). To the extent that an entity is both a Commission-registered clearing agency and registered with another agency, such as a CFTC-registered derivatives clearing organization, the statute requires the two agencies to agree on one agency to act as the Supervisory Agency, and if the agencies cannot agree on which agency has primary jurisdiction, the Council shall decide which agency is the Supervisory Agency for purposes of the Clearing Supervision Act. 12 U.S.C. 5462(8) (as added by Title VIII). 21 See 12 U.S.C. 5465(e)(1)(B) (as added by Title VIII). Clearing agencies registered with the Commission are financial market utilities, as defined in Section 803(6) of Title VIII; 22 thus, the Commission may be the Supervisory Agency of a clearing agency that is designated as systemically important by the Council (“designated clearing agency”). 23 A clearing agency must begin filing Advance Notices pursuant to Section 806(e) once the Council designates the clearing agency as systemically important as of the compliance date of new Rule 19b-4(o), which the Commission is adopting today. 22 12 U.S.C. 5462(6) (as added by Title VIII). 23 See supra note 20 discussing the definition of “Supervisory Agency” under the Dodd-Frank Act. On December 15, 2010, the Commission proposed amendments to Rule 19b-4 under the Exchange Act to implement these new requirements by requiring that Security-Based Swap Submissions under Exchange Act Section 3C and Advance Notices under Section 806(e) be filed with the Commission on Form 19b-4. 24 The Proposing Release also contained two new rules that were proposed in accordance with the authority granted to the Commission pursuant to Exchange Act Section 3C: (i) Proposed Rule 3Ca-1, which would establish a procedure by which the Commission, at the request of a counterparty or on its own initiative, may stay the requirement that a security-based swap is subject to mandatory clearing, and (ii) proposed Rule 3Ca-2, which was intended to prevent evasions of the clearing requirement by specifying that security-based swaps required to be cleared must be submitted for central clearing to a clearing agency that functions as a CCP. Finally, the Commission proposed technical, conforming and clarifying amendments to Rule 19b-4 and Form 19b-4 to conform the rule and form with new deadlines and approval, disapproval and temporary suspension standards with respect to proposed rule changes filed under Section 19(b) of the Exchange Act, as modified by Section 916 of the Dodd-Frank Act (“Exchange Act Section 19(b)”). 25 24 See Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations, Securities Exchange Act Release No. 34-63557 (Dec. 15, 2010), 75 FR 82490 (Dec. 30, 2010) (“Proposing Release”). 25 15 U.S.C. 78s(b) (as amended by Section 916 of the Dodd-Frank Act). The Commission received 19 comment letters on the Proposing Release from clearing agencies, financial institutions, industry trade groups and other interested persons. 26 Commenters were generally supportive of the Commission's proposals. Some commenters did, however, urge the Commission to take a different approach to certain parts of the proposal. For example, a number of commenters provided suggestions on the proposed rules setting forth the information that clearing agencies will need to provide to the Commission in connection with a Security-Based Swap Submission. As discussed below, the Commission is adopting these rules substantially as proposed, with certain modifications to address commenters' concerns. 27 26 Copies of comments received on the proposal are available on the Commission's Web site at: http://www.sec.gov/comments/s7-44-10/s74410.shtml . 27 In addition to the changes discussed throughout this release, the Commission has made a number of minor typographical and clarifying revisions to the final rules as compared to what was included in the Proposing Release, including: (i) Inserting a missing word in each of new Rule 3Ca-1(d) and new Rule 19b-4(n)(3), (ii) amending the header to Rule 19b-4 to reflect the two new types of filings, (iii) replacing the word “or” with “of” in new Rule 19b-4(n)(2)(iii), (iv) replacing the term “designated financial market utility” with “designated clearing agency” in new Rules 19b-4(n)(2)(iii)(A) and (B) and (v) making numerous changes to the rule text to reflect the style requirements for proper inclusion of the final rules into the Code of Federal Regulations. Based on the non-substantive nature of these revisions, the Commission finds notice of the revisions is not necessary. See 5 U.S.C. 553(b). II. Discussion The Commission is adopting rules to implement the new requirements imposed by Title VII and Title VIII discussed above. In accordance with the requirements set forth in Exchange Act Section 3C (as added by Title VII), the Commission is adopting amendments to Rule 19b-4 and Form 19b-4 and new Rule 3Ca-1 under the Exchange Act to establish processes for (i) how clearing agencies registered with the Commission must submit Security-Based Swap Submissions to the Commission for a determination by the Commission of whether the security-based swap (or group, category, type or class of security-based swaps) referenced in the submission is required to be cleared, and to determine the manner of notice the clearing agency must provide to its members of such submission and (ii) how the Commission may stay the requirement that a security-based swap is subject to mandatory clearing. The Commission also is adopting new Rule 3Ca-2 to prevent evasion of the clearing requirement. In addition, the Commission is adopting amendments to Rule 19b-4 and Form 19b-4 to implement Section 806(e), which requires any designated clearing agency for which the Commission is the Supervisory Agency to provide an Advance Notice to the Commission. Moreover, the Commission is adopting amendments to Rule 19b-4 and Form 19b-4 to conform to the requirements specified in Exchange Act Section 19(b), as amended by Section 916 of the Dodd Frank Act. 28 Section 916 provided for new deadlines by which the Commission must publish and act upon a proposed rule change submitted by a self-regulatory organization (“SRO”) and new standards for the approval, disapproval and temporary suspension of a proposed rule change. Finally, the Commission is adopting a number of technical and clarifying amendments to Rule 19b-4 and Form 19b-4. 28 15 U.S.C. 78s(b) (as amended by Section 916 of the Dodd-Frank Act). As set forth in the Proposing Release, Security-Based Swap Submissions and Advance Notices will be required to be filed with the Commission on Form 19b-4 using the existing Electronic Form 19b-4 Filing System (“EFFS”). Currently, EFFS is used by SROs, which include registered clearing agencies, 29 to file proposed rule changes electronically with the Commission pursuant to Exchange Act Section 19(b) and Rule 19b-4. 30 The Commission is requiring clearing agencies to use EFFS for the filing of Security-Based Swap Submissions and Advance Notices because registered clearing agencies already use this system for Exchange Act Section 19(b) filings and because there are similarities between the existing requirement to file proposed rule changes with the Commission under Exchange Act Section 19(b) and the new requirements under the Dodd-Frank Act to file Security-Based Swap Submissions and under the Clearing Supervision Act to file Advance Notices. 29 The definition of SRO in Section 3(a)(26) of the Exchange Act includes any registered clearing agency. 15 U.S.C. 78c(a)(26). 30 SROs are required to file with the Commission, in accordance with rules prescribed by the Commission, copies of any proposed rule or any proposed change in, addition to, or deletion from the rules of the SRO (collectively referred to as a “proposed rule change”). See 15 U.S.C. 78s(b)(1). A. Security-Based Swap Submissions 1. Process for Making Security-Based Swap Submissions to the Commission Exchange Act Section 3C requires each clearing agency that plans to accept a security-based swap for clearing to file a Security-Based Swap Submission with the Commission for a determination by the Commission of whether the security-based swap (or any group, category, type or class of security-based swaps) referenced in the submission is required to be cleared. 31 Accordingly, the Commission is adopting new Rule 19b-4(o)(1), which sets forth the underlying requirement to make these submissions, substantially as proposed, with slight modifications made solely for the purpose of eliminating duplicative language in other parts of the rule and conforming the rule as necessary for certain other non-substantive changes made to other parts of Rule 19b-4 (as discussed below). 31 See 15 U.S.C. 78c-3(b)(2) (as added by Section 763(a) of the Dodd-Frank Act). To facilitate this filing requirement, the Commission is adopting Rule 19b-4(o)(2) to require clearing agencies to use EFFS and Form 19b-4 for Security-Based Swap Submissions. As discussed in the Proposing Release, registered clearing agencies, as SROs, are already required to file proposed rule changes on Form 19b-4 on EFFS. Using the same filing process for Security-Based Swap Submissions would leverage existing technology and reduce the resources clearing agencies would have to expend on meeting Commission filing requirements. Moreover, in situations where a single clearing agency action would trigger more than one filing requirement, allowing for each filing to be made pursuant to a single Form 19b-4 submission would improve efficiency in the filing process. The Commission is adopting the requirements in new Rule 19b-4(o)(2) substantially as proposed, with modifications made to allow for the transition to EFFS filing. Specifically, the Commission is currently in the process of designing and implementing the Commission system upgrades that are necessary in order for Security-Based Swap Submissions to be filed on EFFS. The Commission expects the system upgrades to EFFS to be completed no later than December 10, 2012. In order to avoid delaying clearing agencies from making Security-Based Swap Submissions, the Commission has decided to provide for a temporary means of submission. As a result, the Commission is adopting Rule 19b-4(o)(2) to provide that Security-Based Swap Submissions filed before December 10, 2012 must be filed with the Commission by submitting the Security-Based Swap Submission to a dedicated email inbox to be established by the Commission. A clearing agency that files a Security-Based Swap Submission by email must include in the submission the same information that is required to be included for Security-Based Swap Submissions in the General Instructions for Form 19b-4, as such form has been modified by the rules the Commission is adopting today. Security-Based Swap Submissions filed on or after December 10, 2012 on Form 19b-4 would include the same substantive information. 32 Additional conforming changes have been made to Rule 19b-4(o)(2) to accommodate the phased implementation of the submission process. 32 The Commission notes that a clearing agency must also continue to meet the filing requirements of Rule 19b-4 and Form 19b-4. For example, if the decision to clear a security-based swap referenced in a Security-Based Swap Submission also requires the clearing agency to file a proposed rule change under Exchange Act Section 19(b), the clearing agency must file the proposed rule change with the Commission on Form 19b-4 using EFFS and separately file the Security-Based Swap Submission with the Commission by email. The Commission did not receive any comments on its proposal to use EFFS and the existing Form 19b-4 filing process for Security-Based Swap Submissions. Some commenters did, however, raise questions related to other processes involving the clearing of security-based swaps, namely the interplay between the process by which the Commission will determine whether to approve a new security-based swap for clearing and the process by which the Commission will determine whether a security-based swap is required to be cleared. 