Covered Clearing Agency Resilience and Recovery and Orderly Wind-Down Plans

Federal RegisterNov 18, 2024

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-101446; File No. S7-10-23]

RIN 3235-AN19

Covered Clearing Agency Resilience and Recovery and Orderly Wind-Down Plans

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is adopting amendments to certain rules in the Covered Clearing Agency Standards (“CCA Standards”) under the Securities Exchange Act of 1934 (“Exchange Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The amendments strengthen existing rules by adding new requirements related to the collection of intraday margin by a covered clearing agency (“CCA”) and the use of substantive inputs in its risk-based margin system. The Commission is also adopting a new rule to establish required elements of a CCA's recovery and orderly wind-down plan (“RWP”).

DATES:

Effective date:

January 17, 2025.

Compliance date:

The applicable compliance dates are discussed in Part III.

FOR FURTHER INFORMATION CONTACT:

Elizabeth Fitzgerald, Assistant Director, Matthew Lee, Assistant Director, Jesse Capelle, Special Counsel, Adam Allogramento, Special Counsel, Haley Holliday, Attorney-Adviser, and David Li, Senior Financial Analyst, at (202) 551-5710, Office of Clearance and Settlement, Division of Trading and Markets; Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Pursuant to section 17A of the Exchange Act,

as well as the Payment, Clearing, and Settlement Supervision Act (“Clearing Supervision Act”) in Title VIII of the Dodd-Frank Act,

the Commission is adopting amendments to 17 CFR 240.17ad-22(e)(6) and adding new § 240.17ad-26. Below is a table of citations to the rules referenced in this release, including all rules being amended or adopted:

15 U.S.C. 78q-1.

12 U.S.C. 5461

et seq.

Commission reference

CFR citation (17 CFR)

Exchange Act:

Rule 17Ad-22

§ 240.17ad-22.

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

§ 240.17ad-22(e)(3)(ii).

Rule 17Ad-22(e)(4)

§ 240.17ad-22(e)(4).

Rule 17Ad-22(e)(6)

§ 240.17ad-22(e)(6).

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

§ 240.17ad-22(e)(6)(ii).

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

§ 240.17ad-22(e)(6)(iv).

Rule 17Ad-22(e)(15)

§ 240.17ad-22(e)(15).

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

§ 240.17ad-22(e)(15)(ii).

Rule 17Ad-22(e)(23)

§ 240.17ad-22(e)(23).

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

§ 240.17ad-22(e)(23)(i).

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

§ 240.17ad-22(e)(23)(ii).

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

§ 240.17ad-22(e)(23)(iv).

Rule 17Ad-25

§ 240.17ad-25.

Rule 17Ad-25(c)

§ 240.17ad-25(c).

Rule 17Ad-25(i)

§ 240.17ad-25(i).

Rule 17Ad-25(j)

§ 240.17ad-25(j).

Rule 17Ad-26

§ 240.17ad-26.

Rule 17Ad-26(a)

§ 240.17ad-26(a).

Rule 17Ad-26(a)(1)

§ 240.17ad-26(a)(1).

Rule 17Ad-26(a)(2)

§ 240.17ad-26(a)(2).

Rule 17Ad-26(a)(3)

§ 240.17ad-26(a)(3).

Rule 17Ad-26(a)(4)

§ 240.17ad-26(a)(4).

Rule 17Ad-26(a)(5)

§ 240.17ad-26(a)(5).

Rule 17Ad-26(a)(6)

§ 240.17ad-26(a)(6).

Rule 17Ad-26(a)(7)

§ 240.17ad-26(a)(7).

Rule 17Ad-26(a)(8)

§ 240.17ad-26(a)(8).

Rule 17Ad-26(a)(9)

§ 240.17ad-26(a)(9).

Rule 17Ad-26(b)

§ 240.17ad-26(b).

The amendments to Rule 17Ad-22(e)(6)(ii) establish new requirements with respect to a CCA's policies and procedures regarding the collection of intraday margin, specifically, to (i) include a new requirement to monitor intraday exposures on an ongoing basis, (ii) modify the preexisting reference to making intraday calls “in defined circumstances” to making intraday calls “as frequently as circumstances warrant” and identifying examples of such circumstances, and (iii) require that a CCA document when it determines not to make an intraday margin call pursuant to its written policies and procedures required under paragraph (e)(6)(ii). The amendments to Rule 17Ad-22(e)(6)(iv) establish new requirements for a CCA relying upon substantive inputs to its risk-based margin model, including when such substantive inputs are not readily available or reliable.

New Rule 17Ad-26 prescribes requirements for the contents of a CCA's RWP. While Rule 17Ad-22(e)(3)(ii) currently requires a CCA's written policies and procedures to include the CCA's RWP, Rule 17Ad-22(e)(3)(ii) did not include requirements for the content of RWPs.

New Rule 17Ad-26 identifies elements that a CCA's RWP must contain, including: (i) elements related to planning, including the identification and use of scenarios, triggers, tools, staffing, and service providers, as discussed in Parts II.C.1 through 5; (ii) timing and implementation of the plans,

as discussed in Parts II.C.6 and 7; and (iii) testing and board approval of the plans, as discussed in Parts II.C.8 and 9. Definitions included in new Rule 17Ad-26 are discussed in Part II.D.

17 CFR 240.17ad-22(e)(3)(ii).

In developing these final rules, Commission staff has consulted with the Financial Stability Oversight Council (“FSOC”), the Commodity Futures Trading Commission (“CFTC”), the Federal Deposit Insurance Corporation (“FDIC”), and the Board of Governors of the Federal Reserve System (“FRB”).

See, e.g.,

12 U.S.C. 5464(a)(2); 5472.

The compliance dates for the amendments to Rule 17Ad-22(e)(6) and new Rule 17Ad-26 are discussed in Part III.

Table of Contents

I. Introduction

II. Discussion of Comments Received and Final Rules

A. Collection of Intraday Margin

1. Proposed Amendment to Rule 17Ad-22(e)(6)(ii)

2. Discussion of Comments

B. Inputs to Margin System

1. Proposed Amendment to Rule 17Ad-22(e)(6)(iv)

2. Discussion of Comments

C. Contents of Recovery and Orderly Wind-Down Plans

1. Core Services: Rule 17Ad-26(a)(1)

2. Service Providers: Rule 17Ad-26(a)(2)

3. Scenarios: Rule 17Ad-26(a)(3)

4. Triggers: Rule 17Ad-26(a)(4)

5. Tools: Rule 17Ad-26(a)(5)

6. Implementation: Rule 17Ad-26(a)(6)

7. Notification to Commission: Rule 17Ad-26(a)(7)

8. Testing: Rule 17Ad-26(a)(8)

9. Board Approval: Rule 17Ad-26(a)(9)

10. Other Comments

D. Defined Terms in Rule 17Ad-26

1. Definition of “Orderly Wind-Down”

2. Other Defined Terms and Introductory Clause

III. Compliance Date

IV. Economic Analysis

A. Introduction

B. Economic Baseline

1. Description of Market

2. Overview of the Existing Regulatory Framework

3. Current Recovery and Orderly Wind-Down Plans

4. Current Risk-Based Margin

C. Consideration of Benefits and Costs as Well as the Effects on Efficiency, Competition, and Capital Formation

1. Final Rule 17Ad-26

2. Amendments to Rule 17Ad-22(e)(6)

3. Other Compliance Costs

4. Efficiency, Competition, and Capital Formation

D. Reasonable Alternatives to the Final Rule and Amendments

1. Establish Precise Triggers for Implementation of RWPs Across All CCAs

2. Establish Specific Scenarios and Analyses

3. Establish Specific Rules, Policies, Procedures, Tools, and Resources

4. Require the Identification of Interconnections and Interdependencies

5. Establish a Specific Monitoring Frequency for Intraday Margin Calls

6. Adopt Only Certain Elements of Rule 17Ad-26

7. Focus Intraday Margin Requirements on a Subset of CCAs

V. Paperwork Reduction Act

A. Amendments to Rule 17Ad-22(e)(6)

B. New Rule 17Ad-26

C. Chart of Total PRA Burdens

VI. Regulatory Flexibility Act

A. Clearing Agencies

B. Certification

VII. Other Matters

Statutory Authority

I. Introduction

CCAs are an essential part of the infrastructure of the U.S. securities markets.

While central clearing and other important functions provided by clearing agencies benefit the markets they serve,

clearing agencies can pose systemic risk to the financial system,

due in part to the fact that such clearing functions concentrate risk in the clearing agency.

Disruption to a clearing agency's operations, or failure on the part of a clearing agency to meet its obligations, could therefore serve as a potential source of contagion, resulting in significant costs not only to the clearing agency itself or its members but also to other market participants and the broader U.S. financial system.

As a result, proper management of the risks associated with CCAs is necessary to help ensure the stability of the U.S. securities markets and the broader U.S. financial system.

See

Release No. 34-78961 (Sept. 28, 2016), 81 FR 70786, 70789 (Oct. 13, 2016) (“CCA Standards Adopting Release”),

https://www.govinfo.gov/content/pkg/FR-2016-10-13/pdf/2016-23891.pdf; see also

15 U.S.C. 78q-1(a)(1)(A) (finding that the prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors). CCAs are a subset of clearing agencies registered with the Commission.

See

17 CFR 240.17ad-22(a) (defining “covered clearing agency”);

see also

12 U.S.C. 5461-72 (setting forth provisions under the Clearing Supervision Act for designating a clearing agency as systemically important and imposing risk management standards consistent with international standards).

CCA Standards Adopting Release,

supra

note 5, at 70793.

Id.; see also

Committee on Payment and Settlement Systems, International Organization of Securities Commissions (“CPMI-IOSCO”),

Principles for financial market infrastructures

(Apr. 16, 2012),

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

(“PFMI”) (identifying the risks posed by FMIs, including CCPs and CSDs, across 23 discrete principles). The Committee on Payment and Settlement Systems renamed itself the Committee on Payments and Market Infrastructures (“CPMI”) in 2014.

CCA Standards Adopting Release,

supra

note 5, at 70788 n.18.

Whether in normal or stressed market conditions, the effective functioning of the securities markets requires a regulatory framework for CCAs that can promote effective risk management, help preserve financial stability, and help ensure the continuity of critical CCP and CSD functions for the markets they serve, participants in those markets, and investors more generally. Since the enactment of the Dodd-Frank Act,

the Commission has adopted a series of rules designed to support its ongoing supervision and oversight of clearing agencies and to help ensure that CCAs are robust and resilient under normal market conditions and in periods of market stress.

The potential for CCAs to spread contagion through the financial system, particularly in periods of market stress, has necessitated that the Commission continue to consider and adopt new rules over time to improve the regulatory framework for CCAs. These series of rules help ensure an effective regulatory response to evolving risks that could threaten the U.S. financial system.

Public Law 111-203, 124 Stat. 1376 (2010).

E.g.,

17 CFR 240.17ad-22; 17 CFR 240.17ad-25;

see also

Release No. 34-9895 (Nov. 16, 2023), 88 FR 84454 (Dec. 5, 2023) (“CA Governance Adopting Release”),

https://www.govinfo.gov/content/pkg/FR-2023-12-05/pdf/2023-25807.pdf;

Release No. 34-88616 (Apr. 9, 2020), 85 FR 28853 (May 14, 2020) (“CCA Definition Adopting Release”),

https://www.govinfo.gov/content/pkg/FR-2020-05-14/pdf/2020-07905.pdf;

CCA Standards Adopting Release,

supra

note 5; Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 2012),

https://www.govinfo.gov/content/pkg/FR-2012-11-02/pdf/2012-26407.pdf.

See infra

Part II (discussing the rule amendments and new rules in greater detail). In addition, when designated as systemically important by the FSOC, CCAs are also subject to requirements set forth in Title VIII of the Dodd-Frank Act and rules thereunder.

See, e.g.,

12 U.S.C. 5461-72.

Since the Commission first adopted the CCA Standards, supervisory authorities, CCAs, and market participants have continued to pursue further consideration of several topics,

including the collection of margin generally, the collection of intraday margin specifically, the potential effects of such margin collection on market liquidity, and the need for some transparency into the margin collection process so that market participants that use or rely on CCAs for risk management functions can monitor and manage their own financial and other risks.

E.g.,

CPMI-IOSCO,

Streamlining Variation Margin in Centrally Cleared Markets—Examples of Effective Practices

(Feb. 14, 2024),

https://www.bis.org/cpmi/publ/d221.pdf;

CPMI-IOSCO,

Transparency and Responsiveness of Initial Margin in Centrally Cleared Markets—Review and Policy Proposals

(Jan. 16, 2024),

https://www.bis.org/bcbs/publ/d568.pdf;

CPMI-IOSCO,

Resilience of Central Counterparties (CCPs): Further Guidance on the PFMIs

(July 2017),

https://www.bis.org/cpmi/publ/d163.pdf

(“CPMI-IOSCO Resilience Guidance”).

Although the CCA Standards adopted in 2016 included several provisions directed to a CCA's margin system generally,

and specifically the modeling of financial risk and the collection of margin within it,

the Commission has identified two areas of focus that support strengthening these pre-existing rules: (i) ensuring effective monitoring of intraday exposures and specifying particular circumstances for collection of margin intraday, and (ii) ensuring that CCAs have effective tools for margin modelling even when inputs to the margin system become unreliable or unavailable. Ongoing monitoring by the CCA is necessary to help ensure that a CCA collects sufficient margin to cover its exposures throughout the day, as portfolios and positions may change after margin is collected at the start of the day. This requirement should help ensure that the CCAs have the appropriate policies and procedures to address market events featuring large intraday price and position changes, such as the events in the equity and options markets in early 2021.

In addition, establishing backup procedures if a substantive input to a margin model is unavailable or unreliable is especially relevant to ensuring that a CCA can continue to meet its regulatory obligations and calculate margin appropriately.

See, e.g.,

17 CFR 240.17ad-22(e)(6).

See

17 CFR 240.17ad-22(e)(6)(i) (regarding the setting of margin levels commensurate with the risks and particular attributes of each relevant product, portfolio, and market); (e)(6)(iii) (regarding the calculating of margin sufficient to cover the CCA's potential future exposure to its participants); (e)(6)(vi) (regarding the monitoring and regular review, testing, and verification of margin models using backtesting and sensitivity analysis).

For example, a CCA may require more margin to guard against an increased risk of defaults, which may occur if, for example, buyers do not carry-through on paying for a stock that has plummeted or sellers do not carry-through on delivering a stock that has skyrocketed.

See, e.g.,

Staff Report on Equity and Options Market Structure Conditions in Early 2021, at 31 (Oct. 14, 2021),

https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf

(describing how the National Securities Clearing Corporation (“NSCC”) observed unusual volatility in certain securities in January 2021 and imposed intraday margin calls in response to trading patterns in Gamestop Corp. (“GME”) and other equity securities).

Accordingly, in the RWP Proposing Release,

the Commission proposed new requirements to ensure that CCAs monitor intraday margin on an ongoing basis and to facilitate intraday margin collection not only in “defined” circumstances but as frequently as circumstances warrant.

The Commission also defined two circumstances in which a CCA should have policies and procedures for applying intraday margin: (i) when specific risk thresholds have been breached, and (ii) when the products cleared or markets served display elevated volatility.

As the Commission explained in the RWP Proposing Release, these requirements would help ensure that the CCA has an effective process for monitoring margin and avoiding circumstances in which a participant becomes under-margined, which undermines the ability of a CCA to mitigate risk.

