Derivatives Clearing Organizations and International Standards

Federal RegisterDec 2, 2013

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39, 140, and 190

RIN 3038-AE06

Derivatives Clearing Organizations and International Standards

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“Commission”) is adopting final regulations to establish additional standards for compliance with the derivatives clearing organization (“DCO”) core principles set forth in the Commodity Exchange Act (“CEA”) for systemically important DCOs (“SIDCOs”) and DCOs that elect to opt-in to the SIDCO regulatory requirements (“Subpart C DCOs”). Pursuant to the new regulations, SIDCOs and Subpart C DCOs are required to comply with the requirements applicable to all DCOs, which are set forth in the Commission's DCO regulations on compliance with core principles, to the extent those requirements are not inconsistent with the new requirements set forth herein. The new regulations include provisions concerning: procedural requirements for opting in to the regulatory regime as well as substantive requirements relating to governance, financial resources, system safeguards, special default rules and procedures for uncovered losses or shortfalls, risk management, additional disclosure requirements, efficiency, and recovery and wind-down procedures. These additional requirements are consistent with the Principles for Financial Market Infrastructures (“PFMIs”) published by the Committee on Payment and Settlement Systems and the Board of the International Organization of Securities Commissions (“CPSS-IOSCO”). In addition, the Commission is adopting certain delegation provisions and certain technical clarifications.

DATES:

This rule is effective December 31, 2013, except for the amendments to 17 CFR 39.31 and 140.94, which are effective December 13, 2013, and the amendments to 190.09, which are effective December 2, 2013.

FOR FURTHER INFORMATION CONTACT:

Ananda Radhakrishnan, Director, Division of Clearing and Risk (“DCR”), at 202-418-5188 or

aradhakrishnan@cftc.gov;

Robert B. Wasserman, Chief Counsel, DCR, at 202-418-5092 or

rwasserman@cftc.gov;

M. Laura Astrada, Associate Chief Counsel, DCR, at 202-418-7622 or

lastrada@cftc.gov;

Peter A. Kals, Special Counsel, DCR, at 202-418-5466 or

pkals@cftc.gov;

Jocelyn Partridge, Special Counsel, DCR, at 202-418-5926 or

jpartridge@cftc.gov;

or Tracey Wingate, Special Counsel, DCR, at 202-418-5319 or

twingate@cftc.gov,

in each case, at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Regulatory Framework for Registered DCOs

B. Designation of DCOs as Systemically Important under Title VIII of the Dodd-Frank Act

C. Existing Standards for SIDCOs

D. DCO Core Principles and Regulations for Registered DCOs

E. PFMIs

F. The Role of the PFMIs in International Banking Standards

G. New Regulations Applicable to SIDCOs and Subpart C DCOs

II. Discussion of Revised and New Regulations

A. Regulation 39.2 (Definitions)

B. Regulation 39.30 (Scope)

C. Regulation 39.31 (Election to become subject to the provisions of Subpart C)

D. Regulation 39.32 (Governance for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

E. Regulation 39.33 (Financial resources requirements for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

F. Regulation 39.34 (System safeguards for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

G. Regulation 39.35 (Default rules and procedures for uncovered credit losses or liquidity shortfalls (recovery) for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

H. Regulation 39.36 (Risk management for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

I. Regulation 39.37 (Additional disclosure for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

J. Regulation 39.38 (Efficiency for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

K. Regulation 39.39 (Recovery and wind-down for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

L. Regulation 39.40 (Consistency with the Principles for Financial Market Infrastructures)

M. Regulation 39.41 (Special enforcement authority for systemically important derivatives clearing organizations)

N. Regulation 39.42 (Advance notice of material risk-related rule changes by systemically important derivatives clearing organizations)

O. Regulation 140.94 (Delegation of authority to the Director of the Division of Clearing and Risk)

P. Regulation 190.09 (Member property)

III. Effective Date

A. Congressional Review Act

B. Administrative Procedure Act

IV. Related Matters

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

C. Consideration of Costs and Benefits

I. Background

A. Regulatory Framework for Registered DCOs

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Title VII of the Dodd-Frank Act, entitled the “Wall Street Transparency and Accountability Act of 2010,”

amended the Commodity Exchange Act (“CEA” or the “Act”)

to establish a comprehensive regulatory framework for over-the-counter (“OTC”) derivatives, including swaps.

Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be accessed at

http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.

Section 701 of the Dodd-Frank Act.

7 U.S.C. 1

et seq.

Section 725(c) of the Dodd-Frank Act amended Section 5b(c)(2) of the CEA, which sets forth core principles that a DCO must comply with in order to register and maintain registration with the Commission. In furtherance of the goals of the Dodd-Frank Act to reduce risk, increase transparency, and promote market integrity, the Commission, pursuant to the Commission's enhanced rulemaking authority,

adopted regulations establishing standards for compliance with the DCO core principles.

See

Section 725(c)(2)(i) of the Dodd-Frank Act (giving the Commission explicit authority to promulgate rules regarding the core principles pursuant to its rulemaking authority under Section 8a(5) of the CEA, 7 U.S.C. 12a(5)).

See

Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 69334 (Nov. 8, 2011). These regulations are set forth in Subpart A and Subpart B of part 39 of the Commission's regulations (“Subpart A” and “Subpart B,” respectively).

B. Designation of DCOs as Systemically Important under Title VIII of the Dodd-Frank Act

Title VIII of the Dodd-Frank Act, entitled “Payment, Clearing, and Settlement Supervision Act of 2010,”

was enacted to mitigate systemic risk in the financial system and promote financial stability.

Section 804 of the Dodd-Frank Act requires the Financial Stability Oversight Council (“Council”) to designate those financial market utilities (“FMUs”)

that the Council determines are, or are likely to become, systemically important.

Section 801 of the Dodd-Frank Act.

Section 802(b) of the Dodd-Frank Act.

An FMU includes any person that manages or operates 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 person. Section 803(6)(A) of the Dodd-Frank Act.

Section 804(a)(1) of the Dodd-Frank Act. The term “systemically important” means a situation where the failure of or a disruption to the functioning of a 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. Section 803(9) of the Dodd-Frank Act.

See also

Authority to Designate Financial Market Utilities as Systemically Important, 76 FR 44763, 44774 (July 27, 2011) (final rule).

In determining whether an FMU is systemically important, the Council uses a detailed two-stage designations process, using certain statutory considerations

and other metrics to assess, among other things, “whether possible disruptions [to the functioning of an FMU] are potentially severe, not necessarily in the sense that they themselves might trigger damage to the U.S. economy, but because such disruptions might reduce the ability of financial institutions or markets to perform their normal intermediation functions.”

On July 18, 2012, the Council designated eight FMUs as systemically important under Title VIII.

Two of these are CFTC-registered DCOs

for which the Commission is the Supervisory Agency.

Under Section 804(a)(2) of the Dodd-Frank Act, in determining whether an FMU is or is likely to become systemically important, the Council must take into consideration the following: (A) The aggregate monetary value of transactions processed by the FMU; (B) the aggregate exposure of an FMU to its counterparties; (C) the relationship, interdependencies, or other interactions of the FMU with other FMUs or payment, clearing or settlement activities; (D) the effect that the failure of or a disruption to the FMU would have on critical markets, financial institutions or the broader financial system; and (E) any other factors the Council deems appropriate.

76 FR 44766.

See

Press Release, Financial Stability Oversight Council, Financial Stability Oversight Council Makes First Designations in Effort to Protect Against Future Financial Crises (July 18, 2012), available at

http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.

While Chicago Mercantile Exchange, Inc. (“CME Clearing”), ICE Clear Credit LLC (“ICE Clear Credit”), and The Options Clearing Corporation (“OCC”) are the CFTC-registered DCOs that were designated as systemically important by the Council, the CFTC is the Supervisory Agency only for CME Clearing and ICE Clear Credit; the Securities and Exchange Commission (“SEC”) serves as OCC's Supervisory Agency.

See

Section 803(8)(A) of the Dodd-Frank Act (defining “Supervisory Agency” as the federal agency that has primary jurisdiction over a designated financial market utility under federal banking, securities or commodity futures laws).

C. Existing Standards for SIDCOs

Section 805 of the Dodd-Frank Act directs the Commission to consider relevant international standards and existing prudential requirements when prescribing risk management standards governing the operations related to payment, clearing, and settlement activities for FMUs that are (1) designated as systemically important by the Council and (2) engaged in activities for which the Commission is the Supervisory Agency.

More generally, Section 752 of the Dodd-Frank Act directs the Commission to consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation of, among other things, swaps, futures, and options on futures.

See

Section 805(a)(2) of the Dodd-Frank Act. The Commission notes that, under section 805 of the Dodd-Frank Act, the Commission also has the authority to prescribe risk management standards governing the operations related to payment, clearing, and settlement activities for FMUs that are designated as systemically important by the Council and are engaged in activities for which the Commission is the appropriate financial regulator.

Section 752(a) of the Dodd-Frank Act, codified at 15 U.S.C. 8325, provides, in relevant part, that in order to promote effective and consistent global regulation of swaps and security based swaps, the CFTC, the SEC, and the prudential regulators (as that term is defined in section 1a(30) of the CEA), as appropriate, shall consult and coordinate with foreign regulatory authorities on the establishment of international standards with respect to the regulation of swaps and swap entities. In addition, section 752(b) of the Dodd-Frank Act states that in order to promote effective and consistent global regulation of contracts of sale of a commodity for future delivery and options on such contracts, the CFTC shall consult and coordinate with foreign regulatory authorities on the establishment of international standards with respect to the regulation of contracts of a sale of a commodity for future delivery and on options on such contracts.

In 2013, after careful consideration of the comments on the rules that it had proposed for SIDCOs in 2010 and 2011,

and in light of domestic and international market and regulatory developments, the Commission finalized regulations for SIDCOs in a manner consistent with the PFMIs.

Most recently, the Commission proposed the regulations for SIDCOs and Subpart C DCOs that are being adopted herein (the “Proposal”).

See Financial Resources Requirements for Derivatives Clearing Organizations, 75 FR 63113, 63119 (Oct. 14, 2010) (notice of proposed rulemaking) and Risk Management Requirements for Derivatives Clearing Organizations, 76 FR 3697 (Jan. 20, 2011) (notice of proposed rulemaking).

Specifically, in that final rulemaking, the Commission amended part 39 by creating a Subpart C and adding regulations that (1) increased the minimum financial resource requirements for SIDCOs, (2) restricted the use of assessments by SIDCOs in meeting such financial resource obligations, (3) enhanced the system safeguards requirements for SIDCOs, and (4) granted the Commission special enforcement authority over SIDCOs pursuant to Section 807 of the Dodd-Frank Act.

See

Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations, 78 FR 49663 (Aug. 15, 2013) (“SIDCO Final Rule”).

Derivatives Clearing Organizations and International Standards, 78 FR 50260 (Aug. 16, 2013) (notice of proposed rulemaking).

D. DCO Core Principles and Regulations for Registered DCOs

As noted in the Proposal, in order to register and maintain registration status with the Commission, DCOs must comply with all of the DCO core principles set forth in Section 5b(c)(2) of the CEA, as amended by Section 725 of the Dodd-Frank Act, as well as all applicable Commission regulations. The Proposal did, however, identify and discuss those core principles and related Commission regulations that were most relevant to the proposed regulations. Specifically, the Proposal discussed the following DCO core principles and related Commission regulations Core Principle B (Financial Resources) and regulations 39.11 and 39.29; Core Principle D (Risk Management) and regulation 39.13; Core Principle G (Default Rules and Procedures) and regulation 39.16; Core Principle I (System Safeguards) and regulations 39.18 and 39.30; Core Principle L (Public Information) and regulation 39.21; Core Principle O (Governance Fitness Standards); Core Principle P (Conflicts of Interest); and Core Principle Q (Composition of Governing Boards).

For a summary and description of these core principles and Commission regulations,

see

78 FR 50262-50263.

E. PFMIs

1. Overview

In the SIDCO Final Rule, the Commission determined that, for purposes of meeting its obligation pursuant to Section 805(a)(2)(A) of the Dodd-Frank Act, the PFMIs, which were developed by CPSS-IOSCO over a period of several years,

were the

international standards most relevant to the risk management of SIDCOs.

