# Reporting and Information Requirements for Derivatives Clearing Organizations

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2023-16591

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** August 8, 2023
- **Citation:** 88 FR 53664

## 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:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (Commission) is amending certain reporting and information regulations applicable to derivatives clearing organizations (DCOs). These amendments, among other things, update information requirements associated with commingling customer funds and positions in futures and swaps in the same account, revise certain daily and event-specific reporting requirements in the regulations, and codify in an appendix the fields that a DCO is required to provide on a daily basis under the regulations. In addition, the Commission is adopting amendments to certain delegation provisions in its regulations.

DATES:

Effective date:
The effective date for this final rule is September 7, 2023.

Compliance date:
DCOs must comply with the amendments to § 39.19 and appendix C by February 10, 2025; DCOs must comply with the amendments to all other rules by September 7, 2023.

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;
August A. Imholtz III, Special Counsel, (202) 418-5140,
aimholtz@cftc.gov;
or Gavin Young, Special Counsel, (202) 418-5976,
gyoung@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, 77 West Jackson Boulevard, Suite 800, Chicago, Illinois 60604.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Amendments to § 39.13(h)(5)

III. Amendments to § 39.15(b)(2)

IV. Amendments to § 39.18

V. 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 Reporting Fields for the Daily Reporting Requirements—§ 39.19(c)(1)

D. Non-Substantive and Technical Edits to Appendix C to Part 39

E. Individual Customer Account Identification Requirements—§ 39.19(c)(1)(i)(A) and (D)

F. Daily Reporting of Margin Model Backtesting—§ 39.19(c)(1)(i)

G. Fully Collateralized Positions—§ 39.19(c)(1)(ii)

H. Voluntary Reporting—§ 39.19(c)(1)(iii)

I. Reporting Change of Control of the DCO—§ 39.19(c)(4)(ix)(A)(
1
)

J. Reporting Changes to Credit Facility Funding and Liquidity Funding Arrangements—§ 39.19(c)(4)(xii) and (xiii)

K. Reporting Issues With Credit Facility Funding Arrangements, Liquidity Funding Arrangements, and Custodian Banks—§ 39.19(c)(4)(xv)

L. Reporting of Updated Responses to the Disclosure Framework for Financial Market Infrastructures—§ 39.19(c)(4)(xxv)

VI. Amendments to § 39.21(c)

VII. Amendments to § 39.37(c) and (d)

VIII. 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

In January 2020, the Commission adopted amendments to its part 39 regulations in order to, among other things, update DCO reporting requirements.
1

The Commission subsequently became aware of issues with the amended regulations that would benefit from further change or clarification. Thus, in November 2022, the Commission proposed to amend certain reporting and information regulations applicable to DCOs to address those issues.
2

1
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.

2
Reporting and Information Requirements for Derivatives Clearing Organizations, 87 FR 76698 (Dec. 15, 2022), available at
https://www.federalregister.gov/documents/2022/12/15/2022-26849/reporting-and-information-requirements-for-derivatives-clearing-organizations.

The Commission received a total of 11 substantive comment letters in response to the proposal.
3

After considering the comments, the Commission is largely adopting the rules as proposed, although there are some proposed changes that the Commission has determined to either revise or decline to adopt.

3
The Commission received comment letters submitted by the following: Better Markets; Chris Barnard; CME Group, Inc. (CME); Eurex Clearing AG (Eurex); Futures Industry Association (FIA); The Global Association of Central Counterparties (CCP12); Google Cloud (Google); Intercontinental Exchange, Inc. (ICE); Nodal Clear, LLC (Nodal); The Options Clearing Corporation (OCC); and World Federation of Exchanges (WFE). All comments referred to herein are available on the Commission's website, at
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7343.

In the discussion below, the Commission highlights topics of particular interest to commenters and discusses comment letters that are representative of the views expressed on those topics. The discussion does not explicitly respond to every comment submitted; rather, it addresses the most significant issues raised by the proposed rulemaking and analyzes those issues in the context of specific comments.

II. Amendments to § 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 amendments to part 39 to address fully collateralized positions,
4

the Commission proposed 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

The requirements would still apply to clearing members that clear fully collateralized positions but also clear margined products.
6

The Commission did not receive any comments on the proposed changes to § 39.13(h)(5), and is therefore adopting the changes as proposed.

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 also proposed 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. 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. The Commission proposed several amendments to § 39.15(b)(2) to better reflect the information that the Commission needs to evaluate such a request.

OCC, Eurex, ICE, and Better Markets supported the proposal. OCC stated that the changes appear reasonably calibrated to achieve the Commission's policy objectives while providing useful guidance to DCOs on the required contents of a request. Eurex added that the proposed changes appropriately streamline the procedures and will help focus both DCOs seeking such relief, and the Commission in its review of such request for relief, on the information most relevant to a DCO's request.

Furthermore, recognizing that futures and swaps are typically commingled to allow for portfolio margining, the Commission proposed to add new § 39.15(b)(2)(vii) to require that a DCO 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.” Although ICE generally supported the proposed changes to § 39.15(b)(2), ICE stated that the express confirmation under proposed new § 39.15(b)(2)(vii) is unnecessary, as § 40.5 already requires that a DCO analyze its proposal for compliance with the Commodity Exchange Act (CEA) and Commission regulations. The Commission notes, however, that because the DCO's submission would address commingling but not necessarily portfolio margining, the DCO's analysis may not take § 39.13(g)(4) into account. Thus, the Commission does not want approval of the submission to be misinterpreted as approval of the DCO's portfolio margining as well. Because a submission under § 40.5 is deemed approved by the Commission without any written form of approval, requiring the DCO to provide the express confirmation in § 39.15(b)(2)(vii) is meant to address that.

In response to the Commission's request for 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, ICE does not believe that the Commission should require disclosure of additional information. ICE stated that the information already required, as proposed to be modified, will provide market participants with sufficient information to evaluate a commingling proposal.

In general, Better Markets believes the proposal would strengthen the existing requirements by requiring a DCO to provide not only an analysis of the risk characteristics of the products but also an analysis of any risk characteristics of products to be commingled that are
unusual in relation
to the other products the DCO clears, as well as how it plans to manage any identified risks. Better Markets stated that it supports this aspect of the proposal because adding the phrase “unusual in relation to” in § 39.15(b)(2)(ii) will allow the Commission and the public to better understand any increased risk posed to the DCO or its customers by the commingling of products that otherwise would be held in separate accounts. Better Markets further stated that this additional requirement will better enable the Commission to understand the DCO's ability to manage those risks. In response to a request for comment as to whether there is a better way to articulate this concept, Better Markets argued that the Commission should go a step further and specify that the analysis should cover products with margining, liquidity, default management, pricing, and volatility characteristics that differ from those currently cleared by the DCO. Better Markets believes this discussion is critical in the ever-changing derivatives markets, where new derivatives products are constantly being introduced. Better Markets urged the Commission to be forward-looking in its approach to receiving as much information as possible from a DCO's “unusual in relation to” analysis to determine whether to allow a DCO to commingle products in a single customer account. The Commission is persuaded that this provision should be more specific, and is therefore adding to § 39.15(b)(2)(ii) the requirement that a DCO's analysis address any characteristics that are unusual in relation to the other products cleared by the DCO, “such as margining, liquidity, default management, pricing, or other risk characteristics.” The Commission believes that this information would better assist the Commission in evaluating a DCO's request to commingle customer positions and its ability to manage any identified risks. The Commission is otherwise adopting the amendments to § 39.15(b)(2) as proposed, without any changes.
7

7
For a description of the proposed amendments to § 39.15(b)(2), see Reporting and Information Requirements for Derivatives Clearing Organizations (Dec. 15, 2022), supra note 2, at 76699-76700.