33 Although these comments were not directly responsive to the proposed process by which clearing agencies will file Security-Based Swap Submissions, the Commission appreciates receiving feedback and questions from interested persons regarding how it should ultimately make determinations on which security-based swaps will be subject to mandatory clearing. Of the commenters that discussed the relationship between a mandatory clearing determination and an action approving the voluntary clearing of security-based swaps, one commenter requested that the Commission clarify the circumstances under which a clearing agency would be required to make a Security-Based Swap Submission with the Commission when it already has Commission-approved rules permitting it to clear the security-based swap in question. 34 Another commenter requested that the Commission “de-couple the determination that a clearing agency may clear a security-based swap from the determination that a security-based swap should be subject to a mandatory clearing obligation.” 35 Finally, one commenter asked for confirmation that “the Commission intends that a clearing agency `eligibility to clear' review is to be separate from and precede a security-based swap mandatory clearing review and [that] it is not intended that both reviews can commence simultaneously.” 36 33 See, e.g., comment letter of CME Group, Inc. (Feb. 14, 2011) (“CME Letter”); comment letter of LCH.Clearnet Group (Feb. 14, 2011) (“LCH.Clearnet Letter”); comment letter of the International Swaps and Derivatives Association, Inc. (“ISDA”) (Feb. 14, 2011) (“ISDA Letter”); and comment letter of The Options Clearing Corporation (Feb. 14, 2011) (“OCC Letter”). 34 See OCC Letter at 3. 35 See LCH.Clearnet Letter at 2-3. 36 See ISDA Letter at 4. In response to the three comments described above, the Commission notes that its process for determining whether a security-based swap is required to be cleared pursuant to Exchange Act Section 3C (which process is triggered by the filing of a Security-Based Swap Submission in accordance with the amendments being adopted today to Rule 19b-4 and Form 19b-4) is separate and distinct from the Commission's process for determining whether to approve a request by a clearing agency to commence voluntary clearing of a security-based swap (which process will be triggered by the filing of a proposed rule change pursuant to Exchange Act Section 19(b)). 37 Each filing process, as well as each resulting Commission determination, is governed by separate sections of the Exchange Act, and each operates under separate timeframes. Thus, a clearing agency will be required to make a Security-Based Swap Submission regardless of whether it has existing rules permitting it to clear the security-based swap referred to in the submission. 37 A more detailed discussion regarding the separation of the two filing requirements (and subsequent Commission actions) is contained in section II.F of this release. Notably, the requirement to submit a proposed rule change is not affected by the rules the Commission is adopting today related to the process for filing Security-Based Swap Submissions. However, the Commission anticipates that a clearing agency's decision to plan to clear a security-based swap (or any group, category, type or class of security-based swaps) could require filings under both Exchange Act Section 19(b) and Exchange Act Section 3C. This is because a clearing agency's decision to clear a security-based swap may require the clearing agency to change its rules and thus file with the Commission a proposed rule change under Exchange Act Section 19(b). In this scenario, the clearing agency would be required to file a Security-Based Swap Submission with the Commission for a determination by the Commission of whether the security-based swap (or any group, category, type or class of security-based swaps) referenced in the submission is required to be cleared. 38 In other words, the two filing requirements are not mutually exclusive. Because a clearing agency may be required to file the same proposal under Exchange Act Section 3C and Exchange Act Section 19(b), and because there may be instances where the same information is required under both statutory provisions, 39 the Commission believes that the most efficient use of the Commission's and clearing agencies' resources would be to require clearing agencies to use the existing EFFS system for these two related, though legally separate, types of filings (and, to the extent that the filings are made at the same time, pursuant to a single Form 19b-4 submission). 38 A clearing agency rule is defined broadly in the Exchange Act to include “the constitution, articles of incorporation, bylaws, and rules, or instruments corresponding to the foregoing * * * and such of the stated policies, practices, and interpretations of such exchange, association, or clearing agency as the Commission, by rule, may determine to be necessary or appropriate in the public interest or for the protection of investors to be deemed to be rules of such exchange, association, or clearing agency.” See 15 U.S.C. 78c(a)(27). The Commission anticipates that a proposal to clear a new type, category or class of security-based swap will, in many cases, also be a change to the rules of a registered clearing agency that must be filed with the Commission for approval pursuant to Exchange Act Section 19(b). 39 See infra section II.F. In addition, while the Commission recognizes the concerns raised by the commenter requesting that these two processes not commence simultaneously, 40 the Commission notes that the timing and sequencing of each of these processes ultimately will be determined based on the individual facts and circumstances of a particular filing. The Commission generally believes that when a security-based swap is submitted for review under Exchange Act Section 3C and concurrently filed under Exchange Act Section 19(b) as a proposed rule change, the two separate reviews will be carried out on the same general timeline and likely involving the same staff, both as a practical matter and to promote efficiency in the use of Commission resources. However, in circumstances where no proposed rule change filing would be required, such as a case where a clearing agency's rules already permit it to clear the security-based swap in question, EFFS and Form 19b-4 still will be used for the Security-Based Swap Submission. 40 See supra note 36 and accompanying text. The Commission also received a comment letter that attached a copy of a separate letter that the commenter submitted to the CFTC requesting, among other things, that the CFTC clarify that a designated clearing organization (“DCO”) would not be required to make any submission to the CFTC for swaps previously listed for clearing by a DCO prior to the date of enactment of Section 723 of the Dodd-Frank Act (“pre-enactment swaps”) or for any swaps that a DCO cleared prior to the effective date of the CFTC's final rules setting forth its swap submission process. 41 While this commenter did not explicitly make a concurrent request with respect to security-based swaps, the Commission notes that it will need to have certain information regarding any security-based swap (or any group, category, type, or class of security-based swaps) listed for clearing by a clearing agency as of the date of enactment of Exchange Act Section 3C ( i.e., July 21, 2010) (“pre-enactment security-based swaps”) in light of Exchange Act Section 3C(b)(2)(B) on which to base its determination of whether the security-based swap is required to be cleared. 42 Accordingly, the Commission will continue to work directly with any clearing agency that listed pre-enactment security-based swaps as of the date of enactment of Exchange Act Section 3C to obtain any information necessary for making a mandatory clearing determination. 43 41 See Exhibit A to CME Letter. 42 15 U.S.C. 78c-3(b)(2)(B) (as added by Section 763(a) of the Dodd-Frank Act) (“[a]ny security-based swap or group, category, type, or class of security-based swaps listed for clearing by a clearing agency as of the date of enactment of this subsection shall be considered submitted to the Commission.”). 43 The Commission notes that only two clearing agencies listed security-based swaps for clearing as of July 21, 2010. To begin the process of reviewing pre-enactment swaps, Commission staff has requested, pursuant to Section 17A of the Exchange Act, that each registered clearing agency submit information similar to that which will be required under Rule 19b-4(o)(3) so that the Commission can make the statutorily required determination. The Commission believes that receiving this information directly from the clearing agencies, as opposed to having to gather it from other sources, should help ensure that the Commission is able to make mandatory clearing determinations. Moreover, such information would be based on timely, accurate and comprehensive information obtained from the party most directly involved in the clearing process as it pertains to a particular security-based swap. In addition, providing this information in response to a Commission request is consistent with a clearing agency's general obligations in connection with its registration with the Commission. After the effective date of Rule 19b-4(o) and once the Commission has verified that the previously submitted information is complete on its face, the Commission will publish the submissions for public comment. The Commission confirms that a clearing agency that is clearing pre-enactment security-based swaps may continue to clear them on a voluntary basis and does not have to wait for a determination from the Commission as to whether the security-based swaps are required to be cleared. Finally, one commenter requested that the Commission clarify that, to the extent that a rule of a clearing agency is changed “not through any action of the clearing agency but through the action of ISDA or other external authority, such an event would not constitute a rule change or necessitate an additional [Security-Based Swap] Submission.” 44 This commenter noted that clearing agencies sometimes have rules that incorporate ISDA terms by reference or state that determinations made by an ISDA committee will apply to the security-based swaps that the clearing agency clears. 45 In response to this commenter, the Commission notes that as a general matter, registered clearing agencies have an ongoing responsibility to ensure that their rules are in compliance with Section 17A of the Exchange Act, regardless of the source of, or justification behind, a new rule or rule change. Accordingly, the Commission would need to review actions on a case-by-case basis to determine whether specific actions taken by ISDA or another industry organization would require the filing of a separate proposed rule change or Security-Based Swap Submission. In that respect, the Commission encourages clearing agencies to discuss particular actions with Commission staff in order to determine whether a filing is required. 44 See OCC Letter at 4. 45 See id. a. Substance of Security-Based Swap Submissions: Consistency With Section 17A of the Exchange Act New Rule 19b-4(o)(3)(i), which the Commission is adopting as proposed, requires that each Security-Based Swap Submission contain a statement explaining how the submission is consistent with Section 17A of the Exchange Act. The requirement to submit the information specified in Rule 19b-4(o)(3)(i) is intended to assist the Commission in its review of the Security-Based Swap Submission in accordance with the standards set forth in Exchange Act Section 3C(b)(4)(A). 