# Reporting and Information Requirements for Derivatives Clearing Organizations > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2022-26849 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** December 15, 2022 - **Citation:** 87 FR 76698 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 39 and 140 RIN 3038-AF12 Reporting and Information Requirements for Derivatives Clearing Organizations AGENCY: Commodity Futures Trading Commission. ACTION: Notice of proposed rulemaking. SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission) is proposing to amend certain reporting and information regulations applicable to derivatives clearing organizations (DCOs). These proposed amendments would, among other things, update information requirements associated with commingling customer funds and positions in futures and swaps in the same account, address certain systems-related reporting obligations regarding exceptional events, revise certain daily and event-specific reporting requirements, and include in an appendix the fields that a DCO is required to provide on a daily basis. In addition, the Commission is proposing to amend certain delegation provisions. DATES: Comments must be received by February 13, 2023. ADDRESSES: You may submit comments, identified by “Reporting and Information Requirements for Derivatives Clearing Organizations” and RIN number 3038-AF12, by any of the following methods: • CFTC Comments Portal: https://comments.cftc.gov. Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form. • Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. • Hand Delivery/Courier: Follow the same instructions as for Mail, above. Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to https://comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the Commission's regulations. 1 1 17 CFR 145.9. Commission regulations referred to in this release are found at 17 CFR chapter I (2021), and are accessible on the Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm. The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the FOIA. FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 202-418-5096, edonovan@cftc.gov; Parisa Nouri, Associate Director, 202-418-6620, pnouri@cftc.gov; or August A. Imholtz III, Special Counsel, 202-418-5140, aimholtz@cftc.gov; Division of Clearing and Risk, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; Theodore Z. Polley III, Associate Director, (312) 596-0551, tpolley@cftc.gov; or Elizabeth Arumilli, Special Counsel, (312) 596-0632, earumilli@cftc.gov; Division of Clearing and Risk, Commodity Futures Trading Commission, 525 West Monroe Street, Chicago, Illinois 60661. SUPPLEMENTARY INFORMATION: Table of Contents I. Background II. Proposed Amendments to § 39.13(h)(5) III. Proposed Amendments to § 39.15(b)(2) IV. Proposed Amendments to § 39.18 V. Proposed Amendments to § 39.19(c) A. Daily Reporting of Variation Margin and Cash Flows—§ 39.19(c)(1)(i)(B) and (C) B. Codifying the Existing Reporting Fields for the Daily Reporting Requirements in New Appendix C to Part 39 C. Additional Proposed Reporting Fields for the Daily Reporting Requirements—§ 39.19(c)(1) D. Individual Customer Account Identification Requirements—§ 39.19(c)(1)(i)(D) E. Daily Reporting of Margin Model Back Testing—§ 39.19(c)(1)(i) F. Fully Collateralized Positions—§ 39.19(c)(1)(ii) G. Reporting Change of Control of the DCO—§ 39.19(c)(4)(ix)(A)(1) H. Reporting Changes to Credit Facility Funding and Liquidity Funding Arrangements—§ 39.19(c)(4)(xii) and (xiii) I. Reporting Issues With Credit Facility Funding Arrangements, Liquidity Funding Arrangements, and Custodian Banks—§ 39.19(c)(4)(xv) J. Reporting of Updated Responses to the Disclosure Framework for Financial Market Infrastructures—§ 39.19(c)(4)(xxv) VI. Proposed Amendments to § 39.21(c) A. Publication of Margin-Setting Methodology and Financial Resource Package Information—§ 39.21(c)(3) and (4) B. Publication of List of Clearing Members—§ 39.21(c)(7) VII. Proposed Amendments to § 39.37(c) and (d) VIII. Proposed Amendments to § 140.94(c)(10) IX. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Cost-Benefit Considerations D. Antitrust Considerations I. Background Regulatory requirements for DCOs are set forth in part 39 of the Commission's regulations. In January 2020, the Commission amended many of the provisions in part 39 in order to, among other things, enhance certain risk management and reporting obligations, clarify the meaning of certain provisions, and simplify processes for registration and reporting. 2 Since that time, the Commission has become aware of certain issues with the amended reporting and information requirements that would benefit from further change or clarification. These proposed changes are discussed in greater detail below. 3 2 Derivatives Clearing Organization General Provisions and Core Principles, 85 FR 4800 (Jan. 27, 2020), available at https://www.federalregister.gov/documents/2020/01/27/2020-01065/derivatives-clearing-organization-general-provisions-and-core-principles. 3 The Commission is also proposing a technical correction to § 39.25(c), changing the word “describe” to “have.” II. Proposed Amendments to § 39.13(h)(5) Regulation 39.13(h)(5) requires a DCO to have rules that require its clearing members to maintain current written risk management policies and procedures; ensure that it has the authority to request and obtain information and documents from its clearing members regarding their risk management policies, procedures, and practices; and require its clearing members to make information and documents regarding their risk management policies, procedures, and practices available to the Commission upon the Commission's request. It also requires the DCO to review the risk management policies, procedures, and practices of each of its clearing members on a periodic basis. It is the Commission's view that these requirements are unnecessary for clearing members that clear only fully collateralized positions, as fully collateralized positions do not expose the DCO to any credit or default risk stemming from the inability of a clearing member to meet a margin call or a call for additional capital. Therefore, and consistent with other recent amendments to part 39 to address fully collateralized positions, 4 the Commission is proposing new § 39.13(h)(5)(iii), which would provide that a DCO that clears fully collateralized positions may exclude from the requirements of paragraphs (h)(5)(i) and (ii) those clearing members that clear only fully collateralized positions. 5 These requirements would still apply in the case of clearing members that clear fully collateralized positions but also margined products. 6 4 See 85 FR 4800, 4803-4805. 5 By adopting this regulation, this requirement would be consistent with and would supersede a related interpretation issued by the Division of Clearing and Risk. See CFTC Letter No. 14-05 (Jan. 16, 2014). 6 The Commission is also proposing to combine paragraphs (h)(5)(i)(B) and (C) of § 39.13, which require, respectively, that a DCO have rules that: ensure that it has the authority to request and obtain information and documents from its clearing members regarding their risk management policies, and require its clearing members to make such information and documents available to the Commission upon request. These revisions are purely technical and are not meant to alter the requirements in any way. III. Proposed Amendments to § 39.15(b)(2) Regulation 39.15(b)(2) sets forth procedures a DCO must follow to obtain Commission approval to commingle customer positions and associated funds from two or more of three separate account classes—futures and options, foreign futures and options, and swaps—in either a futures or cleared swaps customer account. Regulation 39.15(b)(2)(i) requires a DCO seeking to commingle customer positions and associated funds in a cleared swaps customer account subject to Section 4d(f) of the Commodity Exchange Act (CEA) 7 to submit rules pursuant to § 40.5 for Commission approval. 8 Regulation 39.15(b)(2)(ii) requires a DCO seeking to commingle customer positions and associated funds in a futures account subject to Section 4d(a) of the CEA to also submit rules for approval pursuant to § 40.5. 9 7 See 7 U.S.C. 6d(f). 8 Regulation 40.5 requires the Commission to approve a new rule or rule amendment unless it is inconsistent with the CEA or the Commission's regulations promulgated thereunder. See 17 CFR 40.5. 9 See 7 U.S.C. 6d(a). Until § 39.15(b)(2)(ii) was amended in 2020, a DCO seeking to commingle in a futures account had to seek a Commission order. Given that the procedural requirements are now the same with respect to both futures and cleared swaps customer accounts, the Commission is proposing to consolidate paragraphs (b)(2)(i) and (b)(2)(ii) into a single paragraph. Existing § 39.15(b)(2)(i) also specifies the information that a DCO must include in its rule submission to obtain Commission approval. The Commission has identified items of information currently required by the regulation that appear to be redundant or of limited use to the Commission given the Commission's pre-existing understanding of a DCO's risk management through its supervision of DCOs and other Commission regulations applicable to DCOs. This information is also available to the DCO's clearing members and the public through other means, such as the public information disclosures required under § 39.21. The Commission has also identified limited instances in which additional information would be helpful to the Commission in reviewing a DCO's commingling rule submission. Therefore, the Commission is proposing to further amend § 39.15(b)(2)(i) as described below. First, the Commission proposes to amend existing paragraph (b)(2)(i)(B), which requires the DCO to provide an analysis of the risk characteristics of the products that would be eligible for commingling. The Commission proposes to specify that this analysis should discuss any risk characteristics of products to be commingled that are unusual in relation to the other products the DCO clears, and how the DCO plans to manage any identified risks. The purpose of this requirement is to allow the Commission and the public to understand any increased risk posed to customers by commingling products that otherwise would be held in separate accounts and to understand the DCO's ability to manage those risks. The Commission is proposing to use the term “unusual” because § 39.13(g)(2) already requires a DCO to have initial margin requirements that account for any unusual characteristics of, or risks associated with, particular products or portfolios. 10 However, the Commission requests comment on whether there are better ways to articulate this concept. For example, should the Commission specify that the discussion should cover products that have margining, liquidity, default management, pricing, or other risk characteristics that differ from those currently cleared by the DCO? 10 See Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 69334, 69365, n.86 (Nov. 8, 2011), available at https://www.federalregister.gov/documents/2011/11/08/2011-27536/derivatives-clearing-organization-general-provisions-and-core-principles. The Commission proposes to remove existing paragraph (b)(2)(i)(C), which requires the DCO to identify whether any swaps to be commingled would be executed bilaterally and/or executed on a designated contract market and/or a swap execution facility. The Commission has not found this information to be relevant to its review of commingling rule submissions. The Commission proposes to remove existing paragraph (b)(2)(i)(E), which requires the DCO to provide an analysis of the availability of reliable prices for each of the eligible products. The Commission believes this requirement is unnecessary as § 39.13(g)(5) separately requires that a DCO have for all of its products a reliable source of timely price data, as well as written procedures and sound valuation models for addressing circumstances where pricing data is not readily available or reliable. The Commission proposes to amend paragraph (b)(2)(i)(F) (and renumber it as (b)(2)(iv)), which currently requires the DCO to describe the financial, operational, and managerial standards or requirements for clearing members that would be permitted to commingle eligible products. The Commission recognizes that this could be interpreted to require that the DCO describe all of the requirements applicable to clearing members that would be permitted to commingle eligible products, including those requirements that apply to the DCO's clearing members generally. The proposed amendment would require only that the DCO describe any additional requirements that would apply to clearing members permitted to commingle eligible products. The Commission proposes to amend paragraph (b)(2)(i)(G) (and renumber it as (b)(2)(v)), which currently requires that a DCO discuss its systems and procedures used to oversee clearing members' risk management of commingled eligible products. The Commission recognizes that a DCO would not necessarily need to implement any systems and procedures specifically for commingled eligible products. Accordingly, the proposed amendment clarifies that a DCO should describe any changes it will implement to oversee clearing members' risk management of commingled eligible products, but also provides that a DCO may instead provide an analysis of why existing risk management systems and procedures are adequate. The Commission proposes to remove existing paragraph (b)(2)(i)(H), which requires the DCO to describe its financial resources, including the composition and availability of a guaranty fund with respect to the eligible products that would be commingled. This requirement is duplicative of § 39.21(c)(4), which requires a DCO to publicly disclose on its website the size and composition of its financial resources package available in the event of a clearing member default. The Commission proposes to remove existing paragraph (b)(2)(i)(I), which requires the DCO to provide a description and analysis of the margin methodology that would be applied to the commingled eligible products, including any margin reduction applied to correlated positions, and any applicable margin rules with respect to both clearing members and customers. Regulation 39.21(c)(3) separately requires a DCO to publicly disclose information concerning its margin methodology on its website, so the requirement in paragraph (b)(2)(i)(I) typically yields information that is already available to the Commission and the public. In place of paragraph (b)(2)(i)(I), the Commission proposes to add new paragraph (b)(2)(vii), which would require the DCO to discuss the extent to which it anticipates allowing portfolio margining of commingled positions, including a description and analysis of any margin reduction to be applied to correlated positions and the language of any applicable clearing rules or procedures. The DCO also would be required to provide an express confirmation that any portfolio margining will be allowed only as permitted under § 39.13(g)(4), which allows portfolio margining of positions only if the price risks with respect to such positions are “significantly and reliably correlated.” The Commission is proposing to require this confirmation out of concern that Commission approval of the commingling of customer positions would be misinterpreted as approval of the portfolio margining of those positions as well, regardless of whether the requirements of § 39.13(g)(4) are met. The Commission proposes to remove existing paragraph (b)(2)(i)(K), which requires the DCO to discuss the procedures it would follow if a clearing member defaulted, and the procedures that the clearing member would follow if a customer defaulted, with respect to any of the commingled eligible products. To the extent a DCO would follow its existing default procedures, this information is already available to the Commission and the public, because § 39.21(c)(6) requires a DCO to publicly disclose its default rules and procedures on its website. The Commission therefore proposes to amend existing paragraph (b)(2)(i)(J) (and renumber it as paragraph (b)(2)(vi)), which also concerns default management, to add a requirement that the DCO discuss any default management procedures that are unique to the products eligible for commingling. This change would appropriately focus the required discussion of the DCO's default management procedures on any changes necessitated by the commingling of eligible products. The Commission proposes to remove existing paragraph (b)(2)(i)(L), which requires the DCO to describe its arrangements for obtaining daily position data with respect to eligible products in the account. Because the DCO would be proposing to commingle positions in products it clears, the DCO would necessarily have position data for the eligible products. The Commission proposes to remove existing paragraph (b)(2)(iii), which provides that the Commission may request additional information from the DCO in support of the DCO's rule submission and may approve the rule submission in accordance with § 40.5. The Commission proposes to replace it with new paragraph (b)(2)(viii), which would require submission of any other information necessary for the Commission to evaluate the rule submission's compliance with the CEA and the Commission's regulations, and provide that the Commission may request supplemental information to evaluate the DCO's submission. Proposed paragraph (b)(2)(viii), like existing paragraph (b)(2)(iii), would ensure that the Commission can consider all information relevant to the rule submission. 11 The paragraph also would clarify that the Commission can extend the review period in accordance with § 40.5(d) to request and obtain supplemental information. 11 Removing existing paragraph (b)(2)(iii) and replacing it with new paragraph (b)(2)(viii) would also delete redundant language incorporating § 40.5 as the applicable procedure for rule approval. Finally, the Commission proposes to add language to the introductory paragraph of § 39.15(b)(2) underscoring the standard of review for Commission approval of a commingling rule submission. While the current regulation already provides that relevant rules are submitted for approval pursuant to § 40.5, the Commission has observed instances in which submitting DCOs do not recognize that the requirements and standard of review contained in § 40.5 apply. To draw attention to the applicability of the requirements of § 40.5, including the standard of review contained therein, the Commission proposes amending § 39.15(b)(2) to explicitly reference them. In evaluating commingling rule submissions, the Commission recognizes that it has access to supervisory information that may not be available to market participants and the public. The Commission requests comment as to whether there is additional information that would be helpful to market participants and the public in evaluating a DCO's commingling rule submission. IV. Proposed Amendments to § 39.18 Regulation 39.18(g)(1) requires that a DCO promptly notify staff of the Division of Clearing and Risk (Division) of any hardware or software malfunction, security incident, or targeted threat that materially impairs, or creates a significant likelihood of material impairment of, automated system operation, reliability, security, or capacity. The Commission is proposing to amend § 39.18(g)(1) to require that a DCO promptly notify the Division of any hardware or software malfunction or operator error that impairs, or creates a significant likelihood of impairment of, automated system operation, reliability, security, or capacity. The Commission is further proposing to adopt new § 39.18(g)(2) to require that a DCO promptly notify the Division of any security incident or threat that compromises or could compromise the confidentiality, availability, or integrity of any automated system or any information, services, or data, including, but not limited to, third-party information, services, or data, relied upon by the DCO in discharging its responsibilities (the text of existing § 39.18(g)(2) would be renumbered as § 39.18(g)(3), without any further revisions). In connection with the proposed amendments to § 39.18(g), the Commission is proposing to amend § 39.18(a) to define “hardware or software malfunction” and “automated system.” These changes are discussed in detail below. As noted above, § 39.18(g)(1) requires a DCO to promptly notify the Division of any “hardware or software malfunction,” which the Commission proposes to define in § 39.18(a) as “any circumstance where an automated system or a manually initiated process fails to function as designed or intended, or the output of the software produces an inaccurate result.” The Commission is proposing to amend § 39.18(g)(1) to also require a DCO to notify the Division when operator error impairs (or creates a significant likelihood of impairment of) the operation, reliability, security, or capacity of an automated system. Because operator error can cause the same or similar issues that can result from hardware or software malfunctions, the Commission believes that it is important for a DCO to notify the Division when operator error causes, or creates a significant likelihood of, impairment of the operation, reliability, security, or capacity of the DCO's automated systems. Lastly, the Commission is proposing to define in § 39.18(a) the term “automated system” as computers, ancillary equipment, software, firmware, and similar procedures, services (including support services), and related resources that a DCO uses in its operations. The Commission also is proposing to delete from § 39.18(g)(1), and not include in new § 39.18(g)(2), any reference to materiality. Based on its experience with this regulation, the Commission believes that neither hardware nor software malfunctions, nor security incidents or threats—particularly cybersecurity incidents or threats—are readily categorized as material or non-material. For example, a software malfunction that impairs (or creates a significant likelihood of impairment of) the operation, reliability, security, or capacity of an automated system can be material, even if the malfunction does not have any effect on the metrics or thresholds often used to determine materiality, such as the number of trades affected by the malfunction, the dollar value of those trades, or the length of a delay in processing and clearing those trades. There have also been instances where the Division learned of a malfunction, incident, or threat that had not been reported, even though Division staff readily concluded, upon subsequently learning of the malfunction, incident, or threat, that it was material and that the DCO should have notified the Division. In some cases, this is because different materiality thresholds used by DCOs resulted in inconsistent reporting across DCOs. The Commission believes that both DCOs and the Division will benefit from having a clear, bright-line rule that requires DCOs to report each qualifying hardware or software malfunction, or operator error, and security incident and threat, as opposed to attempting to determine whether a particular malfunction, incident, or threat qualifies as material. In addition to proposing to modify § 39.18(g)(1) as described above, the Commission also is proposing to delete the requirement that a DCO notify the Division of any security incident or targeted threat that materially impairs, or creates a significant likelihood of material impairment of, automated system operation, reliability, security, or capacity. In its place, the Commission is proposing, as new § 39.18(g)(2), a requirement that a DCO report any security incident or threat that compromises or could compromise the confidentiality, availability, or integrity of any automated system, or any information, services, or data, including, but not limited to, third-party information, services, or data, relied upon by the DCO in discharging its responsibilities. Requiring the reporting of any threat, not just “targeted” ones, is intended to ensure that the Division receives notice of the full spectrum of cyberattacks and cyberthreats. Additionally, proposed new § 39.18(g)(2) is intended to ensure that a DCO notifies the Division of security incidents or threats that could affect the information, services, or data, including, but not limited to, third-party information, services, or data, relied upon by the DCO in discharging its responsibilities, in addition to the existing requirement that a DCO provide notice of any security incident or threat that affects the automated system itself. To the extent that a DCO relies on another entity in connection with providing clearing services, whether via an inter-affiliate services agreement, an arms-length commercial relationship with a third-party vendor, or any other arrangement, then it is important that the DCO notify the Commission upon discovery of any security incidents or threats affecting the information, services, or data that the DCO relies upon from the other entity, just as if the incident or threat had occurred at the DCO. Lastly, proposed new § 39.18(g)(2) is intended to ensure that a DCO notifies the Division if its automated systems or the information, services, or data relied upon by the DCO are, or could be, compromised, as opposed to only receiving notice when those systems are, or could be, impaired. V. Proposed Amendments to § 39.19(c) Regulation 39.19, which was adopted in 2011 12 and revised in 2020, 13 imposes daily, periodic, and event-specific reporting requirements on DCOs. As discussed below, the Commission is proposing to amend the daily reporting requirements in § 39.19(c)(1) and the event-specific reporting requirements in § 39.19(c)(4). 12 See 76 FR at 69399. 13 See 85 FR at 4817. A. Daily Reporting of Variation Margin and Cash Flows—§ 39.19(c)(1)(i)(B) and (C) Regulation 39.19(c)(1) requires a DCO to report to the Commission on a daily basis initial margin, variation margin, cash flow, and position information for each clearing member, by house origin and by each customer origin. The Commission recently amended § 39.19(c)(1) to require a DCO to also report this information by individual customer account. 14 In adopting this change, the Commission stated that the amendments to § 39.19(c)(1) were not intended to require DCOs to report any information that they do not currently have, or do not currently report, subject to any operational or technological limitations that have been discussed with Commission staff. The Commission further specified that the changes to § 39.19(c)(1) to require reporting of information “by each individual customer account” were meant to reflect the information that DCOs currently report, to varying degrees, acknowledging that customer-level information may not be available to all DCOs. 15 14 Id. at 4817. 15 See id. at 4818. The Commission now understands that, although DCOs possess customer-level information regarding initial margin and positions, many DCOs do not possess customer-level information regarding variation margin and cash flows. Also, certain DCOs do not currently have mechanisms in place to collect such information from their respective clearing members, nor do they expect that they could implement these mechanisms without imposing significant new reporting and/or account registration requirements on clearing members. Therefore, the Commission is proposing to amend § 39.19(c)(1)(i)(B) and (C) to remove the requirement that a DCO report daily variation margin and cash flows by individual customer account. 16 16 The Division issued a no-action letter addressing compliance with the amended requirements in § 39.19(c)(1). See CFTC Letter No. 21-01 (Dec. 31, 2020); see also CFTC Letter No. 21-31 (Dec. 22, 2021). The proposed amendments to § 39.19(c)(1)(i)(B) and (C) would eliminate the requirement for which additional time was provided in the staff letter. The Commission requests comment on the proposal to amend § 39.19(c)(1)(i)(B) and (C) to remove the requirement that a DCO report daily variation margin and cash flows by individual customer account. The Commission also requests comment on whether there are products or market segments ( e.g., interest rate swaps) where it may be appropriate for the Commission to retain these requirements. B. Codifying the Existing Reporting Fields for the Daily Reporting Requirements in New Appendix C to Part 39 The Commission is proposing to add a new appendix to part 39 of the Commission's regulations that would codify the existing reporting fields for the daily reporting requirements in § 39.19(c)(1). Until now, the instructions, reporting fields, and technical specifications for daily reporting have been contained in the Reporting Guidebook, which the Division provides to DCOs to facilitate reporting pursuant to § 39.19(c)(1). 