In addition, with respect to the inputs into a CCA's margin system, the Commission proposed to expand existing requirements requiring timely and reliable price data beyond that limited topic to also encompass other substantive inputs to a CCA's risk-based margin system, to help ensure that mechanisms are in place to calculate margin during periods where inputs become unavailable, such as if a data feed becomes interrupted or corrupted.

In Parts II.A and B, the Commission discusses these new requirements in greater detail, in addition to addressing the comments received on the proposed rules.

See

Release No. 34-97516 (May 17, 2023), 88 FR 34708, 34708 (May 30, 2023) (“RWP Proposing Release”),

https://www.govinfo.gov/content/pkg/FR-2023-05-30/pdf/2023-10889.pdf.

See infra

Parts II.A and B (further discussing these amended requirements).

See infra

Part II.A (further discussing these amended requirements).

RWP Proposing Release,

supra

note 18, at 34714.

Id.

at 34715.

Importantly, to be resilient in times of market stress, a CCA will need to monitor intraday risk on an ongoing basis and use timely and accurate data inputs to its margin system. Each helps ensure that a CCA can, in turn, calculate and collect margin in a timely manner, managing its exposures to its participants throughout the day. In times of rapidly evolving or stressed market conditions, a CCA must be able to monitor risk and collect margin while also effectively analyzing the potential impact of any intraday collections on market liquidity and financial stability.

Even a robust and resilient CCA may face stressed market conditions or other events so extreme that the resources it has reserved for potential loss scenarios will prove insufficient. For example, depending on the markets they serve, CCAs may hold financial resources sufficient to withstand the default of the one or two largest participant families from among their clearing participants.

Such CCAs may not have sufficient prefunded resources to withstand defaults beyond these,

and would, in such a circumstance, be charged with allocating losses among their non-defaulting participants to close out the portfolios of its defaulting participants.

CCAs may also find that stressed market conditions lead to liquidity shortfalls or that certain events drain other capital sources that impair the functioning of the CCA. Accordingly, to help preserve financial stability and ensure the continuity of critical CCP and CSD functions in periods of extreme stress, a resilient CCA still needs to plan effectively to replenish financial resources when depleted, address and allocate losses when they accrue, and, if the CCA is unable to allocate losses and replenish depleted resources, implement an orderly wind-down and cessation or transfer of its business. If a CCA is unable to take these steps in a transparent, orderly, and effective way, it will serve as a source of contagion, resulting in the potential for significant costs not only to the CCA itself or its clearing members but also to other market participants and the broader U.S. financial system.

See, e.g.,

17 CFR 240.17ad-22(e)(4)(i), (ii) (establishing requirements related to maintaining financial resources at the minimum to enable a CCA to cover a wide range of foreseeable stress scenarios that include, but are not limited to, the default of the one or two participant families that would potentially cause the largest aggregate credit exposure for the CCA in extreme but plausible market conditions).

Financial Stability Board (“FSB”),

Central Counterparty Financial Resources for Recovery and Resolution

(Mar. 10, 2022),

https://www.fsb.org/wp-content/uploads/P090322.pdf

(“FSB Analysis”).

See, e.g.,

CPMI-IOSCO,

Recovery of financial market infrastructures

(rev. July 2017), at 2.4,

https://www.bis.org/cpmi/publ/d162.pdf

(explaining considerations related to CCP recovery in circumstances where the CCP's prefunded financial resources have been depleted) (“CPMI-IOSCO Recovery Guidance”).

The RWP Proposing Release discusses in greater detail the relationship between RWPs implemented by CCAs and the considerations related to orderly resolution of financial companies

by the FDIC pursuant to Title II of the Dodd-Frank Act. RWP Proposing Release,

supra

note 18, at 34712.

Although the CCA Standards adopted in 2016 included a requirement for CCAs to have policies and procedures that provide for plans for recovery and orderly wind-down, the Commission did not include in the rule the specific elements to be required as part of such plans.

The Commission stated that, given the nature of recovery and resolution planning, the RWP would likely reflect the specific characteristics of the CCA (

e.g.,

its ownership, organizational, and operational structures, as well as its size, systemic importance, global reach, and/or the risks inherent in the products it clears).

Since that time, each CCA has developed an RWP pursuant to the requirement for such plans in Rule 17Ad-22. In addition, the Commission has, through its supervisory process and through its participation in the ongoing consideration of issues regarding CCP recovery and resolution,

identified several elements that should be included in any RWP regardless of the market served or the products cleared, to help ensure that planning is effective, thoughtful, and thorough.

See

17 CFR 240.17ad-22(e)(3)(ii) (requiring “plans for the recovery and orderly wind-down of the CCA necessitated by credit losses, liquidity shortfalls, losses from general business risk, or any other losses”).

RWP Proposing Release,

supra

note 18, at 34709 (citing CCA Standards Adopting Release,

supra

note 5, at 70808-09).

E.g.,

CPMI-IOSCO Recovery Guidance,

supra

note 25; FSB Analysis,

supra

note 24; FSB,

Financial Resources and Tools for Central Counterparty Resolution

(Apr. 25, 2024),

https://www.fsb.org/wp-content/uploads/P250424-1.pdf

(“FSB Guidance”).

Accordingly, in the RWP Proposing Release,

the Commission proposed new requirements directed to establishing specific elements of all RWPs across CCAs, including: requirements to identify critical systems and service providers and related staffing that would support these functions, to be maintained in a recovery or wind-down scenario;

the identification and analysis of scenarios and triggers that could necessitate implementation of a recovery or wind-down;

the identification and analysis of which tools would be appropriate in certain scenarios in order to facilitate recovery or an orderly wind-down;

requirements for effecting implementation of the plan;

notification to the Commission;

robust annual testing with participants and key stakeholders, as appropriate;

and provisions for board review and approval of the plan and any material changes thereto.

As discussed in the RWP Proposing Release, these new requirements draw from existing practices at CCAs.

In Parts II.C and D, the Commission discusses in greater detail these new requirements, codified in new Rule 17Ad-26, in addition to addressing the comments received on the proposed rules. New Rule 17Ad-26 promotes three important objectives: (i) bolstering the existing RWPs at CCAs; (ii) codifying some existing RWP elements to ensure that these elements remain in the plans over time; and (iii) establishing that the RWP of any new CCA would contain each of the elements specified in the rule.

By advancing these objectives, new Rule 17Ad-26 helps ensure that, in times of extreme market stress, the recovery or wind-down of a CCA can preserve financial stability and ensure the continuity of critical CCP or CSD functions.

See

RWP Proposing Release,

supra

note 18, at 34715-16.

See infra

Parts II.C.1 and 2 (discussing critical services and service providers, respectively).

See infra

Parts II.C.3 and 4 (discussing scenarios and triggers, respectively).

See infra

Part II.C.5 (discussing tools).

See infra

Part II.C.6 (discussing requirements related to implementation).

See infra

Part II.C.7 (discussing notification to the Commission).

See infra

Part II.C.8 (discussing the testing requirement).

See infra

Part II.C.9 (discussing board review and approval of the RWP and material changes thereto, including material changes to the covered clearing agency's operations that would significantly affect the viability or execution of the RWP).

RWP Proposing Release,

supra

note 18, at 34709.

See id.

at 34711.

Id.

at 34712. In April, the FSB published guidance describing the existing set of financial resources and tools available for use by resolution authorities (such as the FDIC), in a CCP resolution. FSB Guidance,

supra

note 29. The FSB Guidance is relevant to some of the comments received on proposed Rule 17Ad-26, as discussed further in Part II.

The Commission received comments on the RWP Proposing Release from CCAs, industry groups (representing both clearing agencies and their participants), other market participants, academics, individual investors, and other interested parties.

Commenters were generally supportive of the proposal, though some commenters also expressed concerns regarding specific elements of the proposed rules. In Part II, the Commission discusses these comments in detail and the modifications made to the final rules to address comments received. As discussed further in Part II, the Commission is adopting each of the proposed rules, some substantially as proposed and others with certain modifications.

Comments received are available on the Commission's website at

https://www.sec.gov/comments/s7-10-23/s71023.htm.

In addition, and separate from the Commission's proposed rules for CCAs, the CFTC also has proposed rules directed to the RWPs of systemically important derivatives clearing organizations (“SIDCOs”) under the Commodity Exchange Act.

Like the Commission's final rules for CCAs adopted in this release, the CFTC's proposed rules are intended to codify certain common elements of RWPs across SIDCOs. With respect to some elements of final Rule 17Ad-26, the Commission has taken a different approach from the CFTC's proposed rule. For example, given the range of products cleared and markets served across CCAs, the Commission has not included in Rule 17Ad-26 requirements for scenarios at the same level of granularity as the CFTC. Nonetheless, the final Rule 17Ad-26 and the CFTC's proposal are aligned in their objectives and promote substantially similar outcomes. The differing approaches are discussed further in Part II.C.10.

Derivatives Clearing Organizations Recovery and Order Wind-Down Plans, Information for Resolution Sharing

(July 3, 2023), 88 FR 48968, 48972-73 (July 28, 2023),

https://www.govinfo.gov/content/pkg/FR-2023-07-28/pdf/2023-14457.pdf.

Commission staff communicates with the CFTC staff regularly on topics of mutual interest for their respective registrants, including RWPs, and has consulted with CFTC staff regarding RWPs.

II. Discussion of Comments Received and Final Rules

A. Collection of Intraday Margin

1. Proposed Amendment to Rule 17Ad-22(e)(6)(ii)

The RWP Proposing Release proposed to strengthen the preexisting requirements in Rule 17Ad-22(e)(6)(ii) for a CCA to have policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, among other things, includes the operational capacity to make intraday margin calls in defined circumstances.

Specifically, the proposed amendments to Rule 17Ad-22(e)(6)(ii) required a CCA that provides CCP services to establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to establish a risk-based margin system that, among other things, includes the authority and operational capacity to (i) monitor intraday exposure on an ongoing basis, and (ii) to make intraday margin calls as

frequently as circumstances warrant, including when risk thresholds specified by the CCA are breached or when the products cleared or markets served display elevated volatility.

RWP Proposing Release,

supra

note 18, at 34713.

Id.

at 34712-14. The preexisting requirement in Rule 17Ad-22(e)(6)(ii) to establish written policies and procedures that provide for marking participant positions to market and collecting margin, including variation margin or equivalent charges if relevant, at least daily, would be unchanged under the amendments being adopted in this release.

2. Discussion of Comments

a. Monitoring Intraday Exposure on an Ongoing Basis: Rule 17Ad-22(e)(6)(ii)(B)

When adopted in 2016, preexisting Rule 17Ad-22(e)(6)(ii) included the requirement that CCAs have the authority and operational capacity to make intraday margin calls.

In the RWP Proposing Release, the Commission stated that the “operational capacity” to make intraday margin calls “includes the ability to monitor intraday exposure; otherwise, it would be impossible for a CCA to make appropriate intraday margin calls if it were not monitoring its intraday exposure.”

Therefore, as originally adopted, Rule 17Ad-22(e)(6)(ii) required a CCA to have some ability to monitor for intraday exposure and make intraday margin calls but did not include a specific requirement to monitor for intraday exposure or regarding the frequency at which to monitor intraday exposures.

Id.

at 34713.

Id.

In the RWP Proposing Release, the Commission stated its continued belief, consistent with its statements when adopting the CCA Standards, that it is essential that a CCA monitor its intraday exposures because the CCA faces a risk that a CCA's exposure to its participants can change rapidly because of intraday changes in prices, positions, or both.

The Commission further stated that a requirement that such monitoring occur on an ongoing basis would contribute to ensuring that the CCA is sufficiently informed and situated to take appropriate actions to manage any intraday exposure that arises.

The Commission also stated that being able to monitor, on an ongoing basis, any decrease in the margin coverage (as compared to the changes in intraday credit exposures in its participants' portfolios) should help a CCA ensure that it is able to collect margin sufficient to cover its participants' exposures.

The Commission further stated that this requirement to monitor intraday exposure on an ongoing basis should provide each CCA with some flexibility to determine what monitoring frequency is appropriate in the market served by the CCA. Therefore, the Commission did not specify a particular time period or frequency for monitoring on an ongoing basis because a CCA “should be able to tailor its monitoring to the particular products cleared and markets served.”

Id.

Id.; see also

CPMI-IOSCO Resilience Guidance,

supra

note 14, at 5.2.2 (discussing how a CCP addresses intraday exposure in its margin system and stating that “a CCP faces the risk that its exposure to its participants can change rapidly as a result of intraday changes in prices, positions, or both; ie [sic], adverse price movements, as well as participants building larger positions through new trading (and settlement of maturing trades). For the purposes of addressing these and other forms of risk that may arise intraday, a CCP should address and monitor on an ongoing basis how such risks affect all components of its margin system, including initial margin, variation margin and add-on charges.”).

RWP Proposing Release,

supra

note 18, at 34713. The Commission also explained that a CCA “generally should consider whether its intraday monitoring considers how participants' exposures would affect all risks faced by the CCA, including those that may already by contemplated by variation margin, initial margin, or add-on charges.”

Id.

Commenters generally recognized the importance of monitoring intraday exposure.

Several commenters agreed with the approach in the proposal not to prescribe a particular monitoring frequency that would constitute an “ongoing basis,” because of the need for a CCA to be able to tailor its monitoring to the particular products cleared and markets served.

For example, one such commenter stated that, rather than the Commission prescribing a monitoring frequency, a CCA's monitoring “should align with each [CCA's] scheduled settlement, initial margin, and variation margin practices to support financial stability in both normal and volatile market conditions.”

Letter from Megan Malone Cohen, Corporate Secretary, General Counsel, The Options Clearing Corporation (July 17, 2023) at 3 (“OCC”); Letter from Timothy Cuddihy, Managing Director, Group Chief Risk Officer, Depository Trust & Clearing Corporation (July 17, 2023) at 3 (“DTCC”); Letter from Ullrich Karl, Head of Clearing Services, International Swaps and Derivatives Association, and Jacqueline Mesa, Senior Vice President, Futures Industry Association (July 17, 2023) at 6 (“The Associations”); Letter from Stephen W. Hall, Legal Director and Securities Specialist, Better Markets, Inc. (July 17, 2023) at 7 (“Better Markets”); Letter from Chris Edmonds, Chief Development Officer, Intercontinental Exchange (July 19, 2023) at 2 (“ICE”);

see also

Letter from Sarah Bessin, Deputy General Counsel, Investment Company Institute (Sept. 26, 2023) at 10 (“ICI”) (generally supporting the Commission's proposed amendments).

OCC at 3; Letter from Global Association of Central Counterparties (July 17, 2023) at 2 (“CCP12”); DTCC at 3;

see also

ICE at 2 (stating that clearing agencies should continue to have the flexibility to determine the appropriate timeframe for intraday monitoring).

CCP12 at 2.

By contrast, one commenter stated that the Commission should prescribe some particular universal, minimum monitoring frequency (

i.e.,

establishing a maximum time between instances of a CCA's intraday monitoring of its credit exposures).

This commenter acknowledged the benefit that would arise from deferring ongoing monitoring assessments to a CCA, but supported that the Commission include a universal, minimum monitoring frequency in this requirement.

Specifically, this commenter stated that “every 15 minutes should be the absolute minimum” for frequency of monitoring intraday exposures related to any possible intraday margin collection.

See

The Associations at 6.

Id.

at 6.

Id.

The Commission is adopting the requirement to monitor intraday exposures on an ongoing basis as proposed.

As stated in the RWP Proposing Release, a CCA should be able to tailor its risk monitoring to the particular products cleared and the markets served.

Accordingly, the proposed requirement to monitor intraday exposures on an ongoing basis is designed to allow a CCA to determine what monitoring frequency is appropriate for its particular market.