IV. 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 proposed to amend § 39.18(g)(1) to eliminate the materiality threshold, requiring DCOs to report all such events regardless of their magnitude. Better Markets supported the proposal to remove the materiality threshold, stating that both the Commission and DCOs would benefit from expanded reporting of such incidents. CME, OCC, ICE, Eurex, Nodal, CCP12, Google, and WFE opposed the proposal.

CCP12, CME, Eurex, ICE, Nodal, OCC, and WFE stated that the removal of the materiality threshold would lead to a significant increase in the number of reportable events, including events which have little or no impact on a DCO's operations or on market participants, or which are mitigated well before any impact, and thus of little or no value as the subject of a required notification. CCP12, CME, Eurex, Google, ICE, Nodal, OCC, and WFE commented that such an increase in reportable incidents would burden both DCOs and the Commission, and would

divert attention and resources away from incidents that deserve greater focus and planning, with little corresponding benefit to the Commission, the protection of market participants, or the risk management practices of DCOs. CCP12, CME, Google, and OCC further asserted that the proposal is inconsistent with notification regimes in analogous contexts, including similar Commission rules and reporting obligations to other agencies and authorities.

CCP12, CME, Eurex, ICE, Nodal, and OCC further stated that the Commission underestimated the increase in reporting obligations as a result of the proposal to eliminate the materiality threshold; CCP12, CME, and OCC similarly stated that the Commission underestimated the costs of such notifications. Such underestimates would, according to commenters, distort the Commission's cost-benefit considerations. The Commission received additional comments in opposition to the proposed removal of the materiality threshold, including statements regarding the costs and impacts on third-party contracts, the value of allowing DCOs to use their expertise to determine which events are material, and a request to alternatively allow for quarterly submission of reports for incidents deemed not material.

After considering the comments received, the Commission recognizes the concerns raised therein and declines at this time to adopt the proposal to remove the materiality threshold for the reporting of exceptional events under § 39.18(g). Better Markets supported the removal of the materiality threshold, stating that events might be material even when they do not have any effect on measurements often used to determine materiality, and that both the Commission and DCOs would benefit from clear reporting standards which would promote consistency in reporting across DCOs. However, given the rationale of comments opposed to the removal of the materiality threshold as described above, including arguments regarding increased cost, lack of informational benefit, and the volume of reports which would be required if the threshold were removed, and the lack of opportunity to solicit comment on potentially less costly or voluminous alternatives suggested by commenters, the Commission declines to move forward with the proposal at this time. The Commission understands that removing the materiality threshold altogether could result in a significant increase in the number of reportable events, including events which have little or no impact on a DCO's operations, or which are mitigated well before any impact, and thus could be of little or no value as the subject of a required notification. The Commission will continue to evaluate the effectiveness of the existing reporting standard in generating uniform and timely notification regarding events where notification would be of value to the Commission and will provide additional guidance, or further modify the standard, as appropriate. Better Markets also commented that the requirement in § 39.18(g) that notice of exceptional events be given “promptly” is vague and should be amended to a more specific timeframe in order to avoid undue delay in reporting. The Commission notes, however, that it did not propose to amend this requirement, as Commission staff has not had any issues with the timing of the notices that are made.

The Commission also proposed to amend § 39.18(g)(1) by adding “operator error” to the list of events that would require prompt notification to the Division. Better Markets expressed support for the addition of “operator error” to the list of potentially reportable events, and WFE, CME, OCC, and Nodal expressed opposition. Better Markets stated that “operator error” is appropriately included as an additional subject of reporting because such errors may impact or potentially impact the operation, reliability, security, or capacity of a DCO's automated systems. WFE, CME, OCC, CCP12, and Nodal expressed concern about the potential breadth of the term “operator error,” which is not defined in the regulation and which might be read to include de minimis, routine errors which would require reporting of events that have little or no impact on clearing and settlement functions and for which effective procedures are already in place to mitigate any potential impacts. OCC further stated that “operator error” might be read to include actions of clearing members or their agents and employees because they are responsible for providing information via applications, and OCC suggested adding certainty to the term “operator error” by providing examples.

After considering the comments received, the Commission recognizes the concerns raised therein and declines to adopt the proposal to include “operator error” to the list of events that would require prompt notification to the Division under § 39.18(g)(1). The Commission acknowledges that, as described by Better Markets, operator errors may impact a DCO's operations in the same way as other events described in § 39.18(g)(1). However, the Commission believes that such operator errors are already required to be reported under § 39.18(g)(1) as a “security incident,” which, as defined by § 39.18(a), is a cybersecurity or physical security event that actually jeopardizes or has a significant likelihood of jeopardizing automated system operation, reliability, security, or capacity, or the availability, confidentiality or integrity of data. The proposed addition of “operator error” was intended to specify this obligation more clearly. In light of comments which indicate that the proposal would result in confusion, particularly as to scope, the Commission will not adopt the proposal but will consider providing guidance, or further modifying § 39.18(g)(1), as appropriate.

The Commission further proposed to redesignate existing paragraph (g)(2) of § 39.18 as new paragraph (g)(3) (without any further revisions), and to move from existing paragraph (g)(1) to paragraph (g)(2) the requirement to report security incidents or threats (and not just “targeted” threats). Thus, as proposed, new § 39.18(g)(2) would 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.

Among comments received regarding this proposed amendment, OCC, Google, and ICE expressed opposition, and Better Markets commented in favor. Better Markets stated that non-targeted cyber attacks can be just as destructive as targeted attacks, and thus the reporting of non-targeted attacks may enhance the ability of the CFTC to assess emerging threats and alert DCOs. OCC, Google, and ICE stated that the inclusion of the language “could compromise” is overly broad and ambiguous and would dramatically increase the reach and burdens of the rule without providing regulatory benefit. OCC recommended removing “could compromise” from the proposal and stated that, as proposed, § 39.18(g)(2) would increase a DCO's costs of obtaining third-party services and may lead to termination of existing third-party relationships because of the additional costs and potential liability facing third parties as a result of the proposal. Google also expressed opposition to the removal of the “targeted” qualifier for threats, stating that it would result in overbroad and inefficient reporting. Google

additionally recommended that paragraph (g)(2) also incorporate a probabilistic reporting trigger by, for example, replacing “could” with “reasonably likely to” in order to exclude speculative incidents. After considering the comments received, and in light of the broad scope of attacks which comments indicate would be required to be reported under the proposal, the Commission recognizes the concerns raised therein and declines to adopt new § 39.18(g)(2) as proposed but will consider providing guidance, or further modifying § 39.18(g), as appropriate.

Finally, in connection with the proposed amendments to § 39.18(g), the Commission proposed to amend § 39.18(a) to define “hardware or software malfunction” and “automated system.” WFE, CME, OCC, and CCP12 expressed opposition to the proposed definition of “automated system,” and OCC, CCP12, Eurex and Nodal expressed opposition to the proposed definition of “hardware or software malfunction.” WFE, CME, OCC, and CCP12 stated that the definition of “automated system” is broad and overinclusive, and that most of a DCO's ancillary support systems would fall within the definition, resulting in a significant increase in reporting obligations under § 39.18(g) that are not related to a DCO's core clearing and settlement functions. OCC, CCP12, Eurex, and Nodal expressed opposition to the definition of “hardware or software malfunction,” stating that it is overly broad and would result in a significant increase in reach and burden of reporting requirements with little corresponding regulatory value to the Commission. OCC recommended that both definitions be refined to avoid reporting of incidents that pose no significant risk to a DCO's core functions and which do not impact or narrowly impact market participants. OCC further recommended limiting the definitions to systems or events that impact a DCO's market activities that are subject to the Commission's jurisdiction. After considering the comments received, the Commission recognizes the concerns raised therein and declines to adopt the proposed definitions for “hardware or software malfunction” and “automated system” but will consider providing guidance defining these terms, or further modifying § 39.18(g), as appropriate.

