Standards for Covered Clearing Agencies

Federal RegisterOct 13, 2016

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-78961; File No. S7-03-14]

RIN 3235-AL48

Standards for Covered Clearing Agencies

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“SEC” or “Commission”) is adopting amendments to Rule 17Ad-22 and adding new Rule 17Ab2-2 pursuant to Section 17A of the Securities Exchange Act of 1934 (“Exchange Act”) and the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”), enacted in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). Among other things, the rules establish enhanced standards for the operation and governance of those clearing agencies registered with the Commission (“registered clearing agencies”) that meet the definition of “covered clearing agency.”

DATES:

Effective date:

December 12, 2016.

Compliance date:

April 11, 2017.

The compliance date is discussed in Part II.G below.

FOR FURTHER INFORMATION CONTACT:

Jeffrey Mooney, Assistant Director; Stephanie Park, Senior Special Counsel; Matthew Lee, Branch Chief; Elizabeth Fitzgerald, Branch Chief; or DeCarlo McLaren, Attorney-Adviser; Office of Market Infrastructure, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010, at (202) 551-5710.

SUPPLEMENTARY INFORMATION:

The Commission is amending Rule 17Ad-22 by adding new Rule 17Ad-22(e) to establish requirements for the operation and governance of registered clearing agencies that meet the definition of a “covered clearing agency.” A covered clearing agency includes a registered clearing agency that (i) has been designated as systemically important by the Financial Stability Oversight Council (“FSOC”) and for which the Commission is the supervisory agency under the Clearing Supervision Act (“designated clearing agency”), or (ii) provides central counterparty (“CCP”) services for security-based swaps or is involved in activities the Commission determines to have a more complex risk profile (“complex risk profile clearing agency”), unless the Commodity Futures Trading Commission (“CFTC”) is the supervisory agency under the Clearing Supervision Act.

To facilitate the addition of new Rule 17Ad-22(e), the Commission is amending existing Rule 17Ad-22(d) to limit its application to clearing agencies other than covered clearing agencies and revising Rule 17Ad-22(a) to add 14 new definitions. The Commission is also adopting new Rule 17Ad-22(f) to codify the Commission's statutory authority under Section 807(c) of the Clearing Supervision Act and new Rule 17Ab2-2 to establish procedures for making determinations regarding covered clearing agencies in certain defined circumstances, described further below.

In developing these rules, Commission staff has consulted with the FSOC, CFTC, and Board of Governors of the Federal Reserve System (“FRB”). The Commission has also considered the relevant international standards as required by Section 805(a)(2)(A) of the Clearing Supervision Act.

The relevant international standards for designated clearing agencies and complex risk profile clearing agencies are the

Principles for Financial Market Infrastructures

(“PFMI”).

See

12 U.S.C. 5464(a)(2)(A).

See

Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions (“CPSS-IOSCO”), Principles for financial market infrastructures (Apr. 16, 2012),

available at http://www.bis.org/publ/cpss101a.pdf.

In 2014, the CPSS became the Committee on Payments and Market Infrastructures (“CPMI”).

Table of Contents

I. Introduction

A. Regulatory Framework

1. Exchange Act

2. Dodd-Frank Act

3. Rule 17Ad-22

4. Regulation SCI

5. Relevant International Standards

6. Recognition and Equivalence Within the EU

B. Summary of the Commission's Proposal

C. Comments Received

1. Financial Stability and the Dodd-Frank Act

2. Relationship Between Rules 17Ad-22(d) and (e)

3. Relationship Among Rules 17Ad-22(b), (c), and (e)

4. Risk of Duplicative or Inconsistent Regulation

5. Flexible Versus Prescriptive Approaches to Regulation, and the Role of Rule Filings under Rule 19b-4

6. Consistency With the PFMI

7. Other Comments

II. Description of the Amendments to Rule 17AD-22 and Rule 17AB2-2

A. Scope of Rule 17Ad-22(e)

1. As Applied to CCPs Generally

2. As Applied to Security-Based Swap Clearing Agencies

3. As Applied to Dually Registered Clearing Agencies

B. Principles-Based Approach to Rule 17Ad-22(e)

C. Requirements for Covered Clearing Agencies Under Rule 17Ad-22(e)

1. Rule 17Ad-22(e)(1): Legal Risk

2. Rule 17Ad-22(e)(2): Governance

3. Rule 17Ad-22(e)(3): Framework for the Comprehensive Management of Risks

4. Rule 17Ad-22(e)(4): Credit Risk

5. Rule 17Ad-22(e)(5): Collateral

6. Rule 17Ad-22(e)(6): Margin

7. Rule 17Ad-22(e)(7): Liquidity Risk

8. Rule 17Ad-22(e)(8): Settlement Finality

9. Rule 17Ad-22(e)(9): Money Settlements

10. Rule 17Ad-22(e)(10): Physical Delivery Risks

11. Rule 17Ad-22(e)(11): CSDs

12. Rule 17Ad-22(e)(12): Exchange-of-Value Settlement Systems

13. Rule 17Ad-22(e)(13): Participant-Default Rules and Procedures

14. Rule 17Ad-22(e)(14): Segregation and Portability

15. Rule 17Ad-22(e)(15): General Business Risk

16. Rule 17Ad-22(e)(16): Custody and Investment Risks

17. Rule 17Ad-22(e)(17): Operational Risk Management

18. Rule 17Ad-22(e)(18): Access and Participation Requirements

19. Rule 17Ad-22(e)(19): Tiered Participation Arrangements

20. Rule 17Ad-22(e)(20): Links

21. Rule 17Ad-22(e)(21): Efficiency and Effectiveness

22. Rule 17Ad-22(e)(22): Communication Procedures and Standards

23. Rule 17Ad-22(e)(23): Disclosure of Rules, Key Procedures, and Market Data

D. Rule 17Ab2-2

1. Proposed Rule

2. Comments Received and Commission Response

3. Final Rule

E. Rule 17Ad-22(f)

F. Amendment to Rule 17Ad-22(d)

G. Effective and Compliance Dates

III. Economic Analysis

A. Economic Baseline

1. Regulatory Framework for Registered Clearing Agencies

2. Current Practices

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

1. General Economic Considerations

2. Effect on Competition, Efficiency, and Capital Formation

3. Effect of Amendments to Rule 17Ad-22 and Rule 17Ab2-2

IV. Paperwork Reduction Act

A. Summary of Collection of Information and Use of Information

1. Rule 17Ad-22(e)(1)

2. Rule 17Ad-22(e)(2)

3. Rule 17Ad-22(e)(3)

4. Rule 17Ad-22(e)(4)

5. Rule 17Ad-22(e)(5)

6. Rule 17Ad-22(e)(6)

7. Rule 17Ad-22(e)(7)

8. Rule 17Ad-22(e)(8)

9. Rule 17Ad-22(e)(9)

10. Rule 17Ad-22(e)(10)

11. Rule 17Ad-22(e)(11)

12. Rule 17Ad-22(e)(12)

13. Rule 17Ad-22(e)(13)

14. Rule 17Ad-22(e)(14)

15. Rule 17Ad-22(e)(15)

16. Rule 17Ad-22(e)(16)

17. Rule 17Ad-22(e)(17)

18. Rule 17Ad-22(e)(18)

19. Rule 17Ad-22(e)(19)

20. Rule 17Ad-22(e)(20)

21. Rule 17Ad-22(e)(21)

22. Rule 17Ad-22(e)(22)

23. Rule 17Ad-22(e)(23)

24. Rule 17Ab2-2

25. Rule 17Ad-22(c)(1)

B. Respondents

C. Total Annual Reporting and Recordkeeping Burdens

1. Rule 17Ad-22(e)(1)

2. Rule 17Ad-22(e)(2)

3. Rule 17Ad-22(e)(3)

4. Rule 17Ad-22(e)(4)

5. Rule 17Ad-22(e)(5)

6. Rule 17Ad-22(e)(6)

7. Rule 17Ad-22(e)(7)

8. Rule 17Ad-22(e)(8)

9. Rule 17Ad-22(e)(9)

10. Rule 17Ad-22(e)(10)

11. Rule 17Ad-22(e)(11)

12. Rule 17Ad-22(e)(12)

13. Rule 17Ad-22(e)(13)

14. Rule 17Ad-22(e)(14)

15. Rule 17Ad-22(e)(15)

16. Rule 17Ad-22(e)(16)

17. Rule 17Ad-22(e)(17)

18. Rule 17Ad-22(e)(18)

19. Rule 17Ad-22(e)(19)

20. Rule 17Ad-22(e)(20)

21. Rule 17Ad-22(e)(21)

22. Rule 17Ad-22(e)(22)

23. Rule 17Ad-22(e)(23)

24. Total Burden for Rule 17Ad-22(e)

25. Total Burden for Rule 17Ab2-2

26. Total Burden for Rule 17Ad-22(c)(1)

D. Collection of Information Is Mandatory

E. Confidentiality

V. Regulatory Flexibility Act

A. Registered Clearing Agencies

B. Certification

VI. Statutory Authority

I. Introduction

A. Regulatory Framework

Below is an overview of the regulatory requirements for registered clearing agencies that relate to the amendments to Rule 17Ad-22 and new Rule 17Ab2-2 as set forth under the Exchange Act, the Dodd-Frank Act, and Commission rules and regulations thereunder.

1. Exchange Act

Section 17A of the Exchange Act directs the Commission to facilitate the establishment of (i) a national system for the prompt and accurate clearance and settlement of securities transactions and (ii) linked or coordinated facilities for clearance and settlement of securities transactions.

In facilitating the establishment of the national clearance and settlement system, the Commission must have due regard for the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition among brokers and dealers, clearing agencies, and transfer agents.

See

15 U.S.C. 78q-1(a)(2);

see also

Report of the Senate Committee on Banking, Housing & Urban Affairs, S. Rep. No. 94-75, at 4 (1975) (urging that “[t]he Committee believes the banking and security industries must move quickly toward the establishment of a fully integrated national system for the prompt and accurate processing and settlement of securities transactions”).

See

15 U.S.C. 78q-1(a)(2)(A).

As discussed in the Standards for Covered Clearing Agencies proposing release (“CCA Standards proposing release”),

clearing agencies are broadly defined in the Exchange Act and undertake a variety of functions.

Under Section 17A and Rule 17Ab2-1,

an entity that meets the definition of a clearing agency is required to register with the Commission or obtain from the Commission an exemption from registration prior to performing the functions of a clearing agency. To grant registration to a clearing agency, the Exchange Act requires the Commission to determine that the rules and operations of the applicant clearing agency meet the standards set forth in Section 17A.

Specifically, Section 17A(b)(3) provides that a clearing agency shall not be registered unless the Commission determines that the clearing agency's rules are consistent with the Exchange Act. In so doing, the Commission must determine that, among other things, (i) the clearing agency is so organized and has the capacity to be able to facilitate the prompt and accurate clearance and settlement of securities transactions and to safeguard securities or funds in its custody or control, (ii) the rules of the clearing agency assure a fair representation of its members and participants in the selection of its directors and administration of its affairs, (iii) the rules of the clearing agency provide for the equitable allocation of reasonable dues and fees, and (iv) the rules of the clearing agency are designed to promote the prompt and accurate clearance and settlement of securities transactions.

See

Exchange Act Release No. 34-71699 (Mar. 12, 2014), 79 FR 16865 (Mar. 26, 2014),

corrected at

79 FR 29507, 29510-11 (May 22, 2014);

see also

Exchange Act Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219, 66221-22 (Nov. 2, 2012) (discussing the same) (“Clearing Agency Standards adopting release”).

See

15 U.S.C. 78c(a)(23)(A) (providing the definition of “clearing agency”).

See

17 CFR 240.17Ab2-1.

See

15 U.S.C. 78q-1(b)(3)(A) through(I) (identifying nine determinations that the Commission must make regarding the rules and structure of a clearing agency to grant registration). In 1980, the Commission published a statement of the views and positions of Commission staff regarding the requirements of Section 17A.

See

Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June 23, 1980).

See

15 U.S.C. 78q-1(b)(3)(A), (C), (D), (F).

Following registration, the Commission supervises registered clearing agencies using various tools. One of these tools is Rule 17a-1 under the Exchange Act, which requires every registered clearing agency to keep and preserve at least one copy of all documents, including all correspondence, memoranda, papers, books, notices, accounts, and other such records as shall be made or received by it in the course of its business as such and in the conduct of its self-regulatory activity for a period not less than five years and, upon request of any representative of the Commission, to promptly furnish to the possession of such representative copies of any such documents required to be kept.

Another of these tools is the rule filing process for self-regulatory organizations (“SROs”),

set forth in Section 19(b) of the Exchange Act and rules and regulations thereunder. A registered clearing agency is required to file with the Commission any proposed rule or proposed change in, addition to, or deletion from the registered clearing agency's rules.

The Commission publishes all proposed rule changes for comment and reviews them. Proposed rule changes are generally required to be approved by the Commission prior to going into effect; however, certain types of proposed rule changes take effect upon filing with the Commission.

When reviewing a proposed rule change, the Commission considers the submissions of the clearing agency together with any comments received on the proposed rule change in making a determination of whether the proposed rule change is consistent with the requirements of the Exchange Act. In

addition, Section 17A of the Exchange Act further provides the Commission with authority to adopt rules as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act and prohibits a clearing agency from engaging in any activity in contravention of such rules and regulations.

See

17 CFR 240.17a-1(a) through (c);

see also

15 U.S.C. 78q(a)(1), (2).

Upon registration, registered clearing agencies are SROs under Section 3(a)(26) of the Exchange Act.

See

15 U.S.C. 78c(a)(26).

An SRO must submit proposed rule changes to the Commission for review and approval pursuant to Rule 19b-4 under the Exchange Act. A stated policy, practice, or interpretation of an SRO, such as its written policies and procedures, would generally be deemed to be a proposed rule change.

See

15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.

See

15 U.S.C. 78s(b)(3)(A) (setting forth the types of proposed rule changes that take effect upon filing with the Commission). The Commission may temporarily suspend those rule changes within 60 days of filing and institute proceedings to determine whether to approve or disapprove the rule changes.

See

15 U.S.C. 78s(b)(3)(C).

See

15 U.S.C. 78q-1(d).

In addition, Commission staff conducts examinations of registered clearing agencies to assess, among other things, existing and emerging risks, compliance with applicable statutory and regulatory requirements, and a clearing agency's oversight of compliance by its participants with its rules. Section 21(a) of the Exchange Act provides the Commission with authority to initiate and conduct investigations to determine if there have been violations of the federal securities laws.

Section 19(h) of the Exchange Act also provides the Commission with authority to institute civil actions seeking injunctive and other equitable remedies and/or administrative proceedings arising out of such investigations.