46 Section 17A specifies, among other things, that the Commission is directed, having due regard for the public interest, the protection of investors, the safeguarding of securities and funds and maintenance of fair competition among brokers and dealers, clearing agencies, and transfer agents, to use its authority to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities. 47 46 See 15 U.S.C. 78c-3(b)(4)(A) (as added by Section 763(a) of the Dodd-Frank Act) (“[i]n reviewing a [Security-Based Swap Submission], the Commission shall review whether the submission is consistent with section 17A.”). 47 15 U.S.C. 78q-1. In complying with this requirement, registered clearing agencies should be able to utilize their prior experience with the requirement to comply with a similar rule in the context of filing proposed rule changes with the Commission pursuant to Exchange Act Section 19(b). Specifically, Exchange Act Section 19(b)(2)(C)(i) requires the Commission, prior to approving a proposed rule change filed by any SRO (including a registered clearing agency), to determine that the proposed rule change is consistent with the requirements of the Exchange Act (which would include Section 17A) and the rules and regulations issued thereunder applicable to such organization. 48 In connection with proposed rule changes, an SRO is required to “explain why the proposed rule change is consistent with the requirements of the [Exchange] Act and the rules and regulations thereunder applicable to the [SRO]. A mere assertion that the proposed rule change is consistent with those requirements is not sufficient.” 49 48 See 15 U.S.C. 78s(b)(2)(C)(i). 49 Item 3(b) of the General Instructions for Form 19b-4. 17 CFR 240.819. See also Exchange Act Section 19(b), which requires that an SRO provide a statement of the basis of the proposed rule change and provides that the Commission shall approve a proposed rule change only if it finds that it is consistent with the requirements of the Exchange Act and the rules and regulations thereunder. 15 U.S.C. 78s(b). Presently, in complying with the requirement to file proposed rule changes with the Commission pursuant to Exchange Act Section 19(b), registered clearing agencies are required to specify, among other things, how the proposed rule change is consistent with the requirements under Section 17A(b)(3) of the Exchange Act. In addition, all registered clearing agencies must comply with the standards in Section 17A of the Exchange Act, which include requirements under Section 17A(b)(3) of the Exchange Act to maintain rules for promoting the prompt and accurate clearance and settlement of securities transactions, assuring the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible, fostering cooperation and coordination with persons engaged in the clearance and settlement of securities transactions, removing impediments to and perfecting the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions, and, in general, protecting investors and the public interest. 50 A registered clearing agency also is required under Section 17A(b)(3) of the Exchange Act to provide fair access to clearing and to have the capacity to facilitate the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts, and transactions for which it is responsible, as well as to safeguard securities and funds in its custody or control or for which it is responsible. 51 50 See 15 U.S.C. 78q-1(b)(3)(F). 51 See 15 U.S.C. 78q-1(b)(3)(A), (B) and (F). The Commission did not receive any comments on the requirement contained in Rule 19b-4(o)(3)(i) that a clearing agency explain how the Security-Based Swap Submission is consistent with Section 17A of the Exchange Act. However, one commenter recommended that the Commission provide further specificity as to precisely what elements of Section 17A(b)(3) of the Exchange Act “are relevant to the decision to clear a security-based swap and thus must be addressed in a clearing agency's submission.” 52 Because each Security-Based Swap Submission will be tailored to a particular security-based swap (or group, category, type or class of security-based swaps) and to the clearing arrangement established by the particular clearing agency filing the submission, each submission will raise different issues for the Commission to consider. As such, the Commission is unable to state definitely which elements of Section 17A(b)(3) would be relevant to individual submissions. However, the Commission notes that all registered clearing agencies are required to maintain compliance with each of the standards set forth in Section 17A of the Exchange Act as a condition to registration, and a clearing agency should have considered whether clearing a security-based swap (or group, category, type or class of security-based swaps) is consistent with the requirements of Section 17A of the Exchange Act at the time the clearing agency first reached a decision to clear the particular instrument. Accordingly, and in response to the question raised by the commenter, a clearing agency should consider whether it needs to include a statement in the submission discussing the process the clearing agency followed when it reached its initial decision to clear the security-based swap (or group, category, type or class of security-based swaps). To the extent possible, such discussion could include information on the clearing agency's consideration of the factors set forth in Rule 19b-4(o)(3)(ii) at the time the clearing agency decided to commence clearing the product and the weight, if any, each such factor (or other factors determined to be appropriate by the clearing agency) was given in reaching its conclusion. If additional procedures were followed, over and above those associated with other types of rule changes or designed to assist the clearing agency in considering the particular risk or other characteristics of the security-based swap (or group, category, type or class of security-based swaps) that is the subject of the submission, the clearing agency could specify such procedures. The Commission also encourages clearing agencies to specify and briefly describe any departures from processes contemplated by clearing agency rules in reaching a decision to commence clearing the security-based swap, such as exercises of discretion not to consult established management committees, board committees or participant committees. 52 See CME Letter at 2, n.1. In its comment letter, CME Group, Inc. states that Exchange Act Section 3C “governs the Commission's responsibility to determine whether a security-based swap that a clearing agency chooses to clear may be cleared” and also “requires the Commission to make determinations respecting whether a security-based swap is subject to the mandatory clearing requirement.” The Commission notes, however, that Exchange Act Section 3C only relates to mandatory clearing determinations. The question of whether a clearing agency may clear a security-based swap will depend on whether clearing of the security-based swap is permitted under the clearing agency's rules. To the extent that a clearing agency's rules must also be modified to permit clearing of a new security-based swap (or group, category, type or class of security-based swaps), such change would need to be approved as a proposed rule change governed by Exchange Act Section 19(b). Other than certain technical changes made pursuant to Section 916 of the Dodd-Frank Act, the process for submitting proposed rule changes with the Commission is not being modified by the rules being adopted today. See supra note 37 and accompanying text. To the extent relevant to its initial conclusion to clear a security-based swap, the clearing agency could include a clear statement whether it believes that the security-based swap (or group, category, type or class of security-based swaps) that is the subject of the Security-Based Swap Submission should or should not be required to be cleared by the Commission, together with a discussion of the reasons for its belief. If the Commission's decision to require or not to require the security-based swap (or group, category, type or class of security-based swaps) that is the subject of the submission to be cleared would or would not materially affect the clearing agency's judgment that the clearing proposal is consistent with Section 17A of the Exchange Act, the clearing agency is encouraged to include a statement of this nature and explain why this is the case. 53 53 As compliance with each of the standards of Section 17A of the Exchange Act is required of each registered clearing agency, the information specified throughout this paragraph is expected to be provided by each clearing agency for any security-based swap (or group, category, type or class of security-based swaps) being considered by the Commission, including pre-enactment swaps. b. Substance of Security-Based Swap Submissions: Quantitative and Qualitative Factors The Commission also is adopting new Rule 19b-4(o)(3)(ii) to specify what qualitative and quantitative factors should be discussed by a clearing agency in its Security-Based Swap Submission. This rule is being adopted substantially as proposed, with certain non-substantive changes having been made to correct paragraph numbering. To provide context for the requirements to provide this information, Exchange Act Section 3C(b)(4)(B) requires the Commission, prior to making a mandatory clearing determination, to analyze five specific qualitative and quantitative factors. 54 New Rule 19b-4(o)(3)(ii) requires clearing agencies to submit information to assist the Commission in its consideration of the five factors specified in Exchange Act Section 3C(b)(4)(B), including, but not limited to: 54 See 15 U.S.C. 78c-3(b)(4)(B)(i)-(v) (as added by Section 763(a) of the Dodd-Frank Act). (i) The existence of significant outstanding notional exposures, trading liquidity and adequate pricing data. (ii) The availability of a rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded. (iii) The effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the clearing agency available to clear the contract. (iv) The effect on competition, including appropriate fees and charges applied to clearing. (v) The existence of reasonable legal certainty in the event of the insolvency of the relevant clearing agency or one or more of its clearing members with regard to the treatment of customer and security-based swap counterparty positions, funds, and property. Some commenters requested that the Commission limit the breadth of the information that clearing agencies will be required to submit to the Commission pursuant to Rule 19b-4(o)(3)(ii) pertaining to the five qualitative and quantitative factors. 55 For example, one commenter urged Commission staff to exercise judgment and flexibility in determining the scope of information required in connection with the five qualitative and quantitative factors, noting that some of these factors would require “at most a very cursory mention” in a specific Security-Based Swap Submission, particularly where the responsive information is already well-known to the Commission or where the Commission has extensive knowledge of the clearing agency's rules or operations. 56 Further, this commenter requested that the Commission clarify that when a Rule 19b-4 filing is both a proposed rule change and a Security-Based Swap Submission, any information that is self-evident from the text of the proposed rule need not be repeated for the Security-Based Swap Submission aspect of the filing. 