17 17 Commodity Futures Trading Commission Guidebook for Part 39 Daily Reports, Version 1.0.1, Dec. 10, 2021 (Reporting Guidebook). When § 39.19(c)(1) was first adopted in 2011, DCOs were required to report to the Commission on a daily basis initial margin, variation margin, cash flow, and position information for each clearing member, by house origin and by each customer origin. 18 To implement these requirements and provide more detailed instructions and technical specifications, the Division, after consulting with DCOs, developed and distributed the Reporting Guidebook. The Reporting Guidebook was designed to ensure that all DCOs were reporting a standard set of information in a uniform manner, and that the information was useful to the Commission in its surveillance and oversight of DCOs and the derivatives markets. 18 See 76 FR at 69399. The Commission amended § 39.19(c)(1) in 2020 to require a DCO to also report this information by individual customer account. See 85 FR at 4817. The Division updated and revised the Reporting Guidebook over the years, most recently in 2017 and again in 2021. Each time, it engaged extensively with DCOs in connection with the revisions. The engagement included discussions regarding whether DCOs possessed certain data, and the format in which DCOs would supply that data so that it would be useful by the Division. In addition to the discussions associated with revising the Reporting Guidebook, the Division and DCOs also regularly engaged cooperatively, on an as-needed basis to address any issues that arose regarding daily reporting. The current version of the Reporting Guidebook reflects the cumulative development of the guidebook over the years, from 2012 through 2021. During that time, DCOs have continuously relied on the Reporting Guidebook to report to the Division the required information in accordance with § 39.19(c)(1). The Reporting Guidebook also has grown in length, comprehensiveness, detail, and complexity. It now consists of numerous separate reporting fields, including data fields that directly implement the reporting requirements of § 39.19(c)(1), as well as additional fields for reporting information on an optional basis that, although helpful to the Division in its oversight of DCOs and the derivatives markets, is not required under § 39.19(c)(1). Given the evolution and expansion of the Reporting Guidebook over time, the Commission is proposing to add a new appendix C to part 39 that would set out the relevant contents of the Reporting Guidebook, specifically the reporting fields for which a DCO is required to provide data on a daily basis, as well as additional optional data that DCOs may provide. 19 The Commission is not proposing to codify the non-substantive technical and procedural aspects of the Reporting Guidebook that address the format and manner in which DCOs provide this information. 19 Appendix C specifies whether a field is mandatory, optional, or conditional. In this context, fields that are “conditional” would be reported by the DCO if it collects or calculates the particular data element and uses the data element in the normal course of its risk management and operations, or if the field is subject to any row-level validation rule described in the Reporting Guidebook. C. Proposed Additional Reporting Fields for the Daily Reporting Requirements—§ 39.19(c)(1) The Commission is proposing to include in appendix C several new fields that do not appear in the Reporting Guidebook but would further implement the existing daily reporting requirements under § 39.19(c)(1). These new fields, applicable to interest rate swaps only, include the delta ladder, gamma ladder, vega ladder, zero rate curves, and yield curves that the DCO uses in connection with managing risks associated with interest rate swaps positions. Some DCOs that clear interest rate swaps already provide this information to the Commission on a voluntary basis. The Commission believes that all DCOs that clear interest rate swaps have this information, and have the ability to report it to the Commission, regardless of whether they currently do so. The Commission needs this information to better ascertain and evaluate the risks associated with these positions, including using this information to stress test these positions and to develop an improved understanding of how market price changes would affect these positions. As proposed, the reporting of this information would be required for interest rate swaps only, due to the relatively broad range of risk exposures across a wide variety of tenors. By way of comparison, contracts with optionality ( e.g., swaptions) are generally less cleared than other asset classes; therefore, risk measures other than delta ladders would not, as of now, be that significant and thus not particularly informative relative to the cost of reporting. However, over time, swap contracts with explicit or implicit option characteristics may become more common, potentially leading to greater benefits than costs for non-delta risk measures. Because of this, the Commission requests comment on the potential value of additional risk ladders. For delta ladders specifically, the broad spectrum of risk exposures in rates somewhat contrasts with other asset classes. Credit default swaps tend to be highly focused on the 5-year tenor; therefore, delta ladders would not provide much information beyond that of a single, aggregate delta value. The same is true for FX contracts, which tend to be concentrated in very short tenors. In contrast, large interest rate swap exposures are common for tenors spanning from a single week to 30 years. Therefore, the Commission seeks to obtain data on how this risk is allocated among certain tenor ranges. Additionally, the Commission is proposing to require that a DCO include in its daily reports timing information about variation margin calls and payments. Specifically, the Commission is proposing that this information include the time and amount of each variation margin call to each clearing member, the time and amount that variation margin is received from each clearing member, and the time and amount that variation margin is paid to each clearing member. The Commission needs this information to improve its risk surveillance of DCOs. Information regarding the size and frequency of variation margin calls, and when those calls are paid, is directly relevant to DCO liquidity and how clearing member and customer risk is being managed, both of which are important to the Commission in evaluating risks at each DCO and across the derivatives markets. The Commission anticipates that receiving this information on a daily basis would support its ongoing surveillance and oversight of DCOs and the markets, including potentially identifying liquidity issues as they develop, especially to the extent that liquidity issues associated with one clearing member could affect multiple DCOs. The Commission also anticipates that this information would be useful for historical analysis to evaluate whether potential deficiencies exist regarding DCO liquidity as it relates to the collection and payment of variation margin, including examining whether and how particular market circumstances contribute to liquidity issues, and what measures might be appropriate to address such deficiencies or issues. Further, the Commission is proposing to require a DCO that clears interest rate swaps, forward rate agreements, or inflation index swaps to include in its daily reports the actual trade date for each position along with an event description. Although DCOs currently report the date that these products are cleared, DCOs are not required to report the trade date. The Commission seeks to improve its understanding of when and how positions in interest rate swaps, forward rate agreements, and inflation index swaps arose, because these products sometimes are not cleared on the trade date. Adding the trade date and event description to positions in these products would improve the Commission's understanding of the lifecycle of each position, which would result in a better understanding of the risks these positions present to the DCO and its clearing members. Additionally, the Commission is proposing to require a DCO to include in its daily reports information that reflects that the daily report is complete. 20 The Commission is proposing to require that completeness information be submitted either as a manifest file that contains a list of files sent by the DCO, or by including the file number and count information embedded within each report, where each FIXML file would indicate its position in the sequence of files submitted that day, i.e., file 1 of 10. To the extent that a DCO submits to the Commission multiple files in satisfaction of its daily reporting obligations, it can be difficult for Commission staff to determine whether a DCO has completed its reporting for the day, which in turn makes it difficult to validate the information received. Completeness information is necessary to determine whether DCO daily reporting is complete, which would assist the Commission in its validation and timely use of the reported information. 20 The Commission believes that the proposed requirement that each DCO include in its daily report information that reflects that the daily report is complete is a “format and manner” requirement under § 39.19(b)(1). Additional details regarding the proposed reporting fields discussed above are included in the proposed new appendix C to part 39. The goal is to ensure that appendix C includes every data field that is needed to adequately capture the new information that would be reported under the proposal. 21 Therefore, the Commission requests comment on each of the proposed new daily reporting fields in appendix C, and specifically, whether there are any additional fields that would be necessary or would make the reported data more meaningful. The Commission further requests comment on whether, to the extent that commenters have concerns regarding the proposed requirement that DCOs report timing information for variation margin calls and payments, DCOs should instead be required to report whether calls and payments were made during a broader timeframe, such as at the beginning, middle, or end of day, and how those timeframes should be defined. The Commission also requests comment on which of the two proposed approaches for reporting completeness information is preferable, or whether there are additional alternatives that may be superior. 21 In practice, to the extent that a DCO later finds that there are additional data fields that would be necessary or appropriate to better capture the information that is being reported, the Commission is proposing to add, as new § 39.19(c)(1)(iii), the ability for a DCO to, after consultation with the Division, voluntarily submit any additional data fields it believes would be necessary or appropriate. Lastly, the Commission currently receives from DCOs daily position information that includes settlement prices for a range of contracts with open interest. The Commission is considering whether to also require that DCOs provide the current settlement prices and related information published by designated contract markets for futures and options contracts with no open interest in order to enhance the Commission's ability to perform futures and options risk surveillance by using complete settlement price data. The Commission would likely require the current settlement price, settlement currency, and settlement date, to the extent that a DCO possesses this information. The Commission requests comment on the costs to DCOs, if any, associated with providing this information on a daily basis, and whether the fields listed are necessary or appropriate to capture the information that would be reported. D. Individual Customer Account Identification Requirements—§ 39.19(c)(1)(i)(D) Regulation 39.19(c)(1)(i)(D) requires the daily reporting of end-of-day positions for each clearing member, by house origin and by each customer origin, and by each individual customer account. The Commission recently amended this provision to require, among other things, that a DCO identify each individual customer account using both a legal entity identifier (LEI) and any internally-generated identifier, where available, within each customer origin for each clearing member. 22 The Commission intended that this requirement apply to all instances within § 39.19(c)(1) where a DCO is required to report information at the individual customer account level. However, this may not have been clear because paragraph (D) addresses only the reporting of end-of-day positions. 22 85 FR at 4817. The Commission wishes to clarify that the requirement that a DCO identify each individual customer account by LEI and internally-generated identifier was not intended to be limited to end-of-day position reporting under paragraph (D), but rather to apply to all instances in § 39.19(c)(1) where a DCO is required to report information at the individual customer account level. Under the proposal, § 39.19(c)(1)(i)(A) is the only other paragraph within § 39.19(c)(1) that requires a DCO to report information at the individual customer account level. The Commission therefore proposes to amend § 39.19(c)(1)(i)(A) to specify that when a DCO reports initial margin requirements and initial margin on deposit by each individual customer account as required, the DCO also must identify each individual customer account by LEI and internally-generated identifier, where available. The Commission further seeks to clarify that the requirement that a DCO identify each individual customer account using both an LEI and any internally-generated identifier, “where available,” is intended to mean this information is required, in either case, only if the DCO has the information associated with an account. The Commission is therefore proposing a technical change to make this more clear. E. Daily Reporting of Margin Model Back Testing—§ 39.19(c)(1)(i) The Commission is proposing to add to § 39.19(c)(1)(i) a requirement that a DCO include in its daily reports the results of the margin model back testing that a DCO is required to perform daily pursuant to § 39.13(g)(7)(i). Some DCOs currently provide back testing information to the Commission on a voluntary basis. Back testing is critical to evaluating the efficacy of DCO margin models, which are in turn a critical component of DCO risk management. Receiving back testing information from DCOs on a daily basis would enhance the Commission's supervision and oversight of DCOs and the derivatives markets by enabling the Commission to evaluate and monitor margin model performance on an ongoing basis, and also would provide the Commission with the information necessary to conduct its own analysis of margin model performance. The Commission is also proposing to add to new appendix C to part 39 the data fields it believes would be relevant and necessary to capture the back testing results that, if adopted, would be reported under this provision. As previously stated, the Commission's goal is to ensure that appendix C includes every data field that is needed to adequately capture the new information that would be reported under the proposal. Therefore, the Commission requests comment on each of the proposed reporting fields in appendix C for back testing results, and specifically, whether there are any additional fields that would be necessary or would make the reported data more meaningful. F. Fully Collateralized Positions—§ 39.19(c)(1)(ii) The Commission previously amended § 39.19(c)(1)(i) to provide that the daily reports required by that regulation are not required for fully collateralized positions. 