A CCA needs this flexibility because “more frequent monitoring may be necessary for a CCA that operates in markets where intraday trading may be more prevalent” (such as, for example, in the U.S. Treasury market),

alternatively where a CCA's “intraday exposures may tend to be larger because of specific features, such as the settlement process.”

The Commission is adding paragraph divisions to Rule 17Ad-22(e)(6)(ii) to better delineate the sections of the rule, for clarity. The portion of the rule text regarding monitoring intraday exposure would be Rule 17Ad-22(e)(6)(ii)(B). The Commission is also adding “(A)” before the portion of the rule that relates to marking participant positions to market and collecting margin at least daily and changing the punctuation at the end of that section to a semi-colon, as opposed to a comma. The Commission is also revising the punctuation at the end of Rule 17Ad-22(e)(6)(ii)(B) to a semicolon, as opposed to a comma.

RWP Proposing Release,

supra

note 18, at 34713.

Id.

See, e.g.,

Release No. 34-99149 (Dec. 13, 2023), 89 FR 2714, 2782 (Jan. 16, 2024) (“Treasury Clearing Adopting Release”),

govinfo.gov/content/pkg/FR-2024-01-16/pdf/2023-27860.pdf

(“Today, [proprietary trading firms] actively buy and sell large volumes of U.S. Treasury securities on an intraday basis using high-speed and other algorithmic trading strategies.”);

James C. Harkrader & Daniel J. Weitz, FEDS Notes: How Do Principal Trading Firms and Dealers Trade around FOMC Statement Releases?

(Dec. 31, 2020),

https://www.federalreserve.gov/econres/notes/feds-notes/how-do-principal-trading-firms-and-dealers-trade-around-fomc-statement-releases-20201231.html.

RWP Proposing Release,

supra

note 18, at 34713.

In response to the commenter seeking a required mandatory minimum frequency for intraday monitoring, the Commission does not agree that such a requirement is necessary. Previously, the Commission stated that a CCA generally should consider whether its policies and procedures for intraday monitoring address how participants' exposures would affect financial risks faced by the CCA.

For example, some CCA margin methodologies may be designed to account for some intraday price and position changes, which could have an impact on the appropriate intraday monitoring frequency. Therefore, the Commission is not adopting a minimum monitoring frequency. The Commission, however, would be able to consider whether a particular CCA's intraday monitoring frequency is reasonably designed to meet this requirement within the proposed rule change process when changes thereto are filed as a proposed rule change, including what the CCA has identified as the appropriate ongoing basis for the products cleared and the markets served and in light of the entirety of the CCA's margin methodology (that is, whether it has other components which account for some intraday price and position changes).

More generally, whether a CCA has established, implemented, maintained and enforced written policies and procedures reasonably designed to comply with Rule 17Ad-22(e) is subject to examination.

These risks could include those that “may already be contemplated by variation margin, initial margin, or add-on charges.”

Id.

See infra

note 84 and accompanying text.

When designing its intraday margin monitoring, a CCA generally should consider whether its monitoring encompasses all aspects of intraday exposures, including how such exposures affect all components of a CCA's margin model, including initial margin, variation margin, and add-on charges.

A CCA also generally should consider whether its basis to recalculate margin intraday accounts for both position changes and price volatility.

See, e.g.,

CPMI-IOSCO Resilience Guidance,

supra

note 14, at 5.2.22.

b. Circumstances for Intraday Margin Calls

Preexisting Rule 17Ad-22(e)(6)(ii) also required that a CCA's written policies and procedures be reasonably designed to include the authority and operational capacity to make intraday margin calls “in defined circumstances.”

However, preexisting Rule 17Ad-22(e)(6)(ii) did not define what constitutes “defined circumstances.”

In proposing the requirement regarding collecting intraday margin as frequently as “circumstances warrant,” the Commission stated that the proposed requirement would build upon and expand this preexisting requirement (

i.e.,

to have the authority and operational capacity to make intraday margin calls in “defined circumstances”). Specifically, the proposed requirement would identify two particular circumstances: (1) when risk thresholds specified by the CCA are breached or (2) when the products cleared or markets served display elevated volatility. The proposed requirement would also continue to provide flexibility to CCAs to make intraday margin calls as frequently as circumstances warrant.

17 CFR 240.17ad-22(e)(6)(ii).

Id.; see also

RWP Proposing Release,

supra

note 18, at 34713.

RWP Proposing Release,

supra

note 18, at 34713-14.

Commenters generally agreed with the need for thresholds regarding when a CCA would make intraday margin calls. However, commenters raised several concerns which are addressed below.

See

The Associations; Better Markets; ICI; Letter from Thomas F. Price, Managing Director, Technology, Operations, and Business Continuity, SIFMA, and William C. Thum, Managing Director and Associate General Counsel, SIFMA Asset Management Group (Sept. 26, 2023) (“SIFMA”).

i. Scheduled vs. Unscheduled Intraday Calls

Several commenters suggested that intraday margin calls generally should be scheduled, with unscheduled intraday margin calls limited to extreme circumstances.

One such commenter specified that scheduled intraday margin calls should be at the same time every day, in the early afternoon.

This commenter explained that the unpredictability of unscheduled intraday margin calls may require a fund (which is a participant in a CCA) to keep a portion of its assets in lower-yielding, highly liquid assets.

ICI at 10-11; Letter from John P. Davidson (June 5, 2023) at 2, 9 (“Davidson”) (stating that intraday financial flows should be mandatory at a fixed scheduled time and at the same time across all linked CCPs, but also acknowledging “the occasional need for an additional set of intraday cash and collateral movements in cases of truly extreme market moves”).

SIFMA at 8.

Id.

In response to these comments seeking additional requirements for scheduled intraday margin calls and to limit unscheduled intraday margin calls, the Commission recognizes that scheduled intraday margin calls provide certainty for market participants about when resources will be needed. However, there may be circumstances that arise intraday, such as in times of elevated volatility or significant position changes, where a CCA needs to manage its exposure to a participant through an unscheduled margin call.

In such circumstances, scheduled intraday margin calls may not be sufficient to ensure that a CCA collects margin to cover its exposure to its participants. To ensure strong risk management in such circumstances, CCAs need to have the ability to make unscheduled intraday margin calls. It would not be appropriate to mandate that CCAs only make scheduled intraday margin calls, and, therefore, the Commission is not adopting such a requirement to require scheduled intraday margin calls.

For example, if a CCA schedules intraday margin collection at noon every day, there may be instances when thresholds are triggered after that scheduled time, and the CCA would then make an unscheduled margin call to avoid significant exposure being carried overnight.

However, the Commission understands the need for market participants to plan for the potential resources needed to meet intraday margin calls. To that end, the amended Rule 17Ad-22(e)(6)(ii)(C) states that a CCA must establish policies and procedures regarding at least two particular circumstances in which a CCA would make intraday margin calls, that is, when risk thresholds specified by the CCA are breached and when products cleared or markets served display elevated volatility, as discussed in Part II.A.2.b

infra.

For example, a CCA could specify that its risk threshold is breached when the difference between a member's start of day margin and a calculation of its intraday margin based on its new positions exceeds a predetermined percentage or dollar amount. Thus, market participants should be able to plan for their potential resource needs to meet intraday margin calls because, as discussed in Part II.A.2.b.ii

infra,

a CCA is required to have certain transparency around its margin model. This transparency will allow a market participant to understand those specified circumstances in which a CCA would make intraday margin calls and would therefore allow the market participant to make arrangements for additional liquidity in such circumstances, such

as, for example, securing additional financing to cover such margin calls.

ii. Need for Clear Thresholds and Transparency

Commenters also requested that the Commission revise the proposal to mandate that a CCA define its criteria for any unscheduled intraday margin call in advance of any unscheduled intraday margin call and to require additional disclosures regarding intraday margin calls.

These commenters stated that requiring clear and transparent policies regarding the conditions under which a CCA might make an intraday margin call, both on a scheduled and unscheduled basis, would enhance participants' ability to prepare for these margin calls and understand any potential demands on their liquidity arising from such a call.

The Associations at 2; Better Markets at 8; ICI at 10-11; SIFMA at 9.

The Associations at 2-3 (requesting “clear and transparent policies with regards to the conditions under which a [CCA] might call intraday margin”); Better Markets at 8 (requesting “full transparency for triggers of intraday margin calls”); SIFMA at 9 (requesting “published triggers and thresholds to calculate both start of day and intraday margin requirements”); ICI at 11 (requesting a CCA “communicate to market participants the thresholds that would trigger both scheduled and ad hoc [sic] intraday margin calls”).

The Commission agrees with the commenters that it is essential that a CCA determine and clearly communicate

ex ante

in what circumstances it would make both scheduled and

ad hoc

intraday margin calls. However, as discussed further below, CCAs already are subject to such requirements in preexisting Rule 17Ad-22(e)(6)(ii) and (e)(23) and 17 CFR 240.19b-4 (“Rule 19b-4”). Further, by specifying two instances in which CCAs must establish, implement, maintain and enforce policies and procedures to collect intraday margin, the amendments being adopted in this release will identify for clearing participants conditions under which a CCA would make an intraday margin call.

The Commission is adding paragraph divisions to Rule 17Ad-22(e)(6)(ii) to better delineate the sections of the rule, for clarity. The portion of the rule text regarding the authority and operational capacity to make intraday margin calls is in Rule 17Ad-22(e)(6)(ii)(C).

First, with respect to the commenters' request to require that CCAs determine the circumstances for intraday margin calls, a CCA already is required, under preexisting Rule 17Ad-22(e)(6)(ii), to have certain policies and procedures regarding intraday margin. These policies and procedures are the framework that a CCA uses when determining whether to make intraday margin calls, and these policies and procedures must identify the circumstances in which a CCA would make intraday margin calls.

This requirement will be strengthened by the amendments adopted in this release, which provide more specificity that the CCA must have policies and procedures to be able to make intraday margin calls as frequently as circumstances warrant and in two particular circumstances identified in the rule. Specifically, the amendments to preexisting Rule 17Ad-22(e)(6)(ii) require that a CCA have written policies and procedures to cover its credit exposures to its participants by establishing a risk-based margin system, which, among other things, includes the authority and operational capacity to make intraday margin calls “as frequently as circumstances warrant” including in two particular situations: when risk thresholds specified by the CCA are breached and in times of elevated volatility. This requirement should ensure that the CCA develops

ex ante

policies and procedures to determine risk thresholds for intraday margin and when it considers volatility to be elevated above typical levels in a manner specific to the products cleared and the markets served. Because these amendments would identify specific circumstances in which a CCA must have the authority and operational capacity to make intraday margin calls which would be part of a CCA's overall disclosure requirements regarding its margin methodology, as discussed further below,

these amendments should improve participants' ability to understand when they may be subject to additional margin calls. This improved understanding should further allow participants to be better able to prepare to provide additional financial resources in anticipation of additional margin calls.

This framework is not required to foreclose or prohibit the use of any discretion in such determinations, as discussed further in Part II.A.2.b.iii,

infra.

See infra

notes 81-100 and accompanying text (discussing several Commission requirements that promote disclosure and transparency).

RWP Proposing Release,

supra

note 18, at 34714.

Second, with regard to the commenters' request to clearly communicate

ex ante

the circumstances in which a CCA would make intraday margin calls, the Commission agrees that such

ex ante

transparency is essential for a CCA's participants, but disagrees that any additional requirements are necessary to achieve such transparency. A CCA's participants already have such transparency for several reasons. As a registered clearing agency, a CCA is a self-regulatory organization (“SRO”) under the Exchange Act,

subject to the provisions of section 19(b) of the Exchange Act which requires public notice and an opportunity for public comment on any rule changes that an SRO seeks to adopt.

In addition, a CCA potentially is a “designated financial market utility” (alternatively, a “systemically important financial market utility” or “SIFMU”) subject to section 806(e) of the Dodd-Frank Act regarding advance notice of material changes to its rules, procedures, or operations that could materially affect the nature or level of risks presented. Further, the CCA Standards impose requirements related to transparency and disclosure to its participants.

15 U.S.C. 78c(a)(26) (“The term `self-regulatory organization' means any [. . .] registered clearing agency”).

See, e.g., infra

note 87 (discussing such changes that previously have been considered by the Commission);

infra

note 119 (describing Commission rules that promote transparency regarding margin practices at registered clearing agencies).

A CCA's margin methodology, which would include, among other things, the criteria used to determine whether to make intraday margin calls, constitutes a material aspect of its operations, meaning that it is part of a CCA's stated policies, practices, or interpretations under Exchange Act Rule 19b-4.

As such, a CCA's margin methodology is subject to the filing obligations applicable to SROs under section 19(b) of the Exchange Act regarding any proposed rule or proposed change to its rules.

The proposed rule filing process provides transparency into an SRO's proposed changes, through notice and comment. An SRO is obligated to file its proposed rule changes in a manner consistent with the requirements in Form 19b-4, which is intended to elicit information necessary for the public to

provide meaningful comment on the proposed rule change and for the Commission to determine whether the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder.

The Commission then publishes all proposed rule changes for comment. In this way, the rule filing process promotes transparency to market participants and the public by ensuring notice is provided regarding a CCA's new initiatives or changes to governance, operations, and risk management.

With respect to a CCA's margin methodology, the rule filing process should provide transparency about how and when a CCA would calculate margin, including on an intraday basis, which is consistent with the requirements sought by commenters.

17 CFR 240.19b-4(a)(6)(i) (defining “stated policy, practice, or interpretation” to include,

inter alia,

“[a]ny material aspect of the operation of the facilities of the self-regulatory organization”). Additionally, Rule 19b-4 would also apply to certain statements that a CCA issues concerning its margin methodology. Specifically, this rule would cover any CCA statement “made generally available to the membership of [. . . the CCA] that establishes or changes any standard, limit, or guideline, with respect to: (a) the rights, obligations, and privileges of its membership; or (b) the meaning, administration, or enforcement of an existing rule.” 17 CFR 240.19b-4(a)(6)(ii).

15 U.S.C. 78s(b)(1) (requiring each SRO to “file with the Commission, in accordance with such rules as the Commission may prescribe, copies of any proposed rule or any proposed change in, addition to, or deletion from the rules of such self-regulatory organization”);

see also

17 CFR 240.19b-4. In addition, a stated policy, practice, or interpretation of an SRO (

e.g.,

written policies and procedures) would generally be deemed to be a proposed rule change.

See

17 CFR 240.19b-4(c).

See

General Instructions for Form 19b-4, at Instruction B,

https://www.sec.gov/files/form-19b4-general-instructions.pdf.

The Form 19b-4 specifies the contents that must be included in a proposed rule change filing includes, among other items, a statement of purpose for the proposed rule change, which describes the reasons for adopting the proposed rule change, any problems the proposed rule change is intended to address, the manner in which the proposed rule change will operate to resolve those problems, the manner in which the proposed rule change will affect various persons (

e.g.,

brokers, dealers, issuers, and investors), and any significant problems known to the SRO that persons affected are likely to have in complying with the proposed rule change.

Id.

at Information to Be Included in the Completed Form, Item 3(a). The SRO must also include in its proposed rule change the complete text of the proposed rule.

Id.

at Information to Be Included in the Completed Form, Item 1(a). The SRO may request confidential treatment of any portion of its filing,

see

17 CFR 240.24b-2, but it would still have to comply with the requirements of Form 19b-4 with respect to describing the contents of the proposed rule change for public comment.

See

RWP Proposing Release,

supra

note 18, at 34711.