The PFMIs set out 24 principles which address the risk management and efficiency of a financial market infrastructure's (“FMI”) operations.

Assessments of observance with the PFMIs focus also on the “key considerations” set forth for each of the principles.

While Subpart A and Subpart B of part 39 of the Commission's regulations incorporate the vast majority of the standards set forth in the PFMIs,

the Commission, which is a member of the Board of IOSCO, has an obligation under Section 805(a) of the Dodd-Frank Act to implement regulations relating to risk management that conform with applicable international standards. The PFMIs are such standards and, with this rulemaking, the Commission intends to adopt rules and regulations that are fully consistent with the standards set forth in the PFMIs by the end of 2013. To that end, the Commission has recognized that in certain instances, the standards set forth in the PFMIs may not be fully covered by the requirements set forth in Subpart A and Subpart B of part 39 of the Commission's regulations. Thus, this rulemaking revises Subpart C to address those gaps, specifically with respect to the following PFMI principles: Principle 2 (Governance); Principle 3 (Framework for the comprehensive management of risks); Principle 4 (Credit risk); Principle 6 (Margin); Principle 7 (Liquidity risk); Principle 9 (Money settlements); Principle 14 (Segregation and portability); Principle 15 (General business risk); Principle 16 (Custody and investment risks); Principle 17 (Operational risk); Principle 21 (Efficiency and effectiveness); Principle 22 (Communication procedures and standards); and Principle 23 (Disclosure of rules, key procedures, and market data).

See

Committee on Payment and Settlement Systems and the Technical Committee of the

International Organization of Securities Commissions, “Principles for Financial Market Infrastructures,” (April 2012) available at

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf. See also

the Financial Stability Board June 2012 Third Progress Report on Implementation, available at

http://www.financialstabilityboard.org/publications/r_120615.pdf

(Noting publication of the PFMIs as achieving “an important milestone in the global development of a sound basis for central clearing of all standardised OTC derivatives”).

In making this determination, the Commission noted that “the adoption and implementation of the PFMIs by numerous foreign jurisdictions highlights the role these principles play in creating a global, unified set of international risk management standards for CCPs.”

See

78 FR 49666.

See id.,

¶ 1.19.

See

Committee on Payment and Settlement Systems and the Board of the International Organization of Securities Commissions Principles for Financial Market Infrastructures: Disclosure Framework and Assessment Methodology (Dec. 2012) (hereinafter “Disclosure Framework and Assessment Methodology”), available at

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.

Indeed, Subpart A and Subpart B were informed by the consultative report for the PFMIs.

See generally

76 FR 69334.

For a summary and description of these principles,

see

78 FR 50263-50266.

F. The Role of the PFMIs in International Banking Standards

The Commission notes that where a central counterparty (“CCP”) is not prudentially supervised in a jurisdiction that has domestic rules and regulations that are consistent with the standards set forth in the PFMIs, the implementation of certain international banking regulations will have significant cost implications for that CCP and its market participants. In July of 2012, the Basel Committee on Banking Supervision (“BCBS”),

the international body that sets standards for the regulation of banks, published the “Capital Requirements for Bank Exposures to Central Counterparties” (“Basel CCP Capital Requirements”), which sets forth interim rules governing the capital charges arising from bank exposures to CCPs related to OTC derivatives, exchange traded derivatives, and securities financing transactions.

The Basel CCP Capital Requirements create financial incentives for banks, including their subsidiaries and affiliates,

to clear financial derivatives with CCPs that are prudentially supervised in a jurisdiction where the relevant regulator has adopted rules or regulations that are consistent with the standards set forth in the PFMIs. Specifically, the Basel CCP Capital Requirements introduce new capital charges based on counterparty risk for banks conducting financial derivatives transactions through a CCP.

These incentives include (1) lower capital charges for exposures arising from derivatives cleared through a qualified CCP (“QCCP”) and (2) significantly higher capital charges for exposures arising from derivatives cleared through non-qualifying CCPs. A QCCP is defined as an entity that (i) is licensed to operate as a CCP, and is permitted by the appropriate regulator to operate as such, and (ii) is prudentially supervised in a jurisdiction where the relevant regulator has established and publicly indicated that it applies to the CCP, on an ongoing basis, domestic rules and regulations that are consistent with the PFMIs.

The BCBS is comprised of senior representatives of bank supervisory authorities and central banks from around the world including, Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

See

Bank for International Settlements, Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, December 2010 (revised June 2011), available at

http://www.bis.org/publ/bcbs189.htm.

See

“Capital Requirements for Bank Exposures to Central Counterparties” (July 2012), available at

www.bis.org/publ/bcbs227.pdf.

The Basel CCP Capital Requirements are one component of Basel III, a framework that “is part of a comprehensive set of reform measures developed by the BCBS to strengthen the regulation, supervision and risk management of the international banking sector.”

See

Bank for International Settlement's Web site for compilation of documents that form the regulatory framework of Basel III, available at

http://www.bis.org/bcbs/basel3.htm.

“Bank” is defined in accordance with the Basel framework to mean a bank, banking group or other entity (

i.e.

bank holding company) whose capital is being measured.

See

“Basel III: A Global Regulatory Framework,” Definition of Capital, paragraph 51. The term “bank,” as used herein, also includes subsidiaries and affiliates of the banking group or other entity. The Commission notes that a bank may be a client and/or a clearing member of a DCO.

See

Basel CCP Capital Requirements, Annex 4, Section II, 6(i).

See generally

78 FR 50266-50267.

See

Basel CCP Capital Requirements, Section I, A: General Terms.

The failure of a CCP to achieve QCCP status could result in significant costs to its bank customers. As one market participant noted, the “ramifications for failure to achieve QCCP status are onerous for banks' CCP exposures and can result in capital charges on trade exposures that are 10-20 times larger than capital charges for QCCP trade exposures.”

The increased capital charges for transactions through non-qualifying CCPs may have significant business and operational implications for U.S. DCOs that operate internationally and are not QCCPs. For instance, banks faced with such higher capital charges may transfer their clearing business away from such DCOs to a QCCP in order to benefit from the preferential capital charges provided by the Basel CCP Capital Requirements. Alternatively, banks may reduce or discontinue their clearing business altogether. Banks may also pass through the higher costs of transacting on a non-qualifying DCO that result from the higher capital charges to their customers. Accordingly, customers using such banks as intermediaries may transfer their business to an intermediary at a QCCP. In short, a DCO's failure to be a QCCP may cause it to face a competitive disadvantage in retaining members and customers.

CME at 5, n. 18.

G. New Regulations Applicable to SIDCOs and Subpart C DCOs

As described in detail in section II below, this final rulemaking includes a new defined term, a Subpart C DCO, to allow registered DCOs that are not SIDCOs to elect to become subject to the provisions in Subpart C of part 39 of the Commission's regulations (“Subpart C”). Further, this rulemaking revises Subpart C so that Subpart C applies to SIDCOs and Subpart C DCOs, and includes new or revised standards for governance, financial resources, system safeguards, default rules and procedures for uncovered losses or shortfalls, risk management, disclosure, efficiency, and recovery and wind-down procedures. These requirements address the remaining gaps between the Commission's regulations and the PFMI standards. Thus, Subpart C, together with the provisions in Subpart A and Subpart B, establish domestic rules and regulations that are consistent with the PFMIs. Because Subparts A, B, and C apply to SIDCOs and Subpart C DCOs on a continuing basis, SIDCOs and Subpart C DCOs should be QCCPs for purposes of the Basel CCP Capital Requirements.

See

QCCP definition

supra

Section I.F.

The Commission received twelve comment letters, nine of which commented on the Proposal.

All nine of these letters were generally supportive of the Proposal's goals. Given the importance of obtaining QCCP status for a U.S.-based DCO, the Commission requested comment on additional measures that the Commission should take to help ensure that Subpart C DCOs obtain QCCP status. MGEX responded by asserting that steps should be taken to “ensure that the [Commission's] proposed regulations will be recognized by applicable regulators as being consistent with the PFMIs and that all DCOs subject to those regulations would be considered QCCPs in all relevant jurisdictions.”

MGEX also requested that the Commission “coordinate with other regulators” to provide a “uniform framework that recognizes the oversight provided by multiple regulatory jurisdictions so as not to unnecessarily burden DCOs with requirements established by multiple regulatory jurisdictions.

As noted in the Proposal, the Commission believes that the Subpart C regulations in combination with the provisions contained in Subpart A and Subpart B would establish domestic rules and regulations that are consistent with the PFMIs. Because SIDCOs and Subpart C DCOs would have the requirements of Subpart A, Subpart B and Subpart C applied to them on a continuing basis, such entities should qualify as QCCPs for purposes of the Basel CCP Capital Requirements.

In addition, the Commission notes that it actively coordinates with other domestic and international regulators informally, as required by applicable law (such as through the rulemaking consultation process under Title VIII), and through participation in several working groups and international organizations (such as IOSCO).

ISDA, which expressed support for the Commission's goal of implementing regulations for DCOs that are consistent with the PFMIs by the end of 2013, suggested that the Commission issue this rulemaking as an interim final rule “so that market participants will have an opportunity to provide additional substantive comments.”

The Commission declines to do so. As is the case with other regulations, part 39 of the Commissions regulations may be reviewed or revised by the Commission as necessary.

All comment letters are available through the Commission's Web site at:

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1391.

Comments addressing the Proposal were received from the European Commission and the following parties: CME Group Inc. (“CME”); The Futures Industry Association (“FIA”); IntercontinentalExchange, Inc. (“ICE”); International Swaps and Derivatives Association Inc. (“ISDA”); LCH.Clearnet Group Limited (“LCH”); The Minneapolis Grain Exchange (“MGEX”); New York Portfolio Clearing LLC (“NYPC”); and Chris Barnard.

MGEX at 6.

Id.

In addition, ISDA's comment letter addressed the Commission's examination of SIDCOs and Subpart C DCOs. Specifically, ISDA stated that revised Subpart C should specify whether the Commission will evaluate a SIDCO's or Subpart C DCO's compliance with Subpart C as part of its general rule enforcement review program, or whether SIDCOs and Subpart C DCOs will be subject to a more rigorous and more frequent (

e.g.,

annual) review process. ISDA at 4. This comment does not pertain to any of the proposed regulations and is, therefore, outside the scope of the Proposal. However, the Commission notes that Section 807(a) of the Dodd-Frank Act requires the Commission to examine a SIDCO at least once annually.

78 FR 50297.

The Commission intends to cooperate with other regulators, both domestically and internationally, to foster efficient and effective communication and consultation so that we may support each other in fulfilling our respective mandates with respect to SIDCOs and Subpart C DCOs.

See

PFMIs, Responsibility E.

ISDA at 1.

The following section will address discuss the comments received on specific aspects of the Proposal in connection with explaining each of the amended and new regulations adopted herein.

II. Discussion of Revised and New Regulations

A. Regulation 39.2 (Definitions)

The Commission proposed amending regulation 39.2 by revising one definition and adding six new defined terms. First, the Commission proposed a technical amendment to the definition of “systemically important derivatives clearing organization.” The definition had described a SIDCO as a registered DCO “which has been designated by the [Council] to be systemically important . . .” The proposed definition described a SIDCO as a registered DCO “which is currently designated . . .”

Second, the Commission proposed to add a definition for the phrase “activity with a more complex risk profile,” to provide greater clarity as to the types of activities that would trigger a Cover Two financial resources requirement. The Commission proposed to define “activity with a more complex risk profile” to include clearing credit default swaps, credit default futures, and derivatives that reference either credit default swaps or credit default futures, as well as any other activity designated as such by the Commission. The phrase “activity with a more complex risk profile” currently appears in regulation 39.29 (Financial resources requirements), which the Commission proposed to revise and renumber as regulation 39.33.

See

Section II.E.,

infra.

The Commission also proposed to add a definition for the term “subpart C derivatives clearing organization.” The proposed definition would include any registered DCO that is not a SIDCO and that has elected to become subject to Subpart C.