57 55 See, e.g., CME Letter, LCH.Clearnet Letter and OCC Letter. 56 See OCC Letter at 3-5. 57 See id. In response to this comment, the Commission reiterates that registered clearing agencies will be required to submit Security-Based Swap Submissions for the sole purpose of submitting the information necessary for the Commission to determine, pursuant to Exchange Act Section 3C(b)(2)(C)(ii), whether the security-based swap described in the submission is required to be cleared ( i.e., subject to mandatory clearing). As discussed in section II.A.1 and throughout this release, the process by which the Commission will determine whether a security-based swap is required to be cleared following the submission of a Security-Based Swap Submission is separate and distinct from the process by which the Commission will determine whether to approve a new security-based swap for voluntary clearing following the filing of a proposed rule change pursuant to Exchange Act Section 19(b). 58 In cases where the Rule 19b-4 filing is both a proposed rule change and a Security-Based Swap Submission, each filing should be complete in accordance with the particular rules applicable to the different types of filings. At the same time, the Commission agrees with this commenter that clearing agencies should not be required to provide unnecessarily duplicative information. Accordingly, if more than one type of filing is made pursuant to a single Form 19b-4 submission, clearing agencies may be able to refer to and cross-reference relevant information in the proposed rule change that also is relevant to the Security-Based Swap Submission filing so long as the requirements of each applicable rule are individually satisfied and if the clearing agency clearly explains how the information included in the proposed rule change is applicable to the specific information required to be provided in the Security-Based Swap Submission. 58 As previously noted, although the Commission will accept both Security-Based Swap Submissions and proposed rule changes on Form 19b-4 through EFFS for the sake of efficiency, each filing will be considered a separate submission to be reviewed in accordance with the appropriate statutory provision—even to the extent that both filings are made at the same time using the same form. Another commenter suggested that the Commission should limit the information required to be in a Security-Based Swap Submission to include only information addressing whether clearing a security-based swap comports with Section 17A of the Exchange Act. 59 In particular, this commenter maintained that the qualitative and quantitative factors set forth in Exchange Act Section 3C(b)(4)(B) were most relevant to the Commission in making its determination as to whether a security-based swap is required to be cleared and less relevant in the context of a submission by a clearing agency seeking approval to clear a security-based swap. 60 This commenter maintained that requiring clearing agencies to perform an analysis of the qualitative and quantitative factors set forth in Exchange Act Section 3C(b)(4)(B) in connection with seeking approval to clear a security-based swap would be “broad and burdensome,” noting that the Commission has a great deal of information necessary to address the statutory factors by virtue of the extensive reporting requirements under the Dodd-Frank Act. 61 59 See CME Letter at 3. In addition, the CME Letter attached as an exhibit a comment letter, dated Jan. 3, 2011, that CME Group, Inc. submitted to the CFTC in connection with a similar set of proposed rules. See Exhibit A to CME Letter. In this letter, CME Group, Inc. recommended that the CFTC delete a number of items required to be included in a submission to the CFTC in connection with a mandatory clearing determination for swaps. These recommended deletions included each of the five qualitative and quantitative factors set forth in Section 2(h)(2)(D) of the Commodity Exchange Act (which are identical to the factors contained in Exchange Act Section 3C(b)(4)(B)). Specifically, CME Group, Inc. expressed its belief that these requirements were unclear, unduly burdensome, could defeat the purposes of the Dodd-Frank Act and, in some cases, called for information that the clearing agency does not possess. 60 See id. 61 See id. Similarly, a separate commenter requested that the Commission amend the information requirements in the proposed rule “such that a clearing agency is required to include in its submission only that information which is necessary for determining the suitability of a security-based swap for clearing and the eligibility of a clearing agency to clear that security-based swap (but not the information required to support the determination of whether a security-based swap should be subject to a mandatory clearing obligation).” 62 In furtherance of this suggestion, the commenter suggested specific deletions to the information requirements in the proposed rules that were based on the five statutory factors set forth in Exchange Act Section 3C(b)(4)(B). 63 62 See LCH.Clearnet Letter at 3. 63 See id. at 4 In response to the commenters discussed in the two preceding paragraphs, the Commission notes that the factors specified in new Rule 19b-4(o)(3)(ii) are identical to the qualitative and quantitative factors that the Commission is required to consider pursuant to Exchange Act Section 3C(b)(4)(B) when determining whether a security-based swap (or group, category, type or class of security-based swaps) will be subject to a mandatory clearing requirement. Moreover, and in response to the commenter that requested that the information required in the submission relate only to the suitability of the security-based swap for clearing and the eligibility of the clearing agency to clear the security-based swap, the Commission notes that the information related to the statutory factors are necessary in connection with the Commission's statutory obligation to make a mandatory clearing determination. The Commission believes that it is appropriate to require such information to be included in Security-Based Swap Submissions because clearing agencies ordinarily have primary access to this information, making it easier for them to submit the information to the Commission than it would be for the Commission to gather the information from other sources, resulting in a more effective and efficient process for both the Commission and clearing agencies. Furthermore, the Commission does not believe that requiring clearing agencies to submit information responsive to new Rule 19b-4(o)(3)(ii) would be overly burdensome or require clearing agencies to provide material that is not in their possession. In particular, and based on its prior experience with the operations and governance of clearing agencies, the Commission would expect that clearing agencies would consider the factors set forth in the statute and the rule as part of their decision-making process, particularly in connection with determining whether to list the relevant security-based swaps for clearing (and knowing that such listing could result in the Commission determining that the security-based swap may be required to be cleared). Based on all of the reasons outlined above, particularly the requirement that the Commission consider each of the factors set forth in Exchange Act Section 3C(b)(4)(B) prior to making a mandatory clearing determination, each Security-Based Swap Submission will be required to include information regarding the factors listed in paragraphs (A) through (E) of Rule 19b-4(o)(3)(ii). In addition, the Proposing Release included examples of information that a clearing agency “could” consider including in its Security-Based Swap Submission in order to respond to the quantitative and qualitative factors specified in Exchange Act Section 3C. 64 Some commenters urged the Commission to incorporate these examples into its final rules, thereby requiring all of this information to be included in a clearing agency's Security-Based Swap Submission. 65 For example, one commenter suggested that the proposed rules did not include requirements to ensure that Security-Based Swap Submissions provide sufficiently detailed information; this commenter stated that the range of information discussed in the proposed rule as information a clearing agency “could” include appears to be essential information that the Commission could use to “efficiently and effectively determine whether the clearing agency should be allowed to clear the swap, or whether the swap should be required to clear.” 66 A second commenter requested that the Commission, at a minimum, replace the word “could” with “shall” in the list of disclosures required to be included in a Security-Based Swap Submission. 67 64 See Proposing Release, supra note 24, at section II.A.1.b. 65 See, e.g., comment letter of Americans for Financial Reform (Feb. 14, 2011) (“AFR Letter”); comment letter of American Federation of State, County and Municipal Employees (“AFSCME”) (Feb. 14, 2011) (“AFSCME Letter”); and comment letter of Better Markets, Inc. (Feb. 14, 2011) (“Better Markets Letter”). 66 See AFR Letter at 2. 67 See AFSCME Letter at 3-4. While AFSCME suggested that all of the examples identified in the release be incorporated into the rule, it highlighted as particularly relevant the reference to information on product specifications, including copies of any standardized legal documentation, generally accepted contract terms, standard practices for managing and communicating any life cycle events associated with the security-based swap and related adjustments, and the manner in which the information contained in the confirmation of the security-based swap trade is transmitted. A third commenter urged the Commission to “require every clearing agency to submit all of the information identified in the [Proposing] Release and in the instructions as potentially relevant to the five factors” set forth in Exchange Act Section 3C(b)(4)(B). 68 The same commenter also requested that the proposed rules be expanded to require clearing agencies to submit additional information regarding pricing, liquidity and risk management as part of a Security-Based Swap Submission, and to include an explicit statement in the final rules whereby the Commission would make clear that “a given level of contract-specific systemic risk is not a prerequisite for a determination that a security-based swap is subject to mandatory clearing.” 69 Finally, this commenter urged the Commission to require clearing agencies to include information regarding the decision-making process they follow when deciding whether or not to make a Security-Based Swap Submission. 70 68 See Better Markets Letter at 3-5. 69 See id at 5-7. The additional information suggested by Better Markets, Inc. (“Better Markets”) includes: (1) Information about any price indices used for pricing the security-based swap; (2) information regarding liquidity over the life of a security-based swap; (3) information regarding risk management procedures, particularly with respect to cross-contract netting and credits relating to initial margin, including correlations to be used and algorithms that result in the netting or credits; and (4) certain information on the hedging relationships between the security-based swaps proposed to be cleared and other security-based swaps that are cleared by the clearing agency or by other clearing agencies. 