The Commission has considered numerous proposed rule changes regarding CCAs' margin methodologies. Notably, these proposed rule changes have addressed CCAs' intraday margin policies and procedures, and these proposed rule changes have identified thresholds and criteria that a CCA would use in determining whether to make an intraday margin call, similar to what the commenters have requested.

The notice and comment process provided by section 19(b) of the Exchange Act therefore provides for transparency into a CCA's margin methodology, including input from participants.

See, e.g.,

Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Implement Changes to the Required Fund Deposit Calculation in the GSD Rulebook, Release No. 34-83362 (June 1, 2018), 83 FR 26514 (June 7, 2018) (File No. SR-FICC-2018-001) (approving proposed rule change to provide transparency with respect to GSD's existing authority under GSD Rule 4 to calculate and assess intraday margin amounts, by identifying the three criteria that GSD uses to calculate the intraday amount due ((i) the dollar threshold, which evaluates whether a member's intraday VaR Charge equals or exceeds a set dollar amount when compared to the VaR Charge that was included in the most recent margin collection: (ii) the percentage threshold, which evaluates whether the intraday VaR Charge equals or exceeds a percentage increase of the VaR Charge that was included in the most recent collection; and (iii) the coverage target, which evaluates whether a member is experiencing backtesting results below a 99% confidence level), and stating that FICC assesses intraday margin when all three criteria are breached and, under certain market conditions when the thresholds in (i) and (ii) are breached); FICC Important Notice GOV1244-22 (Apr. 11, 2022) (stating that, consistent with its Rule 4 authority, GSD will assess an Intraday Supplement Fund Deposit on a Netting Member if (i) a change in the Netting Member's Intraday VaR Charge equals or exceeds $1 million when compared to its most recent VaR Charge calculation, (ii) the Netting Member's Intraday VaR Charge equals or exceeds 100% of its most recent VaR Charge calculation, and (iii) the Netting Member's backtesting coverage is below 100%. Additionally, Netting Members who breached the thresholds for (i) and (ii) and have fewer than 100 trading days in a rolling 12-month period will be assessed an Intraday Supplemental Fund Deposit regardless of their backtesting coverage); Order Approving Proposed Rule Change to Adopt Intraday Volatility Charge and Eliminate Intraday Backtesting Charge, Release No. 34-97129 (Mar. 13, 2023), 88 FR 16681 (Mar. 20, 2023) (File No. SR-NSCC-2022-009) (adopting an intraday volatility charge as part of NSCC's margin methodology that would increase the margin collected from members whose trading portfolios experience large and unexpected intraday volatility).

In addition, when a CCA is a SIFMU,

it is also subject to the regulatory framework of the Clearing Supervision Act.

Once designated by FSOC, CCAs that are SIFMUs are required to publicly file 60-days advance notice with the Commission of changes to rules, procedures, and operations that could materially affect the nature or level of risk presented by the designated clearing agency (“advance notice”), and, pursuant to the Commission's rules, the Commission shall provide for prompt publication of such an advance notice, and then the public has the opportunity to comment on such an advance notice.

Rule 19b-4(n) defines the term “materially affect the nature or level of risk presented” to mean matters as to which there is a reasonable possibility that the change could affect the performance of essential clearing and settlement functions or the overall nature or level of risk presented by the designated clearing agency, and it further provides examples of such potential changes as including, among other things, changes that could materially affect risk management or financial resources of the designated clearing agency.

When adopting this requirement, the Commission identified changes to the “methods for making margin calculations” as among the additional examples of such matters.

Therefore, any changes to the intraday margin policies and procedures of a CCA that has been designated as a SIFMU could also be subject to the advance notice process if the changes constitute a material change to the nature or level of risk presented by the CCA, and the advance notice process would bring additional transparency into such changes.

Specifically, the Clearing Supervision Act provides for the enhanced regulation of a CCA that qualifies as a “financial market utility” that the FSOC designates as “systemically important” (a “designated financial market utility”).

See

12 U.S.C. 5462(6)(A) (defining a “financial market utility” to include “any person that manages or operates a multilateral system or the purpose of transferring, clearing, or settling payments, securities or other financial transactions among financial institutions or between financial institutions and the person”) and 12 U.S.C. 5462(4)(defining a “designated financial market utility” to mean “a financial market utility” that FSOC has designated as “systemically important”);

see also

12 U.S.C. 5463 (discussing FSOC's ability to designate entities as “systemically important”). On July 18, 2012, FSOC designated four CCAs as systemically important financial market utilities: The Depository Trust Company (“DTC”); Fixed Income Clearing Corporation (“FICC”); National Securities Clearing Corporation (“NSCC”); and The Options Clearing Corporation (“OCC”). FSOC,

2012 Annual Report: Appendix A: Designation of Systemically Important Financial Market Utilities

(July 18, 2012),

https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf.

See

12 U.S.C. 5461

et seq.

The Clearing Supervision Act defines a “designated clearing entity” to include a “designated financial market utility” that is a clearing agency registered with the Commission (of which a CCA is a subset).

See

12 U.S.C. 5462(3). The Clearing Supervision Act defines the Commission as the “Supervisory Agency” for the four designated clearing agencies that are CCAs (

i.e.,

DTC, NSCC, FICC, and OCC).

See

12 U.S.C. 5462(8)(A)(i). The Commission published a final rule concerning the filing and publication of advance notices for designated clearing agencies in 2012.

See

17 CFR 240.19b-4(n); Release No. 34-67286 (June 28, 2012), 77 FR 41602 (July 13, 2012) (File No. S7-44-10) (“Filing of Advance Notices”),

https://www.govinfo.gov/content/pkg/FR-2012-07-13/pdf/2012-16233.pdf.

17 CFR 240.19b-4(n)(2)(i), (ii).

See

Filing of Advance Notices,

supra

note 90, at 41620.

Moreover, under the CCA Standards, a CCA is obligated to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for publicly disclosing all relevant rules and material procedures, including key aspects of its default rules and procedures.

Such public disclosures generally should include a discussion of a CCA's margin methodology, which could include how the CCA determines intraday margin, and they should, in turn, allow a market participant to understand how a CCA calculates margin, including any margin add-ons

and cross-margin arrangements with other clearing agencies. In addition, under Rule 17Ad-22(e)(23)(ii), these policies and procedures must provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the CCA.

17 CFR 240.17ad-22(e)(23)(i).

17 CFR 240.17ad-22(e)(23)(ii).

Rule 17Ad-22(e)(23)(iv) also requires that a CCA produce a comprehensive public disclosure that describes its material rules, policies, and procedures regarding its legal, governance, risk management, and operating framework (a “Disclosure Framework”), accurate in all material respects at the time of publication, that includes, among other things, a standard-by-standard summary narrative for each applicable standard set forth in paragraphs (e)(1) through (23) of the CCA Standards with sufficient detail and context to enable a reader to understand the CCA's approach to controlling the risks and addressing the requirement in each standard.

Therefore, a CCA must issue a public document addressing each of the CCA Standards, including those with respect to margin under Rule 17Ad-22(e)(6).

A CCA generally should consider whether its disclosures regarding its margin methodology, through its Disclosure Framework and/or other publicly available documents, allows participants to understand how the model reacts to market conditions and to assess with some reasonable degree of certainty whether it will be subject to a margin call and in what amount. In addition, a CCA generally should consider whether it could provide a public-facing margin calculator to allow its participants, and market participants more generally, to understand the potential amount of any intraday margin calls on their portfolios, including with respect to add-on charges and any applicable cross-margin arrangements.

17 CFR 240.17ad-22(e)(23)(iv).

See

DTC, Disclosure Framework for Covered Clearing Agencies and Financial Market Infrastructure (Mar. 2024),

https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC-Disclosure-Framework-2024-Q1.pdf;

FICC, Disclosure Framework for Covered Clearing Agencies and Financial Market Infrastructure (Mar. 2024),

https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/FICC-Disclosure-Framework-Q1-2024.pdf;

ICE, Disclosure Framework (July 31, 2023),

https://www.ice.com/publicdocs/clear_credit/ICEClearCredit_DisclosureFramework.pdf;

LCH, Comprehensive Disclosure (July 31, 2024),

https://www.lch.com/system/files/media_root/LCH%20SA%20-%20Comprehensive%20Disclosure%20as%20required%20by%20SEC%20Rule%2017Ad-22%28e%29%2823%29_2022%20Q2_2024.pdf;

NSCC, Disclosure Framework for Covered Clearing Agencies and Financial Market Infrastructure (Mar. 2024),

https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC-Disclosure-Framework-Q1-2024.pdf;

OCC, Disclosure Framework for Financial Market Infrastructures (July 25, 2024),

https://www.theocc.com/getmedia/4664dece-7172-42a5-8f55-5982f358b696/pfmi-disclosures.pdf.

In light of the existing requirements with respect to transparency in the SRO rule filing process, the advance notice process, and Rule 17Ad-22(e)(23), the Commission does not believe additional mandatory disclosures are necessary at this time. For example, every CCAs' Disclosure Framework discusses the CCAs' margin methodologies.

Several CCAs have published documents further outlining their margin methodologies, including the formulas used in calculating margin.

A CCA generally should consider whether it provides such information,

i.e.,

the formulas used in calculating margin, to market participants, such that a market participant could make such calculations on its own. Finally, at least one CCA has developed a public calculator to provide market participants with the ability to calculate potential margin obligations on a simulated portfolio, for given positions and market value, using its Value at Risk methodology.

Although not a substitute for a market participant's ability to understand a CCA's margin methodology on its own, such a public calculator is a helpful tool for determining how a CCA's margin methodology operates, particularly if the calculator is able to provide information related to add-on charges and any applicable cross-margin arrangements. A CCA generally should consider whether it sufficiently identifies in its Disclosure Frameworks and any other documentation that it makes available the circumstances required under the amendments adopted to Rule 17Ad-22(e)(6)(ii) regarding when a CCA must collect intraday margin. Commenters requested that the Commission require a CCA's intraday margin model to be transparent such that a CCA's participants could anticipate a CCA's future intraday margin calls.

100

As discussed above, a CCA should generally consider whether it sufficiently identifies when Rule 17Ad-22(e)(6)(ii) would require an intraday margin call. Such transparency could improve the ability of a CCA's participants to understand when participants may be subject to additional margin calls. However, participants cannot expect to be able to predict every intraday margin call with complete certainty, and being able to do so may create moral hazard that would undermine the CCA's ability to manage risk effectively.

See id.

See, e.g., https://www.theocc.com/risk-management/margin-methodology

;

https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/GSD-Clearing-Fund-Methodology-Overview.pdf

https://www.dtcc.com/managing-risk/stress-testing-and-liquidity-risk-management/ccfl-public-calculator

100

See supra

note 80 and accompanying text.

Finally, one commenter stated that CCAs should proactively engage with clearing members ahead of applying intraday margin calls to alleviate the potential liquidity risk for clearing members.

101

The Commission acknowledges that it could be helpful for a CCA to engage with its clearing members regarding potential upcoming intraday margin calls. Given the potentially fluid nature of circumstances necessitating the need for an intraday margin call and the possibility that such engagement would not be possible in a time of market stress, imposing such engagement as an obligation would not be appropriate. However, a CCA generally should consider whether its written policies and procedures provide for engagement with a CCA ahead of applying an intraday margin call, as circumstances permit.

101

SIFMA at 9. This commenter also suggested that the Commission should require that a CCA provide the Commission (and to the extent possible, its clearing participants) with an explanation for any discretionary intraday margin calls.

Id.

at 10.

iii. Determinations by CCAs To Collect Intraday Margin

Several commenters addressed the role of discretion in the proposed requirement for a CCA to have the authority and operational capacity to make intraday margin calls as frequently as circumstances warrant, including when risk thresholds specified by the CCA are breached or when the products cleared or markets served display elevated volatility.

102

Specifically, while generally supportive of the proposal, several commenters sought confirmation that a CCA could use discretion when deciding to issue intraday margin calls.

103

These

commenters stated that such discretion was necessary to allow the CCA to consider the potential procyclical impacts of an intraday margin call and/or any financial stability impacts.

104

In this context, procyclicality refers to “changes in risk-management practices that are positively correlated with market, business, or credit cycle fluctuations and cause or exacerbate financial instability.”

105

For example, margin calls during periods of declining asset prices may cause participants to sell assets, putting further negative pressure on asset prices and the market.

106

Such events could negatively affect other CCA participants, as well as other CCAs and their markets.

107

102

See

DTCC; ICE; OCC; CCP12.

103

DTCC at 4 (requesting additional clarity regarding a CCA's discretion and flexibility and stating that a CCA must maintain the discretion and flexibility to determine if intraday margin calls are required based on the totality of all circumstances the CCA may consider relevant and appropriate); ICE at 2 (stating that a CCA should be allowed the discretion on when and how to use its authority to make intraday margin calls under the particular circumstances); OCC at 4 (seeking explicit confirmation that a CCA may “exercise judgment when determining whether and when to actually make intraday margin calls, based on all relevant circumstances and using predefined criteria);

CCP12 at 2 (supporting the proposed approach to intraday margin, but also stating that a CCA needs the ability to exercise discretion when issuing intraday margin calls, including the ability to tailor [its] intraday margin call processes to the characteristics of the market it clears (

e.g.,

market structure));

see also

Davidson at 11.

But see id.

at 9 (explaining that a CCA would only have an “occasional need” for an unscheduled intraday margin call” for only “truly extreme market moves”); and 10 (warning that unfettered issuances of intraday margin calls could become “liquidity sinks” and “absorb[ ] liquidity like a giant sponge”).

104

DTCC at 4 (stating discretion is necessary when considering issuing an intraday market call to consider various factors, such as persistent exposure to a participant during normal market conditions, general market conditions, and any possible procyclical effects a margin collection may trigger); ICE at 2 (stating that discretion is needed for a CCA to consider the procyclical effects of any possible intraday margin call, such as “exacerbating credit and liquidity concerns with clearing members,” or “in extreme cases[,] causing market participant defaults); OCC at 4 (stating that, among other things, a CCA's discretion should include considerations related to anti-procyclicality (by maximizing predictability of liquidity demands) and financial market stability); CCP12 at 2 (stating that this discretion would allow a CCA to consider any potential intraday margin call's “negative procyclical effects” and/or “impacts to the stability of the financial system”).

105

PFMI,

supra

note 9, at 47;

see also

Committee on the Global Financial System,

The role of margin requirements and haircuts in procyclicality

(Mar. 23, 2010) at 8 (defining procyclicality as “the mutually reinforcing interactions between the financial and real sectors of the economy that tend to amplify business cycle fluctuations and cause or exacerbate financial instability”),

https://www.bis.org/publ/cgfs36.pdf

106

See infra

Part IV.C.2.a (discussing the relationship between procyclicality and intraday margin calls).

107

Id.

As discussed above, a CCA's margin methodology includes the criteria that a CCA uses to determine whether to make intraday margin calls.

108

Because a CCA's margin methodology constitutes aspects of the CCA's stated policies, practices, or interpretations under Rule 19b-4, a CCA is required to file a proposed rule change when the CCA revises its margin methodology (including, for example, revisions related to how its risk management concerns may affect a CCA's determination to issue an intraday margin call).

109

In such a filing, the CCA would describe how any such revisions are consistent with the requirements of Exchange Act and the rules thereunder, including Rule 17Ad-22(e)(6).

108

See supra

note 83 and accompanying text.

109

Id.