Finally, the Commission proposed to add definitions for “depository institution,” “U.S. branch or agency of a foreign banking organization,” and “trust company.” These terms are used in the provisions concerning liquidity set forth in paragraphs (c) and (d) of revised regulation 39.29, which the Proposal renumbered as regulation 39.33.

As proposed, a “depository institution” would have the meaning set forth in Section 19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)). A “U.S. branch or agency of a foreign banking organization” would mean the U.S. branch or agency of a foreign banking organization as defined in Section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101). A “trust company” would mean a trust company that is a member of the Federal Reserve System, under

Section 1 of the Federal Reserve Act (12 U.S.C. 221), but that does not meet the definition of “depository institution.”

See id.

The Commission received only one comment on the substance of the proposed definitions. Chris Barnard stated that he approved of the fact that the definition of “activity with a more complex risk profile” includes credit default swaps and other activities designated as such by the Commission under regulation 39.33(a).

In addition, the Commission received a comment regarding the wording of a defined term. MGEX expressed concern regarding the title “Subpart C DCO.” Specifically, MGEX stated that the title “itself implies to the public that the [Subpart C] DCO is of significantly lesser status” as compared to a SIDCO.

MGEX requested that the Commission instead use the term “Qualified Central Counterparty” in its regulations and to define that term to include any DCO that is held to the standards set forth in Subpart C. The Commission declines to adopt this suggestion.

MGEX at 4.

SIDCOs and registered DCOs that elect to opt-in to these heightened standards are not identically situated in that a SIDCO is required to comply with the standards set forth in Subpart C because of its importance to the US financial markets. In other words, a Subpart C DCO may rescind its election whereas a SIDCO may not. In addition, there may be circumstances in which the Commission may want to apply a particular regulation only to SIDCOs. For example, regulation 39.41, enacted pursuant to section 807c of the Dodd-Frank Act, grants the Commission special enforcement authority over SIDCOs, but not Subpart C DCOs. Moreover, SIDCOs are required to comply with regulation 40.10, enacted consistent with section 806 of the Dodd-Frank Act, which, among other things, requires them to provide notice to the Commission not less than 60 days in advance of proposed changes to their rules, procedures, or operations that could materially affect the nature or level of risks presented by the systemically important derivatives clearing organization. This requirement is not imposed on Subpart C DCOs. Thus, it is necessary and appropriate for the Commission to retain the ability to differentiate between SIDCOs and other registered DCOs in its regulations.

Moreover, as discussed below, MGEX and other commenters have noted that the proposed opt-in structure is important in that it allows registered DCOs that are not SIDCOs to be eligible for QCCP status. Once a Subpart C DCO successfully attains QCCP status, the Commission notes that, in general, its regulations do not prohibit a Subpart C DCO (or a SIDCO) from stating that it is a QCCP in its marketing materials. Indeed, the Commission expects that Subpart C DCOs would market themselves as QCCPs, which is why a Subpart C DCO is prohibited from marketing itself as a QCCP while in the process of rescinding its election.

For the reasons stated above, the Commission believes that the proposed revised and new definitions are appropriate and, therefore, is adopting them as proposed.

B. Regulation 39.30 (Scope)

The Commission proposed expanding regulation 39.28 (and renumbering it regulation 39.30) so that Subpart C would apply to SIDCOs and Subpart C DCOs. As described above, the rules proposed in Subpart C address the gaps between Commission regulations and the standards set forth in the PFMIs.

As such, a DCO that is subject to the requirements of Subpart A, Subpart B, and Subpart C should meet the requirements for QCCP status and benefit from the lower capital charges on clearing member banks and bank customers of clearing members for exposures resulting from derivatives cleared through QCCPs.

Such a DCO may also be viewed more favorably by potential members or customers of members in that it would be seen to be held to international standards.

See also

Section 805(b) of the Dodd-Frank Act.

See supra

Section I.E.

PFMIs ¶ 1.15.

See

78 FR 50260, 50268.

C. Regulation 39.31 (Election to become subject to the provisions of Subpart C)

As discussed above and in the Proposal,

the Basel CCP Capital Requirements impose significantly higher capital charges on banks (including their subsidiaries and affiliates) that clear financial derivatives through CCPs that do not qualify as QCCPs (

i.e.,

CCPs that are licensed and supervised in a jurisdiction where the relevant regulator applies to the CCP, on an ongoing basis, domestic rules and regulations that are not consistent with the PFMIs).

Because such charges could create incentives for banks to migrate their business to CCPs that are QCCPs or to avoid clearing,

U.S. DCOs that operate internationally, but are not QCCPs, may face a substantial competitive disadvantage. The Subpart C requirements, as amended herein, address any remaining gaps between the Commission's existing regulations and the PFMI standards.

Accordingly, a DCO that is subject to the collective obligations contained in Subpart A, Subpart B and Subpart C should be a QCCP for purposes of the Basel CCP Capital Requirements.

See

discussion of the role of the PFMIs in international banking standards

supra

Section I.F., 78 FR 50266-9.

See

Basel CCP Capital Requirements at Section I.A.: General Terms.

As noted above, banks alternatively may reduce or discontinue their clearing business or pass through to their customers any higher costs of transacting through a DCO that is not a QCCP.

See

discussion of the role of the PFMIs in International Banking Standards

supra

Section I.F; 78 FR 50267, 50269.

See

discussion of the new regulations applicable to SIDCOs and Subpart C DCOs

supra

Section I.G.

Id.

Regulation 39.31, as proposed, would provide a mechanism whereby a DCO that has not been designated by the Council as systemically important may elect to become subject to the provisions of Subpart C (

i.e.,

may “opt” to become subject to the regulations otherwise applicable only to SIDCOs) and, thereby, attain QCCP status, should the DCO individually determine that the benefits of achieving such status outweigh the costs associated with implementing the Subpart C regulations. The Commission also proposed procedures for withdrawing or rescinding that election.

The Commission received five comment letters regarding proposed regulation 39.31.

These comments generally supported the adoption of procedures that would provide non-SIDCO DCOs the opportunity to become QCCPs through adherence to an enhanced regulatory regime.

LCH, for example, “strongly supported” the adoption of “heightened regulatory standards that would allow both SIDCOs and non-SIDCOs to be QCCPs.”

The European Commission similarly stated that central counterparties “that wish to operate under safer standards and compete on the basis of the quality of their risk-management . . . should not be prevented from doing so.”

Comments on proposed regulation 39.31 were received from the European Commission, FIA, ISDA, LCH and MGEX.

See, e.g.,

European Commission at 1, LCH at 2, MGEX at 1-2.

LCH at 1.

See also

MGEX at 1 (“MGEX applauds the Commission for attempting to establish an avenue by which DCOs not designated as systemically important could qualify for [QCCP] status.”).

European Commission at 1.

MGX and LCH disagreed, however, with the proposed “opt-in” approach and suggested alternative means for achieving the Commission's objectives.

As mentioned above, both LCH and MGEX suggested that the Commission require all currently registered DCOs to be held to the enhanced regulatory requirements proposed to be applicable only to SIDCOs and Subpart C DCOs.

LCH asserted that “it is important for all CCPs which clear swaps and other derivatives . . . to adhere to the higher standards.”

MGEX claimed that requiring DCOs that have not been designated by the Council as systemically important to “opt-in” to Subpart C compliance is “unnecessarily burdensome and discriminatory” in comparison to the regulatory treatment of SIDCOs.

In support of its position, MGEX noted that SIDCOs will be held to the same standards as Subpart C DCOs, but will not be required to submit a Subpart C Election Form, or to otherwise engage in the Subpart C election process in order to become a QCCP.

MGEX contended that requiring all currently registered DCOs to be held to the enhanced regulatory regime would negate the need for a Subpart C Election Form and, therefore, would treat all DCOs identically in terms of their registration status and requirements, which would enable DCOs to spend the time that they would otherwise spend on preparing a Subpart C Election Form on ensuring their compliance with the Subpart C regulations.

See

LCH at 2-4, MGEX at 2-6.

See

LCH at 3, MGEX at 3.

LCH at 2.

MGEX at 2.

Id.

MGEX at 3-4.

MGEX recognized, however, “a number of potential issues” with universal application of the Subpart C requirements.

For example, this proposed alternative, by itself, would not provide flexibility for DCOs that do not wish to be held to the higher standards and could require the Commission to expend “considerable resources to verify compliance for each currently registered DCO shortly after implementation” and to engage in the processes necessary to revoke the Subpart C DCO status of those DCOs that fail to satisfy the proposed regulations.

Both MGEX and LCH suggested alternatives. Specifically, these commenters recommended that the Commission replace the proposed “opt-in” regime with a regime under which the Subpart C standards would be applicable to all DCOs, but a DCO would be permitted to “opt-out” of the heightened standards, if it believed that attaining QCCP status was not important for its business.

Both entities recommended that the opt-out regime be accompanied by an extension of the compliance deadline

for all or some of the substantive proposed Subpart C regulations.

Specifically, LCH and MGEX voiced concern that it would be difficult or unlikely for non-SIDCO DCOs to satisfy the Subpart C election and implementation requirements necessary to achieve QCCP status prior

to December 31, 2013.

LCH specifically stated that additional time is necessary to come into compliance with the regulations “governing financial resources, system safeguards, risk management, and recovery and wind-down plans.”

Both MGEX and LCH commented on the particular difficulty of developing a recovery and wind down plan citing, respectively, the “complexity and potential effects the contents of such a plan would have on the operation of a DCO”

and the fact that the Commission has not previously proposed any requirements with respect to such plans.

MGEX at 3.

Id.

See

LCH at 2-4, MGEX at 3-4.

The Commission notes that, there is no general “compliance deadline” for non-SIDCO DCOs. While a non-SIDCO that wishes to become a Subpart C DCO must satisfy all of the Subpart C requirements (except the specific obligations for which the DCO is permitted to apply for additional time to comply) at the time it elects to become subject to Subpart C, a DCO is not required to make that election at any particular time or at all, unless it determines that the cost of such compliance is usurped by the benefits it would receive through Subpart C status.

LCH at 2-4, MGEX at 3-4.

LCH at 2, MGEX at 2. The Basel III Counterparty Credit Risk and Exposures to Central Counterparties-Frequently Asked Questions (“Basel III FAQs”) state that, if a CCP's primary regulator has publicly stated that it is working towards implementing regulations consistent with the PFMIs, then such CCP may be treated as a QCCP until December 31, 2013. After December 31, 2013, the Basel III FAQs state that the CCP's primary regulator must have implemented regulations consistent with the PFMIs and these regulations must be applied to the CCP on an ongoing basis in order for such CCP to be eligible for QCCP status.

See

Basel III FAQs, Question 5.6, available at:

http://www.bis.org/publ/bcbs237.pdf.

See

LCH at 3, 4.

MGEX at 4.

See

LCH at 3, 4.

In support of their requests for additional time to comply with the Subpart C requirements, LCH and MGEX cited the time needed to identify gaps between their current rules and procedures and the Subpart C regulations, to implement any necessary changes to comply with the Subpart C regulations, and to prepare and submit their Subpart C Election Forms.

Both entities objected to the amount of time between the publication of the Proposal and the time when compliance will be required in order to qualify for QCCP status by the end of the 2013.

See

LCH at 3, MGEX at 3.

See

LCH at 4, MGEX at 2.

MGEX also objected to the alleged disparate treatment afforded SIDCOs which “have been able to prepare for compliance with the enhanced standards at least since the release of the PFMIs in April 2012.”

In addition, LCH asserted that, as proposed, the Commission would be requiring Subpart C DCOs to come into compliance with all aspects of the PFMIS “prior to many non-US CCPs.”

LCH suggested that adopting the final regulations, but permitting compliance at a later date, would allow the Commission to adopt the PFMIs prior to the end of 2013 while, at the same time, providing DCOs with an “ability to achieve QCCP status by the end of 2013.”

MGEX at 2.

