Another commenter expressed its view that operational risk
management and disaster recovery systems are critical to any well-
founded compression service or collateral management service.\328\
However, the commenter argued that a clearing agency that performs
those services should be free to implement and amend such procedures as
it considers necessary to operate its business without undue regulatory
delay or oversight.\329\
---------------------------------------------------------------------------

    \328\ See TriOptima Letter at 7-8.
    \329\ See id. (supporting its position through assertions that:
(1) The robustness of a compression service's systems will be a
competitive issue that will be determinant of the commercial
viability of the compression service; (2) compression services do
not represent a systemic risk to the viability of the market because
collateral management providers merely run a set of calculations for
collateral management purposes; (3) systems integrity is a central
feature of the provider's contractual framework and system design
and, ultimately, its ability to attract users; and (4) the risk of
data loss is, in practice, very small).
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(4) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. We
believe that Rule 17Ad-22(d)(4) complements the existing guidance
provided by the Commission in its Automation Review Policy Statements
\330\ and the Interagency

White Paper on Sound Practices to Strengthen the Resilience of the U.S.
Financial System.\331\ We also believe that Rule 17Ad-22(d)(4) helps to
address risks posed by potential operational deficiencies to a clearing
agency and its participants and therefore supports the requirement in
Section 17A of the Exchange Act that a clearing agency must be so
organized and have the capacity to be able to facilitate prompt and
accurate clearance and settlement. Finally, Rule 17Ad-22(d)(4) does not
require clearing agencies to eliminate all operational risks. Instead,
the rule provides registered clearing agencies with the ability to
consider the relevant trade-offs between cost and risk reduction. The
rule provides this ability by allowing registered clearing agencies,
subject to Commission oversight, to develop systems, controls, and
procedures that are ``appropriate'' in response to the identified
risks.\332\
---------------------------------------------------------------------------

    \330\ See Automated Systems of Self-Regulatory Organizations,
Exchange Act Release No. 34-27445 (Nov. 16, 1989), 54 FR 48703 (Nov.
24, 1989); Automated Systems of Self-Regulatory Organizations (II),
Release No. 34-29815 (May 9, 1991), 56 FR 22489 (May 15, 1991)
(``Automation Review Policy Statements''). Generally, the guidance
in the Automation Review Policy Statements provides for the
following activities by clearing agencies: (1) Performing periodic
risk assessments of its automated data processing (``ADP'') systems
and facilities; (2) providing for the selection of the clearing
agency's independent auditors by non-management directors and
authorizing such non-management directors to review the nature,
scope, and results of all audit work performed; (3) having an
adequately staffed and competent internal audit department; (4)
furnishing annually to participants audited financial statements and
an opinion from an independent public accountant as to the clearing
agency's system of internal control--including unaudited quarterly
financial statements also should be provided to participants upon
request; and (5) developing and maintaining plans to assure the
safeguarding of securities and funds, the integrity of the ADP
system, and recovery of securities, funds, or data under a variety
of loss or destruction scenarios.
    \331\ See Exchange Act Release No. 47638 (Apr. 7, 2003), 68 FR
17809 (Apr. 11, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.
    \332\ See discussion supra Section I.A.2.
---------------------------------------------------------------------------

    As discussed above, Rule 17Ad-22 applies only to registered
clearing agencies. It does not apply to entities that perform post-
trade processing services or that are exempt from registration as a
clearing agency. As discussed above, entities that perform certain post
trade processing services, and that fall within the definition of
clearing agency, may be subject to different rulemaking by the
Commission at a later time.\333\
---------------------------------------------------------------------------

    \333\ See discussion supra Section II.B.4 and Section III.A.
---------------------------------------------------------------------------

5. Rule 17Ad-22(d)(5): Money Settlement Risks
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(5) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to employ money settlement arrangements
that eliminate or strictly limit the clearing agency's settlement bank
risks, that is, its credit and liquidity risks from the use of banks to
effect money settlements with its participants, and require funds
transfers to the clearing agency to be final when effected. Money
settlement arrangements, among other things, are meant to reduce the
risk that financial obligations related to the activities of the
clearing agency are not timely settled or discharged with finality.
Generally, money settlement by a clearing agency and its participants
involves the use of a settlement bank \334\ as an intermediary. Failure
by the settlement bank to effectuate timely and final settlement
adversely affects the clearing agency by exposing it to credit and
liquidity pressures that in turn can destabilize the clearing agency's
ability to facilitate prompt and accurate clearance and settlement.
---------------------------------------------------------------------------

    \334\ A settlement bank is a bank that is used to effect money
settlements between a central counterparty and its participants.
---------------------------------------------------------------------------

    The Commission is providing clearing agencies with flexibility to
implement arrangements in a manner fit for them to meet the requirement
of the rule. The Commission notes that there are a number of
arrangements that clearing agencies could establish to comply with the
rule, including criteria for use of settlement banks that address the
banks' creditworthiness, access to liquidity, and operational
reliability, and legal agreements with settlement banks to ensure that
funds transfers to the clearing agency are final when affected.
b. Comments Received
    One commenter stressed that if the Commission adopts Rule 17Ad-
22(d)(5) as proposed then the Commission should clarify that a clearing
agency cannot eliminate all exposure to settlement bank risk.\335\ The
commenter pointed out that even if a clearing agency uses an account at
a U.S. Federal Reserve bank to make settlement with participants, the
clearing agency is still exposed to the settlement risk of the
commercial banks that are used by clearing agency participants.\336\
---------------------------------------------------------------------------

    \335\ See The OCC Letter at 14.
    \336\ See id.
---------------------------------------------------------------------------

    The same commenter stressed that the Commission should not mandate
a minimum number of settlement banks and that the requirements of Rule
17Ad-22(d)(5) should focus on providing clearing agencies with
discretion to select settlement banks with care, diversifying risk
among those settlement banks to the extent practicable, and monitoring
their financial status.\337\
---------------------------------------------------------------------------

    \337\ See id.
---------------------------------------------------------------------------

    Two commenters argued that proposed Rule 17Ad-22(d)(5) should be
applicable only to clearing agencies that take in or process securities
or funds from users.\338\
---------------------------------------------------------------------------

    \338\ See Omgeo Letter at 11; TriOptima Letter at 8 (stating
that the proposed rule should not apply to compression services and
collateral management providers that do not hold or process any of
their users' assets).
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(5) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. We
believe Rule 17Ad-22(d)(5) limits the potential that a clearing
agency's money settlement arrangements will cause the clearing agency
to face higher levels of credit and liquidity risks. In addition, the
Commission believes that the rule is consistent with the requirement of
Section 17A(b)(3)(F) of the Exchange Act, which requires the rules of a
clearing agency to be designed to assure the safeguarding of securities
and funds that are in the custody or control of the clearing agency or
for which it is responsible.\339\
---------------------------------------------------------------------------

    \339\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As noted, some commenters pointed out that a clearing agency may
not be positioned to eliminate all exposure to credit and liquidity
risks from the use of banks to effect money settlements.\340\ For
example, we agree that even if a clearing agency elects to use an
account at a U.S. Federal Reserve bank to make settlement with
participants, the clearing agency is still exposed to the settlement
risk of the banks chosen by clearing agency participants. The
Commission notes however that Rule 17Ad-22(d)(5) does not require a
clearing agency to completely eliminate settlement bank risks. Instead,
the clearing agency must establish, implement, maintain and enforce
written policies and procedures reasonably designed to employ money
settlement arrangements that eliminate or strictly limit the clearing
agency's settlement bank risks. We believe clearing agencies have the
authority

through their rules to shape the settlement bank practices in order to
achieve that outcome. We also agree with commenters that clearing
agencies should retain discretion, subject to Commission oversight, to
establish rules governing settlement bank practices with participants
that are tailored to the operations of the clearing agency.\341\
---------------------------------------------------------------------------

    \340\ See supra notes 335-336 and accompanying text.
    \341\ See supra note 337 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, Rule 17Ad-22 only applies to registered
clearing agencies and does not apply to entities that are exempt from
registration as a clearing agency except to the extent specifically
contemplated by the terms of a future exemption.
6. Rule 17Ad-22(d)(6): Cost-Effectiveness
a. Proposed Rule
    Rule 17Ad-22(d)(6), as proposed, would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to be cost-effective in meeting the
requirements of participants while maintaining safe and secure
operations.
    Having clearing agencies be mindful of the costs that are incurred
by their participants, while maintaining such compliance, should help
to reduce inefficiencies in the provision of clearing agency services.
This point is particularly important in circumstances where clearing
agencies may not be subject to strong competitive forces (such as when
there is only one clearing agency for an asset class) for the provision
of their services and therefore may have less of an incentive to be
cost-effective in meeting the requirements of participants.
Accordingly, the Commission believes the rule should potentially help
reduce the costs incurred for clearing agency services while also
maintaining appropriate standards for a clearing agency's operations.
b. Comments Received
    Two commenters expressed reservations about the rule.\342\ One
commenter stated that it is unnecessary to apply proposed Rule 17Ad-
22(d)(6) to a clearing agency if the Commission already regulates the
cost-effectiveness of that clearing agency through conditions in an
exemptive order.\343\
---------------------------------------------------------------------------

    \342\ See Omgeo Letter at 11; TriOptima Letter at 8.
    \343\ See Omgeo Letter at 11 (``[P]ursuant to Omgeo's Exemptive
Order, Omgeo may not charge its customers more for use of its
central matching services than Omgeo charges its customers when all
counterparties are customers of Omgeo. Moreover, because DTCC, which
is industry-owned, is the majority owner of Omgeo's Class A
Interests, which controls the U.S. regulated aspects of Omgeo's
business, DTCC can influence the prices Omgeo charges for its U.S.
regulated services. This system has worked well, and therefore
application of Proposed Rule 17Ad-22(d)(6) to Omgeo is
unnecessary'').
---------------------------------------------------------------------------

    Another commenter stressed that unless a provider of compression or
collateral management services is systemically important, or market
participants are obliged to purchase its services, then it should be
free to set fees in a fair and commercial manner that encourages broad
participation while permitting sufficient flexibility to offer
favorable rates to high-volume users, early adopters, magnet clients
and other key participants.\344\ The commenter added that portfolio
compression and collateral management are service areas in which cost
effectiveness is a dominant part of commercial viability and that those
services today do not represent a systemic risk to the viability of the
markets.\345\
---------------------------------------------------------------------------