23 The Commission did not amend § 39.19(c)(1)(ii), which provides that the daily reports required by § 39.19(c)(1)(i) are required for futures, options, swaps, and certain securities positions. Although § 39.19(c)(1)(ii) merely expands on § 39.19(c)(1)(i) and has no independent force or effect, the Commission is proposing to amend § 39.19(c)(1)(ii) to clarify that it does not apply to fully collateralized positions. 23 See 85 FR 4800, 4805. G. Reporting Change of Control of the DCO—§ 39.19(c)(4)(ix)(A)(1) Regulation 39.19(c)(4)(ix)(A)(1) requires a DCO to report to the Commission any anticipated change in the ownership or corporate or organizational structure of the DCO or its parent(s) that would result in at least a 10 percent change of ownership of the DCO. The Commission is proposing to amend this provision to require a DCO to report any change to the entity or person that holds a controlling interest, either directly or indirectly, in the DCO. Because the current rule is tied to changes in ownership of the DCO by percentage share of ownership, DCOs are not currently required to report all instances in which there is a change in control of the DCO. It is possible that a change in ownership of less than 10 percent could result in a change in control of the DCO. For example, if an entity increases its stake in the DCO from 45 percent ownership to 51 percent, it is possible that control of the DCO would change without any required reporting. In addition, in some instances, a DCO is owned by a parent company, and a change in ownership or control of the parent is not required to be reported under the current rule despite the fact that it could change corporate control of the DCO. The proposed changes to the rule would ensure that the Commission has accurate knowledge of the individuals or entities that control a DCO and its activities. H. Reporting Changes to Credit Facility Funding and Liquidity Funding Arrangements—§ 39.19(c)(4)(xii) and (xiii) Regulations 39.19(c)(4)(xii) and (xiii), respectively, require a DCO to report changes to credit facility funding arrangements and liquidity funding arrangements “it has in place.” The Commission is proposing to amend these provisions to clarify that the reporting requirements include reporting new arrangements as well as changes to existing ones. Although DCOs and the Commission have interpreted these requirements to include reporting new arrangements, a literal interpretation of these provisions, with a focus on the phrase “it has in place,” may potentially restrict the application of the reporting requirements only to changes in existing arrangements. I. Reporting Issues With Credit Facility Funding Arrangements, Liquidity Funding Arrangements, and Custodian Banks—§ 39.19(c)(4)(xv) Regulation 39.19(c)(4)(xv) requires that a DCO report to the Commission within one business day after any material issues or concerns arise regarding the performance, stability, liquidity, or financial resources of any settlement bank used by the DCO or approved for use by the DCO's clearing members. The Commission is proposing to amend § 39.19(c)(4)(xv) to require that a DCO report to the Commission within one business day after it becomes aware of any material issues or concerns regarding the performance, stability, liquidity, or financial resources of any credit facility funding arrangement, liquidity funding arrangement, custodian bank, or settlement bank used by the DCO or approved for use by the DCO's clearing members. As a part of the proposed amendments to § 39.19(c)(4)(xv), the Commission is proposing to change the threshold that triggers a DCO's reporting obligations. Specifically, the Commission is proposing to replace the current requirement that a DCO report to the Commission within one business day after any material issues or concerns arise, with the requirement that a DCO report to the Commission within one business day after it becomes aware of any material issues or concerns. Requiring a DCO to report issues or concerns when it becomes aware of them accounts for the possibility that there may be a delay between the time that an issue arises and when the DCO becomes aware of it. Furthermore, although they provide different services to DCOs and may be relied upon by DCOs in differing circumstances, credit facility funding arrangements, liquidity funding arrangements, and custodian banks are similar to settlement banks in that they perform functions that are critical to the clearing process. The Commission recognizes that if a DCO encounters an issue with a settlement bank, it could potentially delay the DCO's ability to access its funds, which could impact the DCO's ability to meet its obligations; the same could be true with respect to issues with a DCO's credit facility funding arrangements, liquidity funding arrangements, and custodian banks. Therefore, it is important that the Commission be informed when a DCO experiences or becomes aware of any issues. J. Reporting of Updated Responses to the Disclosure Framework for Financial Market Infrastructures—§ 39.19(c)(4)(xxv) The Commission is proposing new § 39.19(c)(4)(xxv), which would set forth the requirement currently in § 39.37(b)(2) that, when a DCO updates its responses to the Disclosure Framework for Financial Market Infrastructures published by the Committee on Payment and Settlement Systems and the Board of the International Organization of Securities Commissions in accordance with § 39.37(b)(1), the DCO shall provide notice of those updates to the Commission. The proposal does not alter in any respect the substance of the reporting obligation currently specified in § 39.37(b)(2); it simply references this requirement in § 39.19 in furtherance of the goal of centralizing DCO reporting obligations in § 39.19. 24 24 See id. at 4819. VI. Proposed Amendments to § 39.21(c) Regulation 39.21 requires a DCO to publish on its website a variety of information designed to enable market participants to make informed decisions about using the clearing services provided by the DCO. The Commission is proposing several amendments to these requirements to better align a DCO's disclosure obligations with the type of clearing services that the DCO provides. A. Publication of Margin-Setting Methodology and Financial Resource Package Information—§ 39.21(c)(3) and (4) Regulation 39.21(c)(3) requires a DCO to publish on its website information concerning its margin-setting methodology. Regulation 39.21(c)(4) requires a DCO to publish on its website, and update as required, the size and composition of the financial resource package available in the event of a clearing member default. The Commission is proposing to amend §§ 39.21(c)(3) and (4) to provide that a DCO that clears only fully collateralized positions should instead indicate on its website that it clears such positions in satisfaction of these requirements. As the Commission has previously recognized, fully collateralized positions are designed to have on deposit a sufficient amount of funds, at all times, to cover the maximum potential loss that could be incurred in connection with a position. 25 Therefore, the need to collect margin and maintain a financial resource package to be used in the event of a clearing member default is eliminated by requiring full collateralization. The Commission has therefore provided certain carveouts for DCOs that clear fully collateralized positions in its part 39 regulations. 26 This proposed change would be consistent with such carveouts. 25 See id. at 4804. 26 Id. B. Publication of List of Clearing Members—§ 39.21(c)(7) Regulation 39.21(c)(7) requires a DCO to publish on its website a current list of its clearing members. At a typical DCO, the risk of loss from the default of a clearing member is mutualized among the clearing members, making it useful for each existing or prospective clearing member to know who the others are. Publishing a list of clearing members is less useful where the DCO clears only fully collateralized positions and its clearing members generally do not pose any risk to each other. However, existing or potential customers of a futures commission merchant (FCM) may find it useful to be able to verify whether that FCM is a clearing member at any DCO, including DCOs that clear only fully collateralized positions. For these reasons, the Commission is proposing to amend § 39.21(c)(7) to provide that a DCO may omit any clearing member that clears only fully collateralized positions and is not an FCM clearing member from the list of clearing members that the DCO must publish on its website. 27 27 The proposed amendment to § 39.21(c)(7) is consistent with the position previously taken by the Division. See, e.g., CFTC Letter No. 19-15 (July 1, 2019) (no-action letter to Eris Clearing, LLC, regarding several Commission regulations, including § 39.21(c)(7), due to Eris Clearing, LLC's fully collateralized clearing model). To the extent that a DCO received a no-action letter from the Division regarding compliance with § 39.21(c)(7), the change in the requirement, if adopted, would supersede those letters. VII. Proposed Amendments to § 39.37(c) and (d) Regulation 39.37 requires each systemically important DCO (SIDCO) and each DCO that elects to comply with subpart C of part 39 of the Commission's regulations (subpart C DCO) to disclose certain information to the public and to the Commission. Regulations 39.37(c) and (d) require, respectively, a SIDCO or subpart C DCO to “disclose, publicly, and to the Commission” transaction data, and information regarding the segregation and portability of customers' positions and funds. The Commission is proposing to amend these provisions to clarify that public disclosure of the information is sufficient and a separate report directly to the Commission is not required. To that end, the Commission is proposing to replace the phrase “disclose, publicly, and to the Commission” with the phrase “publicly disclose” in § 39.37(c) and (d). VIII. Proposed Amendments to § 140.94(c)(10) Regulation 140.94(c) is a delegation of authority from the Commission to the Director of the Division of Clearing and Risk to perform certain specific functions. The Commission is proposing to amend § 140.94(c)(10) to delegate to the Director the authority in existing § 39.19(a) to require a DCO to provide to the Commission the information specified in § 39.19 and any other information that the Commission determines to be necessary to conduct oversight of the DCO, and in existing § 39.19(b)(1) to specify the format and manner in which the information required by § 39.19 must be submitted to the Commission. IX. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) requires that agencies consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis on the impact. 28 The amendments proposed by the Commission will affect only DCOs. The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its regulations on small entities in accordance with the RFA. 29 The Commission has previously determined that DCOs are not small entities for the purpose of the RFA. 30 Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations will not have a significant economic impact on a substantial number of small entities. 28 5 U.S.C. 601 et seq. 29 47 FR 18618 (Apr. 30, 1982). 30 See 66 FR 45604, 45609 (Aug. 29, 2001). B. Paperwork Reduction Act The Paperwork Reduction Act (PRA) 31 provides that Federal agencies, including the Commission, may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number from the Office of Management and Budget (OMB). This proposed rulemaking contains reporting and recordkeeping requirements that are collections of information within the meaning of the PRA. If adopted, responses to the collections of information would be required to obtain a benefit. This section addresses the impact that the proposal will have on the existing information collection associated with part 39, “Requirements for Derivatives Clearing Organizations, OMB control number 3038-0076.” 