70 See Better Markets Letter at 7-8. Specifically, Better Markets urged the Commission to require clearing agencies to: (1) Include a summary of member support for clearing the security-based swap as proposed, as well as member objections; (2) notify the Commission and the public of the type of security-based swap being considered at the time it notifies members of the submission or possible submission; (3) submit input from both the public and customers regarding the decision to make a submission, which can be considered alongside member views (including the methods used to solicit such input and the outcome); and (4) notify the Commission of the decision not to make a submission if the decision is made after the clearing agency risk committee (or similar body) solicits input from members, customers or others regarding a submission, which notification should include the objections and supporting statements received regarding the proposed submission. Similarly, Americans for Financial Reform urged the Commission to require clearing agencies to file submissions (which should be made publicly available) when the clearing agency “rejects a class of swaps for clearing.” See AFR Letter at 2. While the Commission has provided full responses to these comments later in this section, with respect to the commenters requesting that a clearing agency notify the Commission when it decides not to make a Security-Based Swap Submission or when it “rejects a class” of security-based swaps for clearing, the Commission notes that, to the extent that these commenters' suggestion is directed toward the Commission's ability to ensure that clearing agencies do not reject new security-based swaps for clearing for improper reasons, such as anticompetitive reasons, other provisions of the Exchange Act provide the Commission with the ability to investigate and address potential anticompetitive behavior if it occurs. For example, Section 17A of the Exchange Act provides that clearing agency rules must not be designed to permit unfair discrimination in the admission of participants or among participants in the use of the clearing agency and that the rules may not impose a burden of competition that is not necessary or appropriate in furtherance of the provisions of the Exchange Act. See 15 U.S.C. 78q-1(b)(3)(F) and (I). All proposed rule changes filed by clearing agency with the Commission under Exchange Act Section 19(b)(2) are subject to approval by the Commission and all Security-Based Swap Submissions will be subject to Commission review to determine whether a security-based swap should be required to be cleared. Pursuant to Rule 17a-1, a registered clearing agency must keep copies of all documents made or received by it in the course of its business as such and provide copies of any such documents to the Commission upon request. See 17 CFR 17a-1. The Commission has broad authority under Section 17(b) of the Exchange Act to conduct examinations of clearing agencies. See 15 U.S.C. 78q. And ultimately, under Section 19(h) of the Exchange Act, the Commission has the authority to bring an enforcement action against a clearing agency that has violated or is unable to comply with any provision of the Exchange Act, the rules or regulations thereunder, or its own rules. See 15 U.S.C. 78s. In response to the three commenters discussed above, the Commission believes that the requirements contained in new Rule 19b-4(o)(3)(ii) strike an appropriate balance by requiring clearing agencies to submit the information necessary to allow the Commission to make informed and timely mandatory clearing determinations. In particular, the Commission believes that the information requirements contained in Rule 19b-4(o)(3)(ii) provide for the submission of a comprehensive set of information to be included in a preliminary Security-Based Swap Submission. For example, the Commission believes that most of the information discussed in the proposed rule as information a clearing agency “could” include in a Security-Based Swap Submission is already contemplated by the rules the Commission is adopting today. In fact, in the discussion set forth both the Proposing Release and in the paragraph immediately below, the Commission has attempted to tie each example identified as information a clearing agency “could” include in a Security-Based Swap Submission to a specific section of new Rule 19b-4(o)(3)(ii). As a result, the Commission does not believe that it is necessary to incorporate this information directly into the rule text, as suggested by three commenters. 71 Similarly, the Commission believes that the information identified by the commenter who suggested that the final rules be expanded by requiring, among other things, information regarding pricing, liquidity, risk management, and certain decision-making processes also is generally contemplated by one of the requirements of new Rule 19b-4(o). 72 Moreover, to the extent that information suggested to be included in the final rules by commenters is not addressed in other provisions (including, for example, information on certain hedging relationships between security-based swaps and information on decisions not to accept a security-based swap for clearing) or omitted from a Security-Based Swap Submission, the Commission notes that it can require the production of additional information from clearing agencies pursuant to Rule 19b-4(o)(6) (to the extent that the information is requested in connection with an actual Security-Based Swap Submission) or in all cases pursuant to the Commission's general supervisory authority to the extent that it believes such information will be relevant to its consideration of the Security-Based Swap Submission or otherwise. 71 See supra notes 65 to 68 and accompanying text. 72 See supra notes 69 to 70 and accompanying text. For example, Better Markets suggested that the Commission require clearing agencies to submit certain information on price indices used for pricing the security-based swap and information on liquidity over the life of the security-based swap. The Commission believes that this information generally falls within the scope of new Rule 19b-4(o)(3)(ii)(A), which requires the clearing agency to provide information about the existence of significant outstanding notional exposures, trading liquidity and adequate pricing data. In addition, Better Markets suggested that the Commission require clearing agencies to submit certain information regarding the clearing agency's risk management procedures which the Commission believes is already contemplated by new Rule19b-4(o)(3)(ii)(B) and (C), which require the clearing agency to provide information about the availability of a rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is then traded as well as the effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the clearing agency available to clear the contract. With respect to the information suggested by Better Markets regarding certain decision-making processes used by the clearing agency when it makes a Security-Based Swap Submission, the Commission believes that much of this information is contemplated by new Rule 19b-4(o)(3)(i), which requires clearing agencies to explain how the submission is consistent with Section 17A of the Exchange Act. Nevertheless, and as described in the Proposing Release, the Commission believes that while the content of each Security-Based Swap Submission will depend on the specific product referenced therein and the particular set of circumstances related to the clearing arrangement, many common types of information likely will be responsive to a large number of these types of submissions. For example, with respect to Rule 19b-4(o)(3)(ii)(A), a statement describing the existence of outstanding notional exposures, trading liquidity and adequate pricing data could address pricing sources, models and procedures demonstrating an ability to obtain price data to measure credit exposures in a timely and accurate manner, as well as measures of historical market liquidity and trading activity, and expected market liquidity and trading activity if the security-based swap is required to be cleared (including information on the sources of such measures). With respect to Rule 19b-4(o)(3)(ii)(B), a statement describing the availability of a rule framework could include a discussion of the rules, policies or procedures applicable to the clearing of the relevant security-based swap. Additionally, a discussion of credit support infrastructure could include the methods to address and communicate requests for, and posting of, collateral. With respect to Rule 19b-4(o)(3)(ii)(C), a discussion of systemic risk could include a statement on the clearing agency's risk management procedures including, among other things, the measurement and monitoring of credit exposures, initial and variation margin methodology, methodologies for stress testing and back testing, settlement procedures and default management procedures. With respect to Rule 19b-4(o)(3)(ii)(D), a discussion of fees and charges could address any volume incentive programs that may apply or impact the fees and charges. With respect to Rule 19b-4(o)(3)(ii)(E), a discussion of legal certainty in the event of an insolvency could address segregation of accounts and all other customer protection measures under insolvency. In addition, the Commission continues to believe that when describing the security-based swap (or group, category, type or class of security-based swaps) referenced in the Security-Based Swap Submission, the clearing agency could discuss the relevant product specifications, including any standardized legal documentation, generally accepted contract terms, 73 standard practices for managing and communicating any life cycle events associated with the security-based swap and related adjustments, 74 and the manner in which the information contained in the confirmation of the security-based swap trade is transmitted. Further, the clearing agency also could discuss its financial and operational capacity to provide clearing services to all customers potentially subject to the clearing requirements as applicable to the particular security-based swap. Finally, the clearing agency could include an analysis of the effect of a clearing requirement on the market for the group, category, type, or class of security-based swaps, both domestically and globally, including the potential effect on market liquidity, trading activity, use of security-based swaps by direct and indirect market participants and any potential market disruption or benefits. This analysis could include whether the members of the clearing agency are operationally and financially capable of absorbing clearing business (including indirect access market participants) that may result from a determination that the security-based swap (or group, category, type or class of security-based swaps) is required to be cleared. 75 73 For example, for some security-based swaps, industry standard documentation would include the applicable ISDA Master Agreement and any related asset-class-specific definitions. 74 The Commission included a definition of “life cycle event” in proposed Regulation SBSR. See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Securities Exchange Act Release No. 63346 (Nov. 19, 2010), 75 FR 75208 (Dec. 2, 2010). 