    \344\ See TriOptima Letter at 8.
    \345\ See id.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(6) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. As
discussed above, the Commission believes Rule 17Ad-22(d)(6) is
appropriate and serves to advance the statutory goals of prompt and
accurate clearance and settlement.\346\ Specifically, the rule should
help reduce the costs incurred for clearing agency services by
requiring registered clearing agencies to be mindful of costs incurred
by their participants, which may include keeping fees lower for
participants, while also requiring that registered clearing agencies
maintain safe and secure operations.
---------------------------------------------------------------------------

    \346\ See supra note 1.
---------------------------------------------------------------------------

    With regard to suggestions that Rule 17Ad-22(d)(6) should not apply
to entities that perform certain post-trade services (i.e., comparison
of trade data, collateral management and compression/tear-up
services),\347\ or a clearing agency through the conditions of an
exemptive order rather than the requirements of Rule 17Ad-
22(d)(6),\348\ we note that Rule 17Ad-22 only applies to CCPs and CSDs
and does not apply to entities exempt from registration as clearing
agency except to the extent specifically contemplated by the terms of a
future exemption.
---------------------------------------------------------------------------

    \347\ See supra notes 344-345 and accompanying text.
    \348\ See supra note 343 and accompanying text.
---------------------------------------------------------------------------

7. Rule 17Ad-22(d)(7): Links
a. Proposed Rule
    Rule 17Ad-22(d)(7), as proposed, would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to evaluate the potential sources of
risks that can arise when the clearing agency establishes links either
cross-border or domestically to clear or settle trades, and to ensure
that these risks are managed prudently on an ongoing basis. Tying the
operations of different clearing agencies together by link arrangements
potentially exposes a clearing agency and its members to the risk that
the other entity may experience a financial loss or is otherwise unable
to meet its settlement obligations that causes the clearing agency or
its members to fail to meet their obligations.\349\ Although the design
and operation of each link will present a unique risk profile, clearing
agencies potentially face legal, operational, credit and liquidity
risks from link arrangements. In addition, because links can create
interdependencies, clearing agencies may be affected by systemic risk
if there are deficiencies in these arrangements. The Commission
believes that requiring clearing agencies to evaluate and monitor any
link arrangements they maintain is essential to protect the
marketplaces that clearing agencies serve because the requirement would
reduce the likelihood that such arrangements perpetuate risks that
could create disruptions in the operations of clearing agencies.
---------------------------------------------------------------------------

    \349\ A clearing agency may be required to enter into a
participant agreement with the other clearing organization as part
of the link arrangement, which includes sharing in the loss
allocations of that clearing organization. See RCCP 4.10.6, supra
note 33.
---------------------------------------------------------------------------

b. Comments Received
    Three commenters expressed concerns about the rule.\350\ One
commenter expressed concern that proposed Rule 17Ad-22(d)(7) is not
sufficiently clear in scope.\351\ Specifically, the commenter stated
that it is not entirely clear whether the rule applies only to links
between clearing agencies or may also apply to other ``links'' and any
other entities that may be involved in the process of clearing and
settling trades.\352\ Accordingly, the

commenter asked the Commission to revise the proposed rule text for
17Ad-22(d)(7).\353\ An additional commenter suggested that proposed
Rule 17Ad-22(d)(7) should be modified to encourage prudent portfolio
compression and collateral management services globally.\354\ One
commenter argued that it should not be subject to Rule 17Ad-22(d)(7)
because it is already subject to the conditions of an exemptive order
from clearing agency registration by the Commission.\355\
---------------------------------------------------------------------------

    \350\ See The DTCC (April) Letter at 22; TriOptima Letter at 9;
Omgeo Letter at 12.
    \351\ See The DTCC (April) Letter at 22.
    \352\ See id. (providing examples of these other types of links
such as those that a clearing agency may establish with a data
processor, pricing service, custodian bank, transfer agent or
liquidity provider).
    \353\ See The DTCC (April) Letter at 23 (requesting that Rule
17Ad-22(d)(7) be revised as follows: ``Each clearing agency shall
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, evaluate the
potential sources of risks that can arise when the clearing agency
establishes links with other central counterparties or central
securities depositories either cross-border or domestically to clear
trades, and ensure that the risks are managed prudently on an
ongoing basis.'').
    \354\ See TriOptima Letter at 9 (noting its belief that
regulations that restrict the global availability of compression
services and collateral management services will necessarily reduce
the effectiveness of the risk-management service, by reducing the
geographic scope of counterparties to which domestic users can
connect). The commenter expressed its views on modifying Rule 17Ad-
22(d)(7) in the larger context of its belief ``that the registration
requirement with respect to [portfolio compression services and] * *
* collateral management services is inappropriate and would place
unnecessary burdens on entities providing swap market participants
useful back-office tools that are intended to improve the efficiency
of collateral management systems in a manner that reduces systemic
risk.'' See TriOptima Letter at 1.
    \355\ See Omgeo Letter at 12 (suggesting that its exemptive
order is the oversight mechanism that strikes the appropriate
balance to govern its link arrangements because its link
arrangements (1) do not involve the handling of securities or funds;
(2) provide for standardization and processing of information in a
uniform and efficient manner; and (3) disruptions to its link
arrangements are of a different type and are far less significant
than disruptions in the linkages of registered clearing agencies).
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(7) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. We
believe the rule is consistent with and furthers the purposes of the
Exchange Act. Section 17A(a)(1)(D) of the Exchange Act states that the
linking of all clearance and settlement facilities and the development
of uniform standards and procedures for clearance and settlement will
reduce unnecessary costs and increase the protection of investors and
persons facilitating transactions by and acting on behalf of
investors.\356\ Further, Section 17A(b)(3)(F) of the Exchange Act
requires that the rules of a clearing agency foster cooperation and
coordination with persons engaged in the clearance and settlement of
securities transactions.\357\
---------------------------------------------------------------------------

    \356\ 15 U.S.C. 78q-1(a)(1)(D).
    \357\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission agrees with the suggestion from some commenters that
the specific type of link arrangements contemplated by Rule 17Ad-
22(d)(7) is link arrangements between clearing agencies.\358\ The
Commission notes however that under Section 17A(b)(3)(F) of the
Exchange Act, a clearing agency is charged with responsibility to
coordinate with persons engaged in the clearance and settlement of
securities transactions, not just other clearing agencies.\359\
Accordingly, we have not amended the text of Rule 17Ad-22(d)(7) from
the proposal. Further, the Commission notes that during the clearance
and settlement process, a registered clearing agency is confronted with
a variety of risks that must be identified and understood if they are
to be effectively controlled.\360\ To the extent that these risks arise
as a result of a registered clearing agency's links with another entity
involved in the clearance and settlement process, Rule 17Ad-22(d)(7)
should help ensure that clearing agencies have policies and procedures
designed to identify those risks.
---------------------------------------------------------------------------

    \358\ See supra note 352.
    \359\ 15 U.S.C. 78q-1(b)(3)(F).
    \360\ See RCCP, supra note 33, at 39.
---------------------------------------------------------------------------

    Rule 17Ad-22 only applies to registered clearing agencies and does
not apply to entities that are exempt from registration as a clearing
agency, unless the terms of future exemptions specifically contemplate
its application, in whole or in part.
8. Rule 17Ad-22(d)(8): Governance
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(8) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent to fulfill the public interest requirements in
Section 17A of the Exchange Act applicable to clearing agencies,\361\
to support the objectives of owners and participants, and to promote
the effectiveness of the clearing agency's risk management
procedures.\362\
---------------------------------------------------------------------------

    \361\ Section 17A(b)(3)(F) of the Exchange Act requires that the
rules of a clearing agency be designed to protect investors and the
public interest. 15 U.S.C. 78q-1(b)(3)(F).
    \362\ Rule 17Ad-22(d)(8) would complement other applicable
requirements concerning governance at clearing agencies that may
also separately apply. These other requirements include the existing
regulatory framework of Section 17A of the Exchange Act and the
related requirements contemplated by proposed Rule 17Ad-25, as well
as Section 765 of the Dodd-Frank Act with respect to security-based
swap clearing agencies. See supra Section III.F (stating that
clearing agencies be required to establish, implement, maintain and
enforce written policies and procedures reasonably designed to
identify and address existing or potential conflicts of interest).
See also Exchange Act Release No. 63107 (Oct. 14, 2010), 75 FR 65882
(Oct. 26, 2010), supra note 231.
---------------------------------------------------------------------------

b. Comments Received
    Two commenters registered their preference for what they regard as
the principles-based approach in proposed Rule 17Ad-22(d)(8) to
regulation of clearing agency governance rather than the prescriptive
rules set forth in the Commission's proposed Regulation MC applicable
to the security-based swap clearing agencies.\363\ One commenter urged
the Commission not to adopt hard and fast standards that will be costly
to implement and maintain and yield little or no apparent corresponding
regulatory benefits.\364\
---------------------------------------------------------------------------

    \363\ See CME Letter at 3; The OCC Letter at 14 (referencing the
Commission's proposed requirements for clearing agencies in
Regulation MC).
    \364\ See CME Letter at 4.
---------------------------------------------------------------------------

    One commenter urged the Commission to ensure that Rule 17Ad-
22(d)(8) as well as any requirements adopted from the Commission's
proposed Regulation MC pertaining to the mitigation of conflicts of
interest are designed to ensure that buy-side market participants have
a meaningful voice in the operating committees of clearing agencies
because that representation is critical to promoting robust governance
arrangements at clearing agencies and serving the best interests of the
U.S. financial system.\365\ Another commenter stated that proposed
Rules 17Ad-22(d)(8), 17Ad-25, and 17Ad-26 reflect a better approach to
governance, conflicts of interest, and board and committee composition
than the Commission's proposed requirements for clearing agencies under
Regulation MC.\366\
---------------------------------------------------------------------------

    \365\ See BlackRock Letter at 2.
    \366\ See The DTCC (April) Letter at 8.
---------------------------------------------------------------------------

    One commenter urged the Commission to consider complementing
proposed Rule 17Ad-22(d)(8) with a minimum board independence
requirement so that at least two-thirds of all board directors would be
required to be independent.\367\
---------------------------------------------------------------------------

    \367\ See CII Letter at 1.
---------------------------------------------------------------------------