LCH at 4. In support of this assertion, however, LCH cites to just one aspect of the Subpart C requirements—the recovery and wind-down plans—which may not be required of certain EU CCPs in order to become and maintain QCCP status. Specifically, LCH asserts that “CCPs in the European Union will not be required to provide recovery and wind-down plans to become and remain QCCPs as EMIR, which implements the PFMIs in Europe, does not include such a requirement. EU legislation implementing the recovery and wind resolution aspects of the PMIs is not expected to be proposed by the European Commission until early next year” and “implementation is unlikely before 2016 at the earliest.”

Id.

LCH also notes that laws in some EU jurisdictions will require CCPs to have recovery plans prior to implementation of EU legislation. LCH at 4, n. 4. As noted below, the Commission will permit SIDCOs and Subpart C DCOs the opportunity to request that the Commission grant the SIDCO or Subpart C DCO an extension of the deadline with respect to recovery and wind-down plans for up to one year.

See infra

Section II.K. (Regulation 39.39 (Recovery and wind down for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)).

See

LCH at 2, 4. LCH claims that requiring a Subpart C DCO to comply with the Subpart C regulations by the end of 2013 would “likely result in Subpart C DCO's not being able to achieve QCCP status prior to that time” and that the failure of a Subpart C DCO to achieve QCCP status would put the Subpart C DCO at a completive disadvantage to non-QCCPs that are “grandfathered” as QCCPs. LCH at 2. As noted below, the Commission believes that permitting Subpart C DCOs a broad-based opportunity to delay compliance with the Subpart C regulations, as suggested by LCH, could put a DCO at greater risk of failing to obtain QCCP status.

The Commission continues to believe that non-SIDCO DCOs that are willing and able to satisfy the enhanced regulatory requirements contained in Subpart C, should, when they are able to do so, be afforded the opportunity to attain QCCP status and to reap the benefits that may result from that designation

and that the application of Subpart C non-SIDCO DCOs that wish to become subject to regulations that are consistent with the standards set forth in the PFMIs helps promote the international consistency called for in Section 752 of the Dodd-Frank Act.

Commenters addressing proposed regulation 39.31 were unanimously supportive of this objective. Accordingly, the Commission has determined to adopt a regulatory framework that permits a DCO that has not been designated as systemically important by the Council to elect to become subject to the heightened standards set forth in Subpart C.

See

78 FR 50268-50269.

See

discussion of existing standards for SIDCOs

supra

Section I.C.

In response to the comments recommending that the” Commission apply the regulatory requirements to all DCOs or employ an “opt-out” regime in lieu of the proposed “opt-out” procedures, the Commission notes that neither commenter advocating such alternatives provided any quantitative data or qualitative analyses of the costs and benefits of its suggested alternatives, particularly as compared to the Commission's Proposal. The Commission believes it would be inappropriate to adopt the proffered alternatives absent such analyses and without sufficient opportunity for the public to review and comment upon them.

The Commission also is concerned that an “opt-out” regime would unfairly shift certain costs associated with the Subpart C regulations to those non-SIDCO DCOs that do not intend to avail themselves of the opportunity to become QCCPs. Specifically, regulation 39.31, as proposed and finalized herein, would require only those non-SIDCO DCOs that wish to become subject to the Subpart C regulations (and to attain the benefits of QCCP status) to complete and file a Subpart C Election Form. Non-SIDCO DCOs that do not wish to become subject to the Subpart C regulations (nor to obtain the benefits of QCCP status) are not obligated to take any further action. In contrast, an “opt-out” regime would impose an obligation to file an opt-out application on those DCOs that do not intend to seek the benefit of QCCP status, while removing the Subpart C Election Form obligation from those DCOs that do.

In response to commenters' requests for additional time for Subpart C DCOs to comply with the new Subpart C regulations, and as discussed in more detail below, the Commission has determined that it would be appropriate to permit SIDCOs and Subpart C DCOs to request extensions of time to comply with the requirements for system safeguards, default rules and procedures for uncovered credit losses or liquidity, and recovery and wind-down plans contained in regulations 39.34, 39.35 and 39.39, respectively.

The Commission is declining, however, to permit requests from a DCO for, or to generally provide, a wholesale extension of time to comply with the new Subpart C regulations. Thus, a DCO seeking to become a Subpart C DCO will otherwise be required to be in compliance with the Subpart C regulations at the time it makes its

Subpart C election. The new Subpart C regulations finalized herein seek to provide DCOs that have not been designated by the Council as systemically important the opportunity to qualify as QCCPs. Despite LCH's assertion to the contrary,

the Commission is concerned that a broad-based extension of the compliance deadline (in contrast to individually justified extensions with respect to particular requirements) would be more likely to jeopardize the ability of a Subpart C DCO to achieve QCCP status. As noted above, rules and regulations that are consistent with the PFMIs must be

implemented

by the end of 2013.

Moreover, as noted above, a QCCP is defined, in part, as a CCP that is prudentially supervised in a jurisdiction where the relevant regulator applies to the CCP, on an ongoing basis, domestic rules and regulations that are consistent with the PFMIs.

See infra

Section II.F. (Regulation 39.34 (System safeguards for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)), Section G (Regulation 39.35 (Default rules or procedures for uncovered credit losses or liquidity shortfalls (recovery) for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)), and Section II.K (Regulation 39.35 (Recovery and wind-down for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)).

Notwithstanding its timing concerns, LCH has indicated that it intends to “take advantage of the Subpart C election process. LCH at 3.

See supra

n 91.

See supra

Section I.F. (The Role of the PFMIs in International Banking Standards).

The Commission further notes that a non-SIDCO DCO is obligated to comply with the Subpart C regulations only if—and when—the DCO affirmatively elects to become subject to such regulations, based upon its own examination of the benefits (including, but not limited to, the opportunity to attain QCCP status) and burdens thereof. No non-SIDCO DCO is obligated to elect to become a Subpart C DCO and thereby comply with the Subpart C regulations by December 31, 2013 or any other date unless it believes that it is prudent to do so in light of its particular business. The Commission stands ready to review the application of any DCO that is prepared to be held to the Subpart C standards, whether the DCO is prepared to do so on December 31, 2013 or any later date.

The Commission also disagrees with commenters' assertions that potential Subpart C DCOs have only recently been advised of the nature of the additional regulations to which they, if they choose, will be subject. The final PFMIs were published in April of 2012. In the same month, the Commission and other domestic financial regulators issued a joint press release explicitly notifying the public of the publication of the final PFMIs.

At a minimum, therefore, DCOs have been on notice of the specific requirements of the PFMIs since April 2012. Moreover, the Basel CCP Capital Requirements were published in July of 2012, and as mentioned above, the Basel FAQs, which were published in December of 2012, state that during 2013, if a CCP regulator has not yet implemented the PFMIs but has publicly stated that it is working towards implementing these principles, the CCPs that are regulated by the CCP regulator may be treated as QCCPs.

Thus, by December of 2012, DCOs were on notice of the preferential capital treatment that would result from becoming subject to regulations that are consistent with the PFMIs by the end of 2013.

Joint Press Release, Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission and the Securities and Exchange Commission, CPSS-IOSCO Issue Final Report on Principles for Financial Market Infrastructures” (April 16, 2012).

Basel III FAQs at 23. In the Final SIDCO Rule the Commission explicitly advised the public of its intention toward implementing regulations that are fully consistent with the PFMIs by the end of 2013.

See

SIDCO Final Rule at 4966 (“Moreover, the Commission, which is a member of the Board of IOSCO, is working towards implementing rules and regulations that are fully consistent with the PFMIs by the end of 2013”).

1. Regulation 39.31(a)—Eligibility Requirements

Regulation 39.31(a), as proposed, set forth the two categories of entities that would be eligible to elect to become subject to the provisions in Subpart C. As proposed: (1) A DCO that is not a SIDCO could request such election using the procedures set forth in proposed regulation 39.31(b) and (2) an entity applying for registration as a DCO pursuant to regulation 39.3 (“DCO Applicant”) could request the election in conjunction with its application for registration (“Registration Application”) using the procedures set forth in proposed regulation 39.31(c). The Commission did not receive any comments specifically addressing proposed regulation 39.31(a). Accordingly, for the reasons cited in the Proposal,

the Commission is adopting regulation 39.31(a) as proposed.

78 FR 50298.

2. Regulation 39.31(b)—Subpart C Election and Withdrawal Procedures for Registered DCOs

Regulation 39.31(b), as proposed, would establish the procedures by which a DCO that is already registered could elect to become subject to the provisions of Subpart C and the procedure by which the DCO could withdraw that election.

Comments generally addressing the Proposal to adopt regulations that would permit a DCO to elect to become subject to Subpart C (

i.e.,

comments on the “opt-in” regime) are discussed above.

In addition, the Commission received one comment referencing the Subpart C Election Form. MGEX asserted that the Commission should “waive” the Subpart C Election Form as “it seems overly burdensome and costly for a currently registered DCO to be required to complete an entirely new application which calls for submission of the same or similar information and analysis that the DCO previously provided [in its DCO Application]”.

In support of this request, MGEX cites to a statement in the Proposal that the Commission “anticipates considerable overlap between the information and documentation contained in the Registration Application files [sic] by a DCO Applicant and the information and documentation that would be required to be submitted to the Commission as part of the Subpart C Election Form.”

This reference is misplaced. The cited statement was made in the portion of the Proposal describing the proposed election and withdrawal procedures for new DCO applicants.

The “overlap in information and documentation” to which the Commission was referring is the overlap between the materials that would be submitted by

new

applicants for DCO registration in their DCO applications and the materials that a newly registered DCO would supply as part of a Subpart C Election Form submitted shortly thereafter.

In contrast, the information supplied by a currently registered DCO as part of the Form DCO that was filed when such DCO applied for registration is likely to be stale and would need to be updated.

Moreover, the Subpart C Election Form simply calls for the electing DCO to demonstrate its compliance with the requirements of Subpart C, with fairly minimal formatting requirements. The form is intended to provide the Commission, clearing members, and customers (and, significantly, the regulators of such

clearing members and customers) with assurance that the electing DCO will be held to and will be required to meet the standards set forth in Subpart C.

Thus, the Commission continues to believe that it is necessary and appropriate to require DCOs electing to become subject to Subpart C to submit such information to the Commission.

78 FR 50271, 50298-99.

See supra

Section II.C. (Regulation 39.31 (Election to become subject to the provisions of Subpart C)).

MGEX at 5.

MGEX at 5 (citing 78 FR 50271).

78 FR 50271.

This distinction is even more important in the case of a clearing organization, such as MGEX, that was “grandfathered in” to DCO status under the Commodity Futures Modernization Act of 2000 (Pub. L. No. 106-554, 114 Stat. 2763, sec. 112(f) (adding sec. 5a(b) to the CEA) and thus never filed an application for registration as a DCO.

See

Subpart C Election Form, Exhibit Instructions at no 2, (“If the [DCO] is an

Applicant,

in its Form DCO, the [DCO] may summarize such information and provide a cross reference to the Exhibit in this Subpart C Election Form that contains the required information” (emphasis added)).

See

78 FR 50269.

MGEX further asserts that the Subpart C Election Form requirement puts Subpart C DCOs at a risk of “delayed regulatory approval” not borne by SIDCOs, which it claims are “grandfathered in to Subpart C . . . due to their SIDCO status.”

100

MGEX states that to “ensure equal treatment” among all DCOs, any requirements to provide information as part of the Subpart C election process should be imposed upon SIDCOs as well.

101

The Commission notes that SIDCOs, having been designated as systemically important by the Council, are subject to annual examinations under Title VIII and are, therefore, in a different position than DCOs that have not been so designated, but wish to elect to be held to the same international standards in an effort to attain QCCP status. The Commission also notes that SIDCOs, as well as Subpart C DCOs, are required by regulation 39.37, as finalized herein, to complete and publically disclose their responses to the Disclosure Framework.

102

As such, and since SIDCOs are required to be subject to the Subpart C regulations, the Commission does not feel it necessary to require SIDCOs to complete a Subpart C Election Form. In addition, because the Commission declines to require all DCOs to comply with the regulations in Subpart C, the Subpart C Election Form is necessary to provide a mechanism by which a registered DCO may elect to become subject to Subpart C.