31 44 U.S.C. 3501 et seq. 1. Subpart B—Requirements for Compliance With Core Principles a. Risk Management The Commission is proposing new § 39.13(h)(5)(iii) to provide that a DCO that clears fully collateralized positions may exclude from the requirements of paragraphs (h)(5)(i) and (ii) those clearing members that clear only fully collateralized positions. These requirements would still apply in the case of clearing members that clear fully collateralized positions but also margined products. This change will reduce the burden for DCOs that clear fully collateralized products, but does not affect the burden for the majority of DCOs that are subject to daily reporting requirements, as only four of the fifteen DCOs clear fully collateralized positions. As a result, the Commission believes that this reduction would have a negligible impact on the overall reporting burden for DCOs, and therefore, the Commission is leaving the reporting burden for these reporting requirements unchanged. b. Treatment of Funds The Commission is proposing to amend § 39.15(b)(2), which only applies when a DCO and its clearing members seek to commingle customer positions in futures, options, foreign futures, foreign options, and swaps, or any combination thereof, and any money, securities, or property received to margin, guarantee or secure such positions, in an account subject to the requirements of Sections 4d(a) or 4d(f) of the CEA. The Commission proposes to consolidate paragraphs (b)(2)(i) and (b)(2)(ii) and renumber paragraphs accordingly. These changes pertain only to the structure and organization of the regulation and therefore do not impact the reporting requirement. The Commission is further proposing to amend § 39.15(b)(2) to clarify that the requirement in paragraph (b)(2)(i)(G) that a DCO discuss the systems or procedures that the DCO has implemented to oversee its clearing members' risk management of eligible products may be addressed by describing why existing risk management systems and procedures are adequate, and to add language clarifying that the requirements and standard of review of § 40.5 apply to commingling rule submissions. Because these proposals are mere clarifications of existing requirements, they also have no impact on the reporting burden. Similarly, the Commission is further proposing to remove existing paragraph (b)(2)(iii), which provides that the Commission may request additional information in support of a rule submission filed under existing paragraph (b)(2)(i) or (ii), and add new paragraph (b)(2)(viii), which provides that the Commission may request supplemental information to evaluate the DCO's submission and requires a DCO to submit any other information necessary for the Commission to evaluate the DCO's rule's compliance with the CEA and the Commission's regulations. This does not impact the reporting burden because proposed paragraph (b)(2)(viii), like existing paragraph (b)(2)(iii), would ensure that the Commission can consider all information relevant to the rule submission. Although existing paragraph (b)(2)(iii) does not contain explicit language similar to new paragraph (b)(2)(viii)'s requirement that the DCO submit any other information necessary for the Commission to evaluate the rule's compliance with the CEA and the Commission's regulations, the fact that existing paragraph (b)(2)(iii) permits the Commission to request such information implies a DCO's obligation to supply it. Simply making this implication explicit does not impact the reporting burden. The Commission is proposing to delete paragraphs (b)(2)(i)(C), (E), (H), and (L) because they require a DCO to submit information the Commission can already access or has not needed in its review of commingling rule submissions. This proposed change would decrease the reporting burden. In addition, the Commission is proposing to remove existing paragraph (b)(2)(i)(I), which requires the DCO to provide information related to its margin methodology, while adding related paragraph (b)(2)(vii), which would require that a DCO discuss whether it anticipates allowing portfolio margining of commingled positions, describe and analyze any margin reductions it would apply to correlated positions, and make an express confirmation that any portfolio margining will be allowed only as permitted under § 39.13(g)(4). These changes would collectively decrease the reporting burden because the requirements proposed to be removed through the deletion of paragraph (b)(2)(i)(I) are, as a whole, more burdensome than the requirements proposed to be added in paragraph (b)(2)(vii). Similarly, the Commission is proposing to remove the requirement in existing paragraph (b)(2)(i)(K) to discuss a DCO's default management procedures generally and maintain only the requirement to address default management procedures unique to the products eligible for commingling and to move that requirement to paragraph (b)(2)(vi). This narrowing of the scope of the requirement reduces the reporting burden on the relevant DCOs. The Commission is proposing to amend paragraph (b)(2)(i)(B), which requires the DCO to provide an analysis of the risk characteristics of the products that would be eligible for commingling, to specify that the DCO should discuss any risk characteristics of products to be commingled that are unusual in relation to the other products the DCO clears and how the DCO plans to manage any risks identified. Because such disclosure was not previously explicitly required, and because DCOs that would not otherwise have addressed such issues in their analysis of the risk characteristics of the eligible products would now be required to do so, this would increase the reporting burden. The Commission proposes to amend paragraph (b)(2)(i)(F) (and renumber it as (b)(2)(iv)), which currently requires the DCO to describe the financial, operational, and managerial standards or requirements for clearing members that would be permitted to commingle eligible products, to require only that the DCO describe any additional requirements that would apply to clearing members permitted to commingle eligible products. The Commission believes that the proposed amendment would have no impact on the reporting burden. Although the proposed requirement that the DCO describe any additional requirements is broader than the current requirement to describe financial, operational, and managerial standards or requirements, the existing paragraph requires the DCO to report even if no additional requirements would apply. The proposal only requires reporting when additional requirements are, in fact, applicable. The Commission believes that the reductions in the reporting burden resulting from the proposed deletion of paragraphs (b)(2)(i)(C), (E), (H), and (L) and the narrowing of the reporting burden resulting from the proposed deletions of paragraphs (b)(2)(i)(I) and (K) (even after giving effect to the addition of new paragraphs (b)(2)(vi) and (vii)) are at least as great as the increase in the reporting burden resulting from the proposed amendments to paragraph (b)(2)(i)(B). Because the Commission lacks the data to fully quantify each of these changes, it is conservatively estimating that these changes collectively do not materially impact the reporting burden. The Commission is of the view that to the extent that the cross-margining program would be submitted as part of a new rule or rule amendment filing pursuant to § 40.5, the proposed changes are already covered by OMB control number 3038-0093 and there is no change in the burden estimates. c. Daily Reporting The Commission is proposing to amend § 39.19(c)(1)(i)(A) to clarify that the existing requirement to identify individual customer accounts by LEI and internally-generated identifier was intended to apply to all instances in § 39.19(c)(1) where reporting is required at the individual customer account level, and not only to end-of-day positions. The Commission therefore proposes to amend § 39.19(c)(1)(i)(A) to specify that when a DCO reports initial margin requirements and initial margin on deposit by each individual customer account as required, the DCO also must identify each individual customer account by LEI and internally-generated identifier, where available. The proposed clarification would not affect the burden on DCOs because DCOs already provide this information and the impact of this amendment is negligible on the existing burden. The Commission also is proposing to amend § 39.19(c)(1)(i)(B) and (C), which require a DCO to report daily variation margin and cash flow information by house origin and separately by customer origin and by each individual customer account, to remove the requirement that a DCO report daily variation margin and cash flows by individual customer account. This proposed change is anticipated to result in a negligible decrease from the current burden of 0.5 hours per report. 32 32 DCOs currently are not reporting variation margin and cash flow information by each individual customer account because the Division issued a no-action letter addressing compliance with the amended requirements in § 39.19(c)(1). See CFTC Letter No. 21-01 (Dec. 31, 2020); see also CFTC Letter No. 21-31 (Dec. 22, 2021). As noted, the proposed amendments to § 39.19(c)(1)(i)(B) and (C) would eliminate the requirement for which additional time was provided in the staff letter. The Commission is also proposing to add to part 39 an appendix that would codify the existing reporting fields for the daily reporting requirements in § 39.19(c)(1). The codification of existing reporting fields in new appendix C would not change the reporting burden. 33 33 The current burden estimates for complying with the daily reporting requirements in § 39.19(c)(1) included in OMB Control No. 3038-0076 take into account the burden associated with reporting in accordance with the Reporting Guidebook. The Commission also is proposing to add new fields within proposed appendix C that would further implement the existing daily reporting requirements under § 39.19(c)(1). Specifically, the Commission is proposing to require that a DCO include in its daily reports, with regard to interest rate swaps only, the delta ladder, gamma ladder, vega ladder, zero rate curves, and yield curves that the DCO uses in connection with managing risks associated with interest rate swaps positions. The Commission also is proposing to require a DCO that clears interest rate swaps, forward rate agreements, or inflation index swaps to include in its daily reports the actual trade date for each position, along with an event description. The Commission is further proposing to require that each DCO include in its daily reports timing information about variation margin calls and payments, and also to include in its daily reports information that reflects that the daily report is complete. Lastly, in connection with the proposal to add to § 39.19(c)(1)(i) a requirement that a DCO include in its daily reports the results of its required daily margin model back testing, the Commission is proposing to add to proposed appendix C the additional data fields necessary to implement this requirement. With respect to the proposal to add new fields to proposed appendix C, and the proposal to add to § 39.19(c)(1)(i) a requirement that a DCO include in its daily reports the results of its required margin model back testing, the Commission believes the incremental capital investment costs associated with implementing these proposed requirements would be negligible. In many cases, the proposed fields are data that are already being used for DCO risk management and operations, and in some cases are already being reported to the Commission on a voluntary basis. Further, the Commission believes that any capital investment implementation for the reporting of these proposed fields would leverage the DCO's existing server architecture that could be scaled up to meet the proposed requirements with negligible costs. The estimated start-up costs, including programming or coding, as well as testing, quality assurance, and compliance review costs, are estimated 34 to be approximately $109,574.43 per DCO. 35 34 To estimate the start-up costs, the Commission relied upon internal subject matter experts in its Divisions of Data and Clearing and Risk to estimate the amount of time and type of DCO personnel necessary to complete the coding, testing, quality assurance, and compliance review. The Commission then used data from the Department of Labor's Bureau of Labor Statistics from May 2021 to estimate the total costs of this work. According to the May 2021 National Occupational Employment and Wage Estimates Report produced by the U.S. Bureau of Labor Statistics, available at https://www.bls.gov/oes/current/oes_nat.htm, the mean salary for a computer systems analyst in management companies and enterprises is $103,860. This number is divided by 1800 work hours in a year to account for sick leave and vacations and multiplied by 2.5 to account for retirement, health, and other benefits, as well as for office space, computer equipment support, and human resources support, all of which yields an hourly rate of $144.25. Similarly, a computer programmer has a mean annual salary of $102,430, yielding an hourly rate of $142.26; a software quality assurance analyst and tester has a mean annual salary of $99,460, yielding an hourly rate of $138.14; and a compliance attorney has a mean annual salary of $198,900, yielding an hourly rate of $276.25. 35 The estimate of total start-up costs consists of the following: $14,101.10 for the delta ladder, gamma ladder, vega ladder, and the zero rate curves, based on 20 hours of systems analyst time, 40 hours of programmer time, and 40 hours of tester time; $7,248.61 for adding interest rate, forward rates, and end of day position fields, based on 8 hours of systems analyst time, 4 hours of programmer time, and 40 hours of tester time; $39,907.22 for the payment file, based on 120 hours of systems analyst time, 120 hours of programmer time, and 40 hours of tester time; $14,140.83 for the manifest file, based on 40 hours of systems analyst time, 40 hours of programmer time, and 20 hours of tester time; and $22,676.67 for adding the back testing fields, based on 40 hours of systems analyst time, 80 hours of programmer time, and 40 hours of tester time. The estimate of total start-up costs also includes $11,500.00 for compliance attorney review. A DCO may choose to employ a manifest file or alternatively a file count to the account and end of day position files. If a DCO elects the latter, the estimate of total start-up costs is reduced to $106,120.38, because while adding a manifest file is estimated to cost $14,140.83, adding file count information is estimated to cost $10,686.78 (based on 20 hours of systems analyst time, 16 hours of programmer time, and 40 hours of tester time). Additionally, the Commission estimates that requiring DCOs to report pricing information for contracts without open interest, which the Commission is considering, would impose non-capital start-up costs of $34,137.22 on each DCO, based on 80 hours of systems analyst time, 120 hours of programmer time, and 40 hours of tester time. The $34,137.22 estimate is not included in the estimated total start-up costs of $109,574.43 per DCO because, although the Commission is considering this requirement and is requesting comment, it has not otherwise proposed this requirement. Lastly, because the Commission understands that the preparation and submission of the daily reports required under § 39.19(c)(1)(i) is largely automated, the Commission estimates that the proposal to add new fields to proposed appendix C, and the proposal to add to § 