    Several commenters made recommendations to the Commission
concerning the application of Rule 17Ad-22(d)(8) to clearing agencies
that perform post-trade processing services.\368\ One commenter stated
that if the Commission interprets proposed Rule 17Ad-22(d)(8) to be
applicable to

clearing agencies that perform post-trade processing services for
security-based swaps (e.g., comparison of data, portfolio compression
and collateral management) then the governance requirements should be
commensurate with the low risk presented by those service providers
because requirements that are unduly onerous would impose unnecessary
burdens and costs.\369\ Another commenter argued that application of
proposed Rule 17Ad-22(b)(8) to a clearing agency is unnecessary in
cases when an industry utility has such a significant influence over a
clearing agency's management and operation that the clearing agency's
governance is already appropriately transparent to fulfill the public
interest.\370\
---------------------------------------------------------------------------

    \368\ See TriOptima Letter at 9; Omgeo Letter at 12.
    \369\ See TriOptima Letter at 9.
    \370\ See Omgeo Letter at 12.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(8) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. Rule
17Ad-22(d)(8) is designed to promote these types of arrangements and
the ability of a clearing agency to serve the interests of its various
constituents and the interests of the general public while maintaining
prudent risk management processes to promote prompt and accurate
clearance and settlement.
    Governance arrangements have the potential to play an important
role in making sure that clearing agencies fulfill the Exchange Act
requirements that the rules of a clearing agency be designed to protect
investors and the public interest and to support the objectives of
owners and participants. Similarly, governance arrangements may promote
the effectiveness of a clearing agency's risk management procedures by
creating an oversight framework that fosters a focus on the critical
role that risk management plays in promoting prompt and accurate
clearance and settlement.\371\
---------------------------------------------------------------------------

    \371\ The role of governance arrangements in promoting effective
risk management has also been a focus of rules recently proposed by
the Commission to mitigate conflicts of interest at security-based
swap clearing agencies. See Exchange Act Release No. 63107 (Oct. 14,
2010), 75 FR 65882 (Oct. 26, 2010).
---------------------------------------------------------------------------

    We appreciate the perspective of commenters who prefer the more
general policies and procedures design of Rule 17Ad-22(d)(8) to any
more prescriptive rulemaking by the Commission in the area of clearing
agency governance.\372\ We agree that Rule 17Ad-22(d)(8) provides an
important element of discretion to a clearing agency to be able to use
its experience and expertise to hone policies and procedures for
governance arrangements that support the clearing agency's particular
operations. Even so, we are not persuaded by the assertions that more
prescriptive Commission rules to address clearing agency governance
practices would necessarily be disproportionately costly to implement
and maintain when compared to potential countervailing benefits.\373\
We continue to perform a careful review and evaluation of the comments
that the Commission received on proposed Rules 17Ad-25, 17Ad-26 and
Regulation MC, which commenters rightly observed represent separate,
and in some cases more prescriptive, proposed requirements related to
clearing agency governance and mitigation of conflicts of interest.
---------------------------------------------------------------------------

    \372\ See supra note 364.
    \373\ See id.
---------------------------------------------------------------------------

    At this time, the Commission also is not acting on the
recommendation of some commenters to structure Rule 17Ad-22(d)(8) so
that it would require at least two-thirds of a clearing agency's board
of directors to be independent.\374\ Proposed Rule 17Ad-26 and
Regulation MC address whether and how to require some degree of
independent representation on the board of a clearing agency. We
believe it is more appropriate to consider those issues in connection
with the Commission's ongoing consideration of those rules.
---------------------------------------------------------------------------

    \374\ See supra note 367.
---------------------------------------------------------------------------

    With regard to suggestions that Rule 17Ad-22(d)(8) should not apply
to entities that perform certain post-trade services (i.e., comparison
of trade data, collateral management and compression/tear-up
services),\375\ we note that Rule 17Ad-22 only applies to registered
clearing agencies and does not apply to entities exempt from
registration as a clearing agency, unless the terms of future
exemptions specifically contemplate its application, in whole or in
part.
---------------------------------------------------------------------------

    \375\ See supra notes 368-370.
---------------------------------------------------------------------------

    We are not persuaded by the argument that the operation of a
clearing agency through a utility model negates the need for Rule 17Ad-
22(d)(8) because regardless of the business model adopted, the board
should reflect the interests of the full range of stakeholders in order
to effective. \376\ In response to comments that the rule should apply
to a clearing agency in a way that is commensurate with the risk of its
services,\377\ the Commission expects that not all policies and
procedures established by clearing agencies to satisfy Rule 17Ad-
22(d)(8) will be the same. Instead, to be useful to a clearing agency
and its interested parties, the policies and procedures should
necessarily reflect the unique relationships at that clearing agency
between the scope of its operations and its governance and risk
management needs.
---------------------------------------------------------------------------

    \376\ See supra note 370 and accompanying text.
    \377\ See supra note 369 and accompanying text.
---------------------------------------------------------------------------

9. Rule 17Ad-22(d)(9): Information on Services
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(9) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide market participants with
sufficient information for them to identify and evaluate the risks and
costs associated with using the clearing agency's services.
    The Commission believes that requiring a clearing agency to
disclose information sufficient for participants to identify risks and
costs associated with using the clearing agency will allow participants
to make informed decisions about the use of the clearing agency and
take appropriate actions to mitigate their risks and costs associated
with the use of the clearing agency.
b. Comments Received
    One commenter stated that it does not believe that the proposed
rule is necessary because among other things a clearing agency's fees,
collateral deposits, and operational requirements are already included
in the clearing agency's rules and its published procedures and are
already required to be sufficiently available to market participants
and the public at large.\378\
---------------------------------------------------------------------------

    \378\ See The OCC Letter at 15.
---------------------------------------------------------------------------

    Two commenters expressed that application of proposed Rule 17Ad-
22(d)(9) to clearing agencies that do not handle securities or funds is
unnecessary.\379\
---------------------------------------------------------------------------

    \379\ See Omgeo Letter at 12; see also TriOptima Letter at 9
(noting that compression services and collateral management services
operate on the basis of clear, standardized documentation and
present few risks to users. If a compression cycle or collateral
management service fails, the users' pre-existing transactions
remain in effect and the risks can be disclosed in user
documentation).
---------------------------------------------------------------------------

c. Final Rule
    We are adopting Rule 17Ad-22(d)(9) as proposed, except for the
clarification discussed in Sections II.B.4 and III.A regarding the
application of the rule only to registered clearing agencies We believe
that requiring a clearing agency to have policies and procedures that
require a clearing agency to disclose

sufficient information so that participants can identify risks and
costs associated with using the clearing agency will allow participants
to make informed decisions about the use of the clearing agency and
take appropriate actions to mitigate their risks and costs associated
with the use of the clearing agency. While the rule provides clearing
agencies flexibility to determine how to adequately disclose
information so participants can identify and evaluate risks and costs
associated with participation, the Commission believes that disclosure
of the clearing agency rulebook, the costs of its services, a
description of netting and settlement activities it provides,
participants' rights and obligations, information regarding its margin
methodology, and information regarding the extreme but plausible
scenarios that the clearing agency uses to stress test its margin
requirements are among the categories of information that participants
could use to identify and evaluate risks and costs associated with use
of the clearing agency. The Commission also believes that it is
reasonable to expect that the type of information and level of detail
that market participants will consider to be sufficient will evolve
over time and therefore clearing agencies should seek to establish
regular channels of communication with market participants and
processes for continuously improving their disclosure practices as the
marketplace changes over time.
    Because clearing agencies are SROs, their rules are published by
Commission and are generally available on each clearing agency's Web
site. Nevertheless, discrete rule proposals do not necessarily provide
a complete picture of a clearing agency's operations and the risk
mitigation procedures. Accordingly, the rule is intended to promote a
better understanding among market participants of a clearing agency's
operations. A better understanding should foster confidence in the
clearing agency's ability to manage those risks and costs, including,
but not limited to, any margin requirements, restrictions or
limitations of the clearing agency's obligations, and conditions used
by the clearing agency to test the adequacy of its financial resources.
    We acknowledge that existing requirements address the need for
clearing agencies to incorporate matters such as the clearing agency's
fees, collateral deposits, and operational requirements in its rules
and procedures, which are already made available to market participants
and the public.\380\ The Commission is also aware that under Rule 17Ad-
22(d)(9), the nature of the information that clearing agencies must
provide, how frequently it must be provided, and who is entitled to
receive it are all aspects of compliance with Rule 17Ad-22(d)(9) that
implicate concerns by clearing agencies about protection of their
proprietary information.\381\ We believe that the nature and extent of
information that is required to be provided under Rule 17Ad-22(d)(9)
should be tailored to the needs of market participants based on the
risks and costs to which they are exposed. Clearing agencies are
expected to establish such tailored approaches in their policies and
procedures designed to achieve compliance with Rule 17Ad-22(d)(9).
---------------------------------------------------------------------------

    \380\ See supra note 378.
    \381\ See id.
---------------------------------------------------------------------------

    We agree with commenters who recommended that Rule 17Ad-22(d)(9)
should only apply categorically to clearing agencies that take in or
process securities or funds. Rule 17Ad-22 only applies to registered
clearing agencies and does not apply to entities exempt from
registration as a clearing agency except to the extent specifically
contemplated by a future exemption.
10. Rule 17Ad-22(d)(10): Immobilization and Dematerialization of
Securities Certificates
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(10) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to immobilize \382\ or dematerialize
\383\ securities certificates and transfer them by book entry to the
greatest extent possible when the clearing agency provides CSD
services.\384\
---------------------------------------------------------------------------

    \382\ Immobilization refers to any circumstance where an
investor does not receive a physical certificate upon the purchase
of securities or is required to physically deliver a certificate
upon the sale of securities.
    \383\ Dematerialization is the process of eliminating physical
certificates as a record of security ownership.
    \384\ See proposed Rule 17Ad-22(a)(2) for definition of
``central securities depository services.'' DTC is currently the
only registered clearing agency that provides central securities
depository services.
---------------------------------------------------------------------------

    The Commission believes that the immobilization and
dematerialization of securities and their transfer by book entry
results in reduced costs and risks associated with securities
settlements and custody by removing the need to hold and transfer many,
if not most, physical certificates.\385\ The Commission also believes
that the proposed rule strengthens the requirement in Section
17A(b)(3)(F) of the Exchange Act for the rules of a clearing agency to
assure the safeguarding of securities and funds that are in the custody
or control of the clearing agency or for which it is responsible.\386\
---------------------------------------------------------------------------