100

MGEX at 5.

101

Id.

102

See supra

Section II.I. (Regulation 39.37 (Additional disclosure for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)).

In its comments on proposed regulation 39.37, MGEX also asserted that, while requiring the submission of a Quantitative Disclosure Document is “consistent with the PFMIs,” the Commission should delay implementation of this requirement until the Quantitative Disclosure Document is finalized in order to allow DCOs time to review and comment upon it or to otherwise prepare for compliance.

103

The Commission confirms that, as noted in the Subpart C Election Form, as proposed and finalized herein, completion and publication of the Quantitative Information Disclosure will not be required until the criteria for such disclosure has been finalized and published, which has not yet occurred.

103

MGEX at 8-9.

Finally, MGEX responded to the Commission's request for comment

104

on whether or not the Commission should add a requirement that the certifications contained in the Subpart C Election Form be made under penalty of perjury. MGEX opposed the addition of this requirement.

105

The Commission notes that such a requirement would be inconsistent with the current Form DCO, which does not include a similar requirement. Therefore, the Commission has decided not to add a perjury certification to the Subpart C Election Form.

104

78 FR 50272.

105

MGEX at 5.

Accordingly, after careful review and consideration of the comments, and for the reasons cited above and set forth in the Proposal,

106

the Commission is adopting regulation 39.31(b) as proposed. The Commission has, however, altered the Subpart C Election Form in two respects.

106

78 FR 50268-69.

As discussed further below,

107

DCOs that seek to become Subpart C DCOs (as well as SIDCOs) will be permitted to request an extension of up to one year to comply with any of the provisions of regulations 39.34, 39.35, or 39.39 pursuant to those regulations.

108

The Commission has determined that, to the extent that a DCO elects to request any such extensions, it must do so prior to filing the Subpart C Election Form and the General Instructions to the Subpart C Election Form have been modified accordingly.

109

The Commission also has made technical modifications to the certifications contained in the Subpart C Election Form to account for any extensions of time granted pursuant to regulation 39.34(d) and/or 39.39(f).

107

See infra

at sections II.F. (Regulation 39.34—System Safeguards), II.G. (Regulation 39.35—Default Rules and Procedures), and II.K. (Regulation 39.39 (Recovery and Wind-Down).

108

Regulation 39.34(d), as finalized herein, provides that the Commission may, upon request, grant a SIDCO or Subpart C DCO an extension of up to one year to comply with any of the provisions of regulation 39.34. Regulation 39.39(f), as finalized herein, similarly provides that a SIDCO or Subpart C DCO, upon request, may be granted an extension of up to one year to comply with the provisions of regulations 39.35 and 39.39. Any such requests made by a DCO seeking to become a Subpart C DCO will become part of that DCO's Subpart C Election Form.

109

The Commission notes that it is not prescribing a particular time period elapse between the filing of applications for compliance extensions and the filing of the Subpart C Election Form.

As noted in the Proposal,

110

the Commission emphasizes that, consistent with the certification required to be provided by a DCO as part of its Subpart C Election Form, a DCO, as of the date that its election to become subject to Subpart C becomes effective, would be held to the requirements of Subpart C. As of that date, the DCO would be subject to examination for compliance with Subpart C and to potential enforcement action for non-compliance. This status would continue until such time, if any, that the election is properly vacated as set forth in regulation 39.31(e), as finalized.

111

To the extent that compliance with Subpart C would require the DCO to implement new rules or rule amendments, all such rules or rule amendments must be approved or permitted to take effect prior to the effective date of the DCO's election.

110

78 FR 50269-50270.

111

See infra

Section II.C.5. (Regulation 39.31(e)—Rescission).

3. Regulation 39.31(c)—Election and Withdrawal Procedures for DCO Applicants

Regulation 39.31(c), as proposed, sets forth procedures through which a DCO Applicant could request to become subject to the provisions of Subpart C at the time the DCO Applicant files its Registration Application. The Commission did not receive any comments specifically addressing proposed regulation 39.31(c).

112

Accordingly, for the reasons cited in the Proposal,

113

the Commission is adopting regulation 39.31(c) as proposed. In the interest of administrative economy, the Commission continues to encourage DCO Applicants to make their election to become subject to Subpart C at the time that their Registration Application is filed. Simultaneous filings would appear to allow Commission resources to be used more efficiently and effectively.

112

See supra

Section II.C. (Regulation 39.31 (Election to become Subject to Subpart C) for a discussion of comments regarding the proposed opt-in regime and process generally and the Subpart C Election Form.

113

78 FR 50271.

4. Regulation 39.31(d)—Public Information

Regulation 39.31(d), as proposed, would provide that certain portions of the Subpart C Election Form will be considered public documents that may routinely be made available for public inspection. The Commission did not receive any comments with respect to proposed regulation 39.31(d). Accordingly, for the reasons set forth in

the Proposal,

114

the Commission is adopting regulation 39.31(d) as proposed.

114

Id.

5. Regulations 39.31(e)—Rescission

Regulation 39.31(e), as proposed, would permit a Subpart C DCO to rescind its election to comply with Subpart C by filing a notice of its intent to rescind the election with the Commission. Such rescission would, however, be subject to certain conditions. As proposed, the rescission of a DCO's election to become subject to Subpart C would become effective on the date specified by the Subpart C DCO in its notice of intent to rescind the Subpart C election, except that the rescission could not become effective any earlier than 90 days after the date the notice of intent to rescind is filed with the Commission. The Subpart C DCO would be required to comply with all of the provisions of Subpart C until such rescission is effective and the Commission would retain its authority concerning any activities or events occurring during the time that the DCO maintained its status as a Subpart C DCO.

Regulation 39.31(e), as proposed, also would require a Subpart C DCO that files a notice of intent to rescind to (1) provide specified notices to each of its clearing members, and to have rules in place requiring each of its clearing members to provide such notices to each of the clearing member's customers; (2) provide specified notices to the general public; and (3) remove references to its Subpart C DCO (and QCCP) status on its Web site and in other materials that it provides to its clearing members and customers, other market participants, or members of the public. In addition, the employees and representatives of the Subpart C DCO would be prohibited from making any reference to the organization as a Subpart C DCO (or QCCP) on and after the date that the notice of its intent to rescind is filed.

The Commission received two comments addressing proposed regulation 39.31(e). ISDA recommended that the Commission modify the proposed regulation to require, as a condition to a Subpart C DCO's rescission of its Subpart C election, “to certify that it has obtained approval from clearing members (

e.g.,

by member ballot) to rescind the election.”

115

In response to ISDA's suggestion, the Commission believes that this is a matter of corporate governance and the DCO should follow its own policies and procedures with respect to internal decisions regarding rescission. The Commission further notes that existing regulation 39.3(e) does not require a DCO to certify that it has obtained the approval of its clearing members to vacate its DCO registration prior to filing with the Commission a request to do so

116

and, thus, requiring the certification suggested by ISDA would be in tension with existing regulations. Accordingly, the Commission has declined to accept ISDA's recommendation.

115

ISDA at 3-4.

116

17 CFR 39.3(e).

FIA recommended that the Commission extend the time period between the date that a DCO files a notice of intent to rescind its election to be subject to Subpart C and the date that such rescission could become effective from 90 days to 180 days.

117

In support of its recommendation, the FIA agreed with the view voiced by the Commission in the Proposal

118

that a delay in the effective date of the rescission is necessary to provide banks and other entities that wish to limit their cleared transactions to clearing solely through a QCCP sufficient time to transfer their business to another Subpart C DCO or a SIDCO.

119

The FIA expressed concern, however, that the 90 day delay is insufficient “to allow a clearing member to make a determination whether to withdraw as a clearing member and, if it elects to do so, notify its customers, find one or more clearing members prepared to accept each customer and allow the new clearing member and each customer to negotiate the terms of their agreement.”

120

The Commission recognizes that the clearing members of a DCO that has filed a notice of intent to rescind its election to become subject to Subpart C may need additional time to determine and to effectuate the actions they may wish to take in light of such filing and believes that a 180 day waiting period until such rescission may become effective is reasonable. Accordingly, the Commission has decided to lengthen the minimum time period between the date a notice of intent to rescind an election to become subject to Subpart C is filed and the date that such rescission may become effective to 180 days. For the reasons cited above and set forth in the Proposal,

121

the Commission is adopting regulation 39.31(e) as proposed in all other respects.

117

FIA at 5.

118

78 FR 50272.

119

FIA at 4.

120

FIA at 4-5.

121

78 FR 50271-72.

6. Regulations 39.31(f)—Loss of SIDCO Designation

Regulation 39.31(f), as proposed, would provide that a SIDCO that is registered with the Commission, but whose designation of systemic importance is rescinded by the Council,

122

would immediately be deemed to be a Subpart C DCO. Such Subpart C DCO would be subject to the Subpart C provisions unless and until it elects to rescind its status as a Subpart C DCO. The Commission did not receive any comments on proposed regulation 39.31(f). Accordingly, for the reasons set forth in the Proposal,

123

the Commission is adopting regulation 39.31(f) as proposed.

122

See

12 CFR 1320.13(b) (procedure for the Council to rescind a designation of systemic importance for a systemically important financial market utility).

123

78 FR 50272.

7. Regulation 39.31(g)

Regulation 39.31(g), as proposed, provides that all forms and notices required by regulation 39.31 shall be filed electronically with the Secretary of the Commission in the format and manner specified by the Commission. The Commission did not receive any comments on proposed regulation 39.31(g) and, thus, is adopting the regulation as proposed.

Regulation 39.32 (Governance for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

The Commission proposed adding regulation 39.32 in order to implement DCO Core Principles O (Governance Fitness Standards), P (Conflicts of Interest), and Q (Composition of Governing Boards) for SIDCOs and Subpart C DCOs in a manner that would be consistent with PFMI Principle 2 (Governance).

124

In 2010 and 2011, the Commission proposed regulations concerning the governance of DCOs (the “2010/2011 Proposals”).

See

Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010);

See also

section IV.C.,

infra.

FIA also commented that U.S. Treasury securities should be considered a qualifying liquid resource under paragraph (c)(3), even if they are not subject to funding arrangements in accordance with proposed subparagraph (E)(2).

166

FIA argued that, alternatively, subparagraph (E)(2) should permit a DCO to arrange for U.S. Treasury securities to be subject to uncommitted repurchase agreements. FIA supports CME's comment that U.S. Treasury securities are “high quality liquid assets” under BCBS standards and have remained highly liquid during times of stress.

167

166

FIA at 3-4.

167

Id.

However, in appealing to the standards established by other jurisdictions, CME acknowledged that

the EMIR Regulatory Technical Standards limit CCPs to “count[ing] `highly marketable financial instruments . . . that the CCP

can demonstrate

are readily available and convertible into cash on a same day basis using prearranged and highly reliable funding arrangements, including in stressed market conditions.' ”

168

Similarly, CME refers to United Kingdom requirements for a liquidity resource to be qualifying that include that the CCP needs to “

demonstrate

its ability to liquidate the resource for same day cash.”

169

The Commission agrees that the obligation of a SIDCO or Subpart C DCO with respect to highly marketable collateral will be to demonstrate that, as stated in subparagraph (E)(2), those assets are, in fact, readily available and convertible into cash pursuant to prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions.

168

CME at 6,

quoting

European Market Infrastructure Regulation Regulatory Technical Standards, Article 33 (emphasis supplied here).

169

CME at 6 (emphasis supplied).

ISDA commented that proposed paragraph (c)(3)(ii), which requires a SIDCO or Subpart C DCO to take steps to verify that the prearranged and highly reliable funding arrangements for U.S. Treasury securities or other sovereign bonds do not include material adverse change provisions, is unnecessary because the PFMIs do not specifically require this.

170

ISDA also noted that credit arrangements generally include such clauses in order to protect the financial institution providing the credit, to protect that institution's shareholders, and to prevent the spread of risk from a DCO to financial institutions.

171

170

ISDA at 4.

171

Id.