39.19(c)(1)(i) a requirement that a DCO include in its daily reports the results of the margin model back testing, will result in a negligible increase from the current estimate of 0.5 burden hours per report. The aggregate burden estimate for daily reporting remains as follows: Estimated number of respondents: 13. Estimated number of reports per respondent: 250. Average number of hours per report: 0.5. Estimated gross annual reporting burden: 1625. d. Event-Specific Reporting Regulation 39.19(c)(4) requires a DCO to notify the Commission of the occurrence of certain events; § 39.19(c)(4)(ix)(A)(1) requires a DCO to report any change in the ownership or corporate or organizational structure of the DCO or its parent(s) that would result in at least a 10 percent change of ownership of the DCO. The Commission is proposing to amend § 39.19(c)(4)(ix)(A)(1) to require the reporting of any change in the ownership or corporate or organizational structure of the DCO or its parent(s) that would result in a change to the entity or person holding a controlling interest in the DCO, whether through an increase in direct ownership or voting interest in the DCO or in a direct or indirect corporate parent entity of the DCO. This increases the reporting requirement. However, the changes of control contemplated by the proposed amendment occur infrequently. In addition, DCOs have typically notified the Commission of such changes of control even if not technically required by the current regulations. Finally, although changes of control usually require the preparation of documents such as a purchase agreement and the amendment of corporate governance documents and organizational charts, those burdens are a result of the change in control itself and not of the reporting requirement. The administrative burden of notifying the Commission—preparing a notification, attaching relevant but pre-existing supporting documents such as the revised organizational chart, and submitting to the Commission—is negligible. Therefore, the increase in the reporting requirement resulting from this proposed amendment is negligible. Regulation 39.19(c)(4)(xii) and (xiii) require notification of changes in a liquidity funding arrangement or settlement bank arrangement. The Commission is proposing to amend these regulations to clarify that the reporting requirements include reporting new arrangements as well as changes to existing ones. The proposed clarification would not affect the burden on DCOs because such reporting is already implied in the regulation. Separately, the Commission is proposing to amend § 39.19(c)(4)(xv) to add credit facility funding arrangements, liquidity funding arrangements, and custodian banks to the list of arrangements or banks for which the DCO must report to the Commission any issues or concerns of which the DCO becomes aware. Although this increases the number of entities or arrangements for which reporting may be required, given that a DCO is only required to report these issues when it becomes aware of them, and given that these events are not very common, any increase should be negligible. The Commission is proposing to revise § 39.18(g) to delete the materiality threshold. Proposed changes would also require notification of each security incident or threat that compromises or could compromise the confidentiality, availability, or integrity of any automated system, or any information, services, or data, including, but not limited to, third-party information, services, or data, relied upon by the DCO in discharging its responsibilities; as well as operator errors that may impair the operation, reliability, security, or capacity of an automated system. The various proposals are intended, in part, to ensure that the Division receives notice of the full spectrum of cyberattacks and cyberthreats that a DCO experiences, including partial breaches, near misses, and cyberattacks and cyberthreats affecting third-party systems that a DCO relies upon, and that the Division receives notice when a DCO's systems or information, or external systems or information that a DCO relies upon, are, or may be, compromised by a security incident or threat, irrespective of whether the incident or threat causes, or could cause, actual impairment to the affected systems. Due to the proposed changes to § 39.18(g), the Commission anticipates some increase in the reporting burden on DCOs. Based on recent levels of reporting, the Commission estimates that these changes will require DCOs to file an additional 4 reports per year, on average. The reporting burden of § 39.18(g) is covered by § 39.19(c)(4)(xxii), and therefore is included in the burden estimate for § 39.19(c)(4). Finally, the Commission is proposing to add § 39.19(c)(4)(xxv) to centralize an existing reporting obligation under § 39.37(b)(2) in § 39.19. This does not create a new reporting obligation. The Commission is also proposing to revise §§ 39.37(c) and (d) to remove the requirement to make certain disclosures to the Commission while retaining a requirement to make such disclosures publicly. This would cause a negligible decrease in costs that would not affect the reporting burden. The reporting burden under existing § 39.37 is covered in the PRA estimate for that regulation. The aggregate burden estimate of § 39.19(c)(4) adjusted for the changes described above is as follows: Estimated number of respondents: 13. Estimated number of reports per respondent: 18 Average number of hours per report: 0.5. Estimated gross annual reporting burden: 117. e. Public Information The Commission is proposing to revise § 39.21(c)(3) and (4) to exclude DCOs that clear only fully collateralized positions from the specific disclosure requirements of these paragraphs. Similarly, the Commission is proposing to amend § 39.21(c)(7), which requires a DCO to publish on its website a current list of its clearing members, to provide that a DCO may omit any clearing member that clears only fully collateralized positions and is not an FCM from the list of clearing members that it must publish on its website. Because such DCOs are still required to report per other parts of § 39.21, such as to disclose the terms and conditions of each contract cleared, the fees it charges its members, and daily settlement prices, volumes, and open interest for each contract, the number of respondents would remain unchanged. The proposed changes do not affect the burden for the majority of DCOs that are subject to the public disclosure requirements. For fully collateralized DCOs, the proposed changes would result in a negligible decrease in the amount of time required per report. The aggregate estimated burden for § 39.21 remains as follows: Estimated number of respondents: 13. Estimated number of reports per respondent: 4. Average number of hours per report: 2. Estimated gross annual reporting burden: 104. Request for Comment. The Commission invites the public and other Federal agencies to comment on any aspect of the proposed information collection requirements discussed above. The Commission will consider public comments on this proposed collection of information in: (1) Evaluating whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have a practical use; (2) Evaluating the accuracy of the estimated burden of the proposed collection of information, including the degree to which the methodology and the assumptions that the Commission employed were valid; (3) Enhancing the quality, utility, and clarity of the information proposed to be collected; and (4) Minimizing the burden of the proposed information collection requirements on registered entities, including through the use of appropriate automated, electronic, mechanical, or other technological information collection techniques, e.g., permitting electronic submission of responses. Copies of the submission from the Commission to OMB are available from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC 20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and individuals desiring to submit comments on the proposed information collection requirements should send those comments to: • The Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Desk Officer of the Commodity Futures Trading Commission; • (202) 395-6566 (fax); or • OIRAsubmissions@omb.eop.gov (email). Please provide the Commission with a copy of submitted comments so that comments can be summarized and addressed in the final rulemaking, and please refer to the ADDRESSES section of this rulemaking for instructions on submitting comments to the Commission. OMB is required to make a decision concerning the proposed information collection requirements between 30 and 60 days after publication of this release in the Federal Register . Therefore, a comment to OMB is best assured of receiving full consideration if OMB receives it within 30 calendar days of publication of this release. Nothing in the foregoing affects the deadline enumerated above for public comment to the Commission on the proposed rules. C. Cost-Benefit Considerations 1. Introduction Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders. 36 Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (1) protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the Section 15(a) factors (collectively referred to herein as Section 15(a) factors). 36 7 U.S.C. 19(a). The Commission recognizes that the proposed amendments impose costs. The Commission has endeavored to assess the anticipated costs and benefits of the proposed amendments in quantitative terms, including PRA-related costs, where feasible. In situations where the Commission is unable to quantify the costs and benefits, the Commission identifies and considers the costs and benefits of the applicable proposed amendments in qualitative terms. The lack of data and information to estimate those costs is attributable in part to the nature of the proposed amendments. Additionally, any initial and recurring compliance costs for any particular DCO will depend on the size, existing infrastructure, level of clearing activity, practices, and cost structure of the DCO. The Commission generally requests comment on all aspects of its cost-benefit considerations, including the identification and assessment of any costs and benefits not discussed herein; data and any other information to assist or otherwise inform the Commission's ability to quantify or qualitatively describe the costs and benefits of the proposed amendments; and substantiating data, statistics, and any other information to support positions posited by commenters with respect to the Commission's discussion. The Commission welcomes comment on such costs, particularly from existing DCOs that can provide quantitative cost data based on their respective experiences. Commenters may also suggest other alternatives to the proposed approach. 2. Baseline The baseline for the Commission's consideration of the costs and benefits of this proposed rulemaking is the existing statutory and regulatory framework applicable to DCOs, including: (1) the DCO core principles set forth in Section 5b(c)(2) of the CEA; (2) the information requirements associated with commingling customer funds and positions in futures and swaps in the same account under § 39.15(b)(2); (3) the reporting obligations under § 39.18(g) related to a DCO's system safeguards; (4) daily reporting requirements under § 39.19(c)(1); (5) event-specific reporting requirements under § 39.19(c)(4); (6) public information requirements under § 39.21(c); (7) disclosure obligations for SIDCOs and subpart C DCOs under § 39.37; and (8) delegation of authority provisions under § 140.94. The Commission notes that this consideration is based on its understanding that the futures and swaps market functions internationally with: (1) transactions that involve U.S. entities occurring across different international jurisdictions; (2) some entities organized outside of the United States that are prospective Commission registrants; and (3) some entities that typically operate both within and outside the United States and that follow substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the discussion of costs and benefits below refers to the effects of the proposed regulations on all relevant futures and swaps activity, whether based on their actual occurrence in the United States or on their connection with, or effect on U.S. commerce pursuant to, Section 2(i) of the CEA. 37 37 Pursuant to Section 2(i) of the CEA, activities outside of the United States are not subject to the swap provisions of the CEA, including any rules prescribed or regulations promulgated thereunder, unless those activities either have a direct and significant connection with activities in, or effect on, commerce of the United States; or contravene any rule or regulation established to prevent evasion of a CEA provision enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376. 7 U.S.C. 2(i). 3. Proposed Amendments to § 39.13(h)(5) a. Benefits The Commission is proposing new § 39.13(h)(5)(iii), which would provide that a DCO that clears fully collateralized positions may exclude from the requirements of paragraphs (h)(5)(i) and (ii) those clearing members that clear only fully collateralized positions. These requirements would still apply in the case of clearing members that clear fully collateralized positions but also margined products. Fully collateralized positions do not expose DCOs to many of the risks that traditionally margined products do. Full collateralization prevents a DCO from being exposed to credit or default risk stemming from the inability of a clearing member or customer of a clearing member to meet a margin call or a call for additional capital. This limited exposure and full collateralization of that exposure renders certain provisions of part 39 inapplicable or unnecessary, including § 39.13(h)(5). The Commission is proposing to amend this provision in order to provide greater clarity to DCOs and future applicants for DCO registration regarding how § 39.13(h)(5) applies to DCOs that clear fully collateralized positions. b. Costs The Commission does not anticipate any costs associated with this change, as it would codify the removal of requirements that need not apply to fully collateralized positions. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in Section 15(a) of the CEA. In consideration of Section 15(a)(2)(B) of the CEA, the Commission believes that the proposal may increase operational efficiency for DCOs that clear fully collateralized positions. The proposed amendments should not impact the protection of market participants and the public, the financial integrity of markets, or sound risk management practices, as the requirements that the Commission is proposing to exclude for fully collateralized positions do not further these factors when applied to such positions. The Commission has considered the other Section 15(a) factors and believes that they are not implicated by the proposed amendments. 4. Proposed Amendments to § 39.15(b)(2) a. Benefits The Commission is proposing to amend § 39.15(b)(2) to clarify its requirements and revise the information a DCO must provide to the Commission when it seeks to commingle customer positions and associated funds from different account classes. The Commission anticipates the proposed amendments will help applicants, the Commission, and the public to focus on those issues that are most important in considering the submission, and will generally reduce compliance burdens on DCOs. Based on its experience in reviewing commingling rule submissions, the Commission believes the proposed changes to the information requirements would improve the quality of future submissions and enhance protection of market participants. The existing requirements often result in rule submissions that provide information the Commission already has and lack sufficient focus on the commingling itself, making it difficult for both the Commission and the public to properly assess the risks that commingling of customer funds may pose. The amendments would improve the quality of the submissions by providing the information needed to evaluate the risks posed to customers by commingling products that otherwise would be held in separate accounts. The proposed amendments would reduce compliance burdens for DCOs by removing existing paragraphs (b)(2)(i)(C), (E), (H), and (L), provisions that call for submission of information the Commission can otherwise access or has not needed in its review of commingling rule submissions. Replacing existing paragraph (b)(2)(i)(I) and adding the related proposed § 39.15(b)(2)(vii) would focus DCO efforts on providing the most useful information on the topic of margin methodology, and eliminates a requirement to provide margin methodology information with which the Commission is already familiar. Similarly, by maintaining only that part of paragraph (b)(2)(i)(K) concerning default management procedures unique to the products eligible for commingling, the proposed regulation would focus the discussion of the DCO's default management procedures on changes necessitated by the commingling of eligible products rather than general information on default management procedures already available to the Commission. b. Costs As discussed above, the Commission expects that the proposed amendments to § 39.15(b)(2) will decrease DCOs' costs associated with seeking commingling approval. The Commission's proposal most meaningfully reduces costs by no longer requiring a DCO to produce certain information it was previously required to provide to the Commission. This is partly offset by the addition of new information requirements. Proposed paragraph (b)(2)(vii) would require information concerning portfolio margining that is largely a subset of the margin methodology information required by existing paragraph (b)(2)(i)(I). The new requirement in this paragraph amounts to a one sentence confirmation of compliance with § 39.13(g)(4). Proposed paragraph (b)(2)(viii), intended to ensure a DCO provides all information the Commission needs to evaluate a commingling rule submission, incorporates the requirements of existing paragraph (b)(2)(iii). Further, the amendment to existing paragraph (b)(2)(i)(B) on risk characteristics, in addition to focusing the discussion on unusual characteristics, extends the analysis to include a discussion of the DCO's management of identified risk characteristics, which is information that should likely be readily available to DCOs. Likewise, to the extent proposed paragraph (b)(2)(vi) on default management procedures extends beyond the scope of existing paragraphs (b)(2)(i)(J) or (b)(2)(i)(K), DCOs should already have this information. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits of the proposed amendments to § 39.15(b)(2) in light of the specific considerations identified in Section 15(a) of the CEA. The Commission believes that the proposed amendments will have a beneficial effect on the protection of market participants and on sound risk management practices. The amendments better focus the DCO submissions on risk management considerations that are relevant to address the commingling of customer positions and associated funds as proposed, and assure that DCOs provide the Commission with the information it needs to consider the regulatory adequacy of their efforts. These activities are ultimately directed towards protecting market participants whose accounts are exposed to risks the commingled positions introduce. The Commission has considered the other Section 15(a) factors and believes that they are not implicated by the proposed amendments to § 39.15(b)(2). 5. Notification of Exceptional Events—§ 39.18(g) a. Benefits The Commission is proposing to amend § 39.18(g)(1) to expand the scope of hardware or software malfunctions for which a DCO must provide notice to the Division by proposing to delete the materiality element from the requirement that such malfunctions materially impair, or create a significant likelihood of material impairment of, the DCO's automated systems. The Commission also is proposing to amend § 39.18(g)(1) to add a new requirement that a DCO notify the Commission of any operator error that impairs, or creates a significant likelihood of impairment of, automated system operation, reliability, security, or capacity. Additionally, the Commission is proposing to add new paragraph § 39.18(g)(2) that incorporates with proposed modifications the requirement currently in paragraph (g)(1) that a DCO notify the Division of security incidents and threats. The proposed modifications to paragraph (g)(2) expand the notification requirement by: (1) eliminating the existing requirement that a DCO report only targeted threats in favor of the proposed requirement that it report all qualifying threats; (2) replacing the requirement that a DCO notify the Division of security incidents and threats that impair, or could impair, the DCO's automated systems with the requirement that a DCO notify the Division of security incidents or threats that compromise or could compromise the DCO's automated systems; and (3) adding the requirement that a DCO notify the Division of security incidents or threats that compromise or could compromise the information, services, or data, including, but not limited to, third-party information, services, or data, relied upon by the DCO in discharging its responsibilities. By removing the qualifier that events be material, the proposed amendments to § 39.18(g) will benefit DCOs by providing additional clarity and certainty regarding their obligations to notify the Division of hardware or software malfunctions, operator errors, or security incidents or threats, including security incidents or threats affecting third parties that DCOs rely upon. Additionally, removing the qualifier that only targeted threats must be reported to the Division, and also specifying that threats to third parties must be reported, may enhance the ability of the Division to inform other DCOs of emerging cyberthreats and the Commission to better assess possible emerging threats across DCOs. b. Costs The Commission anticipates that the proposed amendments to § 39.18(g) may impose additional costs on DCOs because DCOs may be required to provide additional and more frequent notifications to the Division regarding reportable events. Although it is difficult to quantify these costs because they depend almost entirely upon the occurrence of external events that are outside of the DCO's control, the Commission estimates, based on recent levels of reporting, that these changes will require DCOs to file an additional four reports per year, on average. The Commission estimates that this additional reporting will cost each DCO approximately $152 per year. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits of the proposed amendments to § 39.18(g) in light of the specific considerations identified in Section 15(a) of the CEA. To the extent that the proposed amendments to § 39.18(g) reduce, through increased awareness and vigilance or through improved information collection and dissemination, the likelihood or severity of hardware or software malfunctions, operator errors, or security incidents or threats, then the proposed amendments may have a beneficial effect on the protection of market participants, and on ensuring or enhancing sound risk management practices by DCOs. The Commission has considered the other Section 15(a) factors and believes that they are not implicated by the proposed amendments to § 39.18(g). 6. Removing the Requirement To Report Variation Margin and Cash Flow Information by Individual Customer Account in § 39.19(c)(1)(i)(B) and (C) a. Benefits The Commission is proposing to amend § 39.19(c)(1)(i)(B) and (C) to remove the requirement that DCOs report to the Commission on a daily basis variation margin and cash flows by individual customer account. After this requirement was adopted, the Commission learned that the operational and technological requirements, including the related data integrity and validation requirements, are significantly greater than originally anticipated. Indeed, the burden of these requirements would extend beyond DCOs and affect clearing members as well. In removing these requirements from § 39.19(c)(1)(i)(B) and (C), the Commission anticipates benefits to DCOs and their clearing members in that their operational, technological, and compliance burdens would be reduced. b. Costs The Commission expects that DCOs and their clearing members will not incur any costs related to the proposed amendments to § 39.19(c)(1)(i)(B) and (C), as the Commission is proposing to remove existing requirements. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits of the proposed amendments to § 39.19(c)(1)(i)(B) and (C) in light of the specific considerations identified in Section 15(a) of the CEA. The Commission believes that the proposed amendments to § 39.19(c)(1)(i)(B) and (C) would have a moderately beneficial effect by reducing technological, operational, and compliance burdens of DCOs, and of their clearing members. The Commission also believes that the proposed amendments would not have any effect on protection of market participants and the public or on sound risk management practices because, although the Commission is slightly reducing the amount of information that DCOs must report to the Commission, the Commission is confident that it will continue to receive from DCOs sufficient information to effectively and efficiently supervise and oversee DCOs and the derivatives markets. The Commission has considered the other Section 15(a) factors and believes that they are not implicated by the proposed amendments to § 39.19(c)(1)(i)(B) and (C). 7. Codifying the Existing Reporting Fields for the Daily Reporting Requirements in New Appendix C to Part 39 a. Benefits The Commission is proposing to add a new appendix C to part 39 that would codify the existing reporting fields for the daily reporting requirements in § 39.19(c)(1). Until now, the instructions, reporting fields, and technical specifications for daily reporting have been contained in the Reporting Guidebook, which the Division provides to DCOs to facilitate reporting pursuant to § 39.19(c)(1). Although this proposal will not result in material benefit to currently-registered DCOs, the Commission believes that the proposal may benefit prospective DCO applicants, as well as members of the industry and general public, by providing a detailed list of DCO daily reporting obligations, in contrast to the more general requirements in § 39.19(c)(1). b. Costs The Commission does not expect that DCOs will incur increased costs related to the proposal to codify the reporting fields from the Reporting Guidebook as an appendix to part 39 DCOs have been relying on the Reporting Guidebook for nearly a decade to satisfy their daily reporting obligations under § 39.19(c)(1). Codifying these requirements into a regulatory appendix does not alter the existing burden that DCOs have in complying with § 39.19(c)(1). c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits of the proposal to codify the Reporting Guidebook as an appendix to part 39 in light of the specific considerations identified in Section 15(a) of the CEA. The Commission has considered the Section 15(a) factors and believes that they are not implicated by the proposal to add a new appendix to part 39 that codifies the reporting fields set forth in the existing Reporting Guidebook. 