75 In addition to the information required to be submitted to the Commission pursuant to new Rule 19b-4(o)(3), and any information identified in this release as an example of information that clearing agencies may wish to provide in their submissions, the Commission may also require additional information as necessary to assess any of the factors it determines to be appropriate in order to make a determination of whether the clearing requirement applies. See infra section II.A.1.g (discussing new Rule 19b-4(o)(6)). The Commission believes that basing the information submission requirements in new Rule 19b-4(o)(3)(ii) on the five statutory factors set forth in Exchange Act Section 3C(b)(4)(B), and supplementing these requirements by providing the above examples of information that the Commission believes could be responsive, is an appropriate approach to implementing the statute because it retains the flexibility provided for in the Proposing Release to allow clearing agencies to address the statutory factors based on the facts and circumstances of a particular submission without requiring specific data points that could be overly prescriptive at the outset. At the same time, the Commission recognizes that a requirement that does not provide enough detail could result in an inefficient use of clearing agency and Commission resources if Security-Based Swap Submissions contain a large amount of unnecessary or irrelevant information. To that extent, the Commission encourages clearing agencies to discuss, at least initially, prospective Security-Based Swap Submissions with Commission staff to help determine what materials would be responsive to the requirements of new Rule 19b-4(o)(3)(ii) and Exchange Act Section 3C(b)(4)(B) in the context of a particular submission. c. Substance of Security-Based Swap Submissions: Open Access Exchange Act Section 3C also requires that the rules of a clearing agency that clears security-based swaps subject to the clearing requirement provide for open access. 76 In the course of reviewing a Security-Based Swap Submission, the Commission may assess whether a clearing agency's rules provide for open access, particularly with respect to the relevant Security-Based Swap Submission. Accordingly, new Rule 19b-4(o)(3)(ii), which is being adopted as proposed, requires that a Security-Based Swap Submission include a statement regarding how the clearing agency's rules: 76 See 15 U.S.C. 78c-3(a)(2) (“OPEN ACCESS.—The rules of a clearing agency described in paragraph (1) shall—(A) prescribe that all security-based swaps submitted to the clearing agency with the same terms and conditions are economically equivalent within the clearing agency and may be offset with each other within the clearing agency; and (B) provide for non-discriminatory clearing of a security-based swap executed bilaterally or on or through the rules of an unaffiliated national securities exchange or security-based swap execution facility.”). (i) Prescribe that all security-based swaps submitted to the clearing agency with the same terms and conditions are economically equivalent within the clearing agency and may be offset with each other within the clearing agency; and (ii) Provide for non-discriminatory clearing of a security-based swap executed bilaterally or on or through the rules of an unaffiliated national securities exchange or security-based swap execution facility. One commenter requested that the Commission delete the requirement that a clearing agency submit information responsive to the factors related to open access in its Security-Based Swap Submission on the basis that requiring this information is “broad and burdensome” and outside of the authority granted to the Commission by the Dodd-Frank Act. 77 While the Commission recognizes that the factors related to open access are not included in the five qualitative and quantitative factors that the Commission is required to consider when reviewing a Security-Based Swap Submission, the Commission notes that Exchange Act Section 3C(a)(2) provides the authority for including this requirement in new Rule 19b-4(o)(3)(ii) in that it requires that the rules of a clearing agency that clears security-based swaps subject to the clearing requirement be in compliance with the two open access provisions. 78 By requiring that compliance with the open access requirements be assessed each time a clearing agency files a Security-Based Swap Submission, the clearing agency will be required to demonstrate that it continues to satisfy these ongoing conditions prior to listing a new security-based swap (or group, category, type, or class of security-based swap) for clearing. Because clearing in a particular security-based swap is limited to a small number of clearing agencies, it is critical that access to the clearing agency be open and available to market participants having due regard for risk management considerations. 79 Further, the Commission believes that requiring clearing agencies to address the two open access requirements in a Security-Based Swap Submission generally would not require a clearing agency to conduct a completely novel analysis or to consider factors with which it is unfamiliar as clearing agencies are already required to address open access issues as part of their compliance with certain requirements contained in Section 17A of the Exchange Act. 80 Accordingly, the rules the Commission is adopting today, which are unchanged from what was proposed, require that clearing agencies address in their Security-Based Swap Submission how their rules meet such open access requirements. 77 See CME Letter at 3. 78 See 15 U.S.C. 78c-3(a)(2) (as added by Section 763(a) of the Dodd-Frank Act). 79 The Commission has previously recognized that certain conflicts of interest at clearing agencies or among their members could restrict open access to the clearing agency. See Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC, Securities Exchange Act Release No. 63107 (Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (noting that “[a] consequence of increased use of central clearing services, however, is that participants that control or influence a security-based swap clearing agency may gain a competitive advantage in the security-based swaps market by restricting access to the clearing agency. If that occurred, financial institutions and marketplaces that do not have access to central clearing would have limited ability to trade in or list security-based swaps.”). The Commission also recognized, however, that clearing agencies may legitimately impose minimum participation standards that could affect open access. See id (“The provisions in Section 17A recognize that a clearing agency may discriminate among persons in the admission to, or the use of, the clearing agency, by requiring that participants meet certain financial, operational, and other fitness standards. However, Section 17A also requires that sanctioned discriminations must not be unfair.”). 80 See 15 U.S.C. 78q-1(b)(3)(F) (requiring that the rules of a clearing agency, among other things, not be designed “to permit unfair discrimination in the admission of participants or among participants in the use of the clearing agency”). d. Timing of Security-Based Swap Submissions Pursuant to Exchange Act Section 3C(b)(3), the Commission is required to make its determination of whether a security-based swap described in a clearing agency's Security-Based Swap Submission is required to be cleared not later than 90 days after receiving such Security-Based Swap Submission. 81 The statute further provides that this 90-day determination period may be extended with the consent of the clearing agency making such Security-Based Swap Submission. 82 In addition, the statute requires the Commission to make available to the public any Security- Based Swap Submission it receives and to “provide at least a 30-day public comment period regarding its determination whether the clearing requirement shall apply to the submission.” 83 81 15 U.S.C. 78c-3(b)(3) (as added by Section 763(a) of the Dodd-Frank Act). Further, pursuant to new Rule 19b-4(o)(2), if any information submitted to the Commission by a clearing agency on Form 19b-4 were not complete or otherwise in compliance with Rule 19b-4 and Form 19b-4, such information would not be considered a Security-Based Swap Submission and the Commission would be required to inform the clearing agency within twenty-one business days of such submission. 82 15 U.S.C. 78c-3(b)(3) (as added by Section 763(a) of the Dodd-Frank Act). 83 15 U.S.C. 78c-3(b)(2)(C)(iii) (as added by Section 763(a) of the Dodd-Frank Act). Because the Commission's obligation to provide for notice and public comment of Security-Based Swap Submissions is set forth in detail in Exchange Act Section 3C, it was not necessary for the Commission to adopt rules regarding these procedures. However, the Commission believes that it is important to provide guidance on how it intends to implement these statutory requirements in practice. Specifically, the Commission believes that the statutory requirement to “provide at least a 30-day public comment” was intended, at least in part, to enable the public to have an opportunity to comment on the Security-Based Swap Submission and to provide information for the Commission to consider as part of making its determination whether the clearing requirement should apply to the submission. Accordingly, the Commission will indicate in each notice that it publishes of a Security-Based Swap Submission that public comment will be accepted during the period specified in the notice (which will in no event be less than 30 days). In addition, the comment period will begin and end within the 90-day determination period (as opposed to beginning after the Commission has made its final determination). The Commission expects to publish notice of the Security-Based Swap Submission in the Federal Register and it also intends to publish notice on the Commission's publicly-available Web site at www.sec.gov . Such notice would include the solicitation of public comment for the period specified in the notice. This process is consistent with the current process that is in place for proposed rule changes under Exchange Act Section 19(b)(2) and Rule 19b-4. Although the Commission did not propose rules with respect to the procedure it will follow in publishing Security-Based Swap Submissions for public comment, one commenter requested that the Commission extend the minimum public review period to 45 days. 84 This commenter also recommended that the comment period should not commence until after: (1) The clearing agency has proven the ability to clear the product through testing; (2) the clearing agency has sufficient operational resources and established connectivity to the market using standard protocols; (3) all market standardization issues defining the product, life events, etc. have been resolved; (4) pricing standards and margin calculations have been agreed by the clearing agency's risk committee; and (5) the Commission has all the information it needs and such information has been verified as consistent with data received from security-based swap data repositories, security-based swap dealers and major security-based swap participants. 85 In response to this comment letter, the Commission notes that the comment period specified in the notice will be at least 30 days, as is required under the statute. 86 The Commission believes the statute permits it to specify a comment period that is longer than 30 days, and the Commission will state the length of the comment period in each notice. Generally, however, the Commission believes that a 30-day comment period for Security-Based Swap Submissions strikes an appropriate balance by providing commenters with sufficient time to formulate their ideas while still giving the Commission time to consider all of the comments received and to factor them into the mandatory clearing determination, particularly as the Commission has a statutory obligation to make a clearing determination not later than 90 days after receiving the submission. In response to the comment suggesting that the Commission should delay the commencement of the comment period until the actions outlined by the above commenter are completed, the Commission notes that most of the information identified by the commenter is already required by the five quantitative and qualitative factors set forth in Exchange Act Section 3C(b)(4)(B) and new Rule 19b-4(o)(3)(ii). 