See

15 U.S.C. 78u(a).

See

15 U.S.C. 78s(h).

2. Dodd-Frank Act

Title VII of the Dodd-Frank Act provides the Commission with authority to regulate certain over-the-counter (“OTC”) derivatives. Specifically, Title VII added provisions to the Exchange Act that (i) require entities performing the functions of a clearing agency with respect to security-based swaps (“security-based swap clearing agencies”) to register with the Commission, and (ii) direct the Commission to adopt rules with respect to security-based swap clearing agencies.

See

15 U.S.C. 78q-1(i), (j); Dodd-Frank Act, Sec. 763(b), 124 Stat. at 1768-69 (adding paragraphs (i) and (j) to Section 17A of the Exchange Act).

The Clearing Supervision Act, enacted in Title VIII of the Dodd-Frank Act, provides for the enhanced regulation of certain financial market utilities (“FMUs”).

FMUs include clearing agencies that manage or operate a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the FMU.

FSOC has designated certain FMUs as systemically important or likely to become systemically important (“SIFMUs”).

SIFMUs are required to file 60-days advance notice of changes to rules, procedures, and operations that could materially affect the nature or level of risk presented by the SIFMU (“advance notice”).

The Clearing Supervision Act authorizes the Commission to object to changes proposed in such an advance notice, which would prevent the clearing agency from implementing the change.

The Clearing Supervision Act also provides for enhanced coordination between the Commission and FRB by allowing for regular on-site examinations and information sharing.

The Clearing Supervision Act further provides that the Commission and CFTC shall coordinate with the FRB to jointly develop risk management supervision programs for SIFMUs.

In addition, the Clearing Supervision Act provides that the Commission and CFTC may each prescribe risk management standards governing the operations related to payment, clearing, and settlement activities (“PCS activities”) of SIFMUs for which each is the supervisory agency, in consultation with the FSOC and FRB and taking into consideration relevant international standards and existing prudential requirements.

The objectives and principles for the risk management standards prescribed under the Clearing Supervision Act shall be to (i) promote robust risk management; (ii) promote safety and soundness; (iii) reduce systemic risks; and (iv) support the stability of the broader financial system. Further, the Clearing Supervision Act states that the standards may address areas such as risk management policies and procedures; margin and collateral requirements; participant or counterparty default policies and procedures; the ability to complete timely clearing and settlement of financial transactions; capital and financial resources requirements for designated FMUs; and other areas that are necessary to achieve the objectives and principles described above.

See

12 U.S.C. 5464(b), (c).

See

12 U.S.C. 5462(6). The definition of “financial market utility” in Section 803(6) of the Clearing Supervision Act contains a number of exclusions that include, but are not limited to, certain designated contract markets, registered futures associations, swap data repositories, swap execution facilities, national securities exchanges, national securities associations, alternative trading systems, security-based swap data repositories, security-based swap execution facilities, brokers, dealers, transfer agents, investment companies, and futures commission merchants.

See

12 U.S.C. 5462(6)(B).

See

12 U.S.C. 5463. An FMU is systemically important if the failure of or a disruption to the functioning of such FMU could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.

See

12 U.S.C. 5462(9). On July 18, 2012, the FSOC designated as systemically important the following then-registered clearing agencies: CME Group (“CME”), The Depository Trust Company (“DTC”), Fixed Income Clearing Corporation (“FICC”), ICE Clear Credit (“ICC”), National Securities Clearing Corporation (“NSCC”), and The Options Clearing Corporation (“OCC”).

The Commission is the supervisory agency for DTC, FICC, NSCC, and OCC, and the CFTC is the supervisory agency for CME and ICE. The Commission jointly regulates ICC and OCC with the CFTC. The Commission also jointly regulates ICE Clear Europe (“ICEEU”), which has not been designated as systemically important by FSOC, with the CFTC and Bank of England.

The Commission also jointly regulated CME with the CFTC until 2015, when the Commission published an order approving CME's request to withdraw from registration as a clearing agency.

See

Exchange Act Release No. 34-76678 (Dec. 17, 2015), 80 FR 79983 (Dec. 23, 2015).

See

12 U.S.C. 5465(e)(1)(A); 17 CFR 240.19b-4(n). The Commission published a final rule concerning the filing of advance notices for designated clearing agencies in 2012.

See

Exchange Act Release No. 34-67286 (June 28, 2012), 77 FR 41602 (July 13, 2012).

See

12 U.S.C. 5465(e).

See

12 U.S.C. 5466.

See

12 U.S.C. 5472;

see also

Risk Management Supervision of Designated Clearing Entities (July 2011),

available at https://www.federalreserve.gov/publications/other-reports/files/risk-management-supervision-report-201107.pdf

(describing the joint supervisory framework of the Commission, CFTC, and FRB).

See

12 U.S.C. 5464(a)(2). The Commission notes that, under Rule 17Ad-22(a)(6), a SIFMU for which the Commission is the supervisory agency is a “designated clearing agency.”

See infra

note 134 and accompanying text.

3. Rule 17Ad-22

In 2012, the Commission adopted Rule 17Ad-22 under the Exchange Act to strengthen the substantive regulation of registered clearing agencies, promote the safe and reliable operation of registered clearing agencies, and improve efficiency, transparency, and access to registered clearing agencies.

At that time, the Commission noted that the implementation of Rule 17Ad-22 would be an important first step in developing the regulatory changes contemplated by Titles VII and VIII of the Dodd-Frank Act.

In this regard, Rule 17Ad-22(b) established certain requirements for clearing agencies that provide CCP services, and Rule 17Ad-22(d) established requirements for the operation and governance of all registered clearing agencies.

See

CCA Standards proposing release,

supra

note 5, at 29513;

see also

17 CFR 240.17Ad-22; Clearing Agency Standards adopting release,

supra

note 5, at 66225-26.

See

Clearing Agency Standards adopting release,

supra

note 5, at 66224-25.

See

17 CFR 240.17Ad-22(b), (d).

The requirements in Rule 17Ad-22 help guide Commission determinations, when considering an application to register as a clearing agency, that the rules and operations of the applicant clearing agency satisfy the requirements in Section 17A of the Exchange Act.

Today's amendments to Rule 17Ad-22 build on the existing framework for registered clearing agencies by establishing new requirements for designated clearing agencies, complex risk profile clearing agencies unless the

CFTC is the supervisory agency, and, pursuant to Rule 17Ab2-2, any other clearing agencies determined by the Commission to be covered clearing agencies.

See supra

notes 8-9 and accompanying text.

4. Regulation SCI

In 2014, the Commission adopted Regulation Systems Compliance and Integrity (“Regulation SCI”) to strengthen the technology infrastructure of the U.S. securities markets.

In particular, the Commission notes that Regulation SCI is designed to reduce the occurrence of systems issues, improve resiliency when systems problems do occur, and enhance the Commission's oversight and enforcement of securities market technology infrastructure. Since adoption of Regulation SCI, the Commission has established a monitoring and examination structure to oversee compliance with Regulation SCI.

See

Exchange Act Release No. 34-73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014) (“Regulation SCI adopting release”).

Regulation SCI applies to “SCI entities,” a term which includes SROs such as registered clearing agencies.

It requires SCI entities to, among other things, maintain policies and procedures reasonably designed to ensure that certain systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and that they operate in a manner that complies with the Exchange Act as well as their own rules.

Certain SCI systems that are “critical SCI systems” are held to heightened requirements under Regulation SCI,

including a requirement to establish, maintain, and enforce written policies and procedures reasonably designed, among other things, to include a two-hour resumption goal following a wide-scale disruption,

and broader dissemination obligations for “major SCI events.”

The definition of critical SCI systems in Regulation SCI was designed to cover “those SCI systems whose functions are critical to the operation of the markets, including those systems that represent potential single points of failure in the securities markets.”

Regulation SCI requires SCI entities to take certain corrective actions when “SCI events” occur. Regulation SCI defines SCI events to include an event in an SCI entity's SCI systems that disrupts, or significantly degrades, the normal operation of an SCI system. In the Regulation SCI adopting release, the Commission explained its view that for clearance and settlement systems a return to “normal operations” following a systems disruption would include all steps necessary to effectuate timely and accurate end of day settlement.

See

17 CFR 242.1000 (providing the definition of “SCI SROs”).

See

17 CFR 242.1001.

See

17 CFR 242.1000 (providing definitions of “SCI systems” and “critical SCI systems”).

See

17 CFR 242.1001(a)(2)(v).

See

17 CFR 242.1002(c)(3).

See

Regulation SCI adopting release,

supra

note 30, at 72277.

See id.

at 72285 n.395.

5. Relevant International Standards

When prescribing regulations that contain risk management standards for designated clearing agencies, Section 805(a) of the Clearing Supervision Act requires the Commission to consider the relevant international standards and existing prudential requirements.

As previously noted, the PFMI is the relevant international standard for systemically important financial market infrastructures, such as covered clearing agencies.

The PFMI sets forth twenty-four principles, each of which includes a headline standard and a list of key considerations that further explain the headline standard. Accompanying explanatory notes further discuss the objectives of and rationales for the standards, as well as provide guidance on how the standard can be implemented.

See

12 U.S.C. 5464(a)(2);

see also

Regulatory Capital Rules,

supra,

at 62100.

6. Recognition and Equivalence Within the EU

The Commission is aware of recent public attention on the availability of QCCP status under EU capital requirements for certain covered clearing agencies that operate in the United States and have bank clearing members affiliated with a European Union (“EU”) entity.

Specifically, the Commission understands that availability of QCCP status in the EU for a U.S. CCP hinges on the European Securities and Markets Authority (“ESMA”) recognizing the U.S. CCP pursuant to the requirements of the European Markets Infrastructure Regulation (“EMIR”). Recognition by ESMA, in turn, is subject to the European Commission (“EC”) first making certain findings regarding the Commission's regulatory regime for CCPs.

Recognition by ESMA would result in QCCP status for those U.S. CCPs for purposes of the EU's capital requirements, allowing EU-based clearing members of U.S. CCPs to continue to operate and provide clearing services to market participants based in the EU. Under the EU's capital requirements regulation, EU banks and their subsidiaries will incur higher capital charges if they clear through a U.S. CCP not afforded QCCP status in the EU, that is, a CCP not recognized or authorized by ESMA.

See, e.g.,

Fiona Maxwell, EU members of U.S. options CCP face $30 billion capital hit: OCC fears approval will be held up by absence of SEC clearing rules, Risk.net, Nov. 30, 2015,

available at http://www.risk.net/risk-magazine/news/2436901/eu-members-of-us-options-ccp-face-usd30bn-capital-hit

(“A new wrinkle in the transatlantic dispute over clearing house regulation could leave 18 European banks facing an estimated $30 billion jump in capital requirements, and limit access to equity options listed in the [United States] . . . . The potential capital hit for OCC members is a consequence of the Capital Requirements Regulation (CRR), which states that European banks—whether acting through their branch or subsidiary—will only be given a 2% risk weight for cleared trades if using a so-called qualifying CCP following expiration of the current extended grandfathering period. Clearing at a non-QCCP can translate to risk weights of more than 1250%.”).

On March 16, 2016, the EC issued an equivalence decision stating that the CFTC's regulatory framework for CCPs is equivalent to EU requirements.

See

Commission Implementing Decision (EU) 2016/377 of 15 March 2016 on the equivalence of the regulatory framework of the United States of America for central counterparties that are authorised and supervised by the CFTC to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council,

available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016D0377

Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms. As noted earlier, although the United States affords QCCP status to SIFMUs, QCCP status in the EU is distinct from the U.S. banking regulators' determination that any FMU designated as systemically important by FSOC is a U.S. QCCP.

As an initial matter, the Commission understands that, for the EC to make an equivalence decision, Article 25(6) of the European Markets Infrastructure Regulation (“EMIR”) requires the EC to determine that

the legal and supervisory arrangements of a third country ensure that CCPs authorised in that third country comply with legally binding requirements which are equivalent to the requirements laid down in [EMIR], that those CCPs are subject to effective supervision and enforcement in that third country on an ongoing basis and that the legal framework of that third country provides for an effective equivalent system for the recognition of CCPs authorised under third-country legal regimes.

See

Article 25(6), Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories,

available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32012R0648

The Commission understands that its adoption of new Rule 17Ad-22(e) could be relevant to the EC's ongoing consideration of the Commission's regulatory regime for CCPs.

Further, with respect to EMIR's requirement that the legal and supervisory regime of the United States include an “effective equivalent system” for the recognition of CCPs authorized under non-U.S. legal regimes, the Commission notes the following.

See, e.g.,

Philip Stafford, European banks face U.S. capital hit unless rules converge, FT.com, Apr. 4, 2016,

available at http://www.ft.com/cms/s/0/bbe6678a-f5c5-11e5-803c-d27c7117d132.html#axzz48oFXlFrR

See

Article 25(6) of EMIR.

First, the Commission observes that, in certain specific contexts, it is not unfamiliar with the EMIR regime given that one registered clearing agency, ICEEU, is subject to EMIR and will be a covered clearing agency pursuant to Rule 17Ad-22(a)(5).

As previously discussed, each registered clearing agency is an SRO subject to Section 19(b) of the Exchange Act, which requires SROs to submit proposed rule changes to the Commission for public comment and Commission review and approval.

In the course of its regulation of ICEEU as a registered clearing agency, the Commission has published, reviewed, and approved under the Exchange Act a number of proposed rule changes submitted by ICEEU under Rule 19b-4 that, based on the information and representations made by ICEEU at the time, were intended to facilitate ICEEU's efforts to comply with EMIR. These proposed rule changes covered such areas as (i) segregation and portability of customer positions and margin, (ii) risk modeling, (iii) back testing, (iv) stress testing, (v) default management, and (vi) liquidity risk management.

As noted above, ICEEU is also regulated by the Bank of England.

See supra

note 20.

See supra

Part I.C.5 (further describing the obligations of a registered clearing agency to file proposed rule changes under Rule 19b-4).

See

Exchange Act Release No. 34-73075 (Sept. 11, 2014), 79 FR 55848 (Sept. 17, 2014); Exchange Act Release No. 34-72756 (Aug. 4, 2014), 79 FR 46479 (Aug. 8, 2014); Exchange Act Release No. 34-72755 (Aug. 4, 2014), 79 FR 46481 (Aug. 8, 2014); Exchange Act Release No. 34-72754 (Aug. 4, 2014), 79 FR 46477 (Aug. 8, 2014).

Further, the Commission observes that the Exchange Act and Commission rules require that CCPs register with the Commission in certain circumstances, and if registered, must comply with the relevant U.S. requirements, including the Commission rules applicable to registered clearing agencies. The Commission also observes that the registration and supervisory framework for clearing agencies under the Exchange Act provides the Commission with broad authority to provide exemptive relief from certain of the Commission's regulatory requirements under the Exchange Act. Specifically, Section 17A(b)(1) of the Exchange Act provides the Commission with authority to exempt a clearing agency or any class of clearing agencies from any provision of Section 17A or the rules or regulations thereunder. Such an exemption may be effected by rule or order, upon the Commission's own motion or upon application, and conditionally or unconditionally.