Based on the concerns raised in the comments received, the Commission is not adopting any of the proposed changes to § 39.18(g). Although the Commission continues to believe that the considerations that motivated the initial proposal are valid, it also recognizes the concerns and alternatives raised by commenters as requiring additional analysis that precludes adopting the proposal at this time. To that end, the Commission may choose to instead provide guidance to address these considerations, or to propose new modifications to § 39.18(g) reflecting both the motivations for the proposed rule and the concerns raised by commenters.

V. Amendments to § 39.19(c)

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 (VM), cash flow, and position information for each clearing member, by house origin, by each customer origin, and by individual customer account. The Commission proposed to amend § 39.19(c)(1)(i)(B) and (C) to remove the requirement that a DCO report daily VM and cash flows by individual customer account.
8

8
DCOs currently are not reporting VM 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); CFTC Letter No. 22-20 (Dec. 19, 2022). The amendments to § 39.19(c)(1)(i)(B) and (C) eliminate the requirement for which additional time was provided in the staff letter.

FIA, CCP12, Eurex, OCC, and ICE supported the proposal; no commenters opposed it. CCP12 and ICE stated that many DCOs do not possess VM and cash flow information at the customer level. OCC confirmed that it does not collect VM and cash flow information at the individual customer account level in the ordinary course of business. FIA stated that DCOs would need to develop and implement new systems, processes, and controls, at significant cost, to accurately report customer level VM and cash flow information. FIA stated that because clearing members that are futures commission merchants (FCMs) currently do not provide DCOs with daily customer level VM and cash flow information, FCM clearing members would incur substantial upfront and ongoing costs to provide this information to DCOs. OCC stated that collecting this information would impose significant costs on OCC and its clearing members. FIA stated that daily reporting of customer VM and cash flow information would not be of meaningful benefit to the Commission, DCOs, clearing members or market participants, particularly when weighed against the associated costs. OCC believes that because it engages in VM netting at the customer origin level, VM and cash flow information at the individual customer account level would not necessarily reflect OCC's actual exposure to its clearing members.

In response to the Commission's request for comment on whether there are certain products or market segments where it may be appropriate to retain customer-level reporting requirements, FIA and ICE stated that there is no basis to differentiate between product categories, with FIA emphasizing the cost to DCOs and FCMs of developing new reporting processes to report VM and cash flow information by individual customer account, and the limited marginal benefit of reporting such information. Because many DCOs currently do not receive VM and cash flow information at the customer level, and a requirement to collect this information would impose significant costs on DCOs, the Commission is removing this requirement by adopting the amendments to § 39.19(c)(1)(i)(B) and (C) as proposed.

B. Codifying the Existing Reporting Fields for the Daily Reporting Requirements in New Appendix C to Part 39

The Commission proposed 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).
9

The Commission proposed 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.
10

The Commission did not propose 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.
11

9
Commodity Futures Trading Commission Guidebook for Part 39 Daily Reports, Version 1.0.1, Dec. 10, 2021 (Reporting Guidebook).

10
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.

11
The Division will issue a new version of the Reporting Guidebook that will contain only the non-substantive technical and procedural aspects to facilitate daily reporting by DCOs.

Eurex, ICE, CCP12, and OCC supported the proposal to codify the existing daily reporting fields in new appendix C to part 39. Better Markets opposed the proposal, arguing that codifying the Reporting Guidebook will make it more difficult for the Commission to quickly update the reporting fields in response to new products or other financial innovations. In response to Better Markets, the Commission notes that it has drawn on its experience of more than a decade since § 39.19(c)(1) was first adopted to make certain it will receive the data it intended to be provided under this provision. However, in the unlikely event that the Commission identifies additional data it needs, the Commission could, if necessary, request from a DCO “information related to its business as a clearing organization, including information relating to trade and clearing details” pursuant to § 39.19(c)(5)(i). The Commission is therefore adopting the proposal to add new appendix C to part 39 of the Commission's regulations, to codify the existing reporting fields in the Reporting Guidebook, which includes both required and optional fields.
12

12
The Commission is adding to § 39.19(c)(1)(i) a reference to appendix C to specify that daily reports are required to be submitted in accordance with the data fields set forth in the appendix.

C. Additional Reporting Fields for the Daily Reporting Requirements—§ 39.19(c)(1)

The Commission proposed 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). Eurex generally supported the proposal, while CME opposed it, stating that the Commission severely underestimated the time and costs associated with adding the proposed new fields, and that the costs to DCOs substantially outweigh the benefits that additional reporting provides to the Commission. The new fields and comments received are discussed in greater detail below.

1. Risk Metrics

The Commission proposed to include in appendix C a series of new fields applicable only to interest rate swaps, including the delta ladder, gamma ladder, vega ladder, zero rate curves, and yield curves that a DCO uses in connection with managing risks associated with interest rate swap positions. The Commission did not receive any comments on this proposal and therefore is adopting these fields as proposed. However, the Commission is amending the title of this section of appendix C to change it from “Greek Ladder Reporting” to “Risk Metric Ladder Reporting”, which better reflects the contents of the section, since rate and yield curves technically are not “Greeks,” and to account for the possible addition of other non-Greek risk metrics in the future.

2. Timing of Variation Margin Calls and Payments

The Commission proposed to require a DCO to report timing information about VM calls and payments, including the time and amount of each VM call to each clearing member, the time and amount that VM is received from each clearing member, and the time and amount that VM is paid to each clearing member. There were no comments in support of the proposal.

CME, ICE, and OCC opposed the proposal, arguing that it would impose costs on DCOs and settlement banks because they would need to build systems for daily automated reporting of payment flow timestamps. ICE and OCC stated that the manner in which DCOs make and collect a margin call is unique to each DCO based on its own processes and, as a result, the information that would be reported under these proposed fields only would reflect individual DCOs' practices, with the information being too bespoke to be useful for surveillance. OCC further stated that clearing member payments to or from OCC at settlement times are made on a net basis, taking into account multiple categories of pay or collect obligations, in addition to the mark-to-market amounts. CME stated that not all settlement banks communicate with DCOs in automated and digestible file formats that can be used for daily reporting. Echoing comments by CME, CCP12 recommended that the Commission consider whether this proposal would require settlement banks to develop and deploy automated systems to communicate timestamps to DCOs, which could make compliance with this requirement unnecessarily complex. CME also stated that the information would not be useful for the Commission in real-time monitoring of DCO liquidity issues because it would be reported one day later, and because the timing of payments can vary from day to day for reasons unrelated to liquidity issues or other risks to DCOs or their clearing members. ICE stated that specific timing information is generally irrelevant, so long as the amounts are paid before the applicable DCO's deadline, and that the exact timing of payments is not indicative of the DCO's liquidity position or its ability to manage liquidity risks.

As an alternative to the proposal, CME recommended that the Commission require DCOs to report when clearing members are sufficiently late making VM payments that it results in an impactful delay to the completion of the settlement cycle. ICE stated that because the proposal does not account for different approaches to the payment and netting of VM, the proposed fields would need to be revised to reflect the variety of ways that DCOs deal with VM payments. CCP12 commented that reporting VM calls and payment as of the beginning, middle, and end of the day would avoid confusion that may accompany reporting of individual cash flows, and would simplify DCOs' reporting obligations.