In light of these comments, the Commission has decided to make minor revisions to the language in 39.33(c)(3)(E)(1) and (E)(2) to more closely align with the language used in key consideration 5 to Principle 7.

The purpose of the reference to the material adverse change clauses is to ensure that a SIDCO or Subpart C DCO not rely on a credit or liquidity arrangement that can be declined (

i.e.,

would not be reliably enforceable) at the very point in time when the DCO would, in fact, need to use the arrangement. In other words, these funding arrangements are intended to ensure that a SIDCO or Subpart C DCO will be able to meet its obligations when they come due even after a default in extreme but plausible conditions. If a funding arrangement includes a provision that there be no material adverse changes as a condition to draw, then such funding arrangement will not in fact serve its intended purpose. By contrast, a representation that there have been no material adverse changes for some period prior to execution of a liquidity arrangement, where the truth of such representation is not a condition to enforceability of the obligation to provide liquidity, would not be a condition that defeats the purpose of the liquidity arrangement. The Commission believes this interpretation is consistent with key consideration 5 of Principle 7, which states in relevant part that “For the purpose of meeting its minimum liquid resource requirement, an FMI's qualifying liquid resources in each currency include . . . highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions.”

Accordingly, the Commission has decided to modify paragraph (c)(3)(ii) to replace the phrase “material adverse change clause” with “material adverse change condition” and to add the “even in extreme but plausible market conditions” language from key consideration 5 to clarify this issue and to ensure consistency with Principle 7 with respect to this point.

With respect to proposed paragraph (c)(4), ISDA commented that if a SIDCO or Subpart C DCO maintains financial resources in an amount greater than the Cover One financial resources requirement, then the SIDCO or Subpart C DCO

should be required to

maintain collateral with a low credit risk to cover such greater amount.

172

ISDA also commented that the phrase “with proceeds available promptly” should be deleted because it does not appear in the PFMIs and is not clearly defined.

173

The Commission notes that the financial resources at issue in this paragraph are in excess of those required by Principle 7 and regulation 39.33(a). Therefore, the Commission believes it is appropriate for attendant requirements to be less stringent than those that apply to required financial resources. In addition, the requirement in paragraph (c)(4) that a SIDCO or Subpart C DCO

should consider

maintaining collateral with low credit risk for any excess financial resources is consistent with Principle 7. Moreover, the Commission disagrees with ISDA and believe that the concept of “with proceeds available promptly” is covered by, and consistent with, the PFMIs.

172

Id.

173

ISDA at 4-5.

In response to the Commission's question as to whether proposed paragraph (d)(4) should specify the frequency with which a SIDCO or Subpart C DCO must test its procedures for accessing liquidity resources, MGEX commented that it believes the proposed language is sufficient.

174

MGEX commented that the proposed language appropriately affords a DCO the discretion to determine the frequency of testing its procedures for accessing liquidity resources.

175

MGEX stated that a DCO is in the best position to determine this frequency and that unnecessary, redundant testing would cause a DCO to incur unnecessary costs.

176

174

MGEX at 7.

175

Id.

176

Id.

The Commission has decided to finalize regulation 39.33 as modified above. New paragraphs (c), (d), and (e) are intended to address the gaps between current part 39 requirements and standards set forth in Principle 7.

177

The Commission believes these new provisions are appropriate and will reduce risk for SIDCOs and Subpart C DCOs, their clearing members, and customers of clearing members. In particular, new paragraph (c)(1) will help prevent a SIDCO or Subpart C DCO from defaulting on its obligations to non-defaulting clearing members, which is particularly important for a SIDCO because of the potential impact that the failure of a SIDCO could have on the U.S. financial markets, because

maintaining resources that enable the DCO to meet its intraday, same-day, and multiday settlement obligations. New paragraph (c)(2) will require a SIDCO to meet its obligations in each relevant currency in a timely manner. This is important because if a SIDCO has sufficient funds to meet an obligation, but the funds are not in the correct currency, then the SIDCO cannot meet that obligation in a timely manner, which could lead to a disruption of the SIDCO's services. Such disruption could, in turn, have a significant impact on the financial stability of the U.S. economy.

177

Principle 7, K.C. 2 requires a CCP to measure, monitor, and manage liquidity risk effectively. This includes the CCP maintaining sufficient liquid resources in all relevant currencies in order to effect same-day and, where applicable, intraday and multiday settlement of payment obligations in a wide range of potential stress scenarios, including the default of the participant that would create the largest aggregate payment obligations in extreme but plausible market conditions. In addition, Principle 7, K. C. 5 limits a CCP to counting only certain qualifying liquid resources for the purpose of meeting its financial resources requirement. These resources include: cash in the currency of the requisite obligations, held either at the central bank of issue or at a creditworthy commercial bank; committed lines of credit; or high quality, liquid, general obligations of a sovereign nation. In addition, Principle 7, K. C. 4 states that a CCP that is systemically important in multiple jurisdictions or that is involved in activities with a more complex risk profile should consider maintaining sufficient qualifying liquid resources to meet the default of the two participants that would create the largest aggregate payment obligations in such circumstances. Principle 7, K. C. 7 also requires a CCP to monitor its liquidity providers, including clearing members, by undertaking due diligence to confirm that they have sufficient information to understand and manage their liquidity risks and have the capacity to perform as required under their commitments to the CCP.

New paragraph (c)(1)(ii) will require a SIDCO or Subpart C DCO that is systemically important in multiple jurisdictions, or that is involved in activities with a more complex risk profile, to

consider

maintaining certain eligible liquidity resources that, at a minimum, will enable it to meet its intraday, same-day, and multiday settlement obligations, stress scenarios that include a default of the two clearing members creating the largest aggregate liquidity obligation for the DCO in extreme but plausible market conditions. The proposed list of these resources is consistent with those set forth in Principle 7. The financial integrity of a SIDCOs and or Subpart C DCOs might be enhanced if it

considers

meeting this enhanced standard. The provisions of new paragraph (c)(4) (pertaining to, among other issues, the liquidity of financial resources held in addition to those financial resources required by the Cover One standard) are designed to enhance the financial condition of SIDCOs and Subpart C DCOs and help reinforce stability.

178

See generally

Financial Stability Oversight Council 2012 Annual Report, Appendix A at 163 (finding that “the contagion effect of a CME failure could impose material financial losses on CME's clearing members and other market participants (such as customers) and could lead to increased liquidity demands and credit problems across financial institutions, especially those that are active in the futures and options markets.”).

F. Regulation 39.34 (System safeguards for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

In August of 2013, the Commission finalized regulation 39.30, which enhanced system safeguards requirements for SIDCOs with respect to business continuity and disaster recovery, and included a two-hour recovery time objective (“RTO”).

179

As discussed in the adopting release, the two-hour RTO is consistent with Principle 17 of the PFMIs and increases the soundness and operating resiliency of the SIDCO, which in turn, increases the overall stability of the U.S. financial markets.

180

The Commission proposed renumbering regulation 39.30 as regulation 39.34 and amending the regulation to cover Subpart C DCOs in addition to SIDCOs. The Commission also made a technical correction to paragraph (b) to make clear that subparagraphs (1), (2), and (3) concern each activity necessary for the daily processing, clearing, and settlement of existing and new contracts. Finally, the Commission proposed amending the regulation to allow the Commission to, upon request, grant newly designated SIDCOs and Subpart C DCOs up to one year to comply with the provisions of regulation 39.34.

181

179

See

SIDCO Final Rule 78 FR 49672-49674.

180

Id.

181

In response to comments received, regulation 39.39, as finalized herein, will permit the Commission, upon request, to grant newly designated SIDCOs and Subpart C DCOs up to one year to comply with the provisions of regulation 39.35 and 39.39. To harmonize regulation 39.34 with this revision, the Commission has determined to make a technical correction to proposed regulation 39.34 that replaces the phrase “upon application” with the phrase “upon request.”

MGEX commented that it “appreciates the additional time granted for complying” with regulation 39.34.

182

The Commission notes that MGEX's statement implies an automatic compliance extension, which is inaccurate because regulation 39.34(d) permits a SIDCO or Subpart C DCO to

request

that the Commission grant it up to one year to comply with regulation 39.34. In reviewing such requests, the Commission will be attentive to whether the DCO has a well-developed plan to comply with the requirement by the end of the requested extension, with reasonable milestones that can be monitored by the Commission. MGEX also commented that it would like flexibility in developing a business continuity and disaster recovery plan.

183

MGEX stated that the regulation would require it to hire three or four new employees outside of Minneapolis, which would be very costly.

184

MGEX suggested it would be less costly to comply with the regulation if it outsourced its business continuity compliance, but it does not wish to do that because employees, rather than contractors, are more likely to act in the best interests of MGEX.

185

182

MGEX at 7.

183

Id.

184

Id.

185

Id.

First, the Commission notes that to facilitate the two-hour RTO, regulation 39.34 specifically requires a SIDCO or Subpart C DCO to maintain personnel, who live and work outside the relevant area of the physical and technological resources the SIDCO or Subpart C DCO normally relies upon to conduct its clearing activities. This requirement might be met in a number of ways. As MGEX notes, one way is to engage outsourced personnel. An alternative would be to base employees at a geographically diverse location. In general, a SIDCO or Subpart C DCO does have flexibility in designing its business continuity and disaster recovery plan, although such plan must comply with the requirements set forth in regulation 39.34 as well as any other applicable Commission regulations. The Commission expects all SIDCOs and Subpart C DCOs to fully comply with these, and all other applicable, regulations, and anticipates that a registered DCO would carefully weigh any costs associated with compliance with Subpart C prior to electing to become subject to Subpart C. Second, the proposed amendment to allow the Commission, upon request, to grant newly designated SIDCOs and Subpart C DCOs up to one year to comply with the provisions of regulation 39.34 was intended to provide flexibility to address the time practically required to obtain the necessary physical and technological resources, and to organize human resources, as appropriate to implement a two-hour RTO. As such, the Commission has decided to finalize regulation 39.34 as proposed.

The Commission proposed regulation 39.35 in order to add requirements pursuant to DCO Core Principle G, to address certain potential gaps between Commission regulations and Principles 4 and 7.

186

Regulation 39.16 currently requires a DCO to adopt procedures permitting it to take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a default on the obligations of a clearing member to the

DCO.

187

Under proposed regulation 39.35, SIDCOs and Subpart C DCOs would be required to adopt additional procedures to address certain issues arising from extraordinary stress events, including the default of one or more clearing members. Specifically, consistent with Principle 4 of the PFMIs, proposed paragraph (a) would require a SIDCO or Subpart C DCO to adopt rules and procedures addressing the following:

186

DCO Core Principle G requires a DCO to have rules and procedures “designed to allow for the efficient, fair, and safe management of events during which [clearing] members or participants—(I) become insolvent; or (II) otherwise default on the obligations of the members or participants to the [DCO].” Each DCO “is required to (I) clearly state the default procedures on the [DCO]; (II) make publicly available the default rules of the [DCO]; and (III) ensure that the [DCO] may take timely action—(aa) to contain losses and liquidity pressures; and (bb) to continue meeting each obligation of the DCO.”

See supra

Section I.D. and 78 FR 50263.

187

17 CFR 39.16(c).

1. How the SIDCO or Subpart C DCO would allocate losses exceeding the financial resources available to the SIDCO or Subpart C DCO;

2. How the SIDCO or Subpart C DCO would arrange for the repayment of any funds the SIDCO or Subpart C DCO may borrow; and

3. How the SIDCO or Subpart C DCO would replenish any financial resources it may employ during such a stress event, so that the SIDCO or Subpart C DCO would be able to continue to operate in a safe and sound manner.

Consistent with Principle 7 of the PFMIs, proposed paragraph (b) would require a SIDCO or Subpart C DCO to establish rules and procedures enabling it to promptly meet all of its settlement obligations, on a same day and, where appropriate, on an intraday and multiday basis, in the context of the occurrence of either or both of the following scenarios: (i) Following an individual or combined default involving one or more clearing members' obligations to the SIDCO or Subpart C DCO or (ii) if there is an unforeseen liquidity shortfall exceeding the financial resources of the SIDCO or Subpart C DCO. Such rules and procedures should be established

ex ante

and may provide for the means of: Increasing available assets (

e.g.

by using assessments) and/or reducing the size of liabilities (

e.g.

by engaging in variation margin haircuts or tear-ups); as well as obtaining liquidity from participants (

e.g.

through rules-based repurchase arrangements); employing a sequenced application of such tools; and replenishing any credit and liquidity resources that may be employed during a stress event.