The

Commission's exercise of authority to grant exemptive relief must be consistent with the public interest, the protection of investors, and the purposes of Section 17A, including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds.

To apply with the Commission for an exemption under Section 17A(b)(1), the applicant must complete and file a Form CA-1. In this context, an applicant must attach to its Form CA-1, along with the other customary exhibits, an Exhibit S. The Exhibit S is a statement by the applicant demonstrating why the granting of an exemption would be consistent with the public interest, the protection of investors and the

purposes of Section 17A of the Exchange Act, including the prompt and accurate clearance and settlement of securities transactions and the safeguarding of securities and funds.

See

15 U.S.C. 78q-1(b)(1).

The outcome of any exemptive request by the Commission (including, potentially, any exemptions from requirements under Rule 17Ad-22(e)) is dependent on a number of elements. For example, the Commission has used its authority under Section 17A(b)(1) of the Exchange Act to grant exemptions to certain non-U.S. clearing agencies. These exemptions have been tailored in each instance to the exemptive applicants' contemplated clearing agency activities. In certain instances, non-U.S. clearing agencies have received exemptive relief from the registration requirement under Section 17A(b)(1) to perform the functions of a clearing agency with respect to transactions involving U.S. government and agency securities for U.S. participants.

Factors the Commission has considered when determining whether to grant an exemption have included the anticipated level or volume of activity that the applicant seeks to effect within the United States. Generally, the particular system of supervision and oversight in a jurisdiction may also be factors for the Commission to consider in evaluating any non-U.S. framework.

See

Exchange Act Release No. 34-39643 (Feb. 11, 1998), 63 FR 8232 (Feb. 18, 1998),

as modified by

Exchange Act Release No. 34-43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001); Exchange Act Release No. 34-38328 (Feb. 24, 1997), 62 FR 9225 (Feb. 28, 1997).

In the case of matching service providers, the Commission first sought comment on providing exemptive relief before considering any application for exemptive relief.

See

Exchange Act Release No. 34-39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13, 1998) (“Even though matching services fall within the definition of clearing agency, the Commission preliminarily is of the view that an entity that limits its clearing agency functions to providing matching services need not be subject to the full panoply of clearing agency regulation.”). The Commission then engaged a close analysis of the attendant facts and circumstances of each applicant for an exemption from registration as a clearing agency on a case-by-case basis.

See, e.g.,

Exchange Act Release No. 34-44188 (Apr. 17, 2001), 66 FR 20494 (Apr. 23, 2001) (order granting exemption from registration as a clearing agency to Global Joint Venture Matching Services—US, LLC, now Omgeo).

Other factors the Commission could consider in exercising its exemptive authority could include: the structure of, scope of, and requirements under the regulatory regime to which the applicant is subject in its home jurisdiction; the extent to which the presence of said regime is relevant to the findings the Commission must make in considering an exemption under Section 17A(b)(1) of the Exchange Act, and the nature of the non-U.S. covered clearing agency's activities. Such factors, depending on the attendant facts and circumstances, could lead the Commission to determine that the full scope of the requirements under Rule 17Ad-22(e) need not be applied to a non-U.S. clearing agency to achieve the Commission's regulatory objectives.

The Commission also notes that where it has exercised its exemptive authority under Section 17A(b)(1) of the Exchange Act, the Commission and the relevant national competent authority (“NCA”) of the non-U.S. clearing agency have entered into cooperative arrangements whereby the Commission and the NCA have arranged to communicate and cooperate to fulfill their respective regulatory mandates.

For the purposes of the discussion immediately above, such cooperation could also be useful in streamlining the Commission's consideration and analysis of an application for registration or an exemption from any provision of Section 17A of the Exchange Act or the rules or regulations thereunder by a non-U.S. clearing agency. For example, in the case of a non-U.S. clearing agency that is seeking to register or seeking an exemption with the Commission and is already subject to EMIR, the Commission could look to coordinate with the applicant's NCA for the purposes of analyzing and evaluating any materials the applicant might submit as part of the Form CA-1, including the documentation generated in the course of the NCA's EMIR authorization process for the applicant, and any self-assessment an applicant might produce to evidence its analysis of potential duplication between EMIR requirements and Commission requirements for registered clearing agencies. Such cooperative arrangements could be useful not only for the registration or exemption process but also ongoing coordinated or joint supervisory matters between the Commission and the NCA. However, as previously noted, additional careful analysis would need to be performed by the Commission on a case-by-case basis before the Commission could be willing to determine whether such cooperative arrangements would be appropriate.

See, e.g.,

Understanding regarding an Application of Euroclear Bank for an Exemption under U.S. Federal Securities Laws (Jan. 30, 2001),

available at https://www.nbb.be/doc/cp/nl/aboutcbfa/mou/pdf/mou_2001-01-30_euroclearbank.pdf

; Exchange Act Release No. 34-37309 (June 12, 1996) (notice of filing of application for exemption from registration as a clearing agency by Cedel Bank);

see also

Undertaking on Consultation and Cooperation regarding Belgian Firms that are Members of U.S. Clearing Organizations (July 6, 2006),

available at http://www.sec.gov/about/offices/oia/oia_bilateral/belgium.pdf

B. Summary of the Commission's Proposal

The Commission is adopting Rules 17Ad-22(e) and (f) and amendments to Rules 17Ad-22(a) and (d) substantially as proposed. The Commission is adopting Rule 17Ab2-2 with several modifications in light of the comments received. Modifications to the proposed rules are discussed in Part II. Below is a brief summary of the Commission's proposal as set forth in the CCA Standards proposing release.

In proposing amendments to Rule 17Ad-22, the Commission sought to establish an enhanced regulatory framework for registered clearing agencies that meet the definition of a “covered clearing agency.” Specifically, as proposed, a covered clearing agency would include (i) a designated clearing agency; (ii) a complex risk profile clearing agency unless the CFTC is the supervisory agency;

and (iii) any other registered clearing agency that the Commission determines to be a covered clearing agency pursuant to the procedures set forth in proposed Rule 17Ab2-2. A covered clearing agency would be subject to the requirements in Rule 17Ad-22(e) whereas a registered clearing agency that is not a covered clearing agency would remain subject to the requirements in Rule 17Ad-22(d).

As discussed in the CCA Standards proposing release, the Commission believed that such an approach would allow the Commission to maintain discretion to apply Rule 17Ad-22(d) to certain new clearing agencies while also

applying the requirements under Rule 17Ad-22(e) to those clearing agencies that raise systemic risk concerns due to, among other things, their size, systemic importance, global reach, or the risks inherent in the products they clear.

To facilitate this approach, the Commission proposed to modify Rule 17Ad-22(d) so that it would only apply to a registered clearing agency other than a covered clearing agency.

The Commission notes that, as defined in Rule 17Ad-22(a)(4) and as used in this release, “security-based swap clearing agencies” are a subset of complex risk profile clearing agencies that provide CCP services for security-based swaps. For a CCP other than a security-based swap clearing agency, the Commission may determine whether the activities of such CCP have a more complex risk profile and, therefore, whether such CCP is a covered clearing agency pursuant to Rule 17Ab2-2.

See infra

Part II.D (further discussing Commission determinations under Rule 17Ab2-2).

Rule 17Ad-22(d) sets forth minimum requirements for the operation and governance of registered clearing agencies. Under the proposal, all registered clearing agencies and covered clearing agencies would also remain subject to the requirements in Section 17A of the Exchange Act and the other relevant Commission rules and regulations thereunder, including Rules 17Ad-22(a), (b), and (c).

See

CCA Standards proposing release,

supra

note 5, at 29516.

Under proposed Rule 17Ad-22(e), a covered clearing agency would be required to establish, implement, maintain and enforce written policies and procedures reasonably designed to address the following topics concerning its operation and governance:

• General organization (including legal basis, governance, and a framework for the comprehensive management of risks);

• financial risk management (including credit risk, collateral, margin, and liquidity risk);

• settlement (including settlement finality, money settlements, and physical deliveries);

• CSDs and exchange-of-value settlement systems;

• default management (including default rules and procedures and segregation and portability);

• business and operational risk management (including general business risk, custody and investment risks, and operational risk);

• access (including access and participation requirements, tiered participation arrangements, and links);

• efficiency (including efficiency and effectiveness and communication procedures and standards); and

• transparency.

The Commission is adopting Rule 17Ad-22(e) substantially as proposed. Each of the requirements under Rule 17Ad-22(e), any modifications made thereto, and the comments received with respect to them, are discussed in Part II.C.

In addition, the Commission proposed Rule 17Ab2-2 to provide the Commission with procedures to make determinations regarding the following:

• Whether a registered clearing agency should be considered a covered clearing agency;

• whether a covered clearing agency meets the definition of “systemically important in multiple jurisdictions;”

and

See infra

note (discussing the definition of “systemically important in multiple jurisdictions”).

• whether the activities of a clearing agency providing CCP services have a more complex risk profile.

The proposed rule would allow such determinations to occur either at the Commission's own initiative or upon request by either a clearing agency or one of its members. In each case, the Commission would publish notice of its intention to consider such determinations, together with a brief statement of the grounds under consideration, and provide at least a 30-day public comment period prior to any determination. Under the proposed rule, the Commission may also provide a clearing agency subject to any proposed determination opportunity for hearing. The Commission is adopting Rule 17Ab2-2 substantially as proposed. Modifications to Rule 17Ab2-2 made in response to the comments received are discussed in Part II.D.

To facilitate the addition of proposed Rule 17Ad-22(e) and proposed Rule 17Ab2-2, the Commission proposed to add 14 new definitions to Rule 17Ad-22(a). The Commission is adopting those definitions substantially as proposed, but is combining the definitions of “sensitivity analysis” and “conforming sensitivity analysis” into one definition of “sensitivity analysis.”

Each of the definitions, any modifications made thereto, and the comments received with respect to them, are discussed in Part II.C.

Each definition is discussed in Part II. For discussion of the new definition of “sensitivity analysis,” see Part II.C.6.c.

Finally, the Commission also proposed Rule 17Ad-22(f) to codify the Commission's statutory authority under Section 807(c) of the Clearing Supervision Act. The Commission received no comments regarding Rule 17Ad-22(f) and is adopting it as proposed.

See infra

Part II.E.

C. Comments Received

The Commission received seventeen comment letters in response to the CCA Standards proposing release.

Commenters included market participants from across the financial industry, including registered clearing agencies, non-U.S. clearing agencies, non-profit groups, various entities participating in or representing professionals who provide investment or asset management services, participants in the derivatives markets, an association of banks representing clearing participants and members of certain CCPs, and members of the general public.

See

letters from Timothy W. Cameron, Asset Management Group—Head, and Laura Martin, Asset Management Group—Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, and David W. Blass, General Counsel, and Jennifer S. Choi, Associate General Counsel, Investment Company Institute (May 12, 2016) (“AMG-ICI”); Chris Barnard (May 26, 2014) (“Barnard”); Dennis M. Kelleher, President and CEO, Stephen Hall, Securities Specialist, Katelynn Bradley, Attorney, and Caitlin Kline, Derivatives Specialist, Better Markets, Inc. (May 27, 2014) (“Better Markets”); Kurt N. Schact, CFA, Managing Director, Standards and Financial Market Integrity, and Linda L. Rittenhouse, Director, Capital Markets, CFA Institute (May 27, 2014) (“CFA Institute”); Kathleen M. Cronin, Senior Managing Director, General Counsel, and Corporate Secretary, CME Group, Inc. (May 27, 2014) (“CME”); Larry E. Thompson, Managing Director and General Counsel, The Depository Trust and Clearing Corporation (May 27, 2014) (“DTCC”); Scott C. Goebel, Senior Vice President and General Counsel, Fidelity Investments (May 27, 2014) (“Fidelity”); Paul Swann, President and Managing Director, ICE Clear Europe Limited (May 23, 2014) (“ICEEU”); Dorothy M. Donohue, Acting General Counsel, Investment Company Institute (May 21, 2014) (“ICI”); Stephen O'Connor, Chairman, International Swaps and Derivatives Association, Inc. (May 22, 2014) (“ISDA”); John Joyce, Northern Illinois University College of Law (Apr. 1, 2014) (“Joyce”); Susan Milligan, Head of U.S. Public Affairs, LCH.Clearnet (May 27, 2014) (“LCH”); James E. Brown, Executive Vice President, General Counsel, and Secretary, The Options Clearing Corporation (May 27, 2014) (“OCC”); Akshat Tewary et al., Occupy the SEC (June 10, 2014) (“OSEC”); Sheila Bair, Chair, The Systemic Risk Council (May 28, 2014) (“SRC”); Jarryd E. Anderson, Vice President, Regulatory Affairs, The Clearing House Association LLC (May 27, 2014) (“The Clearing House”); Tim Buckley, Managing Director and Chief Investment Officer, and John Hollyer, Principal and Head of Risk Management and Strategy Analysis, Vanguard (May 27, 2014) (“Vanguard”). Copies of the comment letters are available at

http://www.sec.gov/comments/s7-03-14/s70314.shtml

Commenters generally supported the Commission's proposal and the Commission's ongoing efforts to regulate registered clearing agencies,

though several also raised concerns regarding certain aspects of the proposed rules, as discussed throughout this release. Below is a discussion of the comments that were not directed to the content of a particular proposed rule and, where appropriate, the Commission's response.

Comments received that were directed to a particular proposed rule, or aspects thereof, are discussed in Part II.

See

Barnard at 1 (also focusing support on the proposed financial risk management and liquidity requirements); CFA Institute at 2 (expressing overall support for the proposed rules); CME at 2 (applauding the Commission's efforts to support dually registered entities as they continue to focus their resources on the important work of maintaining effective systems of governance and enhancing their operational strength); DTCC at 3 (stating that it is broadly supportive of the proposed rules); ICEEU at 1 (expressing support for comprehensive regulation of clearing agencies and linking such comprehensive regulation to the PFMI and the rules of the Commission); OCC at 3 (expressing support for the Commission's effort to strengthen the substantive regulation of registered clearing agencies).

For comments not directed to the substance of the proposal itself, see Part I.C.7.

1. Financial Stability and the Dodd-Frank Act

One commenter supported the Commission's stated goal of contributing to the enhancement of the stability of the U.S. securities markets.

Another commenter strongly supported the Commission's efforts to promote financial stability through the application of enhanced standards for covered clearing agencies, in particular those that act as CCPs for security-based swaps and other derivatives.

A third commenter similarly expressed the belief that the proposed requirements should promote market integrity, improve the robustness of clearing systems, and protect the financial system against contagion.