The Commission understands that compliance with this requirement would be unnecessarily complex, given that the manner in which DCOs make and collect a margin call is unique to each DCO based on its own processes. The Commission is therefore persuaded by the comments that the timing information would not be particularly useful to it and therefore has determined not to require DCOs to report this information at this time.

3. Trade Date

The Commission proposed 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. CCP12 supported the proposal, but requested that the Commission clarify whether the term “actual trade date” refers to the economically agreed date or the execution date. CME opposed the proposal, stating that the proposed requirement is duplicative of the recent amendments to part 45 of the Commission's regulations, under which DCOs already provide this information to the Commission. CME also stated that numerous dates for these products exist in the over-the-counter registers, and requested clarification as to which date should be reported. The Commission is adopting the proposal, albeit with one change. In response to commenters' requests for clarification, the Commission is modifying the description of “trade date” to read, the “[d]ate a transaction was originally executed, resulting in the generation of

a new USI [unique swap identifier]. For clearing swaps, the date when the DCO accepts the original swap.” In response to CME's comment regarding part 45 reporting, the Commission acknowledges some overlap between the information DCOs report pursuant to part 45 and the information reported pursuant to § 39.19(c)(1), but notes that the two data streams have different albeit complimentary regulatory and supervisory uses within the Commission,
13

and are reported using different underlying technical specifications, sometimes with nuanced differences between substantive or technical definitions of individual data points, which then can affect whether and how the data changes in response to events, such as a compression exercise for swaps.

13
The information reported under § 39.19(c)(1) is intended to ensure that the Division is informed regarding both the risks that are present at each DCO as well as the DCO's management of those risks, which pursuant to § 39.19(c)(1)(ii) includes information about the risks associated the futures, options, swaps, and securities positions cleared at the DCO, in contrast with the part 45 data, which includes highly granular trade data related to both cleared and uncleared swaps.

4. File Completeness

The Commission proposed to require a DCO to include in its daily reports information that reflects that the daily report is complete, with completeness information 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 Financial Information eXchange Markup Language (FIXML) file would indicate its position in the sequence of files submitted that day,
e.g.,
file 1 of 10. No commenters opposed the proposal. Eurex and Nodal supported the proposal that file completeness be reflected in a manifest file and opposed the proposal that files be sequentially numbered to indicate completeness. Eurex and Nodal both explained that submitting a manifest file is more efficient operationally. Specifically, Eurex noted that when files are sequentially numbered to reflect completeness, all of the files would need to be renumbered and resubmitted any time a file is added or removed. Nodal made a similar observation, and also noted that a manifest file can be submitted after the DCO ensures that its reporting for the day is complete and the DCO confirms internally that there will be no changes. OCC stated that sequential file numbering to indicate completeness is preferable to requiring a manifest file, because the former is more efficient given the manner in which OCC submits its daily reports. OCC requested that the Commission provide DCOs with the flexibility to use either a manifest file or sequential file numbering to indicate completeness, so that DCOs could use the method that works best with their processes.

Although the Commission acknowledges that for some DCOs, such as OCC, sequential file numbering to indicate completeness may be preferable, the Commission agrees with Eurex and Nodal that submitting a manifest file is operationally more efficient, especially for those DCOs that submit more complex or voluminous reports. Similarly, to ensure consistency and uniformity across all reports received, the Commission declines to provide DCOs with the option to choose between sequential file numbering and a manifest file to indicate completeness. Therefore, the Commission is adopting the proposal to require a DCO to include in its daily reports a manifest file that reflects that the daily report is complete.

5. Settlement Information for Contracts With No Open Interest

The Commission requested comment on whether it should require that a DCO provide the current settlement prices and related information published by DCMs for futures and options contracts with no open interest. No commenters supported this proposal.

CCP12, Nodal, OCC, ICE, and CME opposed the proposal. CCP12 stated that DCOs already calculate and report settlement prices for contracts with no open interest where they believe those prices provide a benefit to DCOs themselves or the marketplace, and requiring DCOs to report such data for all contracts with no open interest would be of questionable value for analytical or regulatory purposes. CCP12 recommended that DCOs continue to be afforded the discretion to choose to report such information on a voluntary basis. Nodal stated that, in addition to being impractical, the proposal would duplicate information that DCMs are required to report pursuant to part 16 of the Commission's regulations. CME argued that reporting data that is unused and not based on observed open interest would not help the risk surveillance process because it does not represent an actual transaction, and ICE argued that the information would not be reliable because it is not based on actual trading activity. OCC and ICE stated that this information would be of limited utility, with OCC adding that this information relates to contracts that do not impact the DCO's risk profile. CME stated that exchanges and DCOs list new products daily and that this reporting requirement would add complexity to the listing process. CME also questioned whether the Commission has the authority to require this information if it is not clear that this information is necessary to conduct oversight of the DCO since it does not reflect actual trades that are settled or cleared. Similarly, OCC argued that a requirement to report such information could be inconsistent with the scope of reporting required by DCO Core Principle L, which requires a DCO to disclose publicly and to the Commission daily settlement prices, volume, and open interest for each contract settled or cleared by the DCO. CME noted that an alternative would be to require reporting of contracts with no open interest, but without requiring pricing information.

The Commission is persuaded by the comments that settlement information for contracts with no open interest would not be particularly useful to it, given that it does not impact a DCO's risk profile, among other things. Therefore, the Commission has determined not to adopt the proposed requirement at this time.

D. Non-Substantive and Technical Edits to Appendix C to Part 39

The Commission has made a variety of non-substantive and technical edits to appendix C to part 39. Some of the edits are intended to ensure that, to the extent that a requirement appears in multiples places in appendix C, its title and description are uniform throughout. Other edits include the deletion of duplicate fields, the deletion of surplus language, formatting instructions, or technical instructions, or the replacement of abbreviations with complete words. Other edits rename fields or clarify, simplify, or rephrase descriptions. For example, the “Universal Product Identifier” field is being renamed “Unique Product Identifier” (UPI), and its description is being changed from “Uniquely identifies the product of a security using ISO 4914 standard, Unique Product Identifier” to “[a] unique set of characters that represents a particular swap. The Commission will designate a UPI pursuant to 17 CFR 45.7.” Another example is that the description for the Implied Volatility field is being changed from “implied volatility” to “[t]he implied volatility and quotation style for the contract, typically in natural log percent or index points.”

E. Individual Customer Account Identification Requirements—§ 39.19(c)(1)(i)(A) and (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. In January 2020, the Commission 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.
14

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 (c)(1)(i)(D) addresses only the reporting of end-of-day positions. Therefore, the Commission proposed to amend § 39.19(c)(1)(i)(A) 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 (c)(1)(i)(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. Furthermore, the Commission also proposed a technical change 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.

14
85 FR 4800, 4817.

CCP12, OCC, CME, and Eurex supported this proposal. Eurex noted that in Europe there is no requirement that LEIs be provided to DCOs and that, consequently, not all Multilateral Trading Facilities or Approved Trade Sources transmit LEIs to DCOs. On the other hand, CME observed that LEI reporting to DCOs has become more routine. ICE opposed the requirement that a DCO identify each individual customer account by LEI because extensive systems changes would be required to add identifiers to the reportable data, and since DCOs are unlikely to have customer-level LEI information, the costs associated with implementing this requirement outweigh the benefits. In response to ICE's comment, the Commission further emphasizes 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 when the DCO has the information associated with an account, and the information is both maintained and associated with the account in a reportable format, such that reporting will not impose a significant additional burden on the DCO.