The Commission requested comment on all aspects of these proposals. MGEX requested additional time to comply with regulation 39.35, along the lines of proposed regulation 39.34(d), which permits a SIDCO or Subpart C to request that the Commission grant the SIDCO or Subpart C DCO additional time of up to one year to comply with regulation 39.34. MGEX commented that it would be very difficult, if not impossible, to perform the analyses required to satisfy regulation 39.35 by December 31, 2013. The Commission agrees and has decided to permit a SIDCO or Subpart C DCO to request up to a one year extension to comply with regulation 39.35.

188

The Commission has delegated authority to approve such requests.

See

Section II.O. (discussion of regulation 140.94)

infra.

The Commission notes that regulation 39.35 was designed to protect SIDCOs, Subpart C DCOs, their clearing members, customers of clearing members, and the financial system more broadly by requiring SIDCOs and Subpart C DCOs to have plans and procedures to address credit losses and liquidity shortfalls beyond their prefunded resources, thus promoting their ability to promptly fulfill their obligations and continue to perform their critical functions. As proposed, regulation 39.35 addresses significant consequences that could result from a clearing member's default. Specifically, a DCO might not have sufficient financial resources following a clearing member's default either to cover the default or to fulfill its settlement obligations. Similarly, a DCO may be unable to fulfill its settlement obligations due to a liquidity shortfall exceeding its financial resources. In order to avoid the negative effect on its clearing members, their customers, and on the financial system more broadly of a DCO's failure promptly to meet its settlement obligations, it would be prudent for a DCO to have a recovery plan that addresses these scenarios and, given their importance to the U.S. financial system, it is critical for SIDCOs to have such plans. In addition, because this plan would be specified in the DCO's rules and/or procedures, it would be disclosed to clearing members, their customers, and the broader public. Such transparency would likely help clearing members, their customers, and other market participants properly allocate capital and other resources as well as facilitate the development of their own recovery plans.

For the reasons set forth above and in the Proposal, the Commission has decided to finalize regulation 39.35 substantively as proposed but will permit a SIDCO or Subpart C DCO to request that the Commission grant up to a one year extension to comply with regulation 39.35 and regulation 39.39, as discussed below.

189

See

new paragraph (f) of regulation 39.39 and Section II.K.,

infra

(discussing regulation 39.39).

H. Regulation 39.36 (Risk management for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

As proposed, regulation 39.36 would establish additional risk management requirements for SIDCOs and Subpart C DCOs. Current regulation 39.13 establishes the risk management requirements that a DCO must meet in order to comply with Core Principle D

190

including, among other things, specific criteria for stress tests that a DCO must conduct.

191

190

See

78 FR 50262-50263. DCO Core Principle D requires each DCO to possess the ability to manage the risks associated with discharging the responsibilities of the DCO through the use of appropriate tools and procedures. It further requires each DCO to measure its exposure to loss from the default of each clearing member not less than once during each business day and to monitor each such exposure periodically during the business day. Core Principle D also requires each DCO to limit its exposure to potential losses from defaults by clearing members, through margin requirements and other risk control mechanisms, to reduce the risk that its operations would not be disrupted and that non-defaulting clearing members would not be exposed to losses that non-defaulting clearing members cannot anticipate or control. Finally, Core Principle D requires that the margin that the DCO requires from each clearing member be sufficient to cover potential exposures in normal market conditions, and that each model and parameter used in setting such margin requirements be risk-based and reviewed on a regular basis.

191

See supra

Section I.D. Moreover, such stress tests should enable the SIDCO or Subpart C DCO to address procyclicality initial margin requirements and collateral haircuts, consistent with Principle 6, K.C. 3 and Principle 5, K.C. 3.

The Commission proposed regulation 39.36 in order to address certain gaps between Commission regulations and Principles 4, 6, 7, and 9.

192

In particular, proposed regulation 39.36 would require a SIDCO or Subpart C DCO to enhance its stress testing procedures in ways that will make it more likely that the SIDCO or Subpart C DCO will be able to understand the risks posed by its members, so that it can ensure that the relationship between its resources and obligations enables it to meet its obligations promptly.

192

See

discussion of Principles 4 and 6

supra

Section I.E.1.

The Commission requested comment on all aspects of proposed regulation 39.36.

MGEX, the European Commission, and Chris Barnard commented on proposed regulation 39.36(a)(stress tests of financial resources). MGEX stated that the regulation should permit a SIDCO or Subpart C DCO to have the flexibility to use stress test parameters that can be justified by relevant data and to select relevant time periods to review when conducting stress tests.

193

DCOs do have such flexibility, so long as the

meet the performance standards set forth in the regulation.

193

MGEX at 8.

The European Commission stated that regulation 39.36 should be more detailed in order to set a meaningful benchmark for all SIDCOs and Subpart C DCOs.

194

For example, the European Commission suggests that SIDCOs and Subpart C DCOs should be required to conduct an assessment of the theoretical and empirical properties of the margin model and that such requirement, should prescribe minimum liquidation periods for each type of product.

195

The European Commission noted that explanatory note 3.6.7 to Principle 6 states that “close-out periods should be set on a product-specific basis” because less liquid products may require longer close-out periods.

196

The European Commission opined that there should be a minimum liquidation period of two-days for “listed derivatives” (

i.e.,

futures and options) rather than the one-day minimum prescribed in current regulation 39.13(g)(2)(ii)(A).

197

The European Commission also stated more generally that its rules and this Commission's rules diverge in the area of initial margin requirements and that this divergence “is a source of competitive distortion between the E.U.- and U.S.-listed derivative markets as well as a threat to global financial stability.”

198

The European Commission also stressed that this Commission's risk management rules should do more to “mitigate the pro-cyclicality inherent to initial margin.”

199

194

European Commission at 3.

195

Id.

196

Id.

197

European Commission at 3-4.

198

European Commission at 4.

199

Id.

Regulation 39.13(g)(2) already sets out minimum liquidation times for swaps, futures, and swaps on agricultural commodities, energy commodities, and metals. In addition, pursuant to regulation 39.13(g)(2), a DCO is already required to use “[s]uch longer liquidation time as is appropriate based on the specific characteristics of a particular product or portfolio” and the Commission expressly reserved the right to establish, by order, shorter or longer liquidation times for particular products or portfolios. Moreover, under that regulation, all DCOs are obligated to consider the appropriateness of liquidation times in light of the specific characteristics of particular products or portfolios. Reg. 39.36(b)(2)(i) has been amended to clarify this point with respect to SIDCOs and Subpart C DCOs.

Chris Barnard suggested that DCOs should be required to stress test the liquidity of its financial resources in such a way that considers market stress, idiosyncratic stress, combinations thereof.

200

In addition, Chris Barnard stated that assets used to offset projected funding needs should be discounted to reflect their credit risk and market volatility.

201

In response, the Commission notes that regulation 39.36(a), as proposed, would require a SIDCO or Subpart C DCO to address these topics.

200

Chris Barnard at 2.

201

Id.

With regard to paragraph (c)(6) (reporting stress test results to the risk management committee or board of directors), MGEX suggested that this provision should be amended to permit the reporting of high-level summaries, redacted versions, or subsets of stress test results.

202

Otherwise, MGEX stated that this provision would create conflicts of interest because stress test results reveal confidential information about MGEX clearing members, and members of the MGEX risk management committee or board of directors may also be MGEX clearing members.

203

The Commission expects that stress-tests will be reported to the board of directors at a summary level. In complying with new paragraph (c)(6), a DCO should structure its reporting and governance arrangements in such a way that balances effective governance and risk management with confidentiality considerations.

202

MGEX at 8.

203

Id.

With respect to proposed regulation 39.36(e) (annual validation of financial and liquidity risk management models), Chris Barnard commented that persons responsible for the development, implementation, or operation of the systems and models being tested not carry out the annual validation.

204

The Commission agrees that would be a prudent aspect of an appropriately designed validation process.

204

Chris Barnard at 2.

The Commission has decided to finalize regulation 39.36 as amended with the clarification discussed above for the reasons discussed above and in the Proposal.

I. Regulation 39.37 (Additional disclosure for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

The Commission proposed regulation 39.37 to set forth additional public disclosure requirements for SIDCOs and Subpart C DCOs.

205

These requirements were intended to address differences between current requirements and PFMI Principles 14 and 23. In particular, proposed regulation 39.37 was designed to enable members of SIDCOs and Subpart C DCOs, their customers, and the general public to understand the risk of exposures to such DCOs, and to promote their ability to evaluate the quality of such DCOs, thereby enhancing competition and market discipline.

205

Public disclosure requirements for all registered DCOs are set forth in Regulation 39.21, which implements DCO Core Principle L (Public Information), and requires DCOs to provide to market participants sufficient information to enable them to identify and evaluate accurately the risks and costs associated with using the services of the DCO.

Specifically, proposed regulation 39.37 would require SIDCOs and Subpart C DCOs to disclose certain information to the public and to the Commission. First, consistent with Principle 23, a SIDCO or Subpart C DCO would be required to disclose its responses to the CPSS-IOSCO Disclosure Framework.

206

Further, to ensure the continued accuracy and usefulness of a SIDCO or Subpart C DCO's responses, a SIDCO or Subpart C DCO would be required to review and update them (a) at least every two years and (b) following material changes to the SIDCO's or Subpart C DCO's system or its environment.

207

A material change to the SIDCO's or Subpart C DCO's system or environment is a change that would significantly change the accuracy and usefulness of the SIDCO's or Subpart C DCO's existing responses. Under proposed regulation 39.37(c), a SIDCO or Subpart C DCO would also be required to disclose, publicly and to the Commission, relevant basic data on transaction volume and values. This requirement is intended to be consistent with the Quantitative Information Disclosure that CPSS-IOSCO are in the process of developing.

208

206

See also

section II.C.2,

supra.

207

Available at:

http://www.bis.org/publ/cpss106.pdf.

208

See supra

section II.C.2. for a discussion of the Quantitative Information Disclosure (referencing section 2.5 of the CPSS-IOSCO Disclosure Framework).

Also under proposed regulation 39.37, a SIDCO or Subpart C DCO would be required, consistent with Principle 14, to publish its rules, policies, and procedures describing whether customer funds are protected on an individual or omnibus basis and whether customer funds are subject to any legal or operational constraints that may impair the ability of the SIDCO or Subpart C DCO to segregate or port the

positions and related collateral of a clearing member's customers.

The Commission requested comment on all aspects of these proposals. MGEX commented that it is premature for regulation 39.37(c) to require a SIDCO or Subpart C DCO to complete the CPSS-IOSCO Quantitative Disclosure Document because that document has not yet been made available for public comment.

209

It is for this reason that MGEX also stated that it cannot comment on the potential costs of complying with regulation 39.37(c).

210

The Commission notes that regulation 39.37(c) requires the disclosure of relevant basic data on transaction volume and values, which requirement is consistent with key consideration 5 in Principle 23. Further, given the Commission's goal of establishing regulations that are consistent with the PFMIs,

211

to the extent that final international standards are established for the disclosure of relevant basic data on transaction volume and values, SIDCOs and Subpart C DCOs should look to such standards in complying with the requirements set forth in regulation 39.37(c). Further, the Commission notes that on October 15, 2013, CPSS-IOSCO published a consultative document on public quantitative disclosure standards for central counterparties.

212

Moreover, CPSS-IOSCO states that these quantitative disclosures, together with the PFMI Disclosure framework also published by CPSS-IOSCO, would form the minimum disclosures expected of CCPs under Principle 23, Key Consideration 5, of the Principles.