The Commission believes that Rule 17Ad-22(e) achieves these goals by supporting the objectives of (i) the Exchange Act to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of securities transactions and linked or coordinated facilities for clearance and settlement of securities transactions, having due regard for the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition among brokers and dealers, clearing agencies, and transfer agents,

and (ii) the Clearing Supervision Act to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system.

See

CME at 1.

See

The Clearing House at 1.

See

Barnard at 1.

See supra

notes 3-4 and accompanying text.

See supra

note 18 and accompanying text.

One commenter generally supported the mandate of Title VII of the Dodd-Frank Act to promote transparency and regulation in the derivatives markets.

Another commenter noted that the Dodd-Frank Act has sought to shed light on the opaque markets for swaps and other exotic OTC derivatives, which numerous other commentators have asserted contributed to the recent financial crisis, by requiring such derivatives to be cleared through registered clearing agencies.

The commenter stated that this shift toward transparency could be useful if clearing agencies are themselves robust and stable, noting that, in some ways, the risks associated with OTC derivatives trading have not gone away but simply shifted to clearing agencies. The commenter stated that, thus, it is vital for the Commission to not only promulgate strong regulations for clearing agencies but also to enforce such regulations in a vigorous manner. As noted above, the Commission believes that the focus in Rule 17Ad-22(e) on transparency, governance, financial risk management, and operational risk management are consistent with the objectives of promoting strong rules that help ensure covered clearing agencies are robust and stable, and that any risks particular to OTC derivatives trading and the risks present in clearing such derivatives are addressed in requirements for the covered clearing agency's management of financial risks.

See

Vanguard at 1.

See

OSEC at 3.

2. Relationship Between Rules 17Ad-22(d) and (e)

One commenter generally supported the Commission's approach to the regulation of registered clearing agencies, which the commenter stated applies a more general set of standards under Rule 17Ad-22(d) for registered clearing agencies other than covered clearing agencies.

The commenter stated that this framework would allow new entrants to more firmly establish themselves as clearing agencies, which is important for the deconsolidation and diffusion of risk across the market. The commenter noted that at present the clearance and settlement industry, like much of the financial sector, can be described as highly concentrated, and stated that it is paramount that the Commission set policies that promote the proliferation of viable new clearing agencies, given that existing clearing agencies typically serve as intermediaries for trillions of dollars in trading volumes. In the commenter's view, such concentration in the provision of clearance and settlement services results in risk concentration and inhibits price allocation for services, which, in turn, inhibits liquidity.

The Commission is mindful of these concerns and notes, as discussed above, that the approach under Rules 17Ad-22(d) and (e) take into account various clearing agency activities and the risks they pose while promoting robust risk management practices and the general safety and soundness of registered clearing agencies. In particular, as discussed in Part III.B.1.d, the Commission has considered the level of concentration in the provision of clearing agency services.

See

OSEC at 1. The commenter, however, also raised concerns with the proposed dual framework under existing Rule 17Ad-22(d) and proposed Rule 17Ad-22(e) because the commenter believed the dual framework could facilitate regulatory arbitrage.

See id.

at 1-2;

see also infra

note 80 and accompanying text.

See id.

One commenter expressed the belief that some of the proposed requirements under Rule 17Ad-22(e) represent a clarification of existing requirements under Rule 17Ad-22(d) rather than enhanced standards related to the particular risks arising from a clearing agency's systemic importance.

The commenter recommended that the Commission review and revise Rule 17Ad-22(d) to align it with the analogous provisions under proposed Rule 17Ad-22(e), particularly if the different language in the proposed rule is intended to clarify language in the existing rule or represents a logical outgrowth from it. The commenter stated that, to the extent any provision of the proposed rules reflects a best practice, the provision should apply to all registered clearing agencies.

See

DTCC at 4 (citing proposed Rules 17Ad-22(e)(1), (8), (10), and (12) as examples).

See id.

The Commission does not believe that the requirements under Rule 17Ad-22(e) represent a clarification of existing requirements in Rule 17Ad-22(d) or a codification of best practices. As discussed above, the Commission proposed to maintain Rule 17Ad-22(d) to ensure that the Commission could efficiently and effectively regulate registered clearing agencies depending on the specific activity and risks that each type of clearing agency poses to the U.S. financial system. Thus, Rule 17Ad-22(d) applies requirements to registered clearing agencies other than covered clearing agencies, consistent with the continuing development of the national system for clearance and settlement. Since no clearing agency would be subject to both Rule 17Ad-22(d) and Rule 17Ad-22(e), the Commission does not believe that confusion would arise from similarities or differences between the requirements under the two separate rules. With respect to best practices, Rule 17Ad-22(e) includes requirements for covered clearing agencies intended to address the activity and risks that their size, operation, and importance pose to the U.S. securities markets, the risks inherent in the products they clear, and the goals of both the Exchange Act and the Dodd-Frank Act, and is not an attempt to merely reflect best practices.

See

CCA Standards proposing release,

supra

note 5, at 29516.

One commenter stated that the Commission must be vigilant to prevent companies from engaging in regulatory arbitrage by seeking application of Rule 17Ad-22(d) when the requirements of

proposed Rule 17Ad-22(e) would be more appropriate.

The commenter explained that the Commission can expect, for instance, large entities to float new subsidiaries or affiliates seeking to operate under Rule 17Ad-22(d), even though the risk profile of the subsidiary may be part of the greater risk exposure of the entity at-large.

The Commission is mindful of this concern and notes that, in a separate release, the Commission has proposed an expanded definition of “covered clearing agency” that, if adopted, may further reduce potential opportunities for arbitrage.

See

OSEC at 1-2.

See id.

at 2.

In a separate release, the Commission is proposing to modify the definition of “covered clearing agency” to include all CCPs, CSDs, and SSSs.

See

Exchange Act Release No. 34-78963 (Sept. 28, 2016) (“CCA Definition proposing release”).

The same commenter also recommended that the Commission regularly evaluate registered clearing agencies subject to Rule 17Ad-22(d) to ensure that their activities have not risen to a level warranting oversight and requirements pursuant to Rule 17Ad-22(e).

The commenter stated that the Commission should require frequent audits of the policies and procedures of clearing agencies operating under Rule 17Ad-22(d) and proposed Rule 17Ad-22(e) because (i) smaller, profitable clearing agencies may quickly outgrow Rule 17Ad-22(d) and (ii) covered clearing agencies may shift their operations materially after crafting robust policies and procedures under Rule 17Ad-22(e). In addition, the commenter noted that even if policies and procedures are implemented in good faith, their efficacy could be questionable because standard measurements of credit and liquidity risk may only encourage excessive confidence in the risk profile of financial institutions.

The same commenter stated that the Commission's vigorous enforcement of clearing rules will ultimately remain more important in achieving real-world risk reduction than the mere promulgation of detailed rules.

The commenter noted that clearing agencies by definition collect various counterparty risks and, while the agglomeration of such risks by clearing agencies may have not played a significant role in the most recent financial crisis, the continued growth of trading operations and the consolidation of market power in the banking and finance sectors suggest that clearing agencies could serve as “ground zero” in the next crisis.

See

OSEC at 2.

See id.

As to this commenter, the Commission notes that registered clearing agencies are subject to inspections and examinations under both the Exchange Act and the Clearing Supervision Act.

The Commission also monitors registered clearing agencies to assess and evaluate the risks posed by each clearing agency. Rule 17Ad-22(e) provides the Commission with requirements against which a covered clearing agency can be, among other things, monitored, inspected, and examined with respect to its establishing, implementing, maintaining, and enforcing policies and procedures for managing credit and liquidity risk and its compliance with such policies and procedures. In addition, the Commission is proposing in a separate release to expand the definition of “covered clearing agency” to include all CCPs, CSDs, and SSSs. If adopted, the requirements applied to CCPs, CSDs, and SSSs would be uniform under Rule 17Ad-22(e).

See

12 U.S.C. 5466.

See supra

note 82.

3. Relationship Among Rules 17Ad-22(b), (c), and (e)

One commenter raised concerns regarding overlap between existing Rules 17Ad-22(b)(1) through (4) and several of the provisions of proposed Rule 17Ad-22(e).

The commenter expressed the belief that proposed Rules 17Ad-22(e)(4), (6), and (7) fully address all of the matters covered by existing Rules 17Ad-22(b)(1) through (4) and that subjecting covered clearing agencies that provide CCP services to both sets of requirements may create ambiguities and inconsistencies.

The commenter urged the Commission to revise the proposal so that the provisions of existing Rules 17Ad-22(b)(1) through (4) are not applicable to covered clearing agencies that provide CCP services.

The Commission notes that the commenter has not identified specific ambiguities or inconsistencies between Rules 17Ad-22(b) and (e) that might result from application of both rule sets. With respect to the potential for inconsistency, the Commission believes that while Rule 17Ad-22(e) may overlap with some requirements in Rule 17Ad-22(b), it is not inconsistent with Rule 17Ad-22(b) and, as a general matter, includes requirements intended to supplement the more general requirements in Rule 17Ad-22(b). With respect to the potential for ambiguity, the Commission notes that Rule 17Ad-22(b) applies to a registered clearing agency that provides CCP services and Rule 17Ad-22(e) applies to a registered clearing agency that is a covered clearing agency. To the extent that a registered clearing agency is one that both provides CCP services and is a covered clearing agency, then it is subject to the requirements in both rule sets, with the more general requirements in Rule 17Ad-22(b) supplemented by the requirements of Rule 17Ad-22(e). The Commission therefore is declining to limit application of Rule 17Ad-22(b) to clearing agencies that provide CCP services and are not covered clearing agencies.

See

DTCC at 4-5.

See id.

at 5.

See id.; see also

17 CFR 240.17Ad-22(b)(1)-(4).

The commenter stated in the alternative that, at a minimum, the Commission should clarify that the requirement in existing Rule 17Ad-22(c)(1), which requires a registered clearing agency that provides CCP services to calculate and maintain a record of its financial resources available to cover participant defaults in accordance with existing Rule 17Ad-22(b)(3), should instead be determined and calculated in accordance with proposed Rule 17Ad-22(e)(4). The Commission believes that such clarification in the rule text is appropriate. The Commission further believes that, in light of the closely linked nature between the management of credit and liquidity risk, and the holistic approach taken in Rule 17Ad-22(e),

a covered clearing agency generally should also calculate and maintain a record of its qualifying liquid resources under Rule 17Ad-22(e)(7). The Commission therefore is amending Rule 17Ad-22(c)(1) to include a reference to the requirements for financial resources and qualifying liquid resources in Rules 17Ad-22(e)(4) and (e)(7) respectively, so that covered clearing agencies have reporting requirements for their financial and qualifying liquid resources equivalent to other registered clearing agencies.

The Commission notes that, to the extent the computations for financial resources under Rules 17Ad-22(b)(3) and (e)(4) are the same, a covered clearing agency could indicate so in the supporting documentation required pursuant to Rule 17Ad-22(c)(1).

See infra

Part II.B (discussing the principles based approach to Rule 17Ad-22(e)).

See

Rule 17Ad-22(c)(1),

infra

Part VI.

4. Risk of Duplicative or Inconsistent Regulation

One commenter noted that coordination among regulators in implementing derivatives reform is critical to the efficient functioning of the derivatives market by alleviating duplicative and potentially conflicting regulation of cross-border transactions.

In response, the Commission notes that, as discussed above and previously in the CCA Standards proposing release, the Commission has consulted with the CFTC, FRB, and FSOC in developing these rules.

See

ICI at 2.

See

CCA Standards proposing release,

supra

note 5, at 29508 (noting that the Commission has begun, and intends to continue, consultation with the CFTC, FRB, and FSOC).

Another commenter similarly expressed the belief that consistent international regimes are critical to mitigating regulatory arbitrage because opportunities for regulatory arbitrage would disadvantage smaller market participants.

The commenter stated that no basis exists for different regulatory treatment between U.S. and non-U.S. markets for security-based swaps, noting that the Commission may conform its standards for clearing agencies to reflect evolving international standards, consistent with the Dodd-Frank Act and the Exchange Act.

As noted above, the Commission has considered the relevant international standards in developing these rules, consistent with the Dodd-Frank Act and the Exchange Act, and the Commission believes that the scope of and requirements in Rule 17Ad-22(e) appropriately address the risk profile of CCPs that clear security-based swaps.

See

Fidelity at 7.

See id.

at 7-8.

See supra

note 1 and accompanying text;

see also

CCA Standards proposing release,

supra

note 5, at 29508 & n.1 (noting the same at the proposing stage).

A third commenter supported the view that imposing requirements on dually registered entities would subject them to duplicative regimes,

and the commenter stated that avoiding unnecessarily duplicative regulation allows for the most efficient use of both public and private sector resources towards the shared goal of protecting the financial system.

100

See

CME at 2 (citing CCA Standards proposing release,

supra

note 5, at 29516).

100

See

CME at 2.

A fourth commenter stated that the Commission should be wary of imposing additional requirements on top of those imposed by other regulators, particularly where other regulators are attempting to (or have) imposed the same or substantially similar standards.

101

The commenter expressed the concern that, particularly for those clearing entities that are regulated by multiple governmental authorities in multiple jurisdictions, the approach taken in the proposed rules may unnecessarily subject clearing entities to the risk of duplicative or inconsistent regulation.

102

The commenter expressed the belief that avoiding unnecessarily duplicative or, worse, inconsistent regulation is key to maximizing effective regulation and the use of limited regulatory activities.

103

The commenter stated that avoiding unnecessarily duplicative regulation will also allow the Commission to focus its resources on the particular activities within its jurisdiction that present increased risks and should therefore be subject to increased supervision. The commenter urged the Commission, in implementing enhanced standards for covered clearing agencies, to take a more flexible approach that is not “one-size-fits-all” and considers the overall regulatory status of the relevant clearing agency.

104

101

See

ICEEU at 7-8.

102

See id.

at 1-2.

103

See id.

at 8.

104

See id.

at 2.

With respect to these two commenters, the Commission notes, as previously discussed, that the Commission has consulted with the CFTC, FRB, and FSOC in the development of these rules to, in part, avoid unnecessarily duplicative or inconsistent regulation with respect to clearing agencies that are dually registered in the United States. With respect to such clearing agencies—as well as clearing agencies regulated by authorities in other jurisdictions—the Commission is nonetheless mindful, pursuant to the comprehensive framework for regulating swaps and security-based swaps established in Title VII, that the SEC has been given regulatory authority over security-based swaps. CCPs that clear security-based swaps present risks to the securities markets that must be subject to appropriate risk management. The Commission's intent with respect to Rule 17Ad-22(e) is, in part, to take another incremental step under Rule 17Ad-22 to ensure that these risks are appropriately managed consistent with the purposes of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act.