    \385\ By concentrating the location of physical securities in a
single central securities depository, clearing agencies are able to
centralize the operations associated with custody and transfer and
reduce costs through economies of scale. Virtually all mutual fund
securities, government securities, options, and municipal bonds in
the United States are dematerialized and most of the equity and
corporate bonds in the U.S. market are either immobilized or
dematerialized. While the U.S. markets have made great strides in
achieving immobilization and dematerialization for institutional and
broker-to-broker transactions, many industry representatives believe
that the small percentage of securities held in certificated form
impose unnecessary risk and expense to the industry and to
investors. See Exchange Act Release No. 8398 (Mar. 11, 2004), 69 FR
12921 (Mar. 18, 2004).
    \386\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

b. Comments Received
    One commenter expressed concern that proposed Rule 17Ad-22(d)(10)
places responsibilities on clearing agencies that perform CSD services
to immobilize or dematerialize securities that are beyond the clearing
agency's control. Therefore, the commenter requested that the rule be
revised to reflect the need for cooperation from market participants
and regulators.\387\
---------------------------------------------------------------------------

    \387\ See The DTCC (April) Letter at 23-24 (asking the
Commission to reformulate Rule 17Ad-22(d)(10) as follows: ``Each
clearing agency shall establish, implement, maintain and enforce
written policies and procedures reasonably designed to, as
applicable, promote the immobilization or dematerialization of
securities certificates and transfer them by book entry to the
greatest extent possible when the clearing agency provides central
securities depository services.'').
---------------------------------------------------------------------------

    Another commenter stated its belief that the proposed Rule 17Ad-
22(d)(10) should not apply to portfolio compression and collateral
management services for security-based swaps.\388\
---------------------------------------------------------------------------

    \388\ See TriOptima Letter at 11.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(10) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. Rule
17Ad-22(d)(10) does not require a clearing agency to take any actions
that are beyond the scope of its rules, procedures and operations. We
agree that collaboration between regulators, market participants, and
clearing agencies is necessary to achieve total immobilization or
dematerialization of securities

certificates; but this result is not required by Rule 17Ad-22(d)(10).
The Commission also understands that some clearing agencies already
have taken steps in furtherance of full dematerialization in the U.S.
financial markets and that such efforts are ongoing.\389\
---------------------------------------------------------------------------

    \389\ See DTCC White Paper, Strengthening the U.S. Financial
Markets: A Proposal to Fully Dematerialize Physical Securities,
Eliminating the Costs and Risks They Incur (July 2012).
---------------------------------------------------------------------------

    In response to comments about the application of the rule to
portfolio compression and collateral management services, the
Commission notes that Rule 17Ad-22 only applies to registered clearing
agencies and does not apply to entities exempt from registration as a
clearing agency, unless the terms of future exemptions specifically
contemplate its application, in whole or in part.
11. Rule 17Ad-22(d)(11): Default Procedures
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(11) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to make key aspects of their default
procedures publicly available and establish default procedures that
ensure that the clearing agency can take timely action to contain
losses and liquidity pressures and to continue meeting its obligations
in the event of a participant default.
    The Commission believes that the rule would provide certainty and
predictability to market participants about the measures a clearing
agency will take in the event of a participant default because default
procedures, among other things, are meant to reduce the likelihood that
a default by a participant, or multiple participants, will disrupt the
clearing agency's operations. By creating a framework of default
procedures that are designed to permit a clearing agency to take
actions to contain losses and liquidity pressures it faces while
continuing to meet its obligations, the clearing agency should be in a
better position to continue providing its services in a manner that
promotes accurate clearance and settlement during times of market
stress.
    The Commission also believes that the requirements in Rule 17Ad-
22(d)(11) would increase the possibility that defaults by participants,
should they occur, would proceed in an orderly and transparent manner.
In particular, the rule would help to ensure that all participants are
aware of the default process and are able to plan accordingly and that
clearing agencies would have sufficient time to take corrective actions
to mitigate potential losses.
b. Comments Received
    One commenter urged the Commission to place additional requirements
on clearing agencies to conduct and document a test of their default
management plans.\390\ The commenter stated its belief that default
management tests should be undertaken at least on a semi-annual
basis.\391\
---------------------------------------------------------------------------

    \390\ See ISDA Letter at 5.
    \391\ See id.
---------------------------------------------------------------------------

    One commenter responded to a question asked by the Commission in
the Proposing Release about how much flexibility clearing agencies
should have in the amount of time they are permitted to manage a
default and perform a liquidation of positions. The commenter
recommended that in the context of security-based swaps the time
permitted should be the time necessary for the clearing agency to
actually liquidate a security-based swap portfolio rather than
establishing a predetermined period by rule.\392\ The commenter noted
that the time necessary depends on facts and circumstances and is
likely to be tied to the characteristics of the security-based swaps
involved and the particular markets it in which they trade--as well as
the liquidation times derived from the default management plan and
practice testing by the clearing agency.\393\ The commenter stated that
the Commission should have a view of and sign-off authority over the
clearing agency's default management plan.\394\ The commenter also
noted that clearing agencies should continually monitor the risk
associated with concentration in participants' positions, and if that
concentration could not be liquidated within the time required by the
default management plan, the clearing agency should have discretion to
include extra charges in initial margin to reflect that risk.\395\
---------------------------------------------------------------------------

    \392\ See ISDA Letter at 6.
    \393\ See id.
    \394\ See id.
    \395\ See id.
---------------------------------------------------------------------------

    Two commenters argued that proposed Rule 17Ad-22(d)(11) should not
apply to entities that perform post-trade processing services such as
comparison of data,\396\ collateral management and portfolio
compression.\397\
---------------------------------------------------------------------------

    \396\ See Omgeo Letter at 13.
    \397\ See TriOptima Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(11) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. The
Commission believes that the requirements in Rule 17Ad-22(d)(11)
increase the possibility that defaults by participants, should they
occur, will proceed in an orderly and transparent manner because Rule
17Ad-22(d)(11) helps to ensure that all participants are able to plan
for the default process and that clearing agencies will have sufficient
time to take corrective action to mitigate potential losses.
    As an initial matter, we believe that how frequently a clearing
agency conducts default management tests should be determined by each
individual clearing agency, in consultation with, and subject to
oversight by, the Commission.\398\ We agree that it is important for
clearing agencies to conduct default management tests, but clearing
agencies overseen by the Commission already largely perform these types
of exercises as part of their compliance with the requirements of
Section 17A of the Exchange Act. Unless additional circumstances
clarify that a prescriptive course of action by the Commission is
appropriate to bring more standardized scope and frequency to these
exercises, we believe that it is appropriate, subject to Commission
oversight, to continue to allow clearing agencies discretion to design
and perform default management tests that are suited to their
particular clearance and settlement activities.
---------------------------------------------------------------------------

    \398\ See supra notes 390-391 and accompanying text.
---------------------------------------------------------------------------

    With respect to the commenter who advised the Commission not to
establish a particular period in Rule 17Ad-22(d)(11) during which a
clearing agency would be required to manage and complete a default
liquidation process for security-based swaps, we are not adopting
specifically bounded timing requirements in Rule 17Ad-22(d)(11) for a
clearing agency to achieve compliance with the rule. Instead, our
current belief is that the more general approach we are adopting in
Rule 17Ad-22(d)(11) allows clearing agencies to establish, implement,
maintain and enforce policies and procedures that comply with Rule
17Ad-22(d)(11) and take into account the particular characteristics of
the financial instruments and market dynamics involved in a default at
a particular clearing agency. We believe this is the best approach to
allow clearing agencies to contain losses and the liquidity pressures
that they face while continuing to meet their obligations.

    We also agree with commenters who suggested that it is appropriate
for clearing agencies to consider concentration risk in margin
practices and that if certain concentrations indicate that liquidation
of the concentrated positions could not be performed within the
parameters of the clearing agency's default management plan, then the
clearing agency should consider extra initial margin charges to account
for that occurrence.\399\ We believe that these issues are
appropriately addressed by individual clearing agencies through the
submission of proposed rule changes to the Commission for review and
public comment.
---------------------------------------------------------------------------

    \399\ See supra note 395 and accompanying text.
---------------------------------------------------------------------------

    With regard to suggestions that Rule 17Ad-22(d)(11) categorically
should not apply to entities that perform certain post-trade services
(i.e., comparison of trade data, collateral management and compression/
tear-up services),\400\ we note that Rule 17Ad-22 only applies to
registered clearing agencies and does not apply to entities exempt from
registration as a clearing agency, unless the terms of future
exemptions specifically contemplate its application, in whole or in
part.
---------------------------------------------------------------------------

    \400\ See supra notes 396-397 and accompanying text.
---------------------------------------------------------------------------

12. Rule 17Ad-22(d)(12): Timing of Settlement Finality
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(12) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ensure that final settlement occurs
no later than the end of the settlement day and that intraday or real-
time finality is provided where necessary to reduce risks. The
Commission believes that settlement finality should occur not later
than the end of the settlement day because it will help to limit the
volume of outstanding obligations that are subject to settlement at any
one time and thereby reduce the settlement risk exposure of
participants and the clearing agency.
b. Comments Received
    One commenter that operates several clearing agencies expressed
concern that the second clause of proposed Rule 17Ad-22(d)(12), which
reads ``and require that intraday or real-time finality be provided
where necessary to reduce risks'' could be interpreted to require
intraday or real-time settlement finality beyond what its clearing
agencies currently provide and are capable of providing without
significant systems and process changes.\401\ The commenter asked the
Commission to clarify that the rule is not intended to impose an
obligation on the clearing agencies it operates to provide intraday or
real-time finality beyond their current practices or any obligation to
build additional capability unless and until there is industry and
regulatory consensus on whether and what additional capability to build
and how to allocate the cost.\402\
---------------------------------------------------------------------------

    \401\ See The DTCC (April) Letter at 25.
    \402\ See id.
---------------------------------------------------------------------------

    One commenter expressed general support for proposed Rule 17Ad-
22(d)(12) but requested that the Commission provide clarification
regarding how the rule is compatible with correction of errors and also
clarify that ``title transfer'' of initial margin may not occur when it
is posted to a clearing agency.\403\ Another commenter stated that
although it generally supports the proposed requirement to ensure that
final settlement occurs no later than the end of the settlement day, it
also believes that this requirement must be interpreted
reasonably.\404\ The commenter asked the Commission to expressly state
in the adopting release that circumstances may arise that make same-
date settlement impossible, such as natural disasters, terrorist acts,
and major communications breakdowns.\405\ The commenter added that it
currently has the ability to make margin calls on an intraday basis as
necessary and its agreements with settlement banks expressly provide
when payments in satisfaction of such calls become irrevocable. \406\
The commenter asked the Commission to specifically state whether this
structure satisfies the requirements of proposed Rule 17Ad-
22(d)(12).\407\
---------------------------------------------------------------------------