The Commission agrees with these commenters that a CCA's policies and procedures regarding intraday margin generally should be, under Rule 17Ad-22(e)(6)(ii), reasonably designed to address such risk management concerns, such as procyclicality. The Commission confirms that a CCA's consideration of such concerns (and more generally, of a CCA's understanding of its participants' activity and overall market conditions) in its policies and procedures regarding intraday margin (including a CCA's decision to collect or not collect margin in response to such consideration) is permissible and consistent with the requirements of both preexisting Rule 17Ad-22(e)(6)(ii) and the amendments being adopted in this release. The requirement to adopt policies and procedures that include the authority and operational capacity to make intraday margin calls as frequently as circumstances warrant, including when risk thresholds specified by the CCA are breached or when the products cleared or markets served display elevated volatility,

110

should ensure that a CCA establishes the criteria and thresholds that it would consider when determining whether to make an intraday margin call. Such criteria are subject to the transparency and disclosure requirements discussed above in Part II.A.2.b.ii, and as an SRO, a CCA is obligated to follow its own rules. But the CCA's criteria and thresholds are not required to be inflexible or self-executing. A CCA generally should consider how its policies and procedures specify what factors the CCA would consider when determining when to make an intraday margin call when thresholds are breached or there is elevated volatility.

111

110

See supra

Part II.A.2.ii (discussing elevated volatility under Rule 17Ad-22(e)(6)(ii) as when a CCA considers volatility to be elevated above typical levels in a manner specific to the products cleared and the markets served);

contra

CCA Standards Adopting Release,

supra

note 5, at 70815 (stating that what would constitute “high volatility [. . .] may vary across asset classes”).

111

As discussed above,

supra

note 101, one commenter sought for the Commission to require disclosure to the Commission and, if practicable, a CCA's participants, of the explanation for any “discretionary” intraday margin calls. SIFMA at 10. However, such disclosure is not necessary because these policies and procedures should clearly indicate when the CCA would make an intraday margin call. By contrast, the Commission is requiring that a CCA document when it determines

not

to make an intraday margin call when its policies and procedures would otherwise indicate as such.

See infra

note 118 and accompanying text.

The Commission is adopting this requirement as proposed.

112

A CCA's determination to issue intraday margin calls, consistent with its

ex ante

policies and procedures, should improve risk management outcomes by enabling a CCA to apply its risk management expertise to changing intraday circumstances, such as the extreme price volatility or significant position changes recently experienced in January 2021.

113

A CCA should be better positioned to respond to a market event more effectively by developing policies and procedures that provide a clear framework for the timing and collection of intraday margin, but that also allows for the CCA to use its expertise (in specific products and markets) to analyze the particular facts and circumstances related to the market event and the affected market participants.

112

The Commission is making several clarifying changes to Rule 17Ad-22(e)(6)(ii)(C): (1) capitalizing the first word of the rule text to read “Monitors”; (2) adding after the word “including” the language “in the following circumstances”, followed by a semi-colon; (3) adding (1) and (2) to separate the two circumstances described in the rule text; and (4) adding the word “and” following the text of the rule.

113

See supra

note 17 and accompanying text (further discussing the response to heightened volatility in GME and other equity securities).

Commenters observed the importance of avoiding procyclicality in margin calls generally and the importance of considering the impact an intraday margin call may have on a CCA's participant.

114

The Commission agrees that a CCA generally should consider these issues when determining whether to issue an intraday margin call, consistent with the applicable regulatory requirement to consider, and produce margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market, and to calculate margin sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default.

115

114

SIFMA at 8-9.

115

17 CFR 240.17ad-22(e)(6)(i), (iii).

Therefore, in this analysis, a CCA generally should consider, consistent with its policies and procedures, how its approach to intraday margin aligns with broader systemic objectives, such as minimizing potential procyclical effects and avoiding liquidity drains on

its participants. For example, a CCA may choose not to issue an intraday margin call triggered by the thresholds set forth in its policies and procedures (

i.e.,

when risk thresholds specified by the CCA are breached or when the products cleared or markets served display elevated volatility) if, in the CCA's judgment, the intraday call is not required to effectively manage the risks posed to the CCA. A CCA's decision not to issue an intraday margin call could, therefore, avoid unnecessarily worsening market conditions by fostering procyclicality, and drawing on its members' capital more than needed (

i.e.,

avoiding “liquidity sinks”).

116

See infra

notes 559-563 and accompanying text (further discussing the economic impact of procyclical margin calls and considerations that a CCA may undertake in evaluating when to make or not make a call).

A commenter also stated that the Commission should require that a CCA provide to the Commission, and to the extent possible, its clearing members, an explanation of the reasons for discretionary intraday margin calls because such explanation would allow for an evaluation of whether the need to make such a call might have been averted by improved procedures.

117

The Commission does not agree that, as the commenter suggests, an obligation to provide an explanation and disclosure is necessary when a CCA makes an intraday margin call, because its policies and procedures already must identify and document the circumstances in which such a call would be made. However, a CCA should be subject to an obligation to document when it, consistent with its policies and procedures, determines not to make an intraday margin call in circumstances identified in such policies and procedures. A requirement to document when a CCA determines not to make such an intraday margin call, pursuant to its written policies and procedures, is broadly consistent with the goal identified by the commenter: that the CCA should be able to evaluate the implementation of its policies and procedures with respect to intraday margin. By keeping a record of such instances in which a CCA determines not to make an intraday margin call, pursuant to its written policies and procedures, it should be easier for a CCA to review its determination not to make an intraday margin call and to determine whether a breach of the thresholds that triggered an intraday call could have been averted by changed procedures. It also should better allow the CCA to holistically consider the procyclical impacts of intraday margin calls, which, as commenters stated, should be considered as part of a CCA's analysis about such calls.

117

SIFMA at 9, 10.

Therefore, the Commission is further amending Rule 17Ad-22(e)(6)(ii) to add paragraph (e)(6)(ii)(D) to require that a CCA's risk-based margin system “[d]ocuments when the covered clearing agency determines not to make an intraday margin call pursuant to its written policies and procedures required under paragraph (e)(6)(ii)(C)”.

118

See supra

note 111.

A CCA generally should review, on a regular basis, any documentation created pursuant to this requirement of Rule 17Ad-22(e)(6)(ii)(D). Such documentation can be used to identify the CCA's rationale for not making an intraday margin call. In addition, a CCA generally should consider whether (and how) to disclose the information required under this documentation requirement to its participants, to provide additional transparency to its participants about when a CCA chooses not to make intraday margin calls, including whether such disclosure is necessary pursuant to Rule 17Ad-25(j), which requires that the CCA establish, implement, maintain, and enforce written policies and procedures reasonably designed to require the board of directors to solicit, consider, and document its consideration of the views of participants and other relevant stakeholders of the registered clearing agency regarding material developments in its risk management and operations on a recurring basis.

119

Consistent with this obligation under Rule 17Ad-25(j), a CCA generally should consider how best to solicit the views of participants and other relevant stakeholders regarding intraday margin calls, which could include how they were applied in the past by the CCA.

119

17 CFR 240.17ad-25(j).

c. Other Comments

The Commission proposed requirements related to monitoring for intraday exposure and providing further specificity as to the circumstances when an intraday margin call could be made. However, one commenter addressed three additional issues related to more granular details within the calculation of an intraday margin call. First, this commenter addressed the nature of an intraday margin call, stating that any margin determination, including any intraday determination, should be made with respect to a clearing member's current positions and the current value of those positions, to the extent practicable.

120

A CCA generally should determine margin based on its participants' positions, including a participant's total portfolio (that is, not just positions at end of day or intraday).

121

120

SIFMA at 9. The Commission understands this commenter to be referring to the difference between initial margin, which is typically collected to cover potential changes in the value of each participant's position (that is, potential future exposure) over the appropriate close-out period in the event that the participant defaults, as compared to variation margin, which is collected and paid out to reflect current exposures resulting from actual changes in market prices and is typically calculated by marking open positions to current market prices.

See, e.g.,

PFMI,

supra

note 9, at 51. The commenter stated that an intraday call should clearly separate the initial margin and variation margin components of such a call. SIFMA at 9.

121

See, e.g.,

CPMI-IOSCO Resilience Guidance,

supra

note 14, sec. 5.2.22 (“A CCP faces the risk that its exposure to its participants can change rapidly as a result of intraday changes in prices, positions, or both; ie adverse price movements, as well as participants building larger positions through new trading (and settlement of maturing trades). For the purposes of addressing these and other forms of risk that may arise intraday, a CCP should address and monitor on an ongoing basis how such risks affect all components of its margin system . . .”).

Second, this commenter also requested that a CCA net against each other any amounts owing to a clearing member from, on the one hand, initial margin and, on the other hand, variation margin.

122

Third, this commenter also requested that intraday margin calls be bidirectional to return margin cash or collateral to a CCA's participants.

123

122

SIFMA at 9.

123

Id.

at 7-8, 10; Davidson at 2, 11 (stating that such a bidirectional flow would allow the participants to avoid “unnecessary liquidity timing gaps”);

see also

The Associations at 2 (requesting prompt return of margin to clearing members and clients to alleviate liquidity constraints).

In response to these points, the Commission reiterates that the circumstances that could give rise to intraday margin calls at a CCA may vary significantly (

e.g.,

intraday volatility, large changes in participant positions), and may present varied challenges. Accordingly, although there may be circumstances where it would be appropriate for a CCA to take the approach suggested by the commenter, the Commission's approach to Rule 17Ad-22(e) is to provide flexibility to CCAs, subject to their obligations and responsibilities as SROs under the Exchange Act, to design and structure their policies and procedures to take into account the differences among clearing agencies and the markets and products it clears. Accordingly, the Commission is not adopting any requirements in response to this commenter.

This commenter also stated that the establishment of intraday margin

procedures cannot be viewed separately from the establishment of margin procedures as a whole, and that the reduction of “surprises” with respect to intraday margin depends on having transparent margin procedures generally and on having the start of day margin be as near correct as possible (meaning that the margin collected at the established start of day time period, as opposed to an intraday margin call, should be as accurate as possible).

124

The commenter provided several suggestions regarding the calculation of margin more generally.

125

The Commission proposed requirements related to monitoring for intraday exposure and providing further specificity as to when the CCA must consider an intraday margin call. The suggestions provided by the commenter relate to granular details within the calculation of margin. Rule 17Ad-22(e)(6) already contains requirements related to these issues raised by the commenter, most notably, that the CCA's risk-based margin system must consider, and produce margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market, and calculate margin sufficient to cover its potential future exposure to participants between the last margin collection and the close out of positions following a participant default, and use an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products.

126

Although there may be circumstances where it would be appropriate for a CCA to incorporate policies and procedures such as those suggested by the commenter, the Commission's approach to Rule 17Ad-22(e) is to provide flexibility to CCAs, subject to their obligations and responsibilities as SROs under the Exchange Act, to design and structure their policies and procedures to take into account each clearing agency's unique characteristics. In addition, the transparency requirements discussed in Part II.A.2.b.ii apply to all components of a CCA's margin model, including those discussed by the commenter.

124

SIFMA at 7.

125

Id.

at 7-8 (discussing the development and maintenance of margin models; accurate, robust pricing; margin period of risk; calibration scenarios/lookback periods; margin add-ons, such as concentration and liquidity risks; offsets; anti-procyclicality measures; margin returns; and interoperability).

126

17 CFR 240.17ad-22(e)(6)(i), (iii), (v).

One commenter recommended that the Commission require a CCA to disclose particular aspects of its risk models used in the calculation of initial margin.

127

As discussed

supra

in Part II.A.2.b.ii, CCAs are already required to provide disclosure of key aspects of their margin models under Exchange Act Rule 17Ad-22(e)(23)(iv) and to file their rules as part of the SRO and/or SIFMU rule filing processes, which further provides transparency.

128

Therefore, additional disclosure requirements are not required because of the current requirements that a CCA must disclose key aspects of its margin model.

127

The Associations at 3.

128

17 CFR 240.17ad-22(e)(23)(iv).

Another commenter stated that a CCA should be required to publish regular statistics in a consistent format as to the performance of margin requirements, including how many clearing members were subject to margin calls of what size, did clearing members go into a margin deficit, and how frequently.

129

However, CCAs already include, as part of their public disclosures under Rule 17Ad-22(e)(23)(iv)(C), a description of basic data and performance statistics on their services and operations, such as basic volume and value statistics by product type, average aggregate intraday exposures to its participants, and statistics on the CCA's operational reliability.

130

As such, the Commission is not adopting any additional disclosure requirements. However, CCAs generally provide such public information regarding their margin models' performance as part of their periodic disclosures.

131

For example, these disclosures include, with respect to margin, identification of the number of times over the past 12 months that margin coverage held against any account fell below the actual mark-to-market exposure of that member account based on daily backtesting results and, in the event of a breach of initial margin coverage, a report on the size of the uncovered exposure, both of which are data points consistent with the commenter's request to identify whether clearing members went into a margin deficit and how frequently.

132

Accordingly, the Commission is not adopting additional requirements. However, a CCA generally should consider what disclosures regarding its policies and procedures for margin collection can be useful to market participants to facilitate their understanding of the performance of its margin model.

129

SIFMA at 10.

130

See supra

note 96 and accompanying text.

131

Id.

132

See, e.g.,

DTCC, “Fixed Income Clearing Corporation and National Securities Clearing Corporation Public Quantitative Disclosures for Central Counterparties: Q2 2024” (Aug. 29, 2024) at 13,

https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/CPMI-IOSCO-Public-Quantitative-Disclosures-Q2-2024.pdf

B. Inputs to Margin System

1. Proposed Amendment to Rule 17Ad-22(e)(6)(iv)

In the RWP Proposing Release, the Commission proposed to amend Rule 17Ad-22(e)(6)(iv) to strengthen its requirements that a CCA have policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, among other things, uses reliable sources for its price data and uses procedures for addressing circumstances in which price data are not readily available or reliable.

133

Specifically, the Commission proposed expanding the rule's scope beyond price data to also include other substantive inputs to a CCA's risk-based margin system,

134

meaning that the CCA's procedures would also have to address when such a substantive input is not readily available or reliable.

135

The unavailability or unreliability of any substantive input to a CCA's margin system could potentially affect the CCA's ability to calculate margin.

136

Citing as justification the current requirement of “reliable sources” of price data,

137

the Commission stated that there is a need to use reliable sources for substantive inputs other than price data.

138

In response, the Commission proposed to expand this requirement to substantive inputs other than price data.

139

The Commission stated that this proposal “should help ensure that the CCA can continue to calculate and collect margin” pursuant to its obligations under Rule 17Ad-22(e)(6).

140

133

RWP Proposing Release,

supra

note 18, at 34713.

134

See id.

at 34715 (stating that “substantive” refers to “any inputs used by the covered clearing agency that are necessary for the risk-based margin system to calculate margin”).

135

Id.

at 34714.

136

Id.

137

Id.

(explaining that a reliable source of timely price data was necessary because a CCA's “margin system needs such data to operate with a high degree of accuracy and reliability, given the risks that the CCA's size, operation, and importance pose to U.S. securities markets”).

138

Id.

139

Id.

at 34714-15 (“The Commission is therefore proposing to amend Rule 17Ad-22(e)(6)(iv) to expand its scope beyond price data to encompass other substantive inputs to its risk-based margin system and to impose requirements on a [CCA] to have procedures when such substantive inputs are not readily available or reliable”).

140

Id.

at 34714.

The Commission also proposed two new requirements on a CCA's backup procedures when price data and other

substantive inputs are not readily available or reliable. First, the Commission proposed these procedures to help ensure that the CCA can meet its obligations under Rule 17Ad-22(e)(6).

141

Second, the Commission proposed that these procedures must include either: (i) the use of price data or other substantive input from an alternate source; or (ii) the use of an alternate risk-based margin system that does not similarly rely on the same unavailable or unreliable substantive input.