105

In this regard, the Commission does not believe that it has taken a “one-size-fits-all” approach; rather, the Commission has, through Rule 17Ad-22, sought to apply requirements commensurate and appropriate to the risk posed by the clearing agency functions and activities specific to covered clearing agencies as they exist in, and serve, the U.S. securities markets. The Commission acknowledges that other rules and regulations may apply to a covered clearing agency that are similar in scope or purpose to Rule 17Ad-22(e). However, the presence of similar regulations does not negate the Commission's obligation to ensure that risk in the U.S. securities markets is appropriately managed consistent with the purposes of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act. Further, because Rule 17Ad-22(e) and other comparable regulations—including those of the CFTC—are based on the same international standards,

106

the potential for inconsistent regulation is low. The commenters have provided no examples suggesting that Rule 17Ad-22(e) is inconsistent with another comparable regulation. Nonetheless, Part I.A.6 above discusses the process by which the Commission could consider the attendant facts and circumstances in assessing the application of Rule 17Ad-22(e) to a non-U.S. covered clearing agency that is subject to similar regulation in its home jurisdiction, and Part II.A.2 further discusses comments regarding the risk of duplicative or inconsistent regulation targeted to security-based swap clearing agencies subject to similar regulation in the home jurisdiction.

105

See supra

Part I.A.

106

See supra

notes 1-2, 43, and accompanying text.

Finally, one commenter noted that opportunities for regulatory arbitrage may exist based on differences between the Commission's proposed approach and rules adopted by the CFTC.

107

Opportunities for regulatory arbitrage only exist, however, when there are gaps or conflicting regulations for the same matter. Here, as noted above, the Commission and CFTC have separate and distinct statutory mandates, as set forth in the Exchange Act and the Commodity Exchange Act, respectively, for the different markets they regulate. The Commission has specific authority over the national system for clearance and settlement of U.S. securities transactions, including transactions involving security-based swaps.

108

Under the Clearing Supervision Act, the Commission also has specific authority over those SIFMUs for which it is the

supervisory agency. In this regard, such a regulatory structure does not on its face create opportunities for regulatory arbitrage based on any differences between the Commission's proposed approach and rules adopted by the CFTC.

107

See

OSEC at 2.

108

See supra

Parts I.A.1 and 2.

5. Flexible Versus Prescriptive Approaches to Regulation, and the Role of Rule Filings Under Rule 19b-4

One commenter supported the proposed approach that covered clearing agencies be allowed flexibility to use their market experience and understanding of their institutions to shape the implementation of proposed Rule 17Ad-22(e).

109

The commenter emphasized that a flexible and holistic approach would allow a clearing agency to make decisions from a perspective of overall risk management, which may be more productive than a more prescriptive approach.

110

Another commenter was broadly supportive of the proposed rules, noting that the rules provide covered clearing agencies with the necessary flexibility to design and structure their policies and procedures to take into account the differences among clearing agencies.

111

The commenter expressed the view that the Commission generally achieved the appropriate balance between taking a principles-based approach (providing clearing agencies with flexibility) and a more prescriptive, granular approach (limiting a clearing agency's discretion).

112

The commenter also expressed the belief that the precise form of the written policies and procedures required by proposed Rule 17Ad-22(e) should be a matter for the clearing agency to determine, and the commenter listed among such policies and procedures the following: Service guides, operational agreements, compliance procedures, link agreements, and protocols.

113

A third commenter, in contrast, was concerned that the proposed rules rely inordinately on internal risk testing and standards rather than a clear set of external, regulatory demands.

114

In the commenter's view, financial firms often view their policies and procedures as mere inconveniences.

109

See

OCC at 3.

110

See id.

at 4.

111

See

DTCC at 3.

112

See id.

113

See

DTCC at 12-13.

114

See

OSEC at 2.

The Commission does not believe that policies and procedures established by covered clearing agencies and required pursuant to Rule 17Ad-22(e) can or would be viewed as “mere inconveniences.” In proposing Rule 17Ad-22(e) the Commission stated—and continues to believe—that it is important for covered clearing agencies to use their experience and understanding of the markets they serve to shape the rules, policies, and procedures implementing proposed Rule 17Ad-22(e).

115

Nonetheless, as discussed above, Rule 17Ad-22(e) provides the Commission with a uniform set of requirements against which a covered clearing agency can be monitored, inspected, and examined. Additionally, the Commission notes that, in using its experience to shape the policies and procedures that implement Rule 17Ad-22(e), a covered clearing agency must at all times comply with the requirements of both Section 19 of the Exchange Act and the rules and regulations thereunder for SROs, as well as, for designated clearing agencies, the advance notice requirements of the Clearing Supervision Act and the rules and regulations thereunder.

116

Under Section 19(g) of the Exchange Act, a registered clearing agency (as an SRO) must comply with its own rules and, absent reasonable justification or excuse, enforce compliance with its own rules by its participants.

117

115

See

CCA Standards proposing release,

supra

note 5, at 29517.

116

See supra

Parts I.A.1 and 2.

117

See

15 U.S.C. 78s(g).

One of the above commenters further stated that there should be no change in the requirement for filing proposed rule changes under Rule 19b-4 under the Exchange Act, and noted that not all written policies and procedures that would be adopted by a clearing agency in compliance with the proposed rule would be the subject of rule filings under Rule 19b-4.

118

The Commission notes that the amendments to Rule 17Ad-22 do not alter the definition of a rule or a proposed rule change under the Exchange Act, nor do the amendments change a registered clearing agency's obligation to file proposed rule changes under Rule 19b-4.

119

118

See

DTCC at 13;

see also

CCA Standards proposing release,

supra

note 5, at 29508 & n.1.

A second commenter similarly supported the Commission's proposal to adopt enhanced regulatory standards that are consistent with the PFMI and that would facilitate the ability of covered clearing agencies to be considered QCCPs.

124

A third commenter welcomed the efforts of the Commission to implement standards for clearing agencies that are consistent with the PFMI.

125

A fourth commenter noted that enhanced standards are necessary to ensure that the Commission's regulation of CCPs is consistent with international standards, including the PFMI—which serves as a

prerequisite to obtaining QCCP status under the BCBS capital framework—and CPSS-IOSCO's consultative report

Recovery of Financial Market Infrastructures

(“Consultative Recovery Report”).

126

124

See

LCH at 2.

125

See

ICEEU at 1.

126

See

The Clearing House at 1-2. The Commission notes that, since the comment letter was submitted, CPMI-IOSCO has published a final report on this topic.

See supra

note 41 (citing to the final report).

A fifth commenter noted that the Commission's approach differs from the PFMI in some areas (

e.g.,

segregation and portability and liquidity risk), reflecting the nature of the securities markets and the particular requirements of the Exchange Act.

127

The commenter supported this approach because covered clearing agencies need to have appropriate flexibility to implement timely modifications to relevant parameters, assumptions, and approaches. The commenter also expressed the belief that the Commission has generally struck the appropriate balance with respect to incorporating the PFMI principles and the level of granular requirements thereunder.

128

127

See

DTCC at 3.

128

See id.

A sixth commenter, in contrast to the above commenters, urged the Commission to adopt the key considerations of each principle identified in the PFMI and to strengthen the proposed rules to affirmatively require robust standards and procedures that ensure accountability, independence, and financial stability.

129

To the extent that the commenter identified a particular key consideration that the Commission should include as a requirement in Rule 17Ad-22(e), it is discussed and addressed in Part II.C. As a general matter, the Commission believes that the requirements applicable to clearing agencies set forth in the Exchange Act and the rules thereunder, including the rules adopted today, are consistent with the PFMI. The Commission also believes Rule 17Ad-22(e) achieves the appropriate balance between imposing new requirements on covered clearing agencies and allowing each covered clearing agency, subject to its obligations and responsibilities as an SRO under the Exchange Act, to design its policies and procedures pursuant to Rule 17Ad-22(e). This approach is consistent with the Commission's existing approach under Rules 17Ad-22(b) and (d) and recognizes that each registered clearing agency has different organizational and operating structures and clears distinct products that warrant a tailored approach to governance and risk management respectively. The Commission notes that such a policies and procedures approach is also consistent with the Commission's existing regulation of SROs generally.

130

In addition, in the discussion of each final rule under Rule 17Ad-22(e) in Part II.C, the Commission has provided guidance based on the key considerations in the PFMI.

129

See

Better Markets at 4-5.

130

In the Commission's experience, proposed rule changes of the type necessary to implement the rules would generally entail changes to the SRO's written policies and procedures that must be submitted for Commission review and approval pursuant to Rule 19b-4 under the Exchange Act.

See supra

note 12.

7. Other Comments

The Commission also received several comments that were not directed to the substance of the CCA Standards proposal itself. These comments recommended study and rulemaking beyond the scope of the proposed amendments to Rule 17Ad-22 and Rule 17Ab2-2.

131

See

ISDA at 4, 6 (recommending that the Commission (i) develop, in a subsequent rulemaking, more detailed rules that require customer-by-customer accounting of the collateral value held by the covered clearing agency with respect to security-based swap positions and impose corresponding limitations on the value of collateral that the covered clearing agency may apply towards losses on other customers' positions carried by the participant and (ii) commit to a study of insolvency of security-based swap clearing agencies with the goal of identifying uncertainties, proposing solutions, and fostering public discussion); CFA Institute at 2 (expressing general concern regarding the central clearing of OTC swaps and derivatives, urging the Commission to take caution in regulating OTC swaps and derivatives, and asking the Commission to consider whether to require all OTC contracts, whether standardized or not, to be cleared); SRC at 2 (stating that the SEC and CFTC continue to lack the resources available to other self-funded financial regulators, creating structural weakness). The Commission also received one comment letter that recommended modifications to Rule 17Ad-22(e)(14) and other rulemaking outside the scope of Rule 17Ad-22.

See

AMG-ICI at 8-12.

II. Description of the Amendments to Rule 17Ad-22 and Rule 17Ab2-2

Below is a discussion of the amendments to Rule 17Ad-22 and Rule 17Ab2-2. Part II.A discusses the scope of new Rule 17Ad-22(e). Part II.B discusses the Commission's principles-based approach to developing the requirements in Rule 17Ad-22(e). Part II.C discusses the requirements for covered clearing agencies under new Rule 17Ad-22(e) and the definitions that the Commission is adopting in Rule 17Ad-22(a). Part II.D discusses new Rule 17Ab2-2, Part II.E discusses new Rule 17Ad-22(f), and Part II.F discusses the amendment to Rule 17Ad-22(d). Part II.G discusses the effective and compliance dates.

132

If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

A. Scope of Rule 17Ad-22(e)

To facilitate the approach to clearing agency regulation described in Part I.B, the Commission proposed to add five definitions to Rule 17Ad-22(a) to identify those clearing agencies that would be subject to the requirements in Rule 17Ad-22(e). First, the Commission proposed to define “financial market utility” as defined in Section 803(6) of the Clearing Supervision Act.

133

Second, the Commission proposed to define “designated clearing agency” as a clearing agency registered with the Commission under Section 17A of the Exchange Act that is designated as systemically important by the FSOC and for which the Commission is the supervisory agency as defined in Section 803(8) of the Clearing Supervision Act.

134

Third, the Commission proposed to define “clearing agency involved in activities with a more complex risk profile” to mean a clearing agency registered with the Commission under Section 17A of the Exchange Act and that either (i) provides CCP services for security-based swaps or (ii) has been determined by the Commission to be involved in activities with a more complex risk profile (“complex risk profile clearing agency”), either at the time of its initial registration or upon a subsequent determination by the Commission pursuant to proposed Rule 17Ab2-2. Fourth, the Commission also proposed to define “security-based swap” to mean security-based swap as defined in Section 3(a)(68) of the Exchange Act.

135

The Commission received no comments regarding these four definitions. The Commission is modifying the definition of “clearing agency involved in activities with a more complex risk profile” to strike “and” because it is unnecessary. The Commission is adopting the remaining three definitions as proposed.

136

133

See

12 U.S.C. 5462(6) (defining “financial market utility” pursuant to the Clearing Supervision Act);

supra

note 20 (further discussing FMUs under the Clearing Supervision Act).

134

Rule 17Ad-22 does not currently apply to entities operating pursuant to an exemption from clearing agency registration.

135

See

15 U.S.C. 78c(a)(68).

136

The Commission notes that, because of modifications to Rule 17Ad-22(a), the definition of “financial market utility” is being moved to Rule 17Ad-22(a)(7), the definition of “designated

clearing agency” is being moved to Rule 17Ad-22(a)(6), the definition of “security-based swap” is being moved to Rule 17Ad-22(a)(15). The definition of “clearing agency involved in activities with a more complex risk profile” remains in Rule 17Ad-22(a)(4).

See infra

Part VI.

Fifth, the Commission proposed to define “covered clearing agency” to mean a designated clearing agency, a complex risk profile clearing agency for which the CFTC is not the supervisory agency, or any clearing agency determined to be a covered clearing agency by the Commission pursuant to proposed Rule 17Ab2-2. Commenters expressed several views on the entities and activities that should be included within the “covered clearing agency” definition. In Part I.C.4 above, the Commission considered comments focused generally on the potential for duplicative or inconsistent regulation as a result of the proposed scope of Rule 17Ad-22(e). Below is a discussion of comments directed to aspects of the definition of “covered clearing agency.”

137

Comments directed to the scope of proposed Rule 17Ab2-2(a), which would have provided procedures for the Commission to determine whether a registered clearing agency is a covered clearing agency, are discussed separately in Part II.D. In light of those comments, the Commission has determined not to adopt proposed Rule 17Ab2-2(a), and therefore, in adopting the definition of “covered clearing agency,” the Commission has also determined to not adopt the proposed prong regarding determinations pursuant to Rule 17Ab2-2.

138

Accordingly, the Commission is adopting the definition of “covered clearing agency” to mean a designated clearing agency or a complex risk profile clearing agency for which the CFTC is not the supervisory agency as defined in the Clearing Supervision Act.

139

137

The Commission notes that, because of modifications to Rule 17Ad-22(a), the definition of “covered clearing agency” is being moved to Rule 17Ad-22(a)(5).

See infra

Part VI.

138

See infra

Part II.D.2.a.

139

In addition, as first noted in Part 0, in a separate release the Commission is proposing to modify the definition of ‘covered clearing agency’ to include all CCPs, CSDs, and SSSs.

See

CCA Definition proposing release,

supra

note 82, at 25-26.

1. As Applied to CCPs Generally

Four commenters supported applying enhanced standards to CCPs generally.

140

One commenter noted that the mandatory clearing of OTC derivatives introduced following the 2008 financial crisis has heightened the need for enhanced standards for CCPs.

141

A second commenter suggested that the Commission apply Rule 17Ad-22(e) to all clearing agencies to reduce the risk of failure and the problems such a failure would cause for investors.

142

In so suggesting, the commenter cited to the size of the derivatives markets and the potential for disruption and systemic risk that those markets may have on covered clearing agencies.