F. Daily Reporting of Margin Model Backtesting—§ 39.19(c)(1)(i)

The Commission proposed to add to § 39.19(c)(1)(i) a requirement that a DCO include in its daily reports the results of the margin model backtesting that a DCO is required to perform daily pursuant to § 39.13(g)(7)(i). The Commission also proposed to add to new appendix C to part 39 the data fields it believes would be relevant and necessary to capture the backtesting results that would have to be reported under this provision. The Commission is adopting as proposed the amendment to § 39.19(c)(1)(i) to require that a DCO include in its daily reports its margin model backtesting results. As explained below, in response to concerns expressed by commenters, the Commission is modifying certain of the proposed data fields in new appendix C for reporting margin model backtesting results.
15

15
The Commission is also changing the term “back testing” to “backtesting” in all places that this term, or a variation thereof, appears in part 39 of the Commission's regulations.

Chris Barnard supported the proposal, stating that daily reporting of backtesting results will improve the Commission's oversight of DCOs and should work to increase the accuracy, relevance, and effectiveness of DCOs' margin calculations. Nodal generally supported requiring DCOs to provide the Commission with daily backtesting results, noting that it already provides such information to the Commission on a voluntary basis. CME requested that the Commission provide DCOs with ample time, preferably 18 months, to test and implement daily reporting of backtesting results. OCC stated that it has no objection to reporting its margin model backtesting results.

ICE opposed the proposal. ICE argued that the manner in which the Commission currently supervises DCO margin models, including the requirement in § 39.13(g)(3) that margin models be independently validated, and the requirement in § 39.19(c)(4)(xxiii) that a DCO report to the Commission regarding material issues with its margin model, is sufficient for the Commission to supervise margin model performance over time.

Nodal and Eurex argued that the Commission should collaborate with DCOs to determine the specific information needed and the data fields via which it should be reported to ensure that the Commission is receiving the data and information it needs, in a manner that is consistent across all DCOs, to provide effective oversight of the performance of DCOs' margin models.

Commenters expressed concern regarding the new fields that the Commission proposed to add to new appendix C for the purpose of reporting backtesting results, with commenters focusing on the fields for reporting detailed information related to margin model breaches. The Commission had proposed that breach details be reported using three fields: initial margin; VM; and breach amount, which was defined as the difference between the initial margin and VM. ICE, OCC, and Eurex argued that the proposed fields would not provide the Commission with meaningful information regarding margin model breaches. ICE stated that because initial margin requirements and VM payments may not be associated with the same set of positions, “from a formal statistical (hypothesis testing) point of view, the backtesting of the initial margin model should consider fixed positions over the implemented margin period of risk.” Similarly, OCC argued that the VM field should be replaced with a field titled “Static Portfolio Profit/Loss,” which would reflect “profit or loss on the same portfolio against which the initial margin was assessed.” OCC also argued that the Breach Amount field description be revised to delete the reference to VM and instead reflect the “difference between the initial margin and static portfolio profit/loss.” Along the same lines, Eurex argued that VM should be replaced as a measure for backtesting by a more general backtesting profit/loss, which would include further mandatory fields detailing how backtesting profit/loss is calculated (including profit/loss horizon, “clean” vs. “dirty” profit/loss, mark-to-market vs. mark-to-model profit/loss). Lastly, both Eurex and ICE emphasized the importance of the margin period of risk as a component of evaluating backtesting results.

In response to these comments, the Commission is amending the fields for reporting margin model backtesting results. The Commission is replacing the VM field with a new field titled

“Backtesting Metric,” which provides DCOs with the flexibility to designate the type of profit and loss calculation used for backtesting: VM; static portfolio profit and loss (also known as clean profit and loss); dirty profit and loss; mark to market profit and loss; or mark to model profit and loss. In connection with that change, the Commission is amending the Breach Amount field description to be the “difference between the Initial Margin and Backtesting Metric Amount.” Lastly, the Commission is adding a field titled “Margin Period of Risk”, which is defined as the “holding period for which the Backtesting Metric is calculated in days.”

G. Fully Collateralized Positions—§ 39.19(c)(1)(ii)

The Commission proposed to amend § 39.19(c)(1)(ii) to clarify that the daily reporting requirements of § 39.19(c)(1)(i) do not apply to fully collateralized positions. The Commission did not receive any comments on the proposal. The Commission is adopting the amendments to § 39.19(c)(1)(ii) as proposed.

H. Voluntary Reporting—§ 39.19(c)(1)(iii)

The Commission proposed to add, as new § 39.19(c)(1)(iii), the ability for a DCO to, after consultation with the Division, voluntarily submit any additional daily reporting data fields it believes would be necessary or appropriate. OCC supported the proposal. OCC recommended that the Commission remove the phrase “consultation with” and replace it with “notification to,” given the potential timing issues attendant to daily reporting generally, potential ambiguity regarding the extent and nature of the “consultation” required in the proposal, and to provide DCOs with greater flexibility. OCC also recommended that the Commission clarify that voluntarily reporting of additional information does not create an obligation to continue reporting the information, unless agreed to in writing by the DCO and Commission staff. No commenters opposed the proposal.

The Commission agrees with OCC that, absent any agreement to the contrary, voluntary reporting by a DCO of additional information does not create an obligation to continue reporting that information. As for the mechanics of how a DCO should proceed with voluntarily reporting additional information, the Commission believes that the best approach is for the DCO to coordinate with Division staff to ensure that any necessary accommodations are in place so that the Division has the ability to receive the additional information and to incorporate it into its analytics. The Commission therefore disagrees with OCC because it believes that the collaborative approach encompassed within the phrase “consultation with” is preferable to the unilateral approach described in the phrase “notification to.” The Commission is adopting new § 39.19(c)(1)(iii) as proposed.

I. Reporting Change of Control of the DCO—§ 39.19(c)(4)(ix)(A)(1)

The Commission proposed to amend § 39.19(c)(4)(ix)(A)(
1
) 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. Eurex supported the proposal. OCC also supported the proposal, but requested that the Commission clarify whether the phrase the “entity . . . holding a controlling interest” refers to the specific corporate entity holding an ownership interest in the DCO, or whether it refers to any parent entity of one or more owners that collectively own more than 50 percent of the DCO. Better Markets opposed the proposal, asserting that the Commission instead should reinstate the 2011 versions of this regulation and § 39.3(f) because, unlike the current requirements, the 2011 version referenced § 39.3(f), which required Commission approval of the transfer of a DCO registration in connection with any corporate change involving the transfer of all or substantially all of a DCO's assets to another legal entity.

In response to OCC's request for clarification, the Commission notes that the phrase the “entity . . . holding a controlling interest” is intended to refer to both the specific corporate entity holding an ownership interest in the DCO, as well as to any parent entity of one or more owners that collectively own more than 50 percent of the DCO. With respect to the comments from Better Markets, the Commission initially notes that the comments do not address the merits of the proposal, but instead focus on changes the Commission made to a different regulation in a different rulemaking.
16

In any event, the Commission does not believe that it is necessary to reconsider its 2020 amendment of § 39.3(f).
17

The Commission is adopting the amendments to § 39.19(c)(4)(ix)(A)(
1
) as proposed.

16
85 FR 4800, 4802-4803.

17
In the 2020 amendment of this regulation, § 39.3(f) was renumbered as § 39.3(g), and was revised to provide that a DCO seeking to transfer its open interest would be required to submit rules for Commission approval pursuant to § 40.5, rather than submitting a request for a Commission order. The 2020 amendments were intended to, among other things, simplify the requirements for a DCO to request a transfer of open interest and to separate the process from the procedures used to report a change to a DCO's corporate structure or ownership. 85 FR 4800, 4802-4803.