142

141

Id.

at 34715.

142

Id.

In proposing this amendment, the Commission included the following guidance: an alternate source “generally should meet the same level of reliability of the primary source;” and an “alternate risk-based system needs to be an alternate margin model that does not rely on the same data source that is unavailable or unreliable” to ensure to compliance with Rule 17Ad-22(e)(6).

143

The Commission also stated that an alternate risk-based margin system would be subject to the requirements of 17 CFR 240.17ad-22(e)(6)(vi) and (vii), with respect to monitoring, review, testing, verification, and model validation.

144

Additionally, the Commission stated that a CCA should “consider its reliance on any third party sources for purposes of its risk-based margin system and consider whether an alternate system or source of data or other inputs that is internal to the CCA, and does not rely upon any third party provider, would be appropriate.”

145

143

Id.

144

Id.

145

Id.

The Commission is adopting the requirement as proposed, with minor modifications discussed in Part II.B.2 below. The Commission is also making clarifying technical changes.

146

Specifically, the Commission is: (1) adding paragraph markers (in the form of capital letters) to separate the clauses of the rule text into (A), (B), and (C); (2) changing the punctuation from a comma to a semi-colon and deleting the word “and” at the end of paragraph (e)(6)(iv)(A); (2) adding parenthesis around the text “and, with respect to price data, sound valuation models”, deleting the comma at the end of that language, and changing the period to a semi-colon at the end of paragraph (e)(6)(iv)(B); (3) adding additional paragraph markers (

) and (

) to paragraph (e)(6)(iv)(C) before each of the two alternatives listed in this paragraph (

i.e.,

“the use of price data or substantive inputs from an alternate source; or” and “if it does not use an alternate source, the use of a risk-based margin system that does not rely on the unavailable or unreliable substantive input;”) and capitalizing the first word in each new paragraphs (e)(6)(iv)(C)(

) and (

) (“The” and “If”, respectively); (4) adding a clarifying, internal cross-reference (“such procedures under paragraph (e)(6)(iv)(B)”) in paragraph (e)(6)(iv)(C); and (5) replacing the word “shall” in new Rule 17Ad-22(e)(6)(iv)(C) (

i.e.,

“Such procedure under paragraph (e)(6)(iv)(B) of this section

shall

”) with “must” to use more plain language.

2. Discussion of Comments

a. Inclusion and Definition of Substantive Inputs

As discussed above, the Commission proposed expanding the scope of Rule 17Ad-22(e)(6)(iv) beyond price data to also include substantive inputs to a CCA's margin methodology.

147

Based on its supervisory experience, the Commission understands that such substantive inputs could include: (i) portfolio size; (ii) volatility, (iii) sensitivity to various risk factors that are likely to influence security prices; (iv) duration; (v) convexity; and/or (vi) the results of models run by third parties.

148

147

In addition, to improve clarity and consistency of terms, the Commission proposed technical edits standardizing references to “price data” in Rule 17Ad-22(e)(6)(iv), which currently refers to both “price data” and “pricing data,” to refer only to price data. The Commission previously used the two words interchangeably in preexisting Rule 17Ad-22(e)(6)(ii). RWP Proposing Release,

supra

note 18, at 34714 n.59. The Commission received no comments on this proposed technical change of “pricing data” to “price data” in this provision and is adopting as proposed.

148

RWP Proposing Release,

supra

note 18, at 34714.

Several commenters addressed this proposed modification to Rule 17Ad-22(e)(6)(iv).

149

One commenter agreed generally with the proposed extension of the rule's scope to include “substantive inputs.”

150

The commenter supported extending the requirement for “reliable sources” to include substantive inputs because a CCA's margin systems need “to operate with a high degree of accuracy and reliability, given the risk that [its] size, operation, and importance posed to the securities market.”

151

149

See

Better Markets at 8-9; CCP12 at 2; DTCC at 5; The Associations at 8.

150

See

Better Markets at 8-9.

151

Id.

at 8.

Several commenters requested that the Commission provide more guidance regarding its statement about what inputs may be “substantive.”

152

One commenter requested that “the term `substantive' as used in this context be further refined to avoid confusion over the inputs that are `necessary' and those that are `non-consequential.' ”

153

In addition, several commenters stated that the CCA should determine what constitutes a substantive input.

154

One such commenter also stated that, if the Commission prescribed a definition of “substantive input,” a CCA may be forced to “obtain, often at great expense, alternate data sources for inputs with limited utility and minimal or no impact on margin calculations.”

155

152

See

DTCC at 5; CCP12 at 2; The Associations at 8.

153

DTCC at 5.

154

Id.;

CCP12 at 2.

155

CCP12 at 2.

However, another commenter stated that the Commission's rules around substantive inputs should be principles based, identifying one such principle that “every input that affects margin requirements by [x]% is deemed substantive.”

156

The Associations at 8.

The Commission is not making any amendments to define what constitutes a substantive input. A CCA is responsible for developing its own policies and procedures, including its margin methodology, and it is best positioned to determine what constitutes a substantive input into its margin methodology. As stated in the RWP Proposing Release, “substantive” for the purposes of Rule 17Ad-22(e)(6)(iv), “refers to any inputs used by the CCA that are necessary for the risk-based margin system to calculate margin” and “is meant to distinguish from other potential inputs that may not be consequential to the calculation of margin.”

157

Accordingly, as requested by some commenters, the Commission confirms that a CCA has the discretion to determine what is a “substantive” input, based on its knowledge of its risk-based margin system, as compared to those that it determines to be non-consequential.

158

When establishing and maintaining its risk-based margin system, each CCA must have the ability to consider its own unique characteristics and circumstances, as well as those of the market it serves.

159

Rather than have the Commission define the term “substantive” prescriptively for each CCA, this discretion corresponds with the Commission's principles-based approach in Rule 17Ad-22(e), which helps each CCA effectively meet the evolving risks and challenges in the markets that each CCA serves.

160

Therefore, no further clarifications or guidance are necessary to distinguish a substantive input from those inputs that are non-consequential.

157

RWP Proposing Release,

supra

note 18, at 34715.

158

See

DTCC at 5; CCP12 at 2; The Associations at 8.

159

See

CCA Standards Adopting Release,

supra

note 5, at 70800-01.

160

See id.

at 70800.

Further, the Commission is not adopting any amendments to Rule 17Ad-22(e)(6)(iv) to incorporate the principle that “every input that affects margin requirements by [x]% is deemed substantive.”

161

This type of requirement would not be principles-

based and instead would prescribe a particular scope of what constitutes “substantive,” which the Commission does not seek to do. Based on its supervisory experience, the Commission understands that a wide range of margin models exists among the CCAs. This wide range of margin models exists due to each CCA's different participants, different products cleared, and different markets served. Given these distinctions among the CCAs, and consistent with the principles-based approach in Rule 17Ad-22(e) more generally, the Commission believes it would be inappropriate to include in Rule 17Ad-22(e)(6)(iv) a quantitative threshold defining those inputs that would be “substantive.” Such a specific percentage threshold likely would fail to identify all the inputs for all CCAs' margin models that are necessary to ensure every CCA's margin model can meet the requirements of Rule 17Ad-22(e)(6) (

i.e.,

covering its credit exposures to its participants). Therefore, the Commission is not adopting modifications responsive to the commenter requesting “substantive” to correspond to a percentage impact on margin requirements.

161

The Associations at 8.

b. Use of an Alternate Source or an Alternate Risk-Based Margin System

As proposed, the changes to Rule 17Ad-22(e)(6)(iv) required that the procedures for when price data or substantive inputs are not readily available or reliable must include the use of price data or substantive inputs from an alternate source or, if it does not use an alternate source, the use of an alternate risk-based margin system (that does not similarly rely on the unavailable or unreliable substantive input).

162

RWP Proposing Release,

supra

note 18, at 34715.

One commenter expressed support for this proposed requirement,

163

and other commenters acknowledged the importance of ensuring that a CCA's risk-based margin system be able to perform even when certain sources of pricing data or other inputs become unavailable.

164

163

Better Markets at 9 (stating that this proposed requirement would ensure that the backup procedures available to a CCA “are sufficiently distinct from the impaired data source that they will serves as reliable alternatives”).

164

See

OCC at 4; ICE at 2; CCP12 at 2.

However, several commenters disagreed with the requirement of a sole means of contingency (that is, the use of alternate sources) and stated that CCAs should have the flexibility to develop their own backup procedures and/or appropriate substitutions for unavailable inputs in their margin models, depending on the products cleared and the markets served.

165

These commenters stated that it may not always be possible to have a “like-for-like” substitution of an alternate source.

166

One commenter stated that the Commission should not restrict choices in an emergency situation by requiring that an alternate source be independent of the third-party provider, and that CCAs should simply have a “credible fallback” in the event of unavailable price data or substantive inputs.

167

Another such commenter recommended that the proposal be modified to allow for “substantive inputs from an alternate source, and/or of appropriate alternate inputs.”

168

165

DTCC at 4 (stating that a CCA should have “the flexibility to develop reasonable backup procedures and contingency plans for these types of circumstances, which will depend on the cleared products and market structure at issue, and may not in all cases include the use of third-party secondary vendors or data sources”); OCC at 5 (stating that a CCA should be permitted to use its informed judgment to determine the appropriate substitutions for unavailable inputs in its margin system, which would ensure that CCAs have sufficient flexibility to address the need for alternative data sources in a manner that addresses the Commission's policy objectives, is tailored to the markets served and products cleared by the [CCA], and is not unnecessarily burdensome).

166

DTCC at 4-5 (stating that requiring an alternate source would not always be the most practical or effective means to ensure a CCA meets its participants' credit obligations under Exchange Act Rule 17Ad-22(e)(4), due to the possible absence of an alternate source of pricing data or other substantive inputs (

e.g.,

because of industry consolidation among vendors), and the inability to use discretion to develop a solution to unavailable price data or other substantive input); OCC at 4 (stating that alternate sources may not exist, or may be prohibitively expensive or technically difficult to implement when compared to the impact of the input on the margin model). One such commenter suggested that a CCA may find it appropriate if its policies and procedures incorporated the use of an alternative pricing vendor, where applicable, or in the absence of such an alternative provider, pursuant to the CCA's policies and procedures to ensure that timely pricing data is applied, with such procedures including, for example, recording “the last available price” in the CCA's pricing database with such price consumable to applicable participants (citing to its recent update to its Clearing Agencies' Securities Valuation Framework).

Id.

at 5.

167

The Associations at 9.

168

OCC at 5.

In response to the commenters who sought revisions to the proposed requirement's obligation to use an alternate source, the requirement of an alternate source does not mean that such an alternate source must be external to a CCA or that the alternate source must be of the same nature as the original substantive input (that is, the alternate source need not be a “like-for-like” substitute). As stated in the RWP Proposing Release, “alternate source[s] generally should meet the same level of reliability of the primary source,

whether that alternate is sourced from an external provider or created internally

.”

169

By acknowledging that an alternate source may be created internally, the Commission recognized that an alternate source means, simply, an alternate to the primary input and does not require an entirely independent, third-party source to provide the same input. Similarly, the recognition that the alternate source may be created internally means that the Commission also recognized that the alternate source may, in fact, be the result of internal policies and procedures that the CCA designs to develop an internal alternate source and meet the needs of its margin methodology.

169

RWP Proposing Release,

supra

note 18, at 34715 (emphasis added).

Further, in response to the commenters seeking flexibility to develop their own backup procedures, this requirement does not prevent a CCA from using its discretion to determine the most appropriate substitution for any price data or substantive input to its risk-based margin system.

170

This requirement also does not preclude the use of policies and procedures that establish a methodology or approach to determine the appropriate price,

171

so long as, as discussed in Part II.B.2.c

infra,

the CCA can still meet the obligations of Rule 17Ad-22(e)(6), including meeting its credit obligations to its participants.

172

Therefore, revisions to or deletion of the rule text regarding alternate sources, including those suggested by one commenter to allow for “substantive inputs from an alternate source, and/or of appropriate alternate inputs,

173

are not necessary, as the rule text does not require an externally provided alternate source.

170

Id.

171

For example, one CCA commenter stated that its existing policy provided that backup pricing may more accurately be sourced from an alternative pricing vendor or may also be determined, in the absence of an alternative pricing vendor, pursuant to the CCA's applicable policies and procedures to ensure that timely pricing data is applied, with such procedures including, for example, using the last available price which is consumable to applicable participants. DTCC at 5.

172

RWP Proposing Release,

supra

note 18, at 34715.

173

See

OCC at 5.

One commenter stated that the Commission should “refocus[ ]” the final rule on policies and procedures, as opposed to requiring policies and procedures that include an alternate source or risk-based margin system.

174

The Commission agrees that the

requirement should allow for flexibility in how CCAs address the unavailability or unreliability of an input to their margin model. The requirement being adopted does not mandate that a specific alternate source be used, but rather that the CCAs have policies and procedures to ensure that some alternate source is available, even if that source is determined internally by the CCA.

174

CCP12 at 2.

With respect to the requirement of a potential alternate risk-based margin system, one commenter stated that requiring CCAs to develop and maintain an entire alternate risk-based margin system would be prohibitively expensive and operationally burdensome.

175

However, the Commission disagrees with the commenter's characterization that such costs are necessary because the proposed rule does not require the development and maintenance of a second risk-based margin system separate from its current risk-based margin system, as discussed below.

176

Another commenter suggested that the Commission should remove the requirement of a potential alternate risk-based margin system from the rule text.

177

The Commission disagrees that the proposed rule requires a second risk-based margin system separate from a CCA's current risk-based margin system, and the Commission is modifying the term “alternate risk-based margin system” to make this point clear.

178

Specifically, the proposed requirement for backup procedures when substantive inputs “are not readily available or reliable” should help a CCA ensure it “can continue to calculate and collect margin commensurate with, the risks and particular attributes of each relevant product, portfolio, and market, as required under Rule 17Ad-22(e)(6)(i).”

179

175

OCC at 5.

176

See infra

notes 178 and 186 and accompanying text.

177

ICE at 2-3.

178

See infra

note 187 and accompanying text.

179

Id.

Similarly, another commenter disagreed with the proposed additional requirement that a CCA have advance plans “to use an alternate risk-based margin system because of the unavailability or unreliability of a particular input,” which “would impose a significant burden on a [CCA] solely for the purpose of addressing a problem with an input that may be transitory.”

180

The commenter stated that it “is not aware of circumstances where a [CCA] has been unable to address a problem with an input price through its normal business practices and procedures.”

181

The commenter also stated that it “does not believe that the Commission has articulated a problem (other than a theoretical one)” that the proposal is designed to address and “has not recognized the considerable costs to” CCAs, clearing firms, and other market participants “that would be required to develop and implement alternate margin models to address a remote and theoretical problem with price or other data inputs.”

182

The commenter suggested that this clause be removed from the rule text.

183

In addition, one commenter requested that the Commission confirm that any final rule does not create an expectation that CCAs should develop an alternate risk-based margin system.

184

180

ICE at 2.

181

Id.

at 3.

182

Id.

183

Id.

184

CCP12 at 3 (stating that the development of such an alternate system would require a CCA to effectively maintain two very distinct margin systems, which is likely very resource intensive and time consuming).