213

Thus, if and when such public quantitative disclosure standards are finalized, the Commission would expect SIDCOs and Subpart C DCOs to look to such standards in complying with the requirements set forth in regulation 39.37(c). Moreover, the Commission notes that MGEX is not obligated to comply with regulation 39.37(c) unless and until MGEX elects to become subject to Subpart C. As discussed above, a DCO that is not a SIDCO may submit a Subpart C Election Form any time on or after the effective date of these final rules and may, should it so choose, delay such submission until such time as the public quantitative disclosure standards for central counterparties are finalized.

209

MGEX at 8-9.

210

Id.

211

See

Section II.L. discussing Regulation 39.40 (Consistency with the Principles for Financial Market Infrastructures).

212

CPSS-IOSCO, Consultative Report, Public Quantitative Disclosure Standards for Central Counterparties, October 15, 2013, available at

http://www.bis.org/publ/cpss114.pdf.

213

Id.

at 1.

The new additional disclosures will help regulators and market participants assess SIDCOs and Subpart C DCOs, particularly with respect to a SIDCO's or Subpart C DCO's compliance with the PFMIs. Because of a SIDCO's importance to the U.S. financial markets, such public assessment should help provide confidence to market participants, which could prove to be a stabilizing force in times of severe market stress. For the reasons set forth herein, and in the Proposal, the Commission has decided to adopt regulation 39.37 as proposed.

J. Regulation 39.38 (Efficiency for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

Consistent with Principle 21, the Commission proposed regulation 39.38 in order to require a SIDCO or Subpart C DCO efficiently and effectively to design its clearing and settlement arrangements, operating structure and procedures, product scope, and use of technology. Further, under proposed regulation 39.38, a SIDCO or Subpart C DCO would be required to establish clearly defined goals and objectives that are measurable and achievable, including goals with regards to minimum service levels, risk management expectations, and business priorities. Moreover, a SIDCO or Subpart C DCO would be required to facilitate efficient payment, clearing, and settlement by accommodating internationally accepted communication procedures and standards. The explanatory notes to Principle 21 observe that an efficient CCP has the required resources to perform its functions

214

and the efficiency of the CCP depends on the choice of clearing and settlement arrangement, operating structure, scope of products cleared or settled, and integration of technology and procedures.

215

In addition, the explanatory notes state that an effective CCP reliably meets its obligations in a timely manner and achieves the public policy goals of safety and efficiency for participants and the markets it serves.

216

Finally, consistent with Principle 22, proposed regulation 39.38(d) would require each SIDCO and Subpart C DCO to facilitate efficient payment, clearing, and settlement by accommodating internationally accepted communication procedures and standards.

214

See

PFMIs at E.N. 3.21.1.

215

PFMIs at E.N. 3.21.2.

216

PFMIs at E.N. 3.21.5.

The Commission requested comment on all aspects of these proposals. MGEX commented that regulation 39.38(d) should permit a SIDCO or Subpart C DCO to make independent business decisions for establishing communication methods that best serve its clearing members and market participants.

217

MGEX stated it is unclear as to whom or what organization is responsible for establishing international communication standards and would expect that there may be multiple acceptable communication methods.

218

MGEX suggested that the Commission take a flexible approach in reviewing the efficiency of a DCO's methods of communication.

219

The Commission notes that regulation 39.38(d) refers broadly to “internationally accepted communication procedures and standards.” Therefore, the Commission believes that there may be more than one way for a SIDCO or Subpart C DCO to comply with regulation 39.38(d). The Commission appreciates MGEX suggestion regarding flexibility, but as examinations are fact specific, the Commission declines to discuss what approach it would or would not take in a particular review in the abstract.

217

MGEX at 9.

218

Id.

219

Id.

It would appear to be prudent for SIDCOs and Subpart C DCOs to comply with such international standards of efficiency and effectiveness. A SIDCO or Subpart C DCO that is inefficient or ineffective could distort financial activity and market structure, increasing financial and other risks to the SIDCO's or Subpart C DCO's participants.

220

For the reasons set forth in the foregoing discussion, and in the Proposal, the Commission has decided to finalize regulation 39.38 as proposed.

220

PFMIs at E.N. 3.21.1.

K. Regulation 39.39 (Recovery and wind-down for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations)

The Commission proposed regulation 39.39 to require a SIDCO or Subpart C DCO to maintain viable plans for recovery and orderly wind-down. In particular, regulation 39.39 was designed to protect the members of such DCOs and their customers, as well as the financial system more broadly from the consequences of a disorderly failure of such a DCO.

As noted above, Principle 3 requires a CCP to have a sound risk management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.

221

Under Principle 3, such a framework would include identifying scenarios that may prevent the CCP from providing critical operations and services as a going concern and would assess the effectiveness of a full range of options for recovery or orderly wind-down. Similarly, Principle 15 requires a CCP to identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that the CCP can continue operations and services as a going concern if those losses materialize.

222

Further, these liquid net assets should, at all times, be sufficient to allow for recovery or orderly wind-down of critical operations and services.

223

Although there is no Core Principle that pertains directly to the establishment of a recovery and wind-down plan, proposed regulation 39.37 promotes concepts set forth in Core Principles B (Financial Resources), D (Risk Management), G (Default Rules and Procedures), and I (System Safeguards).

224

221

See supra

Section I.E.1.

222

See supra

id.

223

See id.

224

See supra

Section I.D.

Accordingly, under proposed regulation 39.39, a SIDCO or Subpart C DCO would be required to develop additional plans that specifically address “recovery” and “wind-down.” The Commission proposed defining “recovery” as the actions of a SIDCO or Subpart C DCO, consistent with its rules, procedures, and other

ante

contractual arrangements, to address any uncovered credit loss, liquidity shortfall, capital inadequacy, or business, operational or other structural weakness, including the replenishment of any depleted pre-funded financial resources and liquidity arrangements, as necessary to maintain the SIDCO's or Subpart C DCO's viability as a going concern so that it can continue to provide its critical services without requiring the commencement of an insolvency proceeding or the use of resolution powers by the Federal Deposit Insurance Corporation or any other relevant resolution authority. The Commission proposed defining “wind-down” as the actions of a SIDCO or Subpart C DCO to effect the permanent cessation or sale or transfer of one or more services. The Commission also proposed adding a definition for “general business risk,” which would mean any potential impairment of a SIDCO's or Subpart C DCO's financial position, as a business concern, as a consequence of a decline in its revenues or an increase in its expenses, such that expenses exceed revenues and result in a loss that the SIDCO or Subpart C DCO must charge against capital. In addition, the Commission proposed defining “operational risk” to mean the risk that deficiencies in information systems or internal processes, human errors, management failures or disruptions from external events will result in the reduction, deterioration, or breakdown of services provided by a SIDCO or Subpart C DCO. Furthermore, the Commission proposed defining “unencumbered liquid financial assets” to include cash and highly liquid securities. These proposed definitions were designed to be consistent with the meaning of such terms in the PFMIs. The Commission requested comment as to whether these definitions were appropriate. Specifically, the Commission requested comment on whether the definition of “recovery” is appropriate in light of emerging international consensus.

The Commission proposed requiring each SIDCO and Subpart C DCO to maintain viable plans for: (i) Recovery or orderly wind-down, necessitated by credit losses or liquidity shortfalls; and (ii) recovery or orderly wind-down, necessitated by general business risk, operational risk, or any other risk that threatens the SIDCO's or Subpart C DCO's viability as a going concern. The Commission also proposed requiring that the recovery and wind-down plans of SIDCOs and Subpart C DCOs meet certain standards, set forth in proposed subsection (c).

225

Under proposed regulation 39.39(d), a SIDCO or Subpart C DCO would be required to establish recovery and wind-down plans that are supported by certain resources.

225

78 FR 50282.

The Commission requested comment on all aspects of these proposals. In their comment letters, LCH, MGEX, and NYPC suggested that the Commission provide additional time to a SIDCO or Subpart C DCO for developing recovery and wind-down plans in accordance with regulation 39.39.

226

Further, NYPC suggested that a SIDCO or Subpart C not be required to comply with regulation 39.39 until (1) CPSS-IOSCO and the Financial Stability Board finalize their reports on CCP recovery and resolution and (2) CCPs have been allowed a reasonable amount of time to implement the guidance included in such reports.

227

Because reports on CCP recovery and resolution are still under consideration by the relevant international bodies, and further work in these areas may inform the Commission's views on a SIDCO's or Subpart C DCO's recovery or wind-down plans, the Commission has decided to permit a SIDCO or Subpart C DCO to request that the Commission grant the SIDCO or Subpart C DCO up to one year to comply with regulation 39.39 and 39.35 (Default rules and procedures), in a similar manner to the process by which a SIDCO or Subpart DCO may request that the Commission grant the SIDCO or Subpart C additional time for complying with regulations 39.34 (System safeguards).

228

226

LCH at 2-4, MGEX at 9, and NYPC at 2.

227

NYPC at 1-2.

228

See

new paragraph (f) of regulation 39.39, new paragraph (d) of regulation 39.34, footnote 108

supra, and

Section II.G.

supra

(discussing regulation 39.35).

ISDA suggested that regulation 39.39 include more details about the required recovery and wind-down plans, such as the details provided in CPSS-IOSCO's Consultative Report, “Recovery of Financial Market Infrastructures.”

229

The Commission notes that the Consultative Report lists suggested tools, not mandatory standards.

230

This rulemaking, by contrast, is intended to address what the PFMIs require. Therefore, it would be inappropriate for Subpart C to reflect the Consultative Report.

229

ISDA at 1-2.

230

The Consultative Report notes that it “is not intended to create additional standards for FMIs, or authorities, beyond those set out in the CPSS-IOSCO `Principles for financial market infrastructures'.”

Id.

at 1.

With respect to proposed regulation 39.39(b)(2), MGEX commented that the Commission should delete the phrase “or any other risk that threatens the DCO's viability as a going concern.”

231

MGEX stated that Principle 15 requires a DCO to establish recovery and orderly wind-down plans necessitated only by general business risk or operational risk.

232

MGEX commented further that this phrase is ambiguous.

233

Although the phrase does not appear in Principle 15, the Commission notes that key consideration 3 of Principle 3 specifically requires an FMI to “identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down.” Thus, the inclusion of the phrase “or any other risk that threatens the DCO's viability as

a going concern” is consistent with the PFMIs. Moreover, a SIDCO or Subpart C DCO should be aware of, and have plans to address, the risks that threaten their viability without being limited in their analysis to pre-defined risks.

231

MGEX at 10.

232

MGEX at 9-10.

233

Id.

With respect to proposed regulation 39.39(d)(2), MGEX commented that a SIDCO or Subpart C DCO that demonstrates adequate liquidity capabilities should be permitted to use an established line of credit for meeting potential business losses, particularly if the line of credit is offered on the basis that the DCO meet “certain equity covenants.”

234

The Commission notes that, so long as the DCO has sufficient assets funded by the equity of its owners, arrangements such as this one may be effective in providing a DCO with a tool that would be adequate for providing the related liquidity necessary to comply with regulation 39.39(d)(2). A DCO would need to demonstrate that such an arrangement would: (i) enable the DCO to have sufficient unencumbered liquid financial assets to fund its recovery and wind-down plans and (ii) make that liquidity available to the DCO even in a scenario in which the DCO is facing recovery or wind-down. The Commission notes that regulation 39.39(d)(2) uses the phrase “funded by equity . . .” to connote financial resources that are part of the SIDCO's or Subpart C DCO's owners' equity/shareholder capital.

235

234

Id.

235

As mentioned earlier in this section, the phrase “funded by equity” comes from Principle 15.

See

also

supra

Section I.E.1.

For the reasons set forth above and in the Proposal, the Commission has decided to finalize regulation 39.39 substantively as proposed but, as discussed above, will permit a SIDCO or Subpart C DCO to request that the Commission grant the SIDCO or Subpart C DCO up to one year to comply with regulation 39.39.

236

This new regulation is intended to address certain differences between existing Commission regulations and the standards set forth in the PFMIs. In addition, it would appear to be necessary for a SIDCO to maintain and (as part of such maintenance, regularly update) a recovery and wind-down plan so as to reduce, or attempt to control, the potential impact a fa

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