143

A third commenter similarly cited to the risks associated with derivatives trading that has shifted into clearing agencies.

144

With respect to these three commenters, the Commission notes that, according to the “covered clearing agency” definition, a CCP is a covered clearing agency in either of the following circumstances: (i) If the CCP is a designated clearing agency; or (ii) if the CCP is a complex risk profile clearing agency,

145

unless the CFTC is the supervisory authority under the Clearing Supervision Act. Accordingly, under the “covered clearing agency” definition, five of the six active CCPs registered with the Commission will be a covered clearing agency subject to Rule 17Ad-22(e). The Commission believes that it is important to take an initial step to establish coverage of Rule 17Ad-22(e) over this group of clearing agencies and is adopting the “covered clearing agency” definition with only the modification described above regarding Rule 17Ab2-2. However, in consideration of these comments, the Commission is proposing in a separate release to amend the definition of “covered clearing agency” so that it would apply to any registered clearing agency that, among other things, provides CCP services.

146

Under this proposed definition, any CCP registered with the Commission would be a covered clearing agency.

140

See

CFA Institute at 2; OSEC at 3; The Clearing House at 1; DTCC at 4 (recommending that any provision of the proposed rules that reflects best practices should be applied to all registered clearing agencies).

141

See

The Clearing House at 1.

142

See

CFA Institute at 2.

143

See id.

The commenter also suggests that, to account for these risks, the Commission reconsider whether all OTC contracts, whether standardized or not, ought to clear through covered clearing agencies. The Commission notes that whether OTC contracts ought to be subject to mandatory clearing requirements was not a subject of this rulemaking during the proposing stage, and the Commission therefore believes this comment is outside the scope of this rulemaking.

144

See

OSEC at 3.

145

As previously discussed, security-based swap clearing agencies are a subset of complex risk profile clearing agencies under Rule17Ad-22(a)(5).

See supra

note 59.

146

See

CCA Definition proposing release,

supra

note 82, at 25-43.

The fourth commenter recommended that any provision of the proposed rules that reflects best practices should be applied to all registered clearing agencies, CCPs or otherwise.

147

This comment has been previously addressed in Part I.C.2.

148

147

See

DTCC at 4.

148

See supra

notes 77-78 and accompanying text.

2. As Applied to Security-Based Swap Clearing Agencies

In contrast, three commenters sought to limit the scope of Rule 17Ad-22(e) further than was proposed.

149

The Commission believes these arguments are unpersuasive, for the reasons described below.

149

See

CME, ICEEU, and LCH.

One of these commenters expressed the view that Rule 17Ad-22(e) should not apply to complex risk profile clearing agencies but only to designated clearing agencies, and that applying the enhanced regime of Rule 17Ad-22(e) to non-designated clearing agencies undermines the significance of being designated, which the commenter stated is inconsistent with the distinction Congress sought to create between systemically important clearing agencies and other non-designated clearing agencies.

150

The commenter stated that the Commission should take an approach similar to the CFTC, whereby non-designated clearing agencies could choose to “opt-in” to the enhanced requirements of Rule 17Ad-22(e) if desired. The commenter further stated that security-based swap clearing agencies should not automatically fall within the definition of a covered clearing agency, stating that it is not clear security-based swap clearing inherently raises issues that require enhanced standards as compared to other clearing activities.

151

150

See

ICEEU at 3.

151

See id.

at 3-4.

The Commission believes, however, that it is important to establish coverage of the enhanced standards of Rule 17Ad-22(e) for CCPs that clear security-based swaps. In the Commission's view, in addition to designations of systemic importance under the Clearing Supervision Act, Title VII of the Dodd-Frank Act sets out separate and equally important objectives. As described above, Title VII provides the Commission with enhanced authority to regulate security-based swaps, and, among other things, requires the Commission to adopt rules with respect to security-based swap clearing agencies.

152

The Commission previously has noted that Title VII's mandate for the central clearing of security based swaps, wherever possible and appropriate, reinforces the need for proper risk management by security-

based swap clearing agencies to ensure the stability of the U.S. securities markets.

153

The requirements in Rule 17Ad-22(e), among other things, help to mitigate the risks inherent in the functions of a CCP, including a CCP for security-based swaps, and therefore the Commission believes that requiring registered clearing agencies performing such CCP functions to comply with Rule 17Ad-22(e), in addition to those registered clearing agencies that are designated clearing agencies, is consistent with the framework of both Title VII and the Clearing Supervision Act. In light of these considerations, the Commission does not believe that an opt-in regime is appropriate for security-based swap clearing agencies.

152

See supra

note 17 and accompanying text.

153

See

CCA Standards proposing release,

supra

note 5, at 29576.

In the alternative, the commenter stated that application of Rule 17Ad-22(e) should be limited to the particular business or product lines of a covered clearing agency that warrant application of the higher standards.

154

The commenter noted that many clearing agencies clear a range of products, some of which are within and others outside of the Commission's jurisdiction. According to the commenter, for those clearing agencies only some activities, such as the clearing of security-based swaps, should trigger application of Rule 17Ad-22(e), and therefore the requirements in Rule 17Ad-22(e) should be limited to those business or product lines. The commenter noted that this would be applicable where the activity is substantially separate from other business lines, such as through the use of a separate guaranty fund. The commenter recognized that certain standards may not be easily applied to a particular business line,

155

but noted that a categorical rule that does not take into account the scope of a particular clearing agency's security-based swap activities or the risks presented by them raises concerns.

156

154

See

ICEEU at 7.

155

See id.

The commenter further states that this approach will help reduce the likelihood of clearing agencies being subject to inconsistent regulation. The Commission addressed this aspect of the comment above in Part I.C.4.

156

See

ICEEU at 7.

Rule 17Ad-22(e) applies to a covered clearing agency and does not make distinctions among the various product or business lines that the covered clearing agency manages. In the Commission's experience, many aspects of a clearing agency's operations are managed at the entity level (

i.e.,

as a clearing agency) irrespective of product or business line. For example, the clearing agency's legal framework, governance, risk management framework, financial risk management, and operational risk management are determined as part of the policies and procedures of the entity (

i.e.,

the clearing agency), and therefore these areas are not separated out to apply exclusively to a particular business or product line.

157

Thus, requirements in Rule 17Ad-22(e) directed to these aspects of a clearing agency's operations generally could not be easily applied only to a particular business or product line when the clearing agency's operations and risk management are organized at the entity level. The Commission believes that this approach avoids unnecessary complexity and fragmentation in the policies and procedures of a clearing agency. The operations and risk management of a covered clearing agency are closely interrelated across various activities in which the clearing agency engages, and within Rule 17Ad-22(e), the requirements have significant interactions among each other, with some building upon others or complementing others. The Commission believes that this generally also supports a holistic application of the requirements in Rule 17Ad-22(e).

157

See infra

Parts II.C.1-7, 17 (discussing each, respectively).

However, the Commission understands that some covered clearing agencies may manage certain activities and risk at an entity level while others manage the same activities and risk at a business or product level. Covered clearing agencies retain the ability to distinguish among their products in crafting their policies and procedures. Because a covered clearing agency's practices are diverse and difficult to generalize, the Commission has sought to address such concerns in other ways, such as by streamlining the process for rule filings under Rule 19b-4 filed by dually registered clearing agencies.

158

Specifically, for rule filings that primarily concern the clearing operations of a registered clearing agency that are not linked to securities clearing operations but only to clearing of products under the authority of the CFTC, the Commission provides a streamlined process for such rule filings to become effective upon filing with the Commission.

159

158

See

Exchange Act Release No. 34-69284 (Apr. 3, 2013), 78 FR 21046 (Apr. 9, 2013) (“Dually Registered CA release”).

159

See id.

at 21047.

Additionally, two commenters urged the Commission to exclude non-U.S. security-based swap clearing agencies registered with the Commission from the definition of “covered clearing agency” when they are regulated in their home jurisdictions under a regime that is consistent with the PFMI.

160

The commenters stated that this approach would be consistent with the Commission's treatment under Rule 17Ad-22(e) of dually registered SIDCOs for which the CFTC is the supervisory agency under the Clearing Supervision Act and believe a similar exclusion would be appropriate for clearing agencies subject to other regulatory frameworks.

161

The commenters further stated that any decision to apply the enhanced standards for covered clearing agencies should take into account whether, and the extent to which, the clearing agency is already subject to similar or comparable standards under other regulation,

162

noting that recognizing existing foreign regulation is consistent with the Commission's proposals on regulation of cross-border activities generally.

163

In the commenters' view, the approach set out in the Commission's Cross-Border proposing release sensibly balanced the interests of the Commission with those of foreign regulators and appropriately considered the costs and benefits of adding additional regulatory requirements where the home country regulation is comparable.

160

See

ICEEU at 5-6; LCH at 3. The Commission has previously addressed more general comments regarding the risk of duplicative or inconsistent regulation above in Part I.C.4.

161

See

ICEEU at 5-6; LCH at 3.

162

See id.

163

See

ICEEU at 6; LCH at 3 (citing Exchange Act Release No. 34-69490 (May 1, 2013), 78 FR 30968, 31039 (May 23, 2013) (“Cross-Border proposing release”)).

In this regard, one commenter expressed the belief that deference to home country regulation is appropriate because both Rule 17Ad-22(e) and applicable U.K. regulations are consistent with the PFMI, noting that U.S. and U.K. regulators thus have generally aligned interests.

164

In particular, the commenter cited, as comparable regulation to Rule 17Ad-22(e), regulation by the Bank of England under existing U.K. legislation and, for those clearing agencies that have been granted authorization as a CCP under EMIR, the regulations under EMIR.

165

A second commenter echoed this viewpoint, noting that EMIR is consistent with the PFMI.

166

Finally, one of the commenters stated that, in areas where the Commission determines that the home country regulation is not comparable and determines that additional regulation may be appropriate, any incremental regulation

under Rule 17Ad-22 should be targeted to those areas of difference.

167

164

See

ICEEU at 6.

165

See id.

166

See

LCH at 3.

167

See

ICEEU at 6.

One commenter further stated that, at a minimum, a clearing agency subject to Rule 17Ad-22(e) in addition to comparable home regulation is subject to duplicative regulation, which is costly for both the clearing agency and its regulators and serves no meaningful regulatory purpose.

168

The commenter also stated that it is critical that a clearing agency not be subject to inconsistent regulations in different jurisdictions, noting that such inconsistencies can arise not only when relevant regulations are different but also when regulators interpret substantially similar regulations in different ways. As a result, the commenter stated that a clearing agency can still be significantly burdened by being subject to two substantially similar sets of regulations, and in its view, the commenter expressed the view that it would be preferable to allow clearing agencies, where possible, to be subject to a single set of standards.

169

The other commenter also supported an approach that would minimize duplicative requirements on those registered clearing agencies subject to both Rule 17Ad-22(e) and home regulation, while ensuring that all registered clearing agencies that clear security-based swaps are regulated in a manner that is consistent with the PFMI.

170

168

See

ICEEU at 5.

169

See id.

170

See

LCH at 3.

In response to the above comments, the Commission does not believe that a non-U.S. security-based swap clearing agency regulated in its home jurisdiction, under a regime consistent with the PFMI, should be excluded, as a threshold matter, from designation as a covered clearing agency. As previously discussed in Part I.C.4, the Commission's intent with respect to Rule 17Ad-22(e) is, in part, to take another incremental step under Rule 17Ad-22 to ensure that risks inherent in certain CCP activity, including the central clearing of security-based swaps, are appropriately managed consistent with the purposes of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act. The Commission has, through Rule 17Ad-22, sought to apply requirements commensurate and appropriate to the risk posed by the clearing agency functions and activities specific to covered clearing agencies as they exist in, and serve, the U.S. securities markets. The Commission acknowledges that other rules and regulations may apply to a covered clearing agency that are similar in scope or purpose to Rule 17Ad-22(e). However, the presence of similar regulations does not negate the Commission's obligation to ensure that risk in the U.S. securities markets is appropriately managed consistent with the purposes of the Exchange Act, the Clearing Supervision Act, and Title VII of the Dodd-Frank Act.

Further, because Rule 17Ad-22(e) and other comparable regulations are based on the same international standards,

171

the Commission believes the potential for any inconsistent regulation is low. Indeed, applying Rule 17Ad-22(e) to a covered clearing agency that is also subject to comparable regulation consistent with the PFMI in its home jurisdiction should improve harmonization between the Commission's regulatory regime and that of the home jurisdiction, which would reduce the burdens associated with the presence of similar regulation under multiple regulatory regimes. In addition, because clearing agency practices are diverse and difficult to generalize, the Commission has sought to address concerns about duplicative regulation in other ways, such as through streamlining the process for rule filings under Rule 19b-4 filed by clearing agencies dually registered with the Commission and the CFTC so that rule filings that do not pertain to securities clearing operations become effective upon filing with the Commission, without pre-effective notice and opportunity for comment.

172

In addition, Part I.A.6 above discusses the process by which the Commission could consider the attendant facts and circumstances in assessing the application of Rule 17Ad-22(e) to a non-U.S. covered clearing agency that is subject to similar regulation in its home jurisdiction.

171

See supra

notes 1-2, 43, and accompanying text.

172

See

Dually Registered CA release,

supra

note 158, at 21047.

3. As Applied to Dually Registered Clearing Agencies

One commenter noted that the proposed definition is sufficiently broad to enable the Commission to include SIDCOs. The commenter stated that the potential for a SIDCO to be determined to be a covered clearing agency is inconsistent with the Commission's acknowledgment of the purposes of the Clearing Supervision Act and there being duplicative requirements for some dually registered entities.

173

The commenter recommended that the Commission expressly exclude from the definition of “covered clearing agency” those clearing agencies for which the CFTC is the supervisory agency pursuant to the Clearing Supervision Act. The Commission notes that the definition of “covered clearing agency” does expressly exclude those clearing agencies for which the CFTC is the supervisory agency. As previously discussed, in a separate release, the Commission is proposing to amend the definition of a covered clearing agency, and addresses the potential effects of the proposed amendment on clearing agencies dually registered with the CFTC.

174

173

See

CME at 3.

174

See

CCA Definition proposing release,

supra

note 82, at 39-42.

B. Principles-Based Approach to Rule 17Ad-22(e)

Rule 17Ad-22(e) requires a covered clearing agency to establish, implement, maintain and enforce written policies and procedures that address a variety of issues, as described in detail below. The Commission's approach sets forth requirements that a covered clearing agency must achieve when developing its written policies and procedures. With a number of exceptions, Rule 17Ad-22(e) does not prescribe a specific tool or arrangement to achieve its requirements. The Commission believes that when determining the content of its policies and procedures, each covered clearing agency must have the ability to consider its unique characteristics and circumstances, including ownership and governance structures, effect on direct and indirect participants, membership base, markets served, and the risks inherent in products cleared. This ability, however, is subject to the requirements of the SRO rule filing and advance notice processes, which provide some opportunities for the public and participants to comment on the covered clearing agency's rules, policies, and procedures.