J. Reporting Changes to Credit Facility Funding and Liquidity Funding Arrangements—§ 39.19(c)(4)(xii) and (xiii)

The Commission proposed to amend § 39.19(c)(4)(xii) and (xiii), which require a DCO to report changes to credit facility funding arrangements and liquidity funding arrangements, respectively, to clarify that the reporting requirements include reporting new arrangements as well as changes to existing ones. Eurex and OCC supported both proposals, with OCC noting that they are consistent with its interpretation of the existing regulations. No commenters opposed the proposals. The Commission is adopting the amendments to § 39.19(c)(4)(xii) and (xiii) as proposed.

K. Reporting Issues With Credit Facility Funding Arrangements, Liquidity Funding Arrangements, and Custodian Banks—§ 39.19(c)(4)(xv)

The Commission proposed 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. The Commission proposed to extend the reporting requirement, which previously applied only to any settlement bank used by the DCO or approved for use by the DCO's clearing members, to apply as well to any credit facility funding arrangement, liquidity funding arrangement, or custodian bank used by the DCO or approved for use by the DCO's clearing members. The Commission also proposed to change the threshold that triggers a DCO's reporting obligations by replacing the 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.

Eurex, OCC, and ICE supported the proposal. OCC observed that the proposal properly addresses the variety

of arrangements that DCOs use to meet their ongoing and situational funding requirements, and OCC also stated that DCOs should not be subject to potential enforcement action for not reporting an issue of which they are not even aware. With regard to the requirement to report material issues or concerns related to credit facility funding arrangements, ICE supported the proposal, but believes, as a technical matter, that it would be more accurate to refer to the provider of the arrangement, as opposed to the arrangement itself. No commenters opposed the proposal. Better Markets recommended that the Commission remove the materiality standard from the proposed requirement that DCOs report to the Commission regarding material issues with credit facility funding arrangements, liquidity funding arrangements, and custodian banks. Better Markets argued that because the subjective nature of materiality would result in inconsistent and inadequate reporting, the Commission instead should require DCOs to report whenever there are any issues or concerns.

With respect to ICE's comment that § 39.19(c)(4)(xv) should specify that a DCO must report material issues or concerns related to the provider of a credit facility funding arrangement, as opposed to reporting issues or concerns related to the arrangement itself, the Commission intends that the amended regulation apply to issues or concerns related to the provider as well as to the arrangement itself. The amended regulation is intended to ensure that the Division receives notice when a DCO learns that it may not be able to obtain the resources from the provider pursuant to the arrangement. The Commission disagrees with the suggestion from Better Markets that DCOs be required to report all 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. Although Better Markets correctly noted the subjectivity inherent in a materiality standard, the Commission does not believe that it would be useful for it to be notified of all issues or concerns, especially since, in connection with its supervision of DCOs and engagement with DCO staff regarding reporting of issues or concerns related to settlement banks, Division staff has not found that the materiality standard impedes necessary reporting. Because the Commission believes that the threshold for reporting is properly calibrated, the Commission is adopting § 39.19(c)(4)(xv) as proposed.

L. Reporting of Updated Responses to the Disclosure Framework for Financial Market Infrastructures—§ 39.19(c)(4)(xxv)

The Commission proposed 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. Eurex and OCC supported the proposal, with OCC noting that it is a non-substantive change to existing DCO reporting obligations. No commenters opposed the proposal. ICE recommended that, to be consistent with § 39.37(b)(2), the Commission should state explicitly that the proposed reporting requirement only applies to material changes that a DCO makes to its disclosures under the PFMI Disclosure Framework. The Commission does not believe that such clarification is necessary, given that new § 39.19(c)(4)(xxv) simply references the reporting requirements in § 39.37(b)(2) without altering the substance of those requirements. The Commission is adopting new § 39.19(c)(4)(xxv) as proposed.

VI. 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 proposed several amendments to these requirements to better align a DCO's disclosure obligations with the type of clearing services that the DCO provides. Specifically, the Commission proposed to amend § 39.21(c)(3) and (4) to provide that a DCO that clears only fully collateralized positions is not required to disclose its margin-setting methodology, or information regarding the size and composition of its financial resource package for use in a default, if instead the DCO discloses that it does not employ a margin-setting methodology or maintain a financial resource package because it clears only fully collateralized positions. Additionally, the Commission proposed to amend § 39.21(c)(7) to provide that a DCO may omit any non-FCM clearing member that clears only fully collateralized positions, and therefore does not share in the mutualized risk associated with clearing activity, from its published list of clearing members. The Commission did not receive any comments on these proposed changes, and is therefore adopting them as proposed.

VII. 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. Regulation § 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 proposed 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. OCC supports and appreciates the proposal, stating that it would relieve DCOs of duplicative requirements to report this information both publicly and to the Commission. The Commission is adopting this amendment as proposed.

VIII. 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 proposed 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.

OCC generally supported the proposed changes to § 140.94(c)(10), as OCC agreed that the proposed delegations would appropriately empower Commission staff to facilitate efficient administration of part 39, and ensure that the Commission and its staff can obtain relevant information in a timely manner. OCC stated that changes to a DCO's reporting obligations can pose significant technical or logistical challenges, and necessitate substantial investment of time and resources to effect compliance. Therefore, while OCC supported the proposed changes, it urged the Division to continue to engage

in open dialogue with DCOs prior to exercising the delegated authority to seek additional information pursuant to § 39.19 or to change the format or manner of any required reporting. The Commission takes notes of this comment, and expects that information collection or any changes to the format and manner of required reporting would continue to involve engagement with DCOs. The Commission is adopting these changes as proposed.

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.
18

The final rule adopted by the Commission will affect only DCOs. The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its regulations on small entities in accordance with the RFA.
19

The Commission has previously determined that DCOs are not small entities for the purpose of the RFA.
20

Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the rule adopted herein will not have a significant economic impact on a substantial number of small entities.

18
5 U.S.C. 601
et seq.

19
47 FR 18618 (Apr. 30, 1982).

20

See
66 FR 45604, 45609 (Aug. 29, 2001).

B. Paperwork Reduction Act

The Paperwork Reduction Act (PRA)
21

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 final rulemaking contains reporting and recordkeeping requirements that are collections of information within the meaning of the PRA. Responses to the collections of information are required to obtain a benefit.

21
44 U.S.C. 3501
et seq.

This final rulemaking modifies the existing information collection associated with part 39, “Requirements for Derivatives Clearing Organizations, OMB control number 3038-0076.” In accordance with the PRA, 44 U.S.C. 3507(d), the Commission has submitted these information collection requirements to OMB for its review.

1. Subpart B—Requirements for Compliance with Core Principles

a. Risk Management

The Commission is adopting as proposed 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. The requirements would still apply to clearing members that clear fully collateralized positions but also clear 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 currently registered DCOs clear fully collateralized positions. As a result, the Commission believes that this reduction will 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 amending § 39.15(b)(2), which 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 is consolidating paragraphs (b)(2)(i) and (ii) and renumbering 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 amending § 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 changes are mere clarifications of existing requirements, they also have no impact on the reporting burden.