87 Moreover, the Commission is concerned that delaying the commencement of the public comment process would delay the Commission's potential receipt of feedback from the public which, in the Commission's experience reviewing proposed rule changes, is often an important source of information for supplementing or challenging the material submitted by the SRO. 84 See ISDA Letter at 11. 85 See id. 86 See 15 U.S.C. 78c-3(b)(2)(C)(iii) (as added by Section 763(a) of the Dodd-Frank Act). 87 To the extent that a Security-Based Swap Submission does not include the minimum information set forth in new Rule 19b-4(o)(3), such incomplete submission would, pursuant to new Rule 19b-4(o)(2), be deemed not to have been submitted and the Commission would be required to notify that clearing agency of the rejection of the Security-Based Swap Submission within twenty-one business days of the original submission. In addition, a commenter recommended that the Commission adopt an extended transition period between the date that a determination is made that a security-based swap is required to be cleared and the date clearing becomes mandatory for that product. 88 This commenter also recommended a second transition period from “when the `exchange/security-based swap execution facility trading' requirement is determined to when such requirement takes effect.” 89 Finally, this commenter recommended “full transparency of clearing agency requirements and performance during such period(s).” 90 Although the substance of the Commission's mandatory clearing determinations and the timing of implementation of those determinations are not addressed in the rules being adopted today, which focus on the process by which clearing agencies submit filings, the Commission understands the importance of ensuring that clearing agencies and market participants are given an appropriate amount of time and guidance to comply with a clearing mandate. In many cases, the determination of when and how a clearing requirement should be implemented will depend on the particular product that the Commission determines is required to be cleared. The Commission further notes that Exchange Act Section 3C(b)(4)(C) provides that the Commission, in making a mandatory clearing determination, may require such terms and conditions as the Commission determines to be appropriate. 91 88 See ISDA Letter at 10-11. 89 See id. 90 See id. at 11. 91 See 15 U.S.C. 78c-3(b)(4)(C). e. Notice to Clearing Agency Members Exchange Act Section 3C(b)(2)(A) requires that a clearing agency provide notice to its members, in a manner determined by the Commission, of its Security-Based Swap Submissions. 92 To meet this requirement, new Rule 19b-4(o)(5), which is being adopted as proposed, requires clearing agencies to post all Security-Based Swap Submissions, and any amendments thereto, on their Web sites. This public posting must be completed within two business days following the submission to the Commission. The Commission received one comment expressing general support for this requirement. 93 92 See 15 U.S.C. 78c-3(b)(2)(A) (as added by Section 763(a) of the Dodd-Frank Act). 93 See AFR Letter at 2. This Commission believes that a two-business-day timeframe is appropriate because it is consistent with the notice requirement that currently applies to proposed rule changes, 94 and that such timeframe will provide members of the clearing agency and the public with timely notice of the submission. New Rule 19b-4(o)(5) requires a clearing agency to maintain this posting on its Web site until the Commission makes a determination regarding the Security-Based Swap Submission, the clearing agency withdraws the Security-Based Swap Submission or the clearing agency is notified that the Security-Based Swap Submission is not properly filed. 95 These requirements should help ensure that submissions that are being actively considered by the Commission are readily available to the members of the clearing agency and the public and help provide for a more transparent process. 94 Commission rules currently require SROs to post on their Web sites a copy of any proposed rule change the SRO filed with the Commission, and any amendments thereto. Such posting is required within two business days after filing the proposed rule change with the Commission. See 17 CFR 240.19b-4(l). In adopting this rule, the Commission stated that all market participants, investors and other interested parties should have access to proposed rule changes filed with the Commission, and any amendments, as soon as practicable, and that it did not believe that a two-business-day timeframe would be impractical or unduly burdensome on SROs. See Final Rules Regarding Proposed Rule Changes of Self-Regulatory Organizations, Securities Exchange Act Release No. 50486 (Oct. 4, 2004), 69 FR 60287 (Oct. 8, 2004). 95 Proposed Rule 19b-4(o)(5). The Commission notes that the current instructions for Form 19b-4 require an SRO to file with the Commission copies of notices issued by the SRO soliciting comment on the proposed rule change and copies of all written comments on the proposed rule change received by the SRO (whether or not comments were solicited) from its members or participants. 96 Any correspondence the SRO receives after it files a proposed rule change, but before the Commission takes final action on the proposed rule change, also is required to be filed with the Commission. 97 The SRO is required to summarize the substance of all such comments received and respond in detail to any significant issues raised in the comments about the proposed rule change. 98 In accordance with the changes the Commission is adopting today, clearing agencies will be subject to these same requirements in connection with Security-Based Swap Submissions. The Commission believes that applying these requirements in the instructions to Form 19b-4 to Security-Based Swap Submissions will provide the Commission with an opportunity to consider the various viewpoints expressed by commenters by making sure relevant comments are included in the Security-Based Swap Submission. 96 See Items 5 and 9 (Exhibit 2) of the General Instructions for Form 19b-4. 17 CFR 240.819. 97 See id. 98 Item 5 of the General Instructions for Form 19b-4. 17 CFR 240.819. Finally, one commenter requested that the Commission require clearing agencies “to notify the Commission, as well as the public, of the type of swap being considered at the time it notifies members of the submission or possible submission.” 99 The Commission appreciates this suggestion, but has ultimately decided not to modify new Rule 19b-4(o)(5) in this manner as the Commission believes that requiring Web site disclosure of the Security-Based Swap Submission within two business days of the submission itself will provide interested persons and the public with sufficient opportunity to provide feedback on the submission before the Commission makes a mandatory clearing determination. 99 See Better Markets Letter at 8. f. Submissions of a Group, Category, Type or Class of Security-Based Swaps New Rule 19b-4(o)(4), which is being adopted as proposed, requires that clearing agencies submit security-based swaps to the Commission for review by group, category, type, or class to the extent that doing so is practicable and reasonable. Any aggregation will require a clear description in the applicable Security-Based Swap Submission so that market participants and the public know which security-based swaps may be subject to a clearing requirement. The Proposing Release contained a number of requests for comment with respect to how the Commission should apply this rule including, among other things, questions pertaining to how a clearing agency should identify the scope of the group, category, type or class of security-based swaps it plans to clear, the relevant characteristics of security-based swaps that permit aggregation by group, category, type or class, factors that would make aggregation more difficult, and factors that may be specific to a particular clearing agency. Two commenters requested that the Commission further define the meaning and scope of the terms “category,” “class,” “type,” and “group” with respect to security-based swaps. 100 In particular, one of these commenters further suggested using the following characteristics of security-based swaps to define different products: (1) Instrument description; (2) acceptable currencies (and whether the contract is single currency); (3) acceptable indices; (4) types ( e.g., total return or price return); (5) maximum residual term; (6) notional amount (minimum to maximum of the relevant currency unit); (7) applicable day count fraction; (8) applicable business day convention; (9) minimum residual term of the trade ( i.e., the period from the date of submission of the trade to the date of termination); and (10) applicable calculation periods. 101 100 See Exhibit A to CME Letter and ISDA Letter. 101 See ISDA Letter at 3-4. Although the commenter did provide specific suggestions of certain characteristics that could be used to create groups, categories, types or classes of security-based swaps, the Commission did not receive any comment letters responding to its requests for suggestions as to how best to utilize the individual characteristics, which may include among other things the underlying security, tenor, and coupon of the security-based swap, to aggregate security-based swaps into groups, categories, types or classes. In addition, the Commission notes that it has not yet received any Security-Based Swap Submissions and does not have detailed information about how clearing agencies would create groups, categories, types or classes of security-based swaps in determining whether to clear such security-based swaps. For these reasons, the Commission believes that allowing these key terms to evolve over time as an iterative process between the clearing agencies and the Commission is preferable to prematurely hard-coding definitions into the rules without the benefit of experience. Nevertheless, the Commission continues to believe that requiring multiple security-based swaps in each submission—to the extent that such groupings are practicable and reasonable ( e.g., by taking into consideration appropriate risk management issues applicable to the aggregation)—would streamline the submission process for Commission staff and the clearing agencies. This approach would allow more security-based swaps to be reviewed in a timely manner. At the same time, the manner in which the Commission will ultimately determine which security-based swaps are appropriately aggregated into groups, categories, types, or classes likely will depend on the particular facts and circumstances of the products under consideration. This in turn will be informed by how the clearing agency defines the relevant security-based swap (or relevant group, category, type, or class of security-based swaps), how the clearing agency manages the product (both operationally and in its rulebook) and the comments received by the Commission during the public comment period. Prior to the Commission providing further guidance regarding aggregation, clearing agencies may organize their Security-Based Swap Submissions using a reasonable basis that they determine to be appropriate and responsive to the requirements of the Exchange Act. For example, to the extent possible, the groups, categories, types or classes of security-based swaps that are filed with the Commission as a Security-Based Swap Submission could mirror the groups, categories, types or classes that the clearing agency evaluates in determining whether to list such security-based swap for clearing. In addition, clearing agencies could also consider other factors that they deem to be appropriate, including the characteristics identified in the comment letter referred to above. 