The Commission disagrees with the commenter that the failure of a CCA's margin model (

i.e.,

its risk-based margin system) due to an unavailable or unreliable input is a “theoretical” problem. Rather, the unavailability or unreliability of a substantive input could impact a CCA's ability to establish, implement, maintain, and enforce a risk-based margin system that Rule 17Ad-22(e)(6) requires. Moreover, contrary to the commenter's assertion, the Commission is not requiring that CCAs develop and implement alternate margin models, but rather, is requiring that the CCA establish, implement, maintain and enforce written policies and procedures to address particular issues that could affect the functioning of its margin model. The requirement also allows for the use of an alternate source in the existing risk-based margin system, and a CCA may determine the alternate source using its own policies and procedures.

185

An alternate source from a third-party provider is not required. More generally, this requirement is designed to expand the scope of the preexisting rule and ensure that a CCA establishes, implements, maintains and enforces written policies and procedures to address the unavailability of a substantive input to its margin model and meet its obligations under Rule 17Ad-22(e)(6). As stated in the RWP Proposing Release, when substantive inputs are unavailable or unreliable, CCAs must be able to continue to calculate and collect margin commensurate with, the risks and particular attributes of each relevant product, portfolio, and market.

186

Additionally, the Commission analyzed the costs of the requirement in Part IV,

infra,

and in the RWP Proposing Release. Given the analysis, the Commission disagrees with the commenter's suggestion to remove the clause from the proposal.

185

RWP Proposing Release,

supra

note 18, at 34715.

186

Id.

at 34714.

The Commission is making several technical changes to the rule text to clarify that an alternate risk-based margin system is not required in all instances. Specifically, the Commission deletes the word “alternate” from “an alternate risk-based margin system” in Rule 17Ad-22(e)(6)(iv)(C)(

) (and changes “an” to “a” before “risk-based margin system” for grammatical reasons). This revision responds to commenters' concerns that the rule requires that a CCA develop an alternate risk-based margin system separate from a CCA's current risk-based margin system.

187

The rule does not include such a requirement. The Commission is also adding the term “either” after “must include” to clarify that satisfying either paragraph (e)(6)(iv)(C)(

) or (

) fulfills paragraph (e)(6)(iv)(C)'s requirement.

188

187

See supra

notes 175, 184 and 177 and accompanying text.

188

The Commission also removes from Rule 17Ad-22(e)(6)(iv)(C) the word “similarly” from between the words “not” and “rely” (

i.e.,

“the use of a risk-based margin system that does

not rely

on the unavailable or unreliable substantive input”) to remove redundancy (as the word “similarly” was unnecessary to convey the meaning that the prohibited reliance was on the unavailable or unreliable substantive input in question). The Commission also revises the reference to “the unavailable or unreliable substantive input” to “substantive inputs that are unavailable or reliable” for the same reasons.

c. Obligation To Meet a CCA's Obligations Under Rule 17Ad-22(e)(6)

The proposed amendment to Rule 17Ad-22(e)(6)(iv) also provided that the procedures discussed in Part II.B.2.b must ensure that the CCA is able to meet its obligation to cover credit exposures to its participants under Rule 17Ad-22(e)(6).

189

In the RWP Proposing Release, the Commission explained that, by specifying how these procedures must perform (

i.e.,

to allow a CCA to continue to cover its credit exposures), this proposed amendment helps ensure that a CCA adopts sufficiently robust procedures.

190

As such, this proposed amendment would, with respect to both

price data and other substantive inputs, require that such procedures should address circumstances in which price data or substantive inputs are not readily available or reliable, in order to ensure that the CCA be able to meet its requirements under Rule 17Ad-22(e)(6) and cover its credit exposures to its participants.

191

189

RWP Proposing Release,

supra

note 18, at 34715.

190

Id.

191

Id.

The Commission received no comments on this requirement and is adopting as proposed.

C. Contents of Recovery and Orderly Wind-Down Plans

The Commission received several overarching comments on proposed Rule 17Ad-26 that were generally supportive of the approach, particularly the addition of new and more specific requirements applicable to a CCA's RWP. One commenter stated that a detailed RWP is essential, as the inability of a CCA to recover from severe losses, or the disorderly wind-down of a CCA, could have significant repercussions not only for the sector in which the CCA operates but for the markets and the economy as a whole.

192

The commenter also stated that CCAs must have comprehensive RWPs because even sound risk management may not prevent a CCA's default in extreme circumstances.

193

The commenter continued by stating the obvious strength of recovery and orderly wind-down planning is the

ex ante

development of a strategy to maintain as a going concern the critical operations of the CCA, even in the face of losses that would otherwise have caused its insolvency, or to ensure the orderly transfer of functions.

194

The commenter stated that not aligning RWPs to uniform requirements introduces risk, and that the proposed rule mitigates that risk by requiring all RWPs to incorporate at least nine specific elements.

195

Another commenter explained that CCAs face no meaningful competitive pressure when they are the sole clearing agency for the products they clear and can be a source of systemic risk.

196

The commenter stated that, in such cases, to improve CCAs, regulatory mandates must effectively codify existing best practices to enhance resiliency and create a level playing field for resiliency, and that such improvements will only occur if the Commission imposes specific regulatory requirements.

197

192

Better Markets at 10.

193

Id.

194

Id.

195

Id.

196

SIFMA at 10-11.

197

Id.

One commenter cautioned that the proposed upgrades and focus on RWP design and testing may create unrealistic expectations and over-reliance on RWPs. The commenter also stated that care is needed to ensure that confidence in such plans is well grounded and that the efficient implementation of RWPs is properly stressed, accounting for rapidly evolving market risk and for the ever-increasing speed of market-moving data.

198

In the Commission's view, effective planning can help preserve financial stability and ensure the continuity of critical CCP and CSD functions for the markets served by CCAs, and the availability of tools and resources in the RWP generally reserved for recovery and wind-down scenarios would not lead to an “over-reliance” on such tools in practice. In practical terms, default management, recovery, and wind-down exist as distinct points across a spectrum from normal market conditions to highly stressed market conditions. As such, a CCA would deploy its RWP either (i) in a default scenario, only after its business-as-usual default management tools had failed to close out any defaulting portfolios and, likely, after the CCA had fully exhausted its prefunded resources, or (ii) in a non-default scenario, after resources set aside for business risk (

e.g.,

six months of operating expenses) or for other purposes had been exhausted. Commission rules impose a high standard for resilience in normal and stressed market conditions across both default and non-default loss scenarios, consistent with the international standards set forth in the PFMI, of which planning for recovery and orderly wind-down is but one part of a multi-part and comprehensive regulatory framework. Given this dynamic, CCAs would not have incentives to “activate” their RWPs early.

198

Letter from Erkki Liikanen, Co-Chair, and Simon Johnson, Co-Chair, CFA Institute Systemic Risk Council (Aug. 30, 2023) (“CFA”) at 5.

More generally, the Commission agrees with commenters expressing the view that thoughtful recovery and wind-down planning is necessary, even when effective risk-management measures are in place, because of the potential systemic risk implications of the failure of a CCA. Given the evolving nature of recovery and orderly wind-down planning, as well as the annual review and testing requirements included in Rule 17Ad-26, the concern that adding more robust requirements for development and testing of RWPs will lead to “over-reliance” on RWPs is misplaced. Effective RWPs, with robust consideration of scenarios, triggers, and processes for testing and board approval, help promote recovery. Such planning for recovery is essential because, as other commenters have stated, the wind-down of systemic functions often would not leave alternative providers of clearance and settlement services to support continued market function.

199

To reach the stage where a CCA would consider implementing its RWP, in the context of a default loss, the CCA would have to incur default losses greater than the financial resources maintained pursuant to policies and procedures required by Rule 17Ad-22(e)(4),

200

or in a non-default loss context, incur losses greater than the liquid net assets funded by equity held pursuant to the policies and procedures required by Rule 17Ad-22(e)(15)(ii) to cover potential business losses.

201

As such, neither CCAs nor market participants are in danger of “over-reliance” on the policies and procedures that undergird RWPs. In addition, although many systemic functions are not currently offered by alternative providers, RWPs can, in establishing robust policies and procedures for orderly wind-down, help facilitate the orderly transfer of systemic functions to a new entity to maintain clearance and settlement services for the market served.

199

See, e.g.,

Davidson at 1. This concern regarding the feasibility or advisability of wind-down in the context of CCAs is discussed further in Part II.D.1.c.

200

See

17 CFR 240.17ad-22(e)(4)(i) (requiring a CCA to maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence);

see also

17 CFR 240.17ad-22(e)(4)(ii) (requiring a CCA that provides CCP services and is either systemically important in multiple jurisdictions or a clearing agency involved in activities with a more complex risk profile to maintain additional financial resources at the minimum to enable it to cover a wide range of foreseeable stress scenarios that include, but are not limited to, the default of the two participant families that would potentially cause the largest aggregate credit exposure for the CCA in extreme but plausible market conditions); 17 CFR 240.17ad-22(e)(4)(iii) (requiring a CCA that is not subject to Rule 17Ad-22(e)(4)(ii) to maintain additional financial resources at the minimum to enable it to cover a wide range of foreseeable stress scenarios that include, but are not limited to, the default of the participant family that would potentially cause the largest aggregate credit exposure for the CCA in extreme but plausible market conditions).

201

See

17 CFR 240.17ad-22(e)(15)(ii) (requiring a CCA, at a minimum, to hold liquid net assets funded by equity equal to the greater of either six months of the CCA's current operating expenses, or the amount determined by the board of directors to be sufficient to ensure a recovery or orderly wind-down of the CCA).

Another commenter stated that the RWP Proposing Release has not met the burden of proof required by the Administrative Procedure Act. More specifically, the commenter stated that the Commission has not demonstrated that the rule amendments are necessary or in the public interest because the proposed amendments are to existing rules that already more than adequately cover the areas in question, and there have been no examples of CCAs or clearing agency participants that failed or of CCAs that executed recovery plans or parts thereof.

202

The commenter further explains that the existing SRO rules of the CCAs relating to RWPs have been approved by the Commission, and that the Commission has conducted multiple examinations of CCAs under those rules, where any deficiencies found have been subject to, or are in the process of, review and remediation.

202

Davidson at 1-3.

Although rare, CCPs both in the U.S. and abroad have experienced highly stressed market conditions that led to participant defaults, and CCP failures have occurred outside the U.S. Examples of such participant defaults include three CCP failures in other jurisdictions in recent history, as well as the market stress that CCPs faced in response to the 1987 market break and in response to the beginning of the COVID-19 pandemic in 2020.

203

These defaults and failures could happen again and underscore the importance of the Commission's ongoing efforts to ensure effective supervision and regulation of CCAs following the enactment of the Dodd-Frank Act, as discussed in Part I.

204

These examples also reinforce the possibility that even a robust and resilient CCA holding a sizeable pool of prefunded resources and other liquid resources may experience stressed market conditions or other events so extreme that the resources it has reserved for potential loss scenarios will prove insufficient, potentially necessitating actions beyond “business-as-usual” default management. By establishing requirements related to core services and service providers, the identification of scenarios, triggers, and tools for recovery and orderly wind-down, and robust processes for implementation, notification, testing and board review and approval, new Rule 17Ad-26 helps ensure that CCAs can successfully plan for, and navigate highly stressed or extreme market conditions, where events may occur or conditions deteriorate rapidly.

205

203

See, e.g.,

Staff Report on the Regulation of Clearing Agencies (Oct. 1, 2020) at 18, n.93,

https://www.sec.gov/files/regulation-clearing-agencies-100120.pdf

(describing recent examples of participant defaults); Bank for International Settlements (“BIS”),

CCP Failure: A Rare but Present Danger

(Dec. 16, 2018),

https://www.bis.org/publ/qtrpdf/r_qt1812z.htm

(describing three CCP failures over the last 50 years); “The October 1987 Market Break, A Report by the Division of Market Regulation” (Feb. 1988),

https://www.sechistorical.org/collection/papers/1980/1988_0201_MarketBreak_01.pdf

(describing the market stress associated with the 1987 market crash and the stress it placed on CCPs at the time).

204

See supra

Part I and notes 5-13, 23-40, and accompanying text (discussing the rationale for the proposed rules and the statutory authority for the regulation of clearing agencies).

205

See

RWP Proposing Release,

supra

note 18, at 34709.

Pursuant to the Exchange Act, the Commission is directed to facilitate the ongoing development of the national system for clearance and settlement, which includes ensuring effective risk management at CCAs. As discussed throughout the RWP Proposing Release, and in this release, the Commission has proposed and is now adopting new Rule 17Ad-26 to codify certain elements that have emerged across some RWPs that must be included in all RWPs to help ensure a CCA can effectively allocate uncovered losses, manage liquidity shortfalls, and address capital shortfalls arising from other causes. As such, new Rule 17Ad-26 sets forth these elements. While existing RWPs at CCAs may contain several of these elements, new Rule 17Ad-26 requires each CCA to have every element in its RWP. As previously discussed,

206

new Rule 17Ad-26 also promotes three important objectives consistent with its statutory mandates: (i) bolstering the existing RWPs at CCAs; (ii) codifying some existing RWP elements to ensure that these elements remain in the plans over time; and (iii) establishing that the RWP of any new CCA would contain each of the elements specified in the rule. In so doing, the Commission is establishing a higher minimum standard for the quality and effectiveness of RWPs, designed to help ensure that planning for recovery and orderly wind-down is effective and can promote financial stability in periods of market stress. The Commission will continue to review rule filings and advance notices submitted by CCAs under the rules adopted in this release to help ensure the regulatory framework is an effective tool that can advance the evolving process of recovery and resolution planning for CCPs and other CCAs.

206

See supra

note 39 and accompanying text.

Below the Commission addresses comments regarding specific elements of proposed Rule 17Ad-26.

207

The Commission is making one technical edit to the preamble language for Rule 17Ad-26, replacing “shall” with “must” to use more plain language, as well as align with the approaches in other recently adopted rules for clearing agencies at 17 CFR 240.17ad-25 and 240.17ad-27.

1. Core Services: Rule 17Ad-26(a)(1)

Proposed Rule 17Ad-26(a)(1) required a CCA to identify and describe in its RWP the CCA's critical payment, clearing, and settlement services and address how the CCA would continue to provide such critical services in the event of a recovery and during an orderly wind-down, including the identification of the staffing necessary to support such critical services and analysis of how such staffing would continue in the event of a recovery and during an orderly wind-down.

In the RWP Proposing Release, the Commission explained that the first step in effective recovery and orderly wind-down planning must be identification of the critical services provided to market participants because market participants rely on these services to facilitate payment, clearing, and settlement in the U.S. securities markets. The Commission also stated that such planning helps ensure that RWPs focus on a CCA's ability to provide these services on an ongoing basis, even under stress.

208

Furthermore, the Commission stated its belief that the CCA generally should consider the impact that any interruption to particular services would have on the CCA's participants and the smooth functioning of the market it serves, as well as whether the service is available from any substitute provider. In the proposed rule, “critical” referred to the importance of the service to participants and to the proper functioning of the markets, where an inability to provide the service would implicate financial stability concerns. As such, the Commission also proposed definitions of “recovery” and “orderly wind-down” focused on the need to continue to provide the critical payment, clearance, and settlement services provided by a CCA through the recovery or wind-down event.

209

208

RWP Proposing Release,

supra

note 18, at 34718.

209

See

proposed Rule 17Ad-26(b).

Several commenters generally supported the requirement to identify the critical payment, clearance, and settlement services provided by a CCA and address how the CCA would continue to provide such critical services.