The Commission does not believe that a granular or prescriptive approach to its regulation of covered clearing agencies would be appropriate, nor would such an approach ensure that a covered clearing agency does not become a transmission mechanism for systemic risk. Moreover, the Commission believes that the primarily principles-based approach reflected in Rule 17Ad-22(e) will help a covered clearing agency continue to develop policies and procedures that can effectively meet the evolving risks and challenges in the markets that the covered clearing agency serves. It has

been the Commission's experience that particular securities markets (

e.g.,

equities, fixed income, and options) have their unique conventions, characteristics, and structure that are best addressed on a market-by-market basis. The Commission recognizes that a less prescriptive approach can help promote efficient and effective practices and encourage regulated entities to consider how to manage their regulatory obligations and risk management practices in a way that complies with Commission rules, while considering the particular characteristics of their business, and believes the approach reflected in across Rule 17Ad-22, including new paragraph (e), is consistent with this approach. Such a principles-based approach also is consistent with the approach taken in Rule 17Ad-22(d).

175

See, e.g.,

Clearing Agency Standards adopting release,

supra

note 5, at 66231-32 (noting, with respect to credit exposures and margin requirements under Rule 17Ad-22(d), that a less prescriptive and more flexible rule sets a more appropriate baseline standard and stressing the importance of considering different markets characterized by different trading patterns, volumes, liquidity, transparency and other unique market characteristics when determining the appropriate risk management mechanisms for a particular clearing agency).

As a general matter, the Commission believes that using broadly prescriptive requirements that, on an absolute and ex ante basis, prohibit a covered clearing agency's use of particular tools makes it more difficult for a covered clearing agency to maintain flexibility, subject to its obligations and responsibilities as an SRO under the Exchange Act, to address the ever-evolving challenges and risks inherent in the securities markets. Accordingly, the Commission believes that the approach adopted here appropriately preserves such flexibility for a covered clearing agency, and the broader market, to respond to particular risks or issues arising in its operations in an effective manner.

Finally, in certain instances, commenters have suggested that the Commission either prohibit or endorse a covered clearing agency's use of particular tools or rules, policies, or procedures. As discussed in more detail below, the Commission generally declines to take such an approach because it is inconsistent with the principles-based approach reflected in Rule 17Ad-22(e). Instead, the Commission's approach to Rule 17Ad-22(e) is designed to allow the Commission to consider particular tools in the context of the specific facts and circumstances facing a clearing agency in light of its governance structure, the products it clears, and the markets it serves. In addition, in consideration of the issues raised by commenters, the Commission has provided guidance consistent as to what a covered clearing agency generally should consider when developing and maintaining its policies and procedures consistent with Rule 17Ad-22(e).

C. Requirements for Covered Clearing Agencies Under Rule 17Ad-22(e)

Below is a discussion of each of the requirements in new Rule 17Ad-22(e), the related new definitions in Rule 17Ad-22(a), and the comments received by the Commission that were targeted to specific elements of those requirements and definitions.

176

As previously noted, the Commission is adopting Rule 17Ad-22(e) and the related definitions in Rule 17Ad-22(a) substantially as proposed.

177

To the extent the Commission is adopting any modifications either to the requirements in Rule 17Ad-22(e) or the definitions in Rule 17Ad-22(a), such modifications are discussed in detail below. Moreover, the below sections are organized by the particular rules under Rule 17Ad-22(e), with discussion of the definitions incorporated into the overall substantive discussion of each particular rule. Further, in the discussion of each final rule below, the Commission has included guidance that a covered clearing agency generally should consider as it develops and maintains its rules, policies, and procedures in compliance with Rule 17Ad-22(e). As previously noted, this guidance is based, in part, on the key considerations in the PFMI.

178

The Commission intends for this guidance to be read in conjunction with the relevant requirements set forth in Rule 17Ad-22(e), so as to provide further explanation of the types of issues a covered clearing agency generally should consider when implementing those requirements. The Commission does not intend for this guidance to expand, diminish, or otherwise modify the requirements under Rule 17Ad-22(e).

176

Comments that were of a general nature have been discussed in Part I.C.

177

See supra

Part I.B.

178

See supra

Part I.C.6.

1. Rule 17Ad-22(e)(1): Legal Risk

a. Proposed Rule

As proposed, Rule 17Ad-22(e)(1) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for a well-founded, clear, transparent, and enforceable legal basis for each aspect of its activities in all relevant jurisdictions.

179

The Commission proposed Rule 17Ad-22(a)(20) to define “transparent” to mean that relevant documentation is disclosed, as appropriate, to the Commission and other relevant authorities, to clearing members and customers of clearing members, to the owners of the covered clearing agency, and to the public, to the extent consistent with other statutory and Commission requirements.

180

179

See

CCA Standards proposing release,

supra

note 5, at 29519-20.

180

See id.

In addition, the Commission notes that the definition of “transparent” is also used in Rules 17Ad-22(e)(2) and (10).

See infra

Parts II.C.2 and 10.

b. Comments Received and Commission Response

i. Use of Legal Opinions

One commenter supported the Commission's proposal that each covered clearing agency have policies and procedures that provide for a well-founded, clear, transparent, and enforceable legal basis for each of its activities in all relevant jurisdictions, and noted that legal uncertainty can increase risk.

181

A second commenter stated that the Commission explicitly should require a covered clearing agency to obtain, on at least an annual basis, legal opinions on the enforceability of structures used to contain losses within a clearing service upon the insolvency of the clearing service or the covered clearing agency, including closeout netting, right of set-off, classification as a repurchase-style transaction, and collateral protection opinions, and then disclose these opinions to its participants.

182

181

See

CFA Institute at 5.

182

See

The Clearing House at 18.

In satisfying the requirements in Rule 17Ad-22(e)(1), a covered clearing agency could include within its policies and procedures a requirement regarding legal opinions as to certain matters, such as the enforceability of structures used to contain losses within a clearing service upon the insolvency of the clearing service or the covered clearing agency. The use of legal opinions may be one consideration but compliance with Rule 17Ad-22(e)(1) ultimately requires that the covered clearing agency's policies and procedures, taken as a whole, to be reasonably designed to provide for a well-founded, clear, transparent, and enforceable legal basis for each aspect of its activities in all relevant jurisdictions. Whether legal opinions are useful to a covered clearing agency and, if so, what form they ought to take or subject matter they ought to address, may vary on a case-by-case

basis depending on the particular facts and circumstances. Because the appropriate use of legal opinions will vary on a case-by-case basis, the Commission does not believe it is appropriate to modify Rule 17Ad-22(e)(1) to include a specific requirement for legal opinions addressing particular matters.

183

The Commission notes that every registered clearing agency must keep and preserve at least one copy of all documents as shall be made or received by it in the course of its business as such and in the conduct of its self-regulatory activity. 17 CFR 240.17a-1.

ii. Definition of “Transparent”

One commenter, although supportive of the Commission's proposal to require covered clearing agencies to develop policies and procedures to fulfill the requirements of Rule 17Ad-22(e), noted that, because some policies and procedures may include commercially sensitive information, it would be inappropriate to require a covered clearing agency to disclose all of its policies and procedures. The commenter stated that it would be helpful for the language of the rules to explicitly reflect this reality, which was acknowledged by the Commission in the preamble to the proposed rules.

184

See id.

The Commission acknowledges that disclosure of certain information, for example, proprietary or commercially sensitive information, may not be appropriate to be disclosed publicly or to all parties. Because the definition of “transparent” is limited to relevant documentation, as appropriate, and does not conflict with other statutory and Commission requirements on confidentiality and disclosure, it does not lead to the concerns noted by the commenter. The Commission already noted in proposing the rule that certain types of information, such as confidential information, may not be appropriate for disclosure in some circumstances and to some parties. In addition, the level of disclosure required will necessarily depend on the particular facts and circumstances. The definition of “transparent” provides a covered clearing agency with some discretion to develop written policies and procedures addressing disclosures and the use of confidential or proprietary information, consistent with statutory and Commission requirements. To improve clarity, the Commission is modifying the definition of “transparent” to mean for the purposes of paragraphs (e)(1), (2), and (10) of this section, to the extent consistent with other statutory and Commission requirements on confidentiality and disclosure, that documentation required under paragraphs (e)(1), (2), and (10) is disclosed to the Commission and, as appropriate, to other relevant authorities, to clearing members and to customers of clearing members, to the owners of the covered clearing agency, and to the public. Below, the Commission provides additional guidance regarding the definition of “transparent.”

c. Final Rule

The Commission is adopting Rule 17Ad-22(e)(1) as proposed and adopting the definition of “transparent” as described above but moving it to Rule 17Ad-22(a)(19) because of other modifications to Rule 17Ad-22(a).

185

Because the Commission recognizes that there may be a number of ways to address compliance with Rule 17Ad-22(e)(1), the Commission is providing the following guidance that a covered clearing agency generally should consider in establishing and maintaining policies and procedures to address legal risk:

185

See infra

Part VI.

• Whether its policies and procedures for legal risk provide a high degree of certainty for each material aspect of its activities in all relevant jurisdictions;

• whether its rules, policies and procedures, and contracts are clear, understandable, and consistent with relevant laws and regulations;

• whether it can articulate the legal basis for its activities to the relevant authorities, participants, and, where relevant, participants' customers, in a clear and understandable way;

• whether it has rules, policies and procedures, and contracts that are enforceable in all relevant jurisdictions, and whether it has a high degree of certainty that actions taken by it under such rules, policies and procedures, and contracts will not be voided, reversed, or subject to stays; and

• whether, if it conducts business in multiple jurisdictions, it can identify and mitigate the risks arising from any potential conflict of laws across jurisdictions.

The Commission notes that a covered clearing agency operating in multiple jurisdictions under Rule 17Ad-22(e)(1) generally should address any conflicts of law issues that it may encounter.

186

In addition, for covered clearing agencies, the “relevant jurisdiction” includes the United States and any other jurisdiction where the covered clearing agency operates.

With respect to the definition of “transparent,” the Commission notes that certain types of information, such as confidential information, may not be appropriate for public disclosure or disclosure to certain third parties and that confidential information could be reflected in policies and procedures with respect to the security of information technology or other critical systems, such as, for example, as part of business continuity planning. The Commission also notes that generally a covered clearing agency could meet the definition of “transparent” by posting relevant documentation to its Web site.

2. Rule 17Ad-22(e)(2): Governance

a. Proposed Rule

As proposed, Rules 17Ad-22(e)(2) would require a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for governance arrangements that are: clear and transparent; clearly prioritize the safety and efficiency of the covered clearing agency; support the public interest requirements in Section 17A of the Exchange Act and the objectives of owners and participants; and establish that the board of directors and senior management have appropriate experience and skills to discharge their duties and responsibilities.

187

See

CCA Standards proposing release,

supra

note 5, at 29520-22.

b. Comments Received and Commission Response

i. Scope of Interests To Consider

The scope of interests required to be considered as part of Rule 17Ad-22(e)(2)(iii) attracted a range of comments. One commenter conveyed strong support for the Commission's requirement that covered clearing agencies adopt policies and procedures for clear and transparent governance arrangements that prioritize safety and efficiency, noting that decisions made by covered clearing agencies could have an impact on multiple financial markets and jurisdictions.

188

The commenter urged that governance measures should support the objectives of owners and participants and, with respect to certain matters, the public interest. The commenter also noted that a clearing agency's reactions to competition could undermine the safety and soundness of the clearing agency as well as the industry as a whole.

189

188

See

CFA Institute at 6.

189

See id.

A second commenter sought to clarify that proposed Rule 17Ad-22(e)(2)(iii) would not encompass the interests of participants' customers and other stakeholders.

190

This commenter expressed the belief that the Commission's proposed approach, in

which the objectives of participants' customers and other stakeholders are not explicitly stated in Rule 17ad-22(e)(2)(iii), is consistent with the PFMI.

191

The commenter acknowledged that the Commission and other regulators must consider the interests of indirect participants, but the commenter noted that their interests are adequately addressed through participation of a sufficient number of independent directors or through other means.

192

A third commenter expressed support for the proposed standards, believing that a principles based-formulation is generally appropriate, but the commenter also expressed the belief that proposed Rule 17Ad-22(e)(2) should provide clear processes for consideration of participants' views and involvement of participants in the covered clearing agency's decision-making process.

193

190

See

OCC at 4-5.

191

See id.

(discussing CFTC Rule 39.32(a)(1)(iv) and, as proposed, FRB Rule 234.3(a)(2)(iii)).

192

See id.

at 5.

193

See

ISDA at 2;

see also infra

notes 212, 215 and accompanying text (discussing other concerns raised by the commenter).

The Commission believes that the first commenter's concern is addressed by the fact that policies and procedures under Rule 17Ad-22(e)(2) reasonably designed to support the public interest requirements in Section 17A of the Exchange Act generally should consider whether they support the stability of the broader financial system of the United States.

194

For example, as noted by the first commenter, a covered clearing agency could consider the public interest in its response to large scale price moves or position changes.

195

194

As previously discussed, the Commission has stated that the public interest is a broad concept that includes contributing to the ongoing development of the U.S. financial system, in particular the national clearance and settlement system contemplated by Section 17A of the Exchange Act, protecting investors, and fostering fair and efficient markets.

See supra

Part II.C.2.a.

195

See

CFA Institute at 6.

With respect to the second and third commenters,

196

the Commission is modifying proposed Rule 17Ad-22(e)(2) to include new paragraph (vi), which requires policies and procedures for governance arrangements that consider the interests of participants' customers, securities issuers and holders, and other relevant stakeholders of the covered clearing agency.

197

Under new paragraph (vi), other relevant stakeholders are persons that access the national system for clearance and settlement indirectly (

e.g.,

institutional and retail investors), entities that rely on the national system for clearance and settlement to effectively provide services to investors and market participants, and other market infrastructures. Other relevant stakeholders currently include, for example, transfer agents, liquidity providers, and other linked market infrastructures, including exchanges, matching service providers, and payment systems. This new paragraph complements Section 17A(b)(3)(C), which requires the rules of a clearing agency to assure fair representation of its shareholders and participants in the selection of its directors and the administration of its affairs.