Similarly, the Commission is removing 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 adding 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 new 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 deleting 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 change will decrease the reporting burden. In addition, the Commission is removing 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 will 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 will collectively decrease the reporting burden because the requirements being removed through the deletion of paragraph (b)(2)(i)(I) are, as a whole, more burdensome than the requirements being added in paragraph (b)(2)(vii). Similarly, the Commission is removing the requirement in existing paragraph (b)(2)(i)(K) to discuss a DCO's default management procedures generally and maintaining only the requirement to address default management procedures unique to the products eligible for commingling and moving 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 amending paragraph (b)(2)(i)(B) (renumbered as paragraph (b)(2)(ii)), 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 address any risk characteristics of products to be commingled that are unusual in relation to the other products the DCO clears, such as margining, liquidity, default management, pricing, or other risk characteristics, and how the DCO plans to manage any risks identified. Because such analysis 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 will now be required to do so, this will increase the reporting burden. However, the Commission expects this increase to be negligible, as this provision would only apply when a DCO is considering a new commingling of customer positions in various products, and only when the risk characteristics of products to be commingled are unusual in relation to other products the DCO clears.

The Commission is amending paragraph (b)(2)(i)(F) (and renumbering it as paragraph (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 this amendment will have no impact on the reporting burden. Although the new 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 amendment only requires reporting when additional requirements are, in fact, applicable.

The Commission believes that the reductions in the reporting burden resulting from the deletion of paragraphs (b)(2)(i)(C), (E), (H), and (L) and the narrowing of the reporting burden resulting from the 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 amendments to paragraph (b)(2)(i)(B) (renumbered as paragraph (b)(2)(ii)). Because the Commission lacks the data to fully quantify each of these changes, it is conservatively estimating that these changes collectively do not alter 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 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 adopting the proposed amendments to § 39.19(c)(1)(i)(A) that 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 is amending § 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 clarification will not affect the burden on DCOs because DCOs already provide this information and the impact of this amendment on the existing burden is negligible.

The Commission also is amending § 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 change is anticipated to result in a negligible decrease from the current burden of 0.5 burden hours per report.
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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 also is adopting new § 39.19(c)(1)(iii), as proposed, which will give a DCO the ability, after consultation with the Division, to voluntarily submit any additional data field in its daily reports that is necessary or appropriate to better capture the information that is being reported. The Commission believes that adding this provision to § 39.19(c)(1) does not affect the existing burden estimates for daily reporting. Although it is unclear at this time whether any DCOs will decide to voluntarily submit additional data fields in their daily reports and how frequently they will do so, the Commission believes that the impact of this new provision on the existing daily reporting burden is negligible. The Commission does not anticipate that DCOs will add information to their daily reports if doing so is a burden. The Commission instead anticipates that voluntary reporting by DCOs likely will consist only of data that already is maintained in reportable format and that can be included in the daily reports with minimal effort.

The Commission is also adding to part 39 an appendix that will 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 will not change the reporting burden.
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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 is adding new fields within new appendix C that would further implement the existing daily reporting requirements under § 39.19(c)(1). Specifically, the Commission is adopting a requirement 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 adopting a requirement that 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 not adopting a proposed requirement that each DCO include in its daily reports timing information about variation margin calls and payments, but is adopting a proposed requirement to include in its daily reports information that reflects that the daily report is complete. Lastly, in connection with adopting a new requirement in § 39.19(c)(1)(i) that a DCO include in its daily reports the results of its required daily margin model backtesting, the Commission also is adding to new appendix C amended versions of the additional data fields necessary to implement this requirement.

With respect to adding new fields to new appendix C, and adding to § 39.19(c)(1)(i) a requirement that a DCO include in its daily reports the results of its required margin model backtesting, the Commission believes that the incremental capital investment costs associated with implementing these requirements would be negligible. In many cases, the new 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 fields would leverage the DCO's existing server architecture that could be scaled up to meet these requirements with negligible costs. However, to the extent that a DCO does not currently use any of the information that would be required under the 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 new fields, specifically including costs for coding, as well as testing, quality assurance, and compliance review. As explained below in connection with its discussion of cost-benefit considerations, the Commission has estimated
24

that DCOs may incur other start-up costs of approximately $69,667.21 per DCO.
25

CME commented that it believes the time required to implement the proposed changes would be “an order of magnitude greater than predicted,” which would add to the costs. However, CME did not quantify the amount by which it believes that costs would be increased, and as a result, the Commission is reluctant to adjust its estimates based on this comment. Furthermore, the Commission is not adopting all of the new fields that were proposed, which would reduce the costs that may be incurred by DCOs to implement the required changes relative to the initial proposal. Accordingly, the Commission believes that retaining its initial estimates of these costs in the proposal (excluding estimates of any proposals not being adopted in the final rule) addresses CME's concern that the Commission's initial estimates of the costs of implementation were not adequate, while accounting for the fact that costs were reduced by the Commission's decision not to adopt all of the relevant proposals.

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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.

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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; $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 backtesting 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. The amount that was estimated for the payment file in the proposal, $39,907.22, is not being included here, because the Commission did not adopt the proposal for the payment file.

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 adding the new fields to new appendix C, and adding to § 39.19(c)(1)(i) a requirement that a DCO include in its daily reports the results of the margin model backtesting, will result in a negligible increase to the current estimate of 0.5 burden hours per report. Accordingly, the Commission retains its existing estimate for the burden associated with daily reporting under § 39.19(c)(1).

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:
1,625.

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 amending § 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 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 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 amending these regulations to clarify that the reporting requirements include reporting new arrangements as well as changes to existing ones. The clarification will not affect the burden on DCOs because such reporting is already implied in the regulation.

Separately, the Commission is amending § 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 proposed to revise § 39.18(g) to delete the materiality threshold. Proposed changes would also

have required 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 Commission estimated that these changes would require DCOs to file an additional four reports per year, on average. The Commission received several comments stating that this estimate is too low. The Commission is not adopting these changes, however, and is therefore removing the proposed additional four reports per year from the reporting burden.

The Commission proposed modifying the reporting obligations under § 39.18(g)(1) and new § 39.18(g)(2) to specify that only events that impact, or potentially impact, a DCO's clearing operations must be reported under each subsection. The Commission is not adopting these changes.

Finally, the Commission is adding § 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 revising § 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 will cause a negligible decrease in costs that will 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:
14.

Average number of hours per report:
0.5.

Estimated gross annual reporting burden:
91.

e. Public Information

The Commission is revising § 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 amending § 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 will remain unchanged. The changes do not affect the burden for the majority of DCOs that are subject to the public disclosure requirements. For fully collateralized DCOs, the 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.

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.
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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).

26
7 U.S.C. 19(a).

The Commission recognizes that the final rule may impose costs. The Commission has endeavored to assess the expected costs and benefits of the final rule in quantitative terms, including PRA-related costs, where possible. 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 rules in qualitative terms. The lack of data and information to estimate those costs is attributable in part to the nature of the final rule. Additionally, any initial and recurring compliance costs for any particular DCO will depend on the size, existing infrastructure, practices, and cost structure of the DCO.

To further the Commission's consideration of the costs and benefits imposed by the proposal, the Commission invited comments from the public on all aspects of its cost-benefit considerations, including the identification and assessment of any costs and benefits not discussed by the Commission; 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. To the extent that the Commission received comments specific to the costs and benefits of the proposed changes, those comments are discussed in the relevant sections below.

2. Baseline

The baseline for the Commission's consideration of the costs and benefits of this final rule is: (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 of costs and benefits is based on its understanding that the derivatives market regulated by the Commission 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 registered with the Commission; 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 final rule on all relevant derivatives activity, whether based on their actual occurrence in the United

States or on their connection with, or effect on U.S. commerce.
27

27

See, e.g.,
7 U.S.C. 2(i).