8. Additional Proposed Reporting Fields for the Daily Reporting Requirements—§ 39.19(c)(1) a. Benefits The Commission is proposing to add several new daily reporting fields that would be incorporated into new appendix C to part 39. The Commission is proposing to require that DCOs that clear interest rate swaps include in their daily reports the delta ladder, gamma ladder, vega ladder, zero rate curves, and yield curves that those DCOs use in connection with managing risks associated with interest rate swaps positions. The Commission also is proposing to require that DCOs include in their daily reports timing information about variation margin calls and payments. Furthermore, the Commission is proposing to require that DCOs that clear interest rate swaps, forward rate agreements, or inflation index swaps include in their daily reports the actual trade date for each position along with an event description. Lastly, the Commission is proposing to require DCOs to include in their daily reports information that reflects that the daily report is complete. This information would allow the Commission to conduct more effective oversight of DCOs, particularly in connection with identifying positions that create the most risk to the DCO and its clearing members, thereby enhancing the protections afforded to the markets generally. Furthermore, the Commission believes that timing information regarding variation margin calls and payments is an important component of understanding potential liquidity issues at DCOs, especially in circumstances where liquidity issues involving a single clearing member may have the potential to affect multiple DCOs. b. Costs The Commission expects that the proposal to require DCOs to include in their daily reports timing information about variation margin calls and payments could impose a significant burden on DCOs, especially to the extent that DCOs employ systems that do not automatically affix a timestamp to these processes, or that cannot be modified to do so at a reasonable cost. The Commission requests comment on the burdens associated with this aspect of the proposal, as well as any burdens associated with the potential alternative of, in lieu of reporting the exact time of variation margin calls and payments, reporting whether calls and payments were made within a specified timeframe, such as beginning, middle, or end of day. The Commission believes that the costs associated with the remaining aspects of the proposal to add several new daily reporting fields that would be incorporated into new appendix C are negligible. The Commission believes that DCOs already possess this information in read-ready format and use it in the ordinary course of business, and the proposal only requires that they transmit it to the Commission in a standardized format. Despite these beliefs and out of an abundance of caution, the Commission is estimating the cost of developing and producing the new daily reporting fields that would be incorporated into new appendix C. The Commission estimates that the capital costs associated with the proposal are negligible. The Commission also estimates that any ongoing costs are negligible because the Commission understands that the preparation and submission of the daily reports required pursuant to § 39.19(c)(1)(i) is largely automated. However, to the extent that a DCO does not currently use any of the information that would be required under the proposed new fields, or if that information is not accessible on an automated basis, then a DCO may incur start-up costs associated with reporting information pursuant to the proposed new fields, specifically including costs for coding, as well as testing, quality assurance, and compliance review. To estimate these start-up costs, the Commission relied upon internal subject matter experts in its Divisions of Data and Clearing and Risk to estimate the amount of time and type of DCO personnel necessary to complete the coding, testing, quality assurance, and compliance review. The Commission then used data from the Department of Labor's Bureau of Labor Statistics from May 2021 to estimate the total costs of this work. 38 Using this method, the Commission estimates the total start-up costs to be approximately $109,574.43 per DCO. 39 38 According to the May 2021 National Occupational Employment and Wage Estimates Report produced by the U.S. Bureau of Labor Statistics, available at https://www.bls.gov/oes/current/oes_nat.htm, the mean salary for a computer systems analyst in management companies and enterprises is $103,860. This number is divided by 1,800 work hours in a year to account for sick leave and vacations and multiplied by 2.5 to account for retirement, health, and other benefits, as well as for office space, computer equipment support, and human resources support, all of which yields an hourly rate of $144.25. Similarly, a computer programmer has a mean annual salary of $102,430, yielding an hourly rate of $142.26; a software quality assurance analyst and tester has a mean annual salary of $99,460, yielding an hourly rate of $138.14; and a compliance attorney has a mean annual salary of $198,900, yielding an hourly rate of $276.25. 39 The estimate of total start-up costs consists of the following: $14,101.10 for the delta ladder, gamma ladder, vega ladder, and the zero rate curves, based on 20 hours of systems analyst time, 40 hours of programmer time, and 40 hours of tester time; $7,248.61 for adding interest rate, forward rates, and end of day position fields, based on 8 hours of systems analyst time, 4 hours of programmer time, and 40 hours of tester time; $39,907.22 for the payment file, based on 120 hours of systems analyst time, 120 hours of programmer time, and 40 hours of tester time; $14,140.83 for the manifest file, based on 40 hours of systems analyst time, 40 hours of programmer time, and 20 hours of tester time; and $22,676.67 for adding the back testing fields, based on 40 hours of systems analyst time, 80 hours of programmer time, and 40 hours of tester time. The estimate of total start-up costs also includes $11,500.00 for compliance attorney review. A DCO may choose to employ a manifest file or alternatively a file count to the account and end of day position files. If a DCO elects the latter, the estimate of total start-up costs is reduced to $106,120.38, because while adding a manifest file is estimated to cost $14,140.83, adding file count information is estimated to cost $10,686.78 (based on 20 hours of systems analyst time, 16 hours of programmer time, and 40 hours of tester time). Additionally, the Commission estimates that requiring DCOs to report pricing information for contracts without open interest, which the Commission is considering, would impose start-up costs of $34,137.22 on each DCO, based on 80 hours of systems analyst time, 120 hours of programmer time, and 40 hours of tester time. The $34,137.22 estimate is not included in the estimated total start-up costs of $109,574.43 per DCO because, although the Commission is considering this requirement and is requesting comment, it has not otherwise proposed this requirement. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits of the proposal to add these daily reporting fields to new appendix C to part 39 in light of the specific considerations identified in Section 15(a) of the CEA. The Commission believes that, because of its potential to provide the information required to better understand DCO liquidity risk from clearing members, the proposal that DCOs include in their daily reports timing information about variation margin calls and payments is likely to improve protection of market participants and the public, enhance the financial integrity of the futures markets, and ultimately result in improved DCO risk management practices. The proposals to require DCOs to include in their daily reports delta ladder, gamma ladder, vega ladder, zero rate curve, and yield curve information for interest rates swaps, as well as trade dates for interest rate swaps, forward rate agreements, and inflation index swaps, are expected to provide information necessary for the Commission to improve its supervision and oversight of DCOs and the derivatives markets, which in turn is expected to result in improved protection of market participants and the public, improved financial integrity of the futures markets, and potentially improved DCO risk management practices. The Commission has considered the other Section 15(a) factors and believes that they are not implicated by this proposal. 9. Daily Reporting of Margin Model Back Testing—§ 39.19(c)(1)(i) a. Benefits The Commission is proposing to add to § 39.19(c)(1)(i) a requirement that DCOs include in their daily reports the results of the margin model back testing that DCOs are required to perform daily pursuant to § 39.13(g)(7)(i). Margin model back testing results are a crucial element of an effective risk surveillance program; obtaining this information would allow the Commission to conduct more effective oversight of DCOs, thereby enhancing the protections afforded to the markets generally. b. Costs The Commission expects that the proposal to require DCOs to report back testing results daily will impose only a negligible cost on DCOs because DCOs already possess this information, and they are being required only to transmit it to the Commission in a standardized format. However, to the extent that a DCO does not maintain in the required standardized format the information that would be required under the proposal, a DCO may incur initial costs related to modifying its systems to convert the information to the standardized format, specifically including costs for coding, as well as testing, quality assurance, and compliance review. An estimate of these start-up costs is included in the discussion of the estimated costs associated with reporting information pursuant to the proposed new fields in proposed appendix C. The Commission notes, however, that some DCOs are already voluntarily providing back testing information to the Commission on a weekly or monthly basis. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits of the proposal to require DCOs to report back testing results daily in light of the specific considerations identified in Section 15(a) of the CEA. The proposal to require DCOs to report back testing results daily is expected to improve the Commission's supervision of DCO risk management and, therefore, is expected to yield enhanced protection of market participants and the public, improved financial integrity of the futures markets, and also potentially improve DCO risk management practices. The Commission has considered the other Section 15(a) factors and believes that they are not implicated by this proposal. 10. Fully Collateralized Positions—§ 39.19(c)(1)(ii) a. Benefits The Commission is proposing to amend § 39.19(c)(1)(ii) to clarify that, as with § 39.19(c)(1)(i), this regulation does not apply to fully collateralized positions. Because § 39.19(c)(1)(ii) merely expands on § 39.19(c)(1)(i) and has no independent force or effect, this does not represent a substantive change but merely provides greater clarity and certainty. Clarifying the applicability of § 39.19(c)(1)(ii) provides greater certainty to DCOs, their clearing members, and their customers, and should prevent them from having to request guidance on this matter from the Commission or the Division in the future. Further, the Commission believes that it may increase operational efficiency for DCOs that clear fully collateralized positions. b. Costs The Commission does not anticipate any non-negligible change in costs resulting from this proposal. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in Section 15(a) of the CEA. In consideration of Section 15(a)(2)(B) of the CEA, the Commission believes that the proposal to clarify § 39.19(c)(1)(ii) may increase operational efficiency for DCOs that clear fully collateralized positions. The Commission has considered the other Section 15(a) factors and believes that they are not implicated by the proposed amendments. 11. Reporting Change of Control of the DCO—§ 39.19(c)(4)(ix)(A)(1) a. Benefits Regulation 39.19(c)(4)(ix)(A)(1) requires a DCO to report any change in the ownership or corporate or organizational structure of the DCO or its parent(s) that would result in at least a 10 percent change of ownership of the DCO. The Commission is proposing to amend § 39.19(c)(4)(ix)(A)(1) to require a DCO to report any change in the ownership or corporate or organizational structure of the DCO or its parent(s) that would result in a change to the entity or person holding a controlling interest in the DCO, whether through an increase in direct ownership or voting interest in the DCO or in a direct or indirect corporate parent entity of the DCO. This proposal would ensure that the Commission has accurate knowledge of the individuals or entities that control a DCO and its activities regardless of the corporate structures of the equity holders of the DCO. b. Costs The Commission expects the costs related to the proposed amendments to § 39.19(c)(4)(ix)(A)(1) to be negligible. Specifically, the Commission expects a negligible cost burden with respect to the proposed changes, in part because the changes of control contemplated by the proposal occur infrequently. In addition, DCOs have typically notified the Commission of such changes of control even if not technically required by the current regulations. The administrative burden of notifying the Commission—preparing a notification, attaching relevant but pre-existing supporting documents such as the revised organizational chart, and submitting to the Commission—is negligible. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits of the proposed amendments to § 39.19(c)(4)(ix)(A)(1) in light of the specific considerations identified in Section 15(a) of the CEA. The Commission believes that the proposed amendments may have a moderately beneficial effect on protection of market participants and the public, as well as on the financial integrity of the futures markets, because the proposed amendments would provide the Commission with a better understanding of the organizational structure of the DCO and its position in the broader markets. The Commission has considered the other Section 15(a) factors and believes that they are not implicated by the proposed amendments to § 39.19(c)(4)(ix)(A)(1). 11. Reporting Issues With Credit Facility Funding Arrangements, Liquidity Funding Arrangements, Custodian Banks, and Settlement Banks—§ 39.19(c)(4)(xv) a. Benefits The Commission is proposing to amend § 39.19(c)(4)(xv), which currently requires reporting of issues or concerns with regard to settlement banks only, to require that a DCO report to the Commission within one business day after it becomes aware of any material issues or concerns regarding the performance, stability, liquidity, or financial resources of any credit facility funding arrangement, liquidity funding arrangement, custodian bank, or settlement bank used by the DCO or approved for use by the DCO's clearing members. Requiring the reporting of this information will promote the Commission's awareness of material issues or concerns that may impact a DCO's operations and its compliance with its regulatory obligations. b. Costs The Commission expects that the costs related to the proposed amendments to § 39.19(c)(4)(xv) will be negligible. Specifically, because a DCO is only required to report these issues when it becomes aware of them, and given that these events are not very common, any cost increase is estimated to be negligible. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits of the proposed amendments to § 39.19(c)(4)(xv) in light of the specific considerations identified in Section 15(a) of the CEA. The Commission believe [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2022-26849. Public record. Not legal advice.