    \403\ See ISDA Letter at 7.
    \404\ See The OCC Letter at 15.
    \405\ See id.
    \406\ See id.
    \407\ See id.
---------------------------------------------------------------------------

    One commenter expressed concern that proposed Rule 17Ad-22(d)(12)
fails to provide clear standards for real-time trade processing and
therefore does not provide a workable framework for trade processing
and clearing of security-based swaps.\408\ To address its concern, the
commenter requested that the Commission adopt rules equivalent to CFTC
Rules 37.6(b) and 39.12(B)(7) to require swaps to be immediately
confirmed and accepted for clearing upon execution.\409\
---------------------------------------------------------------------------

    \408\ See SDMA Letter at 6.
    \409\ See id.
---------------------------------------------------------------------------

    Two commenters argued that proposed Rule 17Ad-22(d)(11) should not
apply to entities that perform post-trade processing services such as
comparison of data,\410\ collateral management and portfolio
compression,\411\ because those services do not involve settlement of
transactions.
---------------------------------------------------------------------------

    \410\ See Omgeo Letter at 13.
    \411\ See TriOptima Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(12) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. Rule
17Ad-22(d)(12) does not require a clearing agency that has policies and
procedures in place to facilitate final settlement by the end of the
settlement day to alter its rules and procedures. As stated in the
Proposing Release, ``intraday or real-time finality may be necessary to
reduce risk in circumstances where the lack of intraday or real-time
finality may impede the clearing agency's ability to facilitate prompt
and accurate clearance and settlement, cause the clearing agency's
participants to fail to meet their obligations, or cause significant
disruptions in the securities markets.'' \412\ The Commission agrees
with the commenter that a decision to revise the settlement process to
implement intraday settlement should involve consultation with all
stakeholders.\413\ The Commission is not proposing a rule at this time,
but plans to study the issue further. Furthermore, the need to correct
errors would not be a violation of Rule 17Ad-22(d)(12). We agree that
Rule 17Ad-22(d)(12) must be reasonably construed to provide that in
extreme circumstances same-date settlement may be impossible to achieve
(i.e., due to natural disasters, terrorist acts, and major
communications breakdowns).\414\ The Commission however notes that the
duty of a clearing agency to address these situations is governed by
Rule 17Ad-22(d)(4), which requires a clearing agency to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to identify sources of operational risk and
minimize these risks through the development of appropriate systems,
controls, and procedures; implement systems that are reliable,
resilient and secure and have adequate scalable

capacity; and have business continuity plans that allow for timely
recovery of operations and ensure the fulfillment of a clearing
agency's obligations.
---------------------------------------------------------------------------

    \412\ See Proposing Release, supra note 35, at 14490.
    \413\ We note that one clearing agency has made efforts to
create a dialogue with the industry on the issue of shortening the
settlement cycle. See DTCC White Paper, Proposal to Launch a New
Cost-Benefit Analysis on Shortening the Settlement Cycle (Dec.
2011).
    \414\ See supra note 404 and accompanying text.
---------------------------------------------------------------------------

    We agree with commenters that the timing of the effective transfer
of initial margin is an important consideration related to achieving
settlement finality in an event of default.\415\ In general, the
validity of the clearing agency's liens and interest in collateral,
including initial margin posted by participants, likely could be
ascertained by referring to the clearing agency membership agreements,
its rules and procedures and Articles 8 and 9 of the Uniform Commercial
Code.
---------------------------------------------------------------------------

    \415\ See supra note 403 and accompanying text.
---------------------------------------------------------------------------

    With respect to the commenter who said that the rules in 17Ad-
22(d)(12): ``Fail to provide clear standards for real time trade
processing,'' the Commission does not intend for the rule to provide
standards for security-based swaps that are centrally cleared to be
confirmed, accepted for clearing and guaranteed by a clearing agency at
the point of trade execution.\416\ Instead, Rule 17Ad-22(d)(12) focuses
on achieving settlement on the particular settlement date associated
with the securities transaction or on an intraday or real-time basis
(i.e., delivery versus payment) where those additional steps are
necessary to reduce risks. The Commission continues to consider the
appropriateness of proposing more specific rules that would require
transactions to be immediately confirmed and accepted for clearing upon
execution.
---------------------------------------------------------------------------

    \416\ See supra notes 408-409 and accompanying text.
---------------------------------------------------------------------------

    We agree with commenters that Rule 17Ad-22(d)(12) should not apply
if a clearing agency's services do not involve the handling of
securities or funds to facilitate settlement of obligations. As
discussed above, Rule 17Ad-22 applies only to registered clearing
agencies and does not apply to entities exempt from registration as a
clearing agency, unless the terms of future exemptions specifically
contemplate its application, in whole or in part.
13. Rule 17Ad-22(d)(13): Delivery Versus Payment
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(13) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to eliminate principal risk by linking
securities transfers to funds transfers to achieve delivery versus
payment (``DVP'').
    DVP eliminates the risk that a party would lose some or its entire
principal because payment is made only if securities are delivered. The
Commission believes that clearing agencies should be required to use
this payment method to reduce the potential that delivery of the
security is not appropriately matched with payment for a security,
thereby impeding the clearing agency's ability to facilitate prompt and
accurate clearance and settlement.
b. Comments Received
    One commenter pointed out that the Commission previously approved
an SRO rule change which eliminated the commenter's right to reject
matched trades that are reported to it by an exchange even if the
purchasing clearing member eventually fails to pay the purchase price
of the option.\417\ This approach was adopted because of a preference
by the clearing agency and its participants to mutualize the risk of
such defaults rather than bear the risk that a completed trade would be
rejected on the following day because of the default of the
counterparty.\418\ The commenter asked the Commission to confirm that
it would not consider this policy to violate Rule 17Ad-22(d)(13).\419\
---------------------------------------------------------------------------

    \417\ See The OCC Letter at 15.
    \418\ See id.
    \419\ See id.
---------------------------------------------------------------------------

    Two commenters argued that proposed Rule 17Ad-22(d)(13) should not
apply to entities that perform post-trade processing services such as
comparison of data,\420\ collateral management and tear-up/
compression,\421\ because those services do not involve settlement of
transactions.
---------------------------------------------------------------------------

    \420\ See Omgeo Letter at 13.
    \421\ See TriOptima Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(13) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. As
described in the Proposing Release, DVP is achieved in the settlement
process when the mechanisms facilitating settlement ensure that
delivery occurs if and only if payment occurs.\422\ The Commission
believes that clearing agencies should be required to link securities
transfers to funds transfers in a way that achieves DVP to reduce the
potential that delivery of the security is not appropriately matched
with payment for a security, thereby impeding the clearing agency's
ability to facilitate prompt and accurate clearance and settlement.
---------------------------------------------------------------------------

    \422\ See Bank for International Settlements, Delivery Versus
Payment in Securities Settlement Systems (1992), available at http://www.bis.org/publ/cpss06.pdf. Three different DVP models can be
differentiated according to whether the securities and/or funds
transfers are settled on a gross (trade-by-trade) basis or on a net
basis.
---------------------------------------------------------------------------

    The elimination by a clearing agency of its right to reject matched
trades and subsequently relying on mutualization of resources to make
settlement if necessary does not violate Rule 17Ad-22(d)(13), as
mutualization of risk by participants is an acceptable means of
eliminating principal risk that would otherwise exist for a clearing
agency. The rule requires a clearing agency to establish policies and
procedures to link the transfer of securities and funds in a manner
that mitigates principal risk in the event of a participant default.
The rule does not govern when a clearing agency guarantees a
transaction or the clearing agency's loss allocation procedures in the
event of a default.
    We agree with commenters who suggested that Rule 17Ad-22(d)(13) is
not applicable to clearing agencies that do not handle securities or
funds to perform settlement. As discussed above, Rule 17Ad-22 only
applies to registered clearing agencies and does not apply to entities
exempt from registration as a clearing agency, unless the terms of
future exemptions specifically contemplate its application, in whole or
in part.
14. Rule 17Ad-22(d)(14): Risk Controls To Address Participants' Failure
To Settle
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(14) requires clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to institute risk controls, including
collateral requirements and limits to cover the clearing agency's
credit exposure to each participant exposure fully, that ensure timely
settlement in the event that the participant with the largest payment
obligation is unable to settle when the clearing agency provides CSD
services \423\ and extends intraday credit to participants.
---------------------------------------------------------------------------

    \423\ See proposed Rule 17Ad-22(a)(2) for definition of
``central securities depository services.''
---------------------------------------------------------------------------

    The Commission believes it is important for clearing agencies that
provide CSD services to institute risk controls, including collateral
requirements and limits, to cover the clearing agency's credit exposure
to each participant exposure fully, that

ensure timely settlement in these circumstances to address the risk
that the participant may fail to settle after credit has been extended.
The Commission also believes that requiring the controls to be designed
to withstand the inability of the participant with the largest payment
obligation to settle, in such circumstances, would reduce the
likelihood of disruptions at the clearing agency by having controls in
place to account for the largest possible loss from any individual
participant and thereby help the clearing agency to provide prompt and
accurate clearance and settlement during times of market stress.
b. Comments Received
    One commenter asked the Commission to revise Rule 17Ad-22(d)(14) to
expressly state that the rule applies to a clearing agency that
provides CSD services and extends intraday credit through the operation
of a net settlement system.\424\ The commenter emphasized that it is
important to acknowledge a distinction in the rule between central
securities depositories that operate gross settlement systems and those
that operate net settlement systems because gross settlement systems
amount to a direct intraday extension of credit while a net settlement
system places the clearing agency in the position of being a legal
agent that extends intraday credits on behalf of other participants
that are then settled only at one or more discrete, prescribed times
during the process day.\425\
---------------------------------------------------------------------------

    \424\ See The DTCC (April) Letter at 25-26 (noting that the
standard in RSSS 9, on which Rule 17Ad-22(d)(14) is modeled,
specifically identifies central securities depositories that operate
net settlement systems).
    \425\ See The DTCC (April) Letter at 26 (suggesting the
following language to revise the proposed rule: ``Each clearing
agency shall establish, implement, maintain and enforce written
policies and procedures reasonably designed to, as applicable,
institute risk controls, including collateral requirements and
limits to cover the clearing agency's credit exposure to each
participant family fully, that ensure timely settlement in the event
that the participant family with the largest payment obligation is
unable to settle when the clearing agency provides central
securities depository services and operates a net settlement system
or extends intraday credit to participants'').
---------------------------------------------------------------------------