3. Amendments to § 39.13(h)(5)

a. Benefits

The Commission is adopting new § 39.13(h)(5)(iii), which provides that a DCO that clears fully collateralized positions may exclude from the requirements of paragraphs (h)(5)(i) and (ii), which concern clearing members' risk management policies and procedures, those clearing members that clear only fully collateralized positions. The requirements would still apply to clearing members that clear fully collateralized positions but also clear 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 adopting 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. Furthermore, the Commission believes that this amendment will provide a benefit to DCOs that clear fully collateralized positions, as they will no longer need to meet a requirement that does not apply to their clearing model.

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 § 39.13(h)(5)(iii) may increase operational efficiency for DCOs that clear fully collateralized positions. The provision 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 this provision.

4. Amendments to § 39.15(b)(2)

a. Benefits

The Commission is amending § 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 that the amendments will help DCOs, 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 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 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 § 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 and moving that requirement to paragraph (b)(2)(vi), the amended 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 amendments to § 39.15(b)(2) will decrease DCOs' costs associated with seeking commingling approval. These changes most meaningfully reduce 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. Paragraph (b)(2)(vii), as amended, 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). 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 (renumbered as § 39.15(b)(2)(ii)), 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. The Commission is adding to § 39.15(b)(2)(ii) the requirement that a DCO's analysis address any characteristics that are unusual in relation to the other products cleared by the DCO, such as margining, liquidity, default management, pricing, or other risk characteristics. The Commission believes that a DCO may incur additional minor costs, but only to the extent that the products do in fact have margining, liquidity, default management, pricing, or other risk characteristics that are unusual in relation to those currently cleared by the DCO. Lastly, to the extent paragraph (b)(2)(vi) on default management procedures extends beyond the scope of existing paragraph (b)(2)(i)(J) or (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 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 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, 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 amendments to § 39.15(b)(2).

5. Notification of Exceptional Events—§ 39.18(g)

a. Benefits

For reasons discussed in greater detail above, the Commission is declining to adopt the proposal 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 deleting the materiality element from the requirement to report malfunctions that materially impair, or create a significant likelihood of material impairment of, the DCO's automated systems. Similarly, the Commission is also declining to adopt the remaining proposed changes to § 39.18(g), including the elimination of the materiality threshold for reporting of other exceptional events, the addition of new language regarding reporting for operator error, the addition of untargeted threats as a reporting event, and definitions for “hardware or software malfunction” and “automated system.” The retention of the current regulatory framework, including the reporting threshold which affords discretion to DCOs to report only material events, will benefit DCOs by allowing the expenditure of less time and fewer resources to report events of no significance, the knowledge of which would provide little or no informational value to the Division.

b. Costs

Commenters stated that the Commission underestimated the increase in reporting obligations as a result of the proposal to eliminate the materiality threshold for the reporting of exceptional events under § 39.18(g) (estimated at four reports per DCO per year) as well as the costs of such notifications (estimated at $152 per year). The Commission is not adopting the proposal to remove the materiality threshold or any of the other proposed changes to § 39.18(g).

c. Section 15(a) Factors

As the Commission is not adopting the proposed amendments to § 39.18(g), a consideration of costs and benefits under section 15(a) is not applicable for this subsection.

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 amending § 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. 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. The Commission did not receive any comments on the costs or benefits associated with these changes.

b. Costs

The Commission expects that DCOs and their clearing members will not incur any costs related to the amendments to § 39.19(c)(1)(i)(B) and (C), as the Commission is eliminating the existing requirement that DCOs report to the Commission on a daily basis variation margin and cash flows by individual customer account.

c. Section 15(a) Factors

In addition to the discussion above, the Commission has evaluated the costs and benefits of the 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 amendments to § 39.19(c)(1)(i)(B) and (C) will 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 amendments will 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 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 adding a new appendix C to part 39 that codifies 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 codifying the Reporting Guidebook will not result in material benefit to currently registered DCOs, the Commission believes that it likely will 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). The Commission did not receive any comments on the costs or benefits associated with these changes.

b. Costs

The Commission does not expect that DCOs will incur increased costs related to codifying the reporting fields from the Reporting Guidebook in new appendix C 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 codifying the Reporting Guidebook as appendix C 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 adding new appendix C to part 39 to codify the reporting fields set forth in the existing Reporting Guidebook does not implicate the section 15(a) factors.

8. Additional Reporting Fields for the Daily Reporting Requirements—§ 39.19(c)(1)

a. Benefits

The Commission is adding several new reporting fields that will be incorporated into new appendix C to part 39.
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The Commission is requiring 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. Additionally, the Commission is requiring DCOs that clear interest rate swaps, forward rate agreements, or inflation index swaps to include in their daily reports the actual trade date for each position along with an event description. Additionally, the Commission is requiring DCOs to include in their daily reports information that reflects that the daily report is complete. Lastly, in connection the new requirement in § 39.19(c)(1)(i) that a DCO include in its daily reports the results of its required daily margin model backtesting, the Commission also is adding to new appendix C amended versions of the additional data fields necessary to implement this requirement.
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This information, separately and in the aggregate, is expected to assist the Commission in conducting more effective oversight of DCOs, thereby enhancing the protections afforded to the markets generally. The Commission did not receive any comments on the benefits associated with these changes.

28
As noted previously, the Commission is not adopting the proposal that each DCO include in its daily reports timing information about VM calls and payments.

29
Although the costs, benefits, and section 15(a) factors associated with the requirement in § 39.19(c)(1)(i) that a DCO include backtesting results in its daily report are addressed separately below, the costs associated with the implementation of this requirement via the amended new daily reporting fields in appendix C are addressed in this section.

b. Costs

The Commission believes that the costs associated with adding these new daily reporting fields to 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 regulation 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 addition of new daily reporting fields in new appendix C, and the requirement that DCOs include information on their backtesting results in their daily reports 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 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 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.
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Using this method, the Commission estimates the total start-up costs to be approximately $69,667.21 per DCO.
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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.

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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; $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 backtesting 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. The amount that was estimated for the payment file in the proposal, $39,907.22, is not being included here, because the Commission did not adopt the proposal for the payment file.

CME commented on the cost-benefit considerations related to the addition of these new daily reporting fields, arguing that the Commission severely underestimated the amount of time that would be required to comply with the requirement. Specifically, CME commented that it believes the time required to implement the proposed changes would be “an order of magnitude greater than predicted,” which would add to the costs. However, CME did not quantify the amount by which it believes that costs would be increased, and as a result, the Commission is reluctant to adjust its estimates based on this comment. Furthermore, the Commission is not adopting all of the new fields that were proposed, which would reduce the costs that may be incurred by DCOs to implement the required changes. Accordingly, the Commission believes that retaining its initial estimates of these costs in the proposal (excluding estimates of any proposals not being adopted in the final rule) addresses CME's concern that the Commission's initial estimates of the costs of implementation were not adequate, while accounting for the fact that costs were reduced by the Commission's decision not to adopt all of the relevant proposals.

c. Section 15(a) Factors

In addition to the discussion above, the Commission has evaluated the costs and benefits of adding 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. Requiring 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 change.

9. Daily Reporting of Margin Model Backtesting—§ 39.19(c)(1)(i)

a. Benefits

The Commission is adding to § 39.19(c)(1)(i) a requirement that DCOs include in their daily reports the results of the margin model backtesting that DCOs are required to perform daily pursuant to § 39.13(g)(7)(i). Because margin model backtesting results are a crucial element of an effective risk surveillance program, obtaining this information will allow the Commission to conduct more effective oversight of DCOs, thereby enhancing the protections afforded to the markets generally. The Commission did not receive any comments on the costs or benefits associated with these changes.

b. Costs

The Commission expects that requiring DCOs to report backtesting 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. Addition

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2023-16591. Public record. Not legal advice.