210

See

SIFMA at 14 (“strongly supports the requirement that Clearing Agencies ensure that they are able to maintain access to services”); ICE at 3 (“supports the requirement to identify critical payment, clearing, and settlement services and to address continued use of such services during a

recovery or wind-down”); OCC at 6 (“agrees that identification of critical services and planning for their continuation in a recovery or orderly wind-down should be the core content of a CCA's RWP”).

a. Replacing “Critical” With “Core”

The Commission is modifying the final rule to refer to “core payment, clearance, and settlement services” rather than “critical payment, clearance, and settlement services” (hereinafter, referred to as “core services”) to improve clarity and consistency with terminology in other rules, such as Rule 17Ad-25(i),

211

which concerns the governance of “service providers for core services.” Furthermore, the use of “core” as opposed to “critical” helps distinguish a CCA's obligations under Rule 17Ad-26 from those under 17 CFR 242.1000 through 242.1007 (“Regulation SCI”), which addresses, in the context of clearing agencies subject to the rule, “critical systems” that support clearance and settlement.

212

211

17 CFR 240.17ad-25(i).

212

See

17 CFR 242.1000 (defining “Critical SCI systems”);

see also

RWP Proposing Release,

supra

note 18, at 34719 (acknowledging there would likely be some connection between what a CCA identifies as its critical services for purposes of inclusion in its RWP and what it identifies as “critical SCI systems” for purposes of Regulation SCI, but inclusion of a critical service in a CCA's RWP would have no impact on the CCA's obligations under Regulation SCI).

Use of the descriptive term “core” rather than “critical” does not affect the Commission's guidance stated in the RWP Proposing Release on identifying those services.

213

Accordingly, when identifying a core service, the CCA generally should consider the impact that any interruption to a particular service would have on the CCA's participants and the smooth functioning of the markets that it serves, as well as whether the service is available from any substitute provider.

214

213

RWP Proposing Release,

supra

note 18, at 34718.

214

Id.

b. Modification to “Staffing” Element

Several commenters stated that identifying staffing or staffing resources is a necessary part of addressing how a CCA may continue providing its core services.

215

One of those commenters stated that it is not necessary to identify specific personnel or positions required to be maintained, and a CCA should have flexibility to determine the staff needed in a particular situation, including taking into consideration the availability and willingness of personnel to perform services at the time of a recovery or wind-down.

216

The commenter suggested the proposed rule be amended to clarify that the CCA is not required to identify specific personnel or positions required to be maintained.

217

Similarly, another commenter stated that lists of specific employees may become dated quickly due to a shift in responsibility or normal attrition.

218

Another commenter stated, given the volume of employee turnover and new initiatives, personnel designations likely change with regularity, making specific identification of personnel in the RWP superfluous.

219

215

OCC at 6 (agreeing that any consideration of how a CCA will continue its core services necessarily requires consideration of how to plan to retain the necessary staff for such efforts); ICE at 3 (recognizing that it is necessary to identify staffing resources to implement RWPs); The Associations at 13 (agreeing that emphasis should be placed on determining staffing requirements); SIFMA at 14 (strongly supporting the requirement that CCAs ensure that they are able to maintain access to services, including personnel services, in a default scenario).

216

ICE at 3.

217

Id.

218

OCC at 6.

219

Davidson at 6.

The Commission agrees with the commenters that identifying specific personnel or employees is not necessary in planning and recognizes that changes may occur in the staffing at a CCA. However, it is important for planning purposes to identify those positions, roles, or personnel functions that are necessary for the continuation of core services, regardless of who or how many staff fills the role in ordinary circumstances, to avoid unnecessary disruptions. As such, the Commission is modifying the final rule from the proposal to refer to the identification of “staffing roles” instead of “staffing,” the latter of which could have been interpreted as requiring the identification of specific individuals.

Several commenters responded to the clause requiring “analysis of how such staffing would continue in the event of a recovery and during an orderly wind-down.” One commenter stated that the process for preparing to retain and incentivize critical employees under adverse circumstances is the critical piece of information necessary for the CCA and its supervisory and resolution authorities.

220

The commenter stated that what is most important in this aspect of planning are the retention tools the CCA uses, how it considers retention when setting and negotiating employment terms with essential personnel, and how it tracks the terms of each such employee's employment.

221

The commenter suggested a minor wording change to proposed Rule 17Ad-26(a)(1) to state “analysis of how the CCA prepares for such staffing to continue in the event of a recovery and during an orderly wind-down.”

222

Another commenter stated that it is important to have sufficient going concern resources to allow a CCA to retain its key personnel, claiming that the inability to keep personnel from leaving after a prior high profile insolvency event in the 2008 financial crisis contributed to large losses.

223

Another commenter stated that not even the most lucrative employment agreements can be sufficient to retain highly in-demand skilled employees on a “sinking ship,” and furthermore stated that certain CCAs have organized labor agreements in place with many employees that would require time consuming renegotiation to satisfy this clause in the proposed rule.

224

220

OCC at 6.

221

Id.

222

Id.

223

SIFMA at 14.

224

Davidson at 6.

To address the above concerns regarding the potentially unpredictable or evolving circumstances of employment during a recovery or wind-down event, the Commission is modifying the clause related to analyzing the continuation of staffing roles in a recovery and during an orderly wind-down. The clause has been modified in the final rule to state “analyzing how such staffing roles necessary to support such core services would continue in the event of a recovery and during an orderly wind-down.”

225

In response to commenters generally focused on concerns that a CCA could not guarantee the circumstances of employment during a recovery or wind-down event, the rule only requires that a CCA conduct an analysis, through which it would be able to identify potential challenges and potential ways to address those challenges. The final rule does not require the CCA to guarantee or compel specific staff or personnel to remain in place. Rather, the requirement promotes preparation for recovery and wind-down events, helping to ensure that from a staffing perspective the necessary roles or functions have been identified and established so that core services can continue uninterrupted. As one commenter stated, there may be organized labor agreements in place with employees. Pursuant to the final rule, to address such circumstances, a CCA is required in its RWP to analyze any such arrangements to see whether and how they might impact staffing during a recovery or an orderly wind-

down, consistent with the terms of the rule requirement. The rule does not require a CCA to renegotiate such arrangements.

225

To eliminate extraneous words and align the text grammatically, the Commission has replaced the phrase “analysis of” with “analyze.”

See infra

note 228 and accompanying text (describing other grammatical changes to the rule text).

In addition, and separate from the requirements in Rule 17Ad-26(a)(1), a CCA is required by Rule 17Ad-22(e)(15)(ii) to have written policies and procedures to cover potential general business losses by holding liquid net assets funded by equity equal to the greater of either six months of the covered clearing agency's current operating expenses, or the amount determined by the board of directors to be sufficient to ensure a recovery or orderly wind-down of critical operations and services of the covered clearing agency.

226

As such, a CCA generally should estimate the potential costs associated with ensuring its core services, which could include the staffing necessary to support those services, to ensure that it can meet the requirements in Rule 17Ad-22(e)(15) related to implementing the recovery or orderly wind-down of critical operations and core services.

226

Pursuant to Rule 17Ad-22(e)(15)(iii), these liquid assets are in addition to resources held by the CCA to cover participant defaults or other risks covered by Rules 17Ad-22(e)(4)(i) through (iii), as applicable, and to cover the liquidity risks identified in Rules 17Ad-22(e)(7)(i) and (ii).

One commenter suggested a “process” approach to retain employees with an associated wording change in the rule.

227

By focusing on “roles” in the final rule, the modified rule text achieves the same result. In addition to the substantive change from “staffing” to “staffing roles necessary to support such core services” discussed above, the Commission has made technical edits to the rule text to add paragraph markers (i) and (ii), aligning the text grammatically.

228

227

OCC at 6.

228

Specifically, the phrase “the identification of” has become “by: identifying” and “analysis of” has become “analyzing.”

See supra

note 225 (describing other grammatical changes to the rule text).

2. Service Providers: Rule 17Ad-26(a)(2)

Proposed Rule 17Ad-26(a)(2) required the RWP of a CCA to identify and describe any service providers upon which the CCA relies to provide the services identified in paragraph (a)(1) of proposed Rule 17Ad-26, specify to what services such service providers are relevant and address how the CCA would ensure that such service providers would continue to perform in the event of a recovery and during an orderly wind-down, including consideration of contractual obligations with such service providers and whether those obligations are subject to alteration or termination as a result of initiation of the recovery and orderly wind-down plan.

The Commission, based on its supervisory experience, has observed that CCAs rely upon some service providers to deliver core services.

229

For those service providers that are necessary for the provision of core services, the failure of those service providers to perform could pose significant operational risks and have substantial effects on a CCA's ability to provide core services. In a recovery or wind-down event, the continued performance of such a service provider would be essential for the continuity of core services. Thus, the Commission proposed to require a CCA to identify and describe the subset of its service providers necessary to ensure the continued delivery of core services throughout a recovery or wind-down event.

229

RWP Proposing Release,

supra

note 18, at 34719.

Final Rule 17Ad-26(a)(2) refers to “its written agreements” instead of “contractual obligations” for the reasons discussed in the modifications to the definition of “service provider for core services” in final Rule 17Ad-26(b) in Part II.D.2,

infra.

230

The Commission is also making technical changes to Rule 17Ad-26(a)(2) by adding paragraph markers to separate the clauses of the rule text into paragraphs (a)(2)(i) and (ii).

230

The Commission is also modifying in final Rule 17Ad-26(a)(2) the clause “and whether those obligations” to “and whether the obligations under those written agreements” for consistency with the written agreements modification.

The Commission received comments on proposed Rule 17Ad-26(a)(2) and is making the modifications to the rule discussed below.

a. Identify and Describe Service Providers for Core Services

One commenter, agreeing with the Commission that continued performance of a service provider as part of the RWP would be essential, stated that the requirements of proposed Rule 17Ad-26(a)(2) and the related proposed definition of “service provider” in proposed Rule 17Ad-26(b) are circular in nature and overly broad, resulting in too many service providers being captured and the requirement being overly burdensome.

231

Specifically, the commenter stated that the phrases “. . . upon which the covered clearing agency relies to provide the services identified in paragraph (a)(1) of this section . . .” in proposed Rule 17Ad-26(a)(2) and “. . . in any way related to the provision of critical services, as identified by the covered clearing agency in paragraph (a)(1) of this section . . .” in the definition of “service provider” in proposed Rule 17Ad-26(b) are superfluous and unnecessary, and thus, both are not needed.

232

The commenter further stated that by including the term “in any way” as well as “relies” in these two sections of the proposed rules, the Commission broadened the scope of “service provider” to a point that renders the term functionally useless for identifying those service providers that are critical to the business operations of a CCA.

233

By contrast, another commenter stated that the term as used in proposed Rule 17Ad-26(a)(2) appears to limit the subset of providers to be addressed in the RWP.

234

231

DTCC at 5-6.

232

Id.

at 5.

233

Id.

at 6.

234

OCC at 6.

Commenters differed in their interpretation of these phrases in proposed Rule 17Ad-26(a)(2) and the definition of “service provider” in proposed Rule 17Ad-26(b). The phrase “upon which the covered clearing agency relies to provide the services identified in paragraph (a)(1) of this section” has been deleted in final Rule 17Ad-26(a)(2) to avoid any duplication of, or inconsistency with, the definition of “service providers for core services” in final Rule 17Ad-26(b).

235

Along with the modifications to the definition of “service provider for core services” in final Rule 17Ad-26(b) discussed in Part II.D.2

infra,

the scope of service providers captured is appropriate for recovery and orderly wind-down planning purposes.

235

To improve grammar and clarity, the Commission has also modified the phrase “specify to what services such service providers are relevant” to “specifying which core services each service provider supports” in final Rule 17Ad-26(a)(2).

b. Ensure Continued Performance of Service Providers for Core Services

One commenter disagrees that CCAs can reasonably “ensure” that there will be continuation of services by service providers.

236

The commenter stated that it interprets Rule 17Ad-22(e)(15)(ii) to require a CCA to have sufficient resources to continue to pay service providers through the entirety of an execution of a CCA's RWP, and therefore states that this existing requirement should adequately address

the Commission's goals for this aspect of the proposal and recommends that the Commission revise proposed Rule 17Ad-26(a)(2) by removing any requirement that a CCA “ensure” continuation of services.

237

Alternatively, the commenter requested that the Commission adopt a standard that acknowledges these limitations of a CCA to ensure continued performance of service providers and that requires a CCA to establish, implement, maintain, and enforce written policies and procedures reasonably designed to facilitate considerations of contractual provisions with service providers that, subject to continued payment by the CCA (or successor) obligates them to continue to perform in the event of a recovery or during an orderly wind-down.

238

236

DTCC at 8-9 (The commenter stated that the proposed requirement “overestimates the negotiating leverage that CCAs have when entering contracts with service providers or assumes that CCAs would be able to unilaterally require service providers to continue performance during a recovery or orderly wind-down.”).

237

DTCC at 9.

238

Id.

Another commenter stated it “does not believe it is possible for a CCA to `ensure' that a service provider would perform.” The commenter also stated that a CCA can and should analyze whether a service provider has any termination rights or other contractual basis for not performing in a recovery or wind-down situation. The commenter also stated that a CCA should assess and document how it would handle the situation where a service provider has a right to terminate or otherwise not perform in a recovery or wind-down situation.

239

Accordingly, the commenter suggested that proposed Rule 17Ad-26(a)(2) be modified to require a CCA evaluate whether the service provider would continue to perform in the event of a recovery or orderly wind-down and address how the CCA would handle any termination or alternation of performance by the service provider.

239

ICE at 4.

The Commission acknowledges that, while a CCA can, and generally should, include provisions in its written agreements so that it can contractually require that a service provider for core services continues to perform during a recovery or wind-down, a CCA may not be able to compel a service provider to continue to perform in all circumstances. However, as proposed, Rule 17Ad-26(a)(2) addresses planning for a recovery or wind-down scenario by requiring written policies and procedures reasonably designed to address how a CCA

would

ensure that service providers for core services would continue to perform in the event of a recovery and during an orderly wind-down.

240

Thus, even though a CCA may not be able to compel a service provider to continue performing in all circumstances, such planning and any related contractual provisions designed to continue performance under the contract help limit the potential for abrupt or unanticipated disruptions in services during a recovery or wind-down event.

241

Achieving this requirement would likely involve an evaluation of whether the service provider would continue to perform in the event of a recovery or orderly wind-down and address how the CCA would handle any termination or alteration of performance by the service provider. As previously discussed above, a CCA generally should consider when and how to include provisions in its written agreements with service providers that acknowledge and help ensure that service providers can continue to perform their services during a recovery or wind-down event to avoid potential disruptions in core services. In so doing, a CCA generally should consider the terms to which its service providers may be willing or unwilling to agree, so that the CCA can evaluate its options effectively and develop its written agreement accordingly. As this requirement concerns actions taken at the planning stage and does not require a CCA to compel another entity to act, the Commission is not making further modifications to Rule 17Ad-26(a)(2).

240

The requirements of Rule 17Ad-26 lay out necessary elements of a RWP, while the requirement for the RWP itself resides in Rule 17Ad-22(e)(3)(ii), which requires reasonably designed written policies and procedures.

241

A CCA designated systemically important generally should consider also whether and how such agreements may be impacted by the resolution or transfer of services conducted by the resolution authority pursuant to Title II.

One commenter, while agreeing that proposed Rule 17Ad-26(a)(2) identifies a key component of planning for recovery and orderly wind-down, stated that the Commission would best accomplish its objective of ensuring continued performance by service providers for core services by amending the proposed rule to focus on the CCA's relevant processes for third-party engagement and management rather than on conditions at a snapshot point in time, as the nature of a CCA's relationship with a service provider, the services provided, and the roster of relevant service providers necessarily evolves over time.

242

The commenter recommended slightly altering the language of the relevant portion of proposed Rule 17Ad-26(a)(2) to state the following:

242

OCC at 6.

. . . address

the process by which

how

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