    Responding to a question posed by the Commission in the Proposing
Release, the same commenter stated its belief that clearing agencies
that provide CSD services should not be required to maintain enough
financial resources to be able to withstand a settlement failure by the
two participant families with the largest settlement obligations to the
clearing agency that performs central depository services.\426\ The
commenter argued that no empirical or historical case has been made to
support such a change in how clearing agencies that perform CSD
services currently operate their risk management controls.\427\
---------------------------------------------------------------------------

    \426\ See The DTCC (April) Letter at 26-27.
    \427\ See id.
---------------------------------------------------------------------------

    One commenter stated that the requirements of proposed Rule 17Ad-
22(d)(14) should not apply to portfolio compression or collateral
management service providers for security-based swaps.\428\
---------------------------------------------------------------------------

    \428\ See TriOptima Letter at 10.
---------------------------------------------------------------------------

c. Final Rule
    We are adopting Rule 17Ad-22(d)(14) as proposed, except for the
clarification discussed in Sections II.B.4 and III.A regarding the
application of the rule only to registered clearing agencies. The
Commission believes it is important for clearing agencies that provide
CSD services to institute risk controls, including collateral
requirements and limits to cover the clearing agency's credit exposure
to each participant exposure fully, that ensure timely settlement in
these circumstances to address the risk that the participant may fail
to settle after credit has been extended. The Commission also believes
that requiring the controls that ensure timely settlement in the event
that the participant with the largest payment obligation is unable to
settle, in such circumstances, reduces the likelihood of disruptions at
the clearing agency.
    The Commission considered the concerns of commenters who asked the
Commission to abstain from any action that would modify Rule 17Ad-
22(d)(14) to require a clearing agency that performs CSD services and
extends intraday credit to participants to maintain enough financial
resources to be able to withstand a settlement failure by the two
participant families with the largest settlement obligations to the
clearing agency.\429\ Rule 17Ad-22(d)(14) does not apply to clearing
agencies that provide CCP services.
---------------------------------------------------------------------------

    \429\ See supra notes 426-427 and accompanying text.
---------------------------------------------------------------------------

    We understand the request for clarification from some commenters
who asked the Commission to revise Rule 17Ad-22(d)(14) to apply solely
to a clearing agency that performs CSD services and extends intraday
credit to participants through a net settlement system.\430\ We agree
that the requirements of Rule 17Ad-22(d)(14) apply in full in the
context of the operation of a net settlement system. Nevertheless, a
clearing agency providing CSD services may choose to organize its
operations so that it settles transactions on a trade-for-trade or
gross basis and may extend credit in the form of intraday loans or
repurchase agreements to facilitate settlement. Accordingly, we are not
changing the text of Rule 17Ad-22(d)(14), as suggested, in order to
continue to address that situation if it occurs.
---------------------------------------------------------------------------

    \430\ See supra notes 424-425 and accompanying text.
---------------------------------------------------------------------------

    We agree with commenters who argued that Rule 17Ad-22(d)(14) does
not apply to clearing agencies that do not perform CSD services and do
not extend intraday credit to participants.\431\ As discussed above,
Rule 17Ad-22 only applies to entities that perform CCP or CSD services
and does not apply to entities exempt from registration as a clearing
agency, unless the terms of future exemptions specifically contemplate
its application, in whole or in part.
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    \431\ See supra note 428 and accompanying text.
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15. Rule 17Ad-22(d)(15): Physical Delivery Risks
a. Proposed Rule
    Proposed Rule 17Ad-22(d)(15) would require clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to disclose to their participants the
clearing agency's obligations with respect to physical deliveries.\432\
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    \432\ The proposed rule would provide clearing agencies with the
flexibility to determine the method by which the clearing agency
will state this information to its participants. However, the
clearing agencies should take care to develop an approach that
provides sufficient notice to its participants regarding the
clearing agency's obligations.
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    The Commission believes that such policies and procedures will help
to ensure that participants have information that is likely to enhance
the participants' understanding of their rights and responsibilities
with respect to using the clearance and settlement services of the
clearing agency. The Commission also believes that providing such
information to participants would promote a shared understanding
regarding physical delivery practices between the clearing agency and
its participants that could help reduce the potential for fails and
thereby facilitate prompt and accurate clearance and settlement.
    The rule also would require clearing agencies to reasonably design
their operations to identify and manage the risks that arise in
connection with their obligations for physical deliveries. The risks
associated with physical deliveries could stem from, among other
factors, operational limitations with respect to assuring receipt of
physical deliveries and processing of physical deliveries.

The Commission believes that requiring clearing agencies to identify
and manage these risks would reduce the potential that issues will
arise as a result of physical deliveries because the clearing agency
will have acted preemptively to deal with potential issues that may
disrupt the clearance and settlement process. Accordingly, the
Commission believes this requirement would help a clearing agency to
facilitate prompt and accurate clearance and settlement consistent with
Section 17A of the Exchange Act.\433\
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    \433\ 15 U.S.C. 78q-1(b)(3)(F).
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b. Comments Received
    One commenter stated that the requirements of proposed Rule 17Ad-
22(d)(15) should not apply to portfolio compression or collateral
management service providers for security-based swaps.\434\
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    \434\ See TriOptima Letter at 11.
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c. Final Rule
    The Commission is adopting Rule 17Ad-22(d)(15) as proposed, except
for the clarification discussed in Sections II.B.4 and III.A regarding
the application of the rule only to registered clearing agencies. The
Commission believes that Rule 17Ad-22(d)(15) helps ensure that
participants will have information that enhances their understanding of
their rights and responsibilities with respect to using the physical
delivery services of a clearing agency which will help reduce the
potential for fails. Accordingly, the Commission believes this
requirement should help facilitate prompt and accurate clearance and
settlement consistent with Section 17A of the Exchange Act.\435\
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    \435\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, Rule 17Ad-22 only applies to registered
clearing agencies and does not apply to entities exempt from
registration as a clearing agency, unless the terms of future
exemptions specifically contemplate its application, in whole or in
part.

IV. Paperwork Reduction Act

A. Overview and Burden Estimate Comparison to Proposing Release

    Certain provisions of the final rules contain new ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\436\ In accordance with 44 U.S.C. 3507
and 5 CFR 1320.11, the Commission has submitted the information to the
Office of Management and Budget (``OMB'') for review. The title of the
new collection of information is ``Clearing Agency Standards.'' An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number. The control number for Rule 17Ad-22 is OMB
Control No. 3235-0695.
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    \436\ 44 U.S.C. 3501 et seq.
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1. Changes in Estimates
    As an initial matter, we note that the PRA burden estimates in this
adopting release are significantly lower than the PRA burden estimates
in the Proposing Release.\437\ Several reasons account for the change.
The Proposing Release contained five proposed rules with PRA collection
of information requirements in addition to Rule 17Ad-22--proposed Rules
17Aj-1, 17Ad-23, 17Ad-25, 17Ad-26 and 3Cj-1. As described above, these
other proposed rules are not being adopted at this time.
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    \437\ See Proposing Release, supra note 35, at 14521 (``The
Commission preliminarily believes that for all respondent clearing
agencies the aggregate paperwork burdens contained in proposed Rules
17Ad-22(d)(1), (2), (3), (4), (5), (6), (7), (8), (9), (10), (11),
(12), (13), (14), (15), (b)(1), (2), (3), (4), (5), (6), (7), (c)(1)
and (2) would impose a one-time burden of 83,343 hours and an
ongoing annual burden of 39,658 hours.''). In the adopting release,
the Commission estimates the total initial burden for Rule 17Ad-22
to be 11,880 hours, with the total ongoing annual burden for Rule
17Ad-22 to be 4,888 hours. See infra Section IV.C.7.
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    Additionally, the Proposing Release estimated that the proposed
rules would have applied to seventeen entities. A number of these
entities--in particular those providing post-trade processing services
for security-based swap transactions--would have been completely
unfamiliar with the Commission's registration process for clearing
agencies. Further, these entities typically do not have written rule
books to govern their relationship with their users. As a result, they
would have experienced significant initial burdens associated with the
proposed rules.
    In contrast, the final rules being adopted today apply only to the
seven clearing agencies currently registered with the Commission that
provide CCP or CSD services, as discussed above in Section II.B.4.\438\
These registered clearing agencies already have written rules, policies
and procedures addressing significant aspects of Rule 17Ad-22. For
purposes of the PRA analysis, the Commission also estimates that three
entities may potentially register with the Commission as clearing
agencies acting as CCPs, bringing the total number of respondents to
ten--nine of which are CCPs and one of which is a CSD.\439\ The
Commission believes that some of the entities seeking to register with
the Commission as clearing agencies may already be providing similar
services in other jurisdictions and therefore may already have written
rules and procedures similar to those contemplated by Rule 17Ad-22.
Accordingly, the Commission believes that the potential PRA burden on
this smaller and more established group of respondents will be
significantly lower than the estimates provided in the Proposing
Release. Further, the Proposing Release treated each subsection of the
rule--and therefore each required policy and procedure--as a separate
PRA burden. However, the Commission believes that registered clearing
agencies are more likely to be able to address the changes required by
Rule 17Ad-22 in an integrated, not piecemeal, review and drafting
process. That is, respondents are likely to group aspects of Rule 17Ad-
22 together as they implement policies and procedures responsive to
Rule 17Ad-22. Therefore, the revised PRA burden estimates no longer
account for each requirement as a separate burden.
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    \438\ The Commission also notes that the Boston Stock Exchange
Clearing Corporation (``BSECC'') and Stock Clearing Corporation of
Philadelphia (``SCCP'') are currently registered with the Commission
as clearing agencies but conduct no clearance or settlement
operations. See Securities Exchange Act Release Nos. 63629 (Jan. 3,
2011), 76 FR 1473 (Jan. 10, 2011), and 63268 (Nov. 8, 2010), 75 FR
69730 (Nov. 15, 2010), respectively.
    \439\ The burden estimates include the possibility that either
BSECC or SCCP, or both, resume operations in the future.
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    Finally, the Commission has revised the PRA burden estimates in
recognition that many parts of Rule 17Ad-22--specifically Rules 17Ad-
22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15)--reflect usual and customary
practices of registered clearing agencies. Since registered clearing
agencies already comply with significant aspects of Rule 17Ad-22 in the
normal course of their activities, many aspects of Rule 17Ad-22 impose
minimal PRA burdens on registered clearing agencies limited to the
review of the rule and their existing policies and procedures. As
discussed below, because certain rules would involve adjustments to a
registered clearing agency's rule book and its policies and procedures
rather than the creation of entirely separate policies and procedures
to support entirely new operations and practices, the Commission
recognizes that some aspects of Rule 17Ad-22 will impose incremental
new PRA burdens on registered clearing agencies.
    Accordingly, the estimated PRA burdens discussed below reflect
these updated assessments of the likely PRA burdens.