102 In reaching a determination regarding any aggregation, the Commission also expects to conduct its own analysis, which will take into account, at a minimum, the five qualitative and quantitative factors that the Commission is required to consider pursuant to Exchange Act Section 3C(b)(4)(B) when making a mandatory clearing determination. 102 See id. g. Other Issues Related to Security-Based Swap Submissions Proposed Rule 19b-4(o)(6)(i) provided that, in making a mandatory clearing determination, the Commission would take into account the factors addressed in the Security-Based Swap Submission and any additional factors the Commission determines to be appropriate. Proposed Rule 19b-4(o)(6)(i) also required a clearing agency to provide any additional information requested by the Commission as necessary to make a determination. In addition, proposed Rule 19b-4(o)(6)(ii) provided that, in making a determination of whether or not the clearing requirement would apply to the security-based swap (or any group, category, type, or class of security-based swaps) described in the submission, the Commission may require such terms and conditions as the Commission determines to be appropriate in the public interest. 103 103 See 15 U.S.C. 78c-3(b)(4)(C) (as added by Section 763(a) of the Dodd-Frank Act) and proposed Rule 19b-4(o)(6)(ii). In connection with proposed Rule 19b-4(o)(6), one commenter urged the Commission to remove the language allowing the Commission, in addition to considering the five statutory factors set forth in Exchange Act Section 3C(b)(4)(B), to consider “any additional factors the Commission determines to be appropriate” in connection with a mandatory clearing determination. The commenter believes that this language exceeds the Commission's statutory authority and would expose the proposed rules to potential litigation. 104 104 See Better Markets Letter at 8-10. The Commission has carefully considered the comments it received in respect of proposed Rule 19b-4(o)(6). While the Commission disagrees with the commenter that the Commission lacks authority to promulgate a rule allowing it to consider “any additional factors the Commission determines to be appropriate” in connection with a mandatory clearing determination, 105 the Commission has nonetheless decided not to adopt the language in the final rule. The Commission believes the language is unnecessary because Exchange Act Section 3C already requires that the Commission shall take into account the five factors in Exchange Act Section 3C(b)(4)(B) in making a mandatory clearing determination and new Rule 19b-4(o)(6)(i), as adopted, requires clearing agencies to provide any additional information requested by the Commission as necessary to assess any of the factors it determines to be appropriate in order to make a mandatory clearing determination in connection with a Security-Based Swap Submission. The Commission believes that this rule, as adopted, already empowers it to require the provision of any additional information relevant to making mandatory clearing determinations under Exchange Act Section 3C. 105 The Commission does not read Exchange Act Section 3C as restricting its existing authority to obtain information from registered clearing agencies. The Commission notes that Section 23(a) of the Exchange Act allows the Commission to “make such rules and regulations as may be necessary or appropriate to implement the provisions of this title for which [it is] responsible or for the execution of the functions vested in [it] by this title.” See 15 U.S.C. 78w(a)(1). The Commission also has decided not to adopt: (i) The preamble to proposed Rule 19b-4(o)(6), which had stated that upon receipt of a Security-Based Swap Submission, the Commission was required to review the submission and determine whether the relevant security-based swap (or group, category, type or class of security-based swaps) would be required to be cleared and (ii) proposed Rule 19b-4(o)(6)(ii), which had stated that the Commission may include such terms and conditions as it determined to be appropriate in the public interest in connection with making a mandatory clearing determination. In each case, the Commission notes that these provisions simply mirror statutory provisions set forth in Exchange Act 3C. 106 As noted above in connection with the Commission's modifications to proposed Rule 19b(o)(6)(i), promulgating rules to reiterate existing Commission powers and obligations is unnecessary, and the Commission believes that it would be prudent to remove these types of provisions so as to simplify the final rule to focus on the process by which clearing agencies will be required to make Security-Based Swap Submissions with the Commission. 106 See 15 U.S.C. 78c-3(b)(2)(C)(ii) (as added by Section 763(a) of the Dodd-Frank Act) (requiring the Commission to review each Security-Based Swap Submission and determine whether the security-based swap, or group, category, type, or class of security-based swaps, described in the submission is required to be cleared) and 15 U.S.C. 78c-3(b)(4)(C) (as added by Section 763(a) of the Dodd-Frank Act) (providing that the Commission, in making a mandatory clearing determination, may require such terms and conditions to the requirement as the Commission determines to be appropriate). In the Proposing Release, the Commission also requested comment on whether a clearing agency, in connection with each submission or in some circumstances, should be required to include an independent validation of its margin methodology and its ability to maintain sufficient financial resources. In response to this request, one commenter expressed an opinion that independent validations may be helpful in verifying elements of a submission, but that the Commission should use caution in allowing them to become a substitute for the Commission's own judgment. This commenter also urged the Commission to pay careful attention to the question of what constitutes “independence” for these purposes. 107 Another commenter noted that a clearing agency should have an ongoing internal process for validating its internal risk models, which process should be independent of the internal models' development, implementation, and operation. 108 As such, this commenter believes that it should be permissible for the review personnel to be employed by the clearing agency, so long as they are not involved in the development, implementation, and operation of the risk models. 109 This commenter further recommended that the independent validation evaluate “empirical evidence and documentation supporting the methodologies used, important model assumptions and their limitations, adequacy and robustness of empirical data used in parameter estimation and model calibration, and evidence of a model's strengths and weaknesses.” 110 After reviewing the comments received, the Commission has determined that it is not necessary to include an express requirement in new Rule 19b-4(o)(3) that a Security-Based Swap Submission refer to an independent validation of the clearing agency's margin methodology and its ability to maintain sufficient financial resources. The Commission believes such requirement is already contemplated by the final rules, particularly new Rule 19b-4(o)(3)(ii)(B). Specifically, in discussing a clearing agency's rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the security-based swap (or group, category, type or class of security-based swaps) under consideration, as required by this provision, it may be appropriate for a Security-Based Swap Submission to refer to any independent validation of the clearing agency's margin methodology or other processes satisfactory to the clearing agency that have assessed the fundamental soundness of all of the assumptions contained in the model as it exists at the time of the submission and that have assessed the appropriateness of the model during a relevant time period. 107 See AFR Letter at 3. 108 See OCC Letter at 3. 109 See id. 110 See id. Finally, one commenter requested that the Commission promulgate rules governing Commission-initiated Reviews. 111 The commenter further stated that these rules should make clear that during a Commission-initiated Review, the Commission will apply standards that are no different than the standards applied to a review of Security-Based Swap Submissions. 112 The Commission notes that the Dodd-Frank Act does not require rulemaking regarding Commission-initiated Reviews. Commission staff are in the process of determining how these reviews will proceed, particularly with respect to sources of and access to the information the Commission will need to conduct Commission-initiated Reviews, and whether any rulemaking related to these reviews is necessary, either now or in the future. 111 See Better Markets Letter at 11-12. 112 See id. h. Additional Comments The Commission also received a number of comments that did not directly relate to the process of filing Security-Based Swap Submissions or to any specific provision in new Rule 19b-4(o). In particular, many of these comments related to the clearing of security-based swaps in general and to the rationale underlying the Commission's specific mandatory clearing determinations. While the Commission appreciates receiving the benefit of the public's views on a wide range of issues, the Commission nevertheless reiterates that the rules that are being adopted today are limited solely to the process by which clearing agencies will be required to make Security-Based Swap Submissions with the Commission. Accordingly, the Commission is not modifying the final rules in response to the comments summarized below. However, the Commission continues to consider a number of important issues related to its substantive mandatory clearing determinations, including many of the points raised in these comment letters. To the extent that these issues are raised by a particular Security-Based Swap Submission, the Commission will address them at the appropriate time. For example, one commenter urged the Commission to exempt certain structured security-based swaps from the mandatory clearing requirement on the basis that such instruments are “not clearable” as they are not standardized, their underlying collateral pool cannot be evaluated, they would transfer risk to the clearing entity and clearing would require the posting of collateral. 113 This comment was related to the determinations to be made by the Commission under Exchange Act Section 3C and not to the process for filing Security-Based Swap Submissions with the Commission. Another commenter provided detailed suggestions to the Commission with respect to how it should evaluate information responsive to the five qualitative and quantitative factors set forth in Exchange Act Section 3C(b)(4)(B), and additional considerations regarding: (1) Standardization, (2) exceptions, (3) affiliate (intra-group) transactions, (4) wrong way risk, (5) implementation timing, and (6) moral hazard concerns. 114 Similarly, a commenter advocated that the Commission consider information that is different from what was included in a clearing agency's Security-Based Swap Submission and to draw upon information provided by other members of the Council. 115 113 See comment letter of American Securitization Forum (Feb. 14, 2011). 114 See ISDA Letter at 9-12. 115 See AFR Letter at 4. Commenters representing seven forei [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2012-16233. Public record. Not legal advice.