198

This requirement for fair representation necessarily applies to policies and procedures adopted and maintained by a covered clearing agency pursuant to Rule 17Ad-22(e)(2). Consistent with this requirement, the Commission believes that a covered clearing agency generally should, in selecting its directors and administering its affairs, consider the interests of owners, participants, participants' customers, securities issuers and holders, and other relevant stakeholders to, consistent with the public interest requirements in Section 17A, strike an appropriate balance among the potentially competing views of such other stakeholders represented within a covered clearing agency. As noted by one commenter below, the inclusion of independent directors on the board may be one mechanism for helping to ensure that the relevant views are presented and considered,

199

provided the covered clearing agency's overall corporate governance structure is consistent with the fair representation and public interest requirements in Section 17A of the Exchange Act. The Commission notes, further, that the approach a covered clearing agency may take in considering such views could vary depending on the ownership structure or organizational form of the covered clearing agency. A covered clearing agency operating under a mutualized utility model where losses are fully mutualized among its participant-owners may take a different approach to consider the interests of all the relevant stakeholders compared to a covered clearing agency operating under a different model, such as one where it is owned by another organization, is operated as a for-profit entity, and/or is publicly listed and traded.

196

See supra

notes 190-193 and accompanying text.

197

See

Rule 17Ad-22(e)(2)(vi),

infra

Part VI;

see also infra

Part II.C.2.c.

198

See

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

199

See

ICI at 14-15;

see also infra

Part II.C.2.b.ii below (discussing comments regarding public or independent representation on the board of directors).

ii. Representation on the Board of Directors

Commenters generally supported the requirement in proposed Rule 17Ad-22(e)(2)(iv) that requires members of the board of directors and senior management to have the skills and experience to perform their duties and responsibilities.

200

Multiple commenters, however, advocated for the inclusion of additional requirement related to the board of directors. One commenter urged the Commission to require that covered clearing agencies have public or independent representation on their boards.

201

The commenter also urged the Commission to define independent directors to exclude parties with significant business relationships with the covered clearing agency, cross-directorships, or controlling shareholdings, as well as executives, officers, or employees of the covered clearing agency or its affiliate.

202

Another commenter recommended that the Commission require a covered clearing agency to include representatives of both buy-side and sell-side market participants on the board.

203

The commenter stated that some equities clearing agencies and stock exchanges already include investor representatives on their boards to benefit from a diverse group of market participants.

204

The commenter expressed the view that stakeholder involvement at the board level would minimize conflicts of interest by balancing commercial interests of covered clearing agencies with those of other stakeholders.

205

The commenter also expressed the view that the risk committee of a covered clearing agency should include a wide range of indirect participants, as the customers of clearing members also have an interest in ensuring adequate and diverse stakeholder representation in the covered clearing agency, in addition to transparency in the decision making process.

206

200

See, e.g.,

CFA Institute at 6 (noting that those responsible for the operations of a covered clearing agency should be capable of performing the required decision-making in light of the systemic importance of covered clearing agencies); OCC at 5 (believing that covered clearing agencies are well positioned to determine which individuals have the appropriate experience, skills, incentives, and integrity to discharge their duties and responsibilities in a way that reflects the particular needs of each covered clearing agency).

201

See

Better Markets at 7; Fidelity at 3-4; ICI at 14.

202

See

Better Markets at 7.

203

See

ICI at 14.

204

See id.

205

See id.

at 14-15.

206

See id.

at 15.

After careful consideration of the comments, the Commission has determined not to modify Rule 17Ad-22(e)(2) to include specific requirements related to public or independent representation on the covered clearing agency's board or risk committee. The Commission believes that new paragraph (vi), previously discussed above, sufficiently addresses the concerns raised by the commenters because it requires specific policies and procedures for governance arrangements that consider the interests of a wide range of market participants. In addition, public representation, combined with clear requirements for the qualifications of the board of directors, could improve the functioning of the board and could be one way to ensure that the covered clearing agency has governance arrangements consistent with the fair representation requirements of Section 17A(b)(3)(C) of the Exchange Act, provided that the covered clearing agency's governance structure, as a whole, is consistent with the fair representation and public interest requirements in Section 17A of the Exchange Act. The Commission is declining to modify Rule 17Ad-22(e)(2) to further specify that a particular director represent the interests of buy-side or sell-side market participants. The Commission notes that public or independent representation are one possible approach to governance that can help ensure consistency with the fair representation and public interest requirements in Section 17A of the Exchange Act. In addition, and for the same reasons, the Commission is declining to modify Rule 17Ad-22(e)(2) to provide further specification regarding business relationships and affiliates because these topics, like the above, are already addressed by the fair representation requirement in Section 17A(b)(3)(C) and the public interest requirements of Section 17A of the Exchange Act.

Separate from the above, one commenter also encouraged the Commission to specify that independent directors must support the objectives of customers and the public, rather than simply the clearing members.

207

The Commission notes that Rule 17Ad-22(e)(2)(iii) requires policies and procedures that support not only the public interest considerations of Section 17A of the Exchange Act but also the objectives of both owners and participants. In addition, the Commission generally believes that the governance arrangements of a covered clearing agency should include consideration of the interests of participants' customers and other stakeholders, and this is why the Commission is modifying proposed Rule 17Ad-22(e)(2), as previously discussed, to include new paragraph (vi), which requires policies and procedures for governance arrangements that consider the interests of participants' customers and other stakeholders. Further, the Commission notes that the requirements of Section 17A(b)(3)(F) of the Exchange Act, which require that the rules of a clearing agency be designed to, in general, protect investors and the public interest, also address the commenter's concern.

207

See

Better Markets at 7.

iii. Accountability of the Board of Directors and Senior Management

One commenter expressed concern that the proposed rules fail to foster accountability by the board and management, and the commenter requested that the Commission require covered clearing agencies to clearly document the roles and responsibilities of the board of directors and management and implement governance arrangements that specify clear and direct lines of responsibility.

208

To address this concern, the Commission is modifying proposed Rule 17Ad-22(e)(2) to include new paragraph (v) to require each covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for governance arrangements that specify clear and direct lines of responsibility.

209

The Commission believes that such policies and procedures should generally entail documenting the responsibilities of the board of directors and senior management, which could help foster accountability and complement the requirements described above that address the qualifications of the board and management. The Commission believes that this additional requirement will assist a covered clearing agency in formulating its policies and procedures for assessing the qualifications of board members and management by requiring the covered clearing agency to further specify the roles that each individual would fulfill and the lines of responsibility that would exist within the board and within management. The Commission believes that such accountability can help ensure that a covered clearing agency is well-positioned to fulfill its risk management obligations. For example, the Commission believes that a covered clearing agency should clearly define roles and responsibilities for addressing governance over financial risk (including credit risk, margin, and liquidity risk), operational risk, and other risks reflected in the covered clearing agency's risk management framework.

208

See id.

at 3.

209

See

Rule 17Ad-22(e)(2)(v),

infra

Part VI; ;

see also infra

Part II.C.2.c.

iv. Conflicts of Interest

One commenter stated that proposed Rule 17Ad-22(e)(2) does not require covered clearing agencies to resolve conflicts of interests among board members and management and urged the Commission explicitly to require covered clearing agencies to document and maintain policies and procedures governing the resolution of conflicts of interests that may impact certain decisions by the board of directors.

210

The Commission notes, as discussed above, that the commenter's concern is addressed by Section 17A(b)(3)(F) of the Exchange Act, which requires that the rules of a clearing agency be designed, in general, to protect investors and the public interest.

211

210

See

Better Markets at 6.

211

In addition, the Commission has solicited comments on proposed rules designed to further address conflicts of interest.

See

CCA Standards proposing release,

supra

note 5, at 29589 & n.664;

see also

Exchange Act Release No. 34-64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (proposing Rule 17Ad-25 to address conflicts of interest and Rule 17Ad-26 to require standards for board members or board committee directors at registered clearing agencies); Exchange Act Release No. 34-63107 (Oct. 14, 2010), 75 FR 65881 (Oct. 26, 2010) (proposing Regulation MC to mitigate conflicts of interest at security-based swap clearing agencies).

v. Crisis or Emergency Decision-Making

One commenter stated that governance arrangements should explicitly address decision-making during a crisis or emergency and require the covered clearing agency to obtain the views and approval of member representatives (such as through its risk committee or otherwise) before taking any material action in response to an emergency.

212

After careful consideration, the Commission declines to modify Rule 17Ad-22(e)(2) to specifically address decision-making in a crisis or emergency, and the Commission believes that Rule 17Ad-22(e) addresses such circumstances as proposed. For instance, Rule 17Ad-22(e)(2) requires policies and procedures for governance that are clear and transparent, clearly prioritize the safety and efficiency of the covered clearing agency, and support the public interest requirements in Section 17A and the objectives of owners and participants. A covered clearing agency

should generally consider whether its governance arrangements for decision-making in the ordinary course are appropriate for a crisis or emergency circumstance in light of the requirements in Rule 17Ad-22(e)(2).

212

See

ISDA at 2.

In addition, Rule 17Ad-22(e)(3) requires policies and procedures that maintain a sound risk management framework for comprehensively managing risks that arise in or are borne by the covered clearing agency. Such policies and procedures must be designed to identify, measure, monitor, and manage those risks and include plans for the recovery and orderly wind-down of the covered clearing agency.

213

The Commission believes that such a framework for comprehensively managing risk generally should consider the need for decision-making in crisis or emergency circumstances.

213

See

Rule 17Ad-22(e)(3)(i), (ii),

infra

Part VI.

vi. Disclosure of Major Board Decisions

Three commenters responded to a question asking whether the Commission should require covered clearing agencies to have policies and procedures that provide for governance arrangements that ensure major decisions are disclosed to the public.

214

One commenter recommended that the proposed rule expressly require that major board decisions having a broad market impact be disclosed to all relevant stakeholders and the public, except to the extent that such disclosure is inconsistent with statutory and regulatory confidentiality restrictions. The commenter noted that the CFTC has included this provision in its requirements for SIDCOs.

215

Another commenter, however, expressed the belief that such a requirement is unnecessary and that the interests of public stakeholders in having visibility into major decisions are adequately served through the participation of independent directors, through the rule filing process, and the existing voluntary disclosure practices.

216

A third commenter expressed the view that publication of board resolutions prior to a determinative decision would be confusing, potentially misleading or market moving, and could deter open discussions amongst members of the board of directors.

217

214

See

CCA Standards proposing release,

supra

note 5, at 29522.

215

See

ISDA at 2 n.5 (citing 17 CFR 39.32).

216

See

OCC at 5.

217

See

LCH at 4.

After careful consideration, the Commission declines to modify Rule 17Ad-22(e)(2). The Commission notes that existing requirements for registered clearing agencies under Exchange Act Rule 19b-4 provide a mechanism for publishing notice of proposed rule changes, which in general must be approved by board action or under authority delegated by the board, to clearing members, the relevant stakeholders, the Commission, and the public.

218

Designated clearing agencies are further required to submit advance notices under the Clearing Supervision Act, which provides another mechanism for disclosure.

219

In addition, the requirements in Rule 17Ad-22(e)(23) regarding disclosure will also provide stakeholders and the public with information regarding certain operations and decisions of covered clearing agencies.

220

218

See supra

Part I.C.5 (further describing the obligations of a clearing agency with respect to proposed rule changes).

219

See supra

Part I.A.2.

220

See infra

Part II.C.23.

vii. Incentives and Skin in the Game

One commenter stated that the Commission should enhance or clarify Rule 17Ad-22(e)(2) to ensure that covered clearing agencies have appropriate incentives to oversee and manage risk in a manner consistent with the public interest and objectives of participants. According to the commenter, safeguards should exist to ensure that a covered clearing agency with authority to adopt rules, policies, or procedures governing or affecting risk to participants does not face undue incentives to take on excessive risk in pursuit of increased earnings.

221

The Commission believes that Rule 17Ad-22(e)(2) sufficiently addresses the commenter's concern by requiring policies and procedures that are clear and transparent, clearly prioritize the safety and efficiency of the covered clearing agency, and support the public interest requirements in Section 17A of the Exchange Act and the objectives of owners and participants.

222

Rule 17Ad-22(e)(3), discussed below, also requires policies and procedures for the comprehensive management of risk, and other requirements in Rule 17Ad-22(e) are specifically designed to establish a risk management framework that sufficiently accounts for a wide spectrum of risks that a covered clearing agency may identify, assess, manage, and mitigate. Further, the Commission believes that, taken as a whole, Rule 17Ad-22(e) requires each covered clearing agency to undertake careful and ongoing consideration of the risks faced and posed by its operations.

223

221

See

The Clearing House at 7-8.

222

See supra

Part II.C.2.a. and note 194 (describing the scope of the public interest requirements under Section 17A of the Exchange Act).

223

See supra

Parts II.A.2 and II.C.2.b.i (further discussing the risks posed by a covered clearing agency's ownership structure, organizational form, markets served, and products cleared).

The same commenter also stated that safeguards should exist to ensure that any default management decision-making body has appropriate incentives.

224

The commenter stated that the Commission should require that any decision-making body responsible for administering a covered clearing agency's default management policies and procedures be composed of constituencies with significant exposure to potential loss as a consequence of the default management process.

225

224

See

The Clearing House at 8.

225

See

The Clearing House at 2, 9. The commenter further elaborated that the assumption of risk by a CCP must be governed by a risk management committee comprised of persons whose interests are aligned by exposure to the losses associated with such risks (including members and, where a CCP has capital at risk in the waterfall, representatives of the CCP), with those members with the greatest risk exposure within the CCP constituting the majority of such committee. The commenter added that such a structure would ensure that the CCP's risk management function is appropriately aligned with risk mitigation incentives.

See id.,

annex at 15.

With respect to these comments, the Commission believes, as discussed above, that Rule 17Ad-22(e)(2) includes requirements designed to ensure governance arrangements that clearly prioritize the safety and efficiency of the covered clearing agency, support the public interest requirements in Section 17A of the Exchange Act applicable to clearing agencies, and support the objectives of owners and participants. In addition, the Commission believes that the requirement in Section 17A(b)(3)(F) of the Exchange Act to have rules designed, in general, to protect investors help ensure that a covered clearing agency's risk management functions are appropriately aligned with the goal of risk mitigation and responsive to the legitimate concerns of the relevant constituents. The Commission does not believe that an approach in which a CCP's default management process must be governed by a decision-making body composed of constituencies with significant exposure to potential loss as a consequence of the default management process is appropriate. Instead, the Commission believes that covered clearing agencies should be afforded discretion to structure their default management committees and manage incentives in light of the needs of their unique ownership or governance structures, provided that their governance arrangements are consistent with the requirements of the

Exchange Act and rules and regulations thereunder, including Section 17A(b)(3)(C), concerning the fair representation of shareholders or members and participants in the administration of the covered clearing agency's affairs. The Commission believes that decisions regarding default management should reside with those who have extensive expertise and expert knowledge of the tools available at the covered clearing agency to manage a default. Further, even if the risk exposures of clearing members are generally stable, they can change, perhaps rapidly, during periods of market stress.

Lastly, the commenter stated that, to ensure that a covered clearing agency's governance arrangements align with the public interest and the interest of constituencies subject to the risk of a clearing agency default, the Commission should require a covered clearing agency to commit its own capital on a pre-funded basis to satisfy its losses arising from the default of one or more participants in an amou

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