2. Organization of PRA Review
    The discussion of the PRA burdens and costs associated with Rule
17Ad-22 is organized in the following manner:

1. Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15)
2. Rule 17Ad-22(b)(4)
3. Rules 17Ad-22(b)(5)-(7)
4. Rule 17Ad-22(c)
5. Rule 17Ad-22(c)(1)
6. Rule 17Ad-22(c)(2)

    Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15) are discussed
together because these rules represent usual and customary practices
already being implemented by registered clearing agencies. Because
Rules 17Ad-22(b)(4), (b)(5)-(7) and (c), respectively establish new
minimum practices for registered clearing agencies with regard to model
validation, membership practices and certain financial information, the
adopting release discusses these rules separately. The burden
discussion for Rules 17Ad-22(c)(1) and (2) has been split into sections
to account for the different information collection requirements for
varying numbers of respondents.

B. Summary of Collection of Information, Use of Information and
Comments Received

    As noted earlier, the Commission received 25 comment letters
concerning the proposed rules.\440\ While the Commission received
general comments in support of its approach that is both consistent
with current global standards \441\ and principles-based,\442\ thereby
making compliance less burdensome for registered clearing agencies, a
few commenters discussed the paperwork and compliance burden concerns
for some of the rules associated with this adopting release. Some
commenters expressed general concerns about the burden of regulation,
but such comments focused on rules in the Proposing Release not being
adopted today and on areas that go beyond the scope of the adopting
release.\443\ Commenters expressed concerns about the burdens
associated with parts of Rule 17Ad-22(b), and those comments are
addressed below. Commenters did not specifically comment on the burdens
associated with Rule 17Ad-22(c)-(d).
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    \440\ See supra note 37.
    \441\ See The DTCC (April) Letter at 4 (stating that ``[t]he
application of global standards to clearing agencies will also
prevent clearing agencies and their participants from incurring
unnecessary expense associated with complying with different, and
potentially conflicting regulatory standards.''); see also The OCC
Letter at 3 (encouraging the Commission ``to avoid taking final
action on the Proposed Rules prior to receiving greater clarity on
what clearinghouse regulations are ultimately adopted by European
and U.K. legislators and regulators and what approaches to
regulation are ultimately embraced by CPSS/IOSCO. Many potential
market participants will be able to choose the jurisdiction in which
they conduct their clearing activity, and imposing more prescriptive
and costly regulatory burdens on U.S. clearing agencies will have a
predictably adverse competitive impact on those clearing
agencies.'').
    \442\ See The DTCC (April) Letter at 6 (stating that ``[i]f the
Proposed Rules are overly prescriptive, organizations such as DTCC
may be subject to conflicting requirements and may be forced to
fragment certain enterprise-wide programs in order to comply with
such conflicting requirements, which could substantially increase
costs and compliance risks within such organizations.''); The OCC
Letter at 2 (stating that it ``support[s] the Commission's approach.
* * *''); CME Letter at 3 (stating that ``CME Group favors a
principles-based approach in these areas, and we urge the Commission
not to adopt hard and fast standards that will be costly to
implement and maintain and that yield little or no apparent
corresponding regulatory benefits.'').
    \443\ See, e.g., ICE Letter at 1-2 (stating that ``[p]ost-trade
processing service providers would be unable to distribute end-of-
day settlement prices, as required by the Proposal, and the record
keeping requirements of the Proposal would prove so burdensome to
such providers that the efficiency and alacrity that they provide to
the CDS industry would be adversely affected.'').
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1. Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15)
    The rules in the adopting release contain requirements subject to
the PRA. Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) contain ``collection
of information requirements'' within the meaning of the PRA. These
rules would require a registered clearing agency to have policies and
procedures to adequately document all material aspects of its liquidity
risk management processes and its compliance with their requirements.
The information collected by virtue of written policies and procedures
requirements contained in Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-
22(d)(1)-(15) generally codify usual and customary practices at CCPs
and registered clearing agencies, and thus the PRA burden would be
expected to be minimal. Rules 17Ad-22(b)(1)-(3) require written
policies and procedures that address risk management practices by CCPs.
Specifically, the rules would create standards with respect to: (1)
Measurement and management of credit exposures; (2) margin
requirements; and (3) financial resources. The Commission did not
receive comments on the burdens associated with Rules 17Ad-22(b)(1)-
(3).
    Rule 17Ad-22(d) sets forth certain minimum standards regarding the
operations of registered clearing agencies. The standards established
in 17Ad-22(d) address areas including: (1) Transparent and enforceable
rules and procedures; (2) participation requirements; (3) custody of
assets and investment risk; (4) operational risk; (5) money settlement
risk; (6) cost-effectiveness; (7) links; (8) governance; (9)
information on services; (10) immobilization and dematerialization of
securities certificates; (11) default procedures; (12) timing of
settlement finality; (13) delivery versus payment; (14) risk controls
to address participants' failures to settle; and (15) physical delivery
risks. Commenters did not comment on the burdens associated with Rule
17Ad-22(d).
2. Rule 17Ad-22(b)(4)
    Rule 17Ad-22(b)(4) contains ``collection of information
requirements'' within the meaning of the PRA. Rule 17Ad-22(b)(4) will
require a CCP to establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for an annual
model validation consisting of evaluating the performance of the
clearing agency's margin models and the related parameters and
assumptions associated with such models by a qualified person who is
free from influence so that he can be candid in his assessment of the
model.
    One commenter stated that ``a regulatory requirement of model
validation on an annual basis is unnecessary (and may be overly
burdensome) * * *. [and] can be achieved in a less directive manner.''
\444\ The commenter did not provide an estimate of the proposed
burdens. The commenter suggested that model validation should be
conducted on a ``periodic'' basis by a qualified person who ``is
sufficiently free from outside influences to perform a candid
evaluation.'' \445\ The commenter did not explain how the suggested
alternative requirements would achieve the purposes of the rule with a
lesser burden.
---------------------------------------------------------------------------

    \444\ See The DTCC (April) Letter at 13.
    \445\ See The DTCC (April) Letter at 15.
---------------------------------------------------------------------------

    The Commission is not persuaded by the position that the frequency
of the model validation should be left to the discretion of the
CCP.\446\ The rule requiring that CCPs have policies and procedures in
place for model validation at least annually is appropriate because
model performance is not ordinarily expected to vary significantly over
short periods but should be reevaluated as market conditions change.
Overall, the Commission believes the collection of information related
to Rule 17Ad-22(b)(4) is necessary to achieve its purpose, particularly
in light of the

Congressional mandate under the Dodd-Frank Act.
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    \446\ See id.
---------------------------------------------------------------------------

3. Rules 17Ad-22(b)(5)-(7)
    Rules 17Ad-22(b)(5)-(7) contain ``collection of information
requirements'' within the meaning of the PRA. The information
collection under the written policies and procedures requirements
contained in Rules 17Ad-22(b)(5)-(7) would establish requirements
regarding access to CCPs.
    One commenter expressed that proposed Rules 17Ad-22(b)(5)-(7)
providing for mandatory access to CCPs in certain circumstances goes
``beyond anything in current or proposed global standards * * *. [and
is, therefore,] unnecessary and counterproductive to the goal of fair
and open access within a framework of safe and sound operation.'' \447\
But the commenter did not provide an estimate of these burdens. Nor did
the commenter suggest alternative requirements that would achieve the
purposes of the rule with a lesser burden.
---------------------------------------------------------------------------

    \447\ See The DTCC (April) Letter at 5; see also The DTCC
(April) Letter at 4 (stating that ``[t]he application of global
standards to clearing agencies will also prevent clearing agencies
and their participants from incurring unnecessary expense associated
with complying with different, and potentially conflicting
regulatory standards.'').
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    While the Commission understands the concerns raised, the
Commission ultimately believes that the benefits of Rules 17Ad-
22(b)(5)-(7) are critical to maintaining fairness and open access to
central clearing for all market participants, including security-based
swaps participants.\448\ In this regard, the Commission believes the
collection of information related to the rule is necessary to achieve
its purpose, particularly in light of the Congressional mandate under
the Dodd-Frank Act.
---------------------------------------------------------------------------

    \448\ See supra Section III.D.1.
---------------------------------------------------------------------------

4. Rules 17Ad-22(c)(1)-(2)
    Rule 17Ad-22(c)(1)-(2) contains ``collection of information
requirements'' within the meaning of the PRA. The information
collection under the written policies and procedures requirements
contained in Rule 17Ad-22(c) establishes a recordkeeping requirement
for CCPs regarding their responsibilities under Rule 17Ad-22(b)(3) and
for registered clearing agencies with respect to posting on their
respective Web sites annual audited financial statements.
    Commenters did not specifically comment on the burdens associated
with Rule 17Ad-22(c)(1)-(2).

C. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Standards in Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15)
That Impose a PRA Burden
    The requirements to develop written policies and procedures in
Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15) impose a PRA
burden. The requirements in Rules 17Ad-22(b)(1)-(3) will apply to CCPs
that are registered clearing agencies. The Commission estimates that a
total of nine CCPs \449\ will be subject to the burdens under Rules
17Ad-22(b)(1)-(3). Currently, six clearing agencies are registered to
provide CCP services, and the Commission estimates that three more
entities could register as clearing agencies to provide CCP services.
The requirements in Rules 17Ad-22(d)(1)-(15) (with the exception of
Rules 17Ad-22(d)(10) and (13)-(15), which are applicable only to CSDs),
on the other hand, apply to all registered clearing agencies, of which
there could potentially be a total of ten entities, including the one
registered clearing agency that is a CSD.
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    \449\ The Commission believes that there is a potential for new
security-based swap clearing agencies to form but does not expect
there to be a large number based on the significant level of capital
and other financial resources needed for the formation of a clearing
agency.
---------------------------------------------------------------------------

    As noted above, registered clearing agencies already have written
policies and procedures that meet the standards set forth in Rules
17Ad-22(b)(1)-(3) and (d)(1)-(15) as part of their usual and customary
business practice. Accordingly, the Commission believes that the
registered clearing agencies would not need to build new infrastructure
or modify operations to continue to meet Rule 17Ad-22(b)(1)-(3) and
(d)(1)-(15). The Commission believes that registered clearing agencies
will incur the incremental burdens of reviewing existing policies and
procedures for compliance and updating existing policies and procedures
where appropriate. The requirements would impose an aggregate one-time
burden of approximately 1,750 hours for all registered clearing
agencies.\450\ The standards contained in Rule 17Ad-22(d) would also
impose ongoing burdens on registered clearing agencies. For example,
Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) would require registered
clearing agencies to perform certain ongoing monitoring and enforcement
activities with respect to the written policies and procedures the
registered clearing agency creates in response to the standard.
Accordingly, the Commission believes that those ongoing activities
would impose an aggregate annual burden of approximately 600 hours for
all respondent clearing agencies.\451\ Because recent assessments of
the registered U.S. clearing agencies support the conclusion that
clearing agencies and their rule books generally meet or exceed
analogous standards of operation and governance to those standards
within Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15),\452\ the Commission
believes that the burden estimate for the aggregate one-time burden
should be revised down from the burden estimated in the Proposing
Release. The Commission estimates that because these initial compliance
efforts will largely comprise a review of existing policies and
procedures, the aggregate one-time burden on respondent clearing
agencies will be incremental to their current compliance processes. The
expected review of current policies and procedures will likely not
involve much involvement by the information technology staff at the
clearing agency or much involvement by the clearing agency's assistant
general counsel because the requirements of these rules have already
been written into and have been implemented as part of the policies and
procedures of registered clearing agencies. Accordingly, those burden
estimates have been reduced and the burden estimate for the compliance
attorney, who will most likely perform most of the review of current
policies and procedures, has been increased. In order to estimate the
one-time burden and annual burden for ongoing activities, we looked to
the burdens imposed by similar policies and procedures requirements in
Regulation NMS as a guide and adapted those figures for the purposes of
this release.\453\
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    \450\ This figure was calculated as follows: ((Assistant General
Counsel at 60 hours) + (Compliance Attorney at 85 hours) + (Computer
Operations Manager at 15 hours) + (Senior Business Analyst at 15
hours)) = 175 hours x 10 respondent clearing agencies = 1,750 hours.
    \451\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 10 respondent clearing agencies = 600 hours.
    For each respondent clearing agency, the estimated annualized
burden for Rules 17Ad-22(b)(1)--(3) and (d)(1)--(15) is 98 hours
(figure calculated as follows: 175 hours (Year 1 burden) + 60 hours
(Year 2 burden) + 60 hours (Year 3 burden) = 295 hours (estimated
total burden over 3 years) / 3 years = 98 hours).
    \452\ See Proposing Release, supra note 35, at 14509.
    \453\ See Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496 (June 29, 2005) (discussing in Section VIII.A.4 the time
needed from legal, compliance, information technology and business
operations personnel to create policies and procedures for
preventing and monitoring trade-throughs).

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2. Standards in Rule 17Ad-22(b)(4) That Impose a PRA Burden
    The requirement to develop written policies and procedures in Rule
17Ad-22(b)(4) imposes a PRA burden. The requirement in Rule 17Ad-
22(b)(4) will apply to all CCPs. As discussed above, the Commission
estimates that nine CCPs will be subject to the burdens under Rule
17Ad-22(b)(4).
    Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS, the Commission has
preserved the burden estimates from the Proposing Release. The
Commission estimates that Rule 17Ad-22(b)(4) would impose a one-time
burden on each respondent CCP of 210 hours, corresponding to an
aggregate one-time burden on all respondent CCPs of 1,890 hours.\454\
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    \454\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent CCPs = 1,890 hours.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(4) would require one-time systems adjustments
related to the capability to perform an annual model validation. These
adjustments would amount to an aggregate one-time burden of
approximately 900 hours.\455\
---------------------------------------------------------------------------

    \455\ This figure was calculated as follows: ((Chief Compliance
Officer for 40 hours) + (Computer Department Operations Manager for
40 hours) + (Senior Programmer for 20 hours)) = 100 hours x 9
respondent CCPs = 900 hours.
---------------------------------------------------------------------------

    CCPs would be required to collect information relating to their
model validation standards required by Rule 17Ad-22(b)(4) on an ongoing
basis. The Commission expects that the exact burden of administering
the procedures for model validation standards would vary depending on
how frequently each CCP may need to update its procedures. Based on the
analogous policies and procedures requirements and the corresponding
burden estimates in Regulation NMS, the Commission estimates that the
ongoing requirements of this rule would impose an annual burden of 60
hours on each respondent CCP, corresponding to an aggregate annual
burden for all respondent CCPs of 540 hours.\456\
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    \456\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent CCPs = 540 hours for all respondent CCPs.
     For each respondent CCP, the estimated annualized burden for
Rule 17Ad-22(b)(4) is 143 hours (figure calculated as follows: 210
hours + 100 hours (Year 1 burden) + 60 hours (Year 2 burden) + 60
hours (Year 3 burden) = 430 hours (estimated total burden over 3
years) / 3 years = 143 hours).
---------------------------------------------------------------------------

    Based on its oversight of clearing agencies, the Commission
estimates that Rule 17Ad-22(b)(4) would impose an annual cost on all
respondent CCPs for work on model validation. The Commission believes
clearing agencies would hire a consulting firm that dedicates two
consultants to the project. Consistent with the Proposing Release,\457\
the Commission estimates that should respondent CCPs decide to hire
external consultants to develop and implement Rule 17Ad-22(b)(4)
through written policies and procedures, the ongoing cost associated
with hiring such consultants would be approximately $3.9 million per
year.\458\
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    \457\ See Proposing Release, supra note 35, at 14529.
    \458\ This figure was calculated as follows: 2 Consultants for
30 hours per week at $600 per hour = $36,000 per week x 12 weeks =
$432,000 per clearing agency x 9 respondent CCPs = $3,888,000. The
$600 per hour figure for a consultant was calculated using
www.payscale.com, modified by Commission staff to account for an
1800 hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
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3. Standards in Rules 17Ad-22(b)(5)-(7) That Impose a PRA Burden
    The requirements to develop written policies and procedures in
Rules 17Ad-22(b)(5)-(7) impose a PRA burden. These PRA burdens will
apply to all CCPs. As discussed above, the Commission estimates that
nine CCPs will be subject to the burdens under Rules 17Ad-22(b)(5)-(7).
The Commission believes that CCPs are more likely to be able to address
the changes required by Rules 17Ad-22(b)(5)-(7) in an integrated, not
piecemeal, review and drafting process to implement policies and
procedures responsive to these rules. Therefore, the revised PRA burden
estimates no longer account for each requirement as a separate burden.
    Based on the analogous policies and procedures requirements and the
corresponding burden estimates in Regulation NMS, the Commission has
preserved the burden estimates from the Proposing Release. The
Commission estimates that Rules 17Ad-22(b)(5)-(7) would impose a one-
time burden on each respondent CCP of 210 hours, corresponding to an
aggregate one-time burden on all respondent CCPs of 1,890 hours.\459\
---------------------------------------------------------------------------

    \459\ This figure was calculated as follows: ((Assistant General
Counsel at 87 hours) + (Compliance Attorney at 77 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 210 hours x 9 respondent CCPs = 1,890 hours.
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    CCPs would be required to collect information relating to standards
of Rules 17Ad-22(b)(5)-(7) on an ongoing basis. Based on the analogous
policies and procedures requirements and the corresponding burden
estimates in Regulation NMS, the Commission estimates that the ongoing
requirements of this rule would impose an annual burden of 60 hours on
each respondent CCP, corresponding to an aggregate annual burden for
all respondent CCPs of 540 hours.\460\
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    \460\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 9 respondent CCPs = 540 hours for all respondent CCPs.
     For each respondent CCP, the estimated annualized burden for
Rules 17Ad-22(b)(5)-(7) is 110 hours (figure calculated as follows:
210 hours (Year 1 burden) + 60 hours (Year 2 burden) + 60 hours
(Year 3 burden) = 330 hours (estimated total burden over 3 years) /
3 years = 110 hours).
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 4. Standards in Rule 17Ad-22(c) That Impose a PRA Burden
    The standards in Rule 17Ad-22(c) impose a PRA burden.\461\ The
requirements of Rule 17Ad-22(c) will apply to all registered clearing
agencies. Based on the analogous policies and procedures requirements
and the corresponding burden estimates in Regulation NMS, the
Commission has preserved the burden estimates from the Proposing
Release. In contrast to the Proposing Release's burden estimates for
proposed Rule 17Ad-22(c)(2), which accounted for 17 clearing agencies,
the burden estimate in the adopting release for Rule 17Ad-22(c)
reflects a smaller number of clearing agencies. The Commission
estimates that Rule 17Ad-22(c) would impose a one-time burden on each
respondent clearing agency of 191 hours, corresponding to an aggregate
one-time burden on all respondent clearing agencies of 1,910
hours.\462\
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    \461\ The burden discussion for the different information
collection requirements of Rule 17Ad-22(c)(1)-(2) has been split
into sections to account for the different requirements for varying
numbers of respondents. Rule 17Ad-22(c) imposes an overall burden
relating to policies and procedures and system adjustments on all
registered clearing agencies, while Rule 17Ad-22(c)(1), as discussed
below, imposes on CCPs an ongoing burden to generate the required
reports concerning their financial resources and Rule 17Ad-22(c)(2),
as discussed below, imposes initial and ongoing burdens related to
annual audited financial statements to all registered clearing
agencies, some of which are already implementing this requirement as
part of their usual and customary practices.
    \462\ This figure was calculated as follows: ((Assistant General
Counsel at 60 hours) + (Compliance Attorney at 85 hours) + (Computer
Operations Manager at 23 hours) + (Senior Business Analyst at 23
hours)) = 191 hours x 10 respondent clearing agencies = 1,910 hours.
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    The Commission believes the one-time burden imposed would involve
adjustments needed to synthesize and format existing information in a
manner sufficient to explain the methodology the clearing agency uses
to meet the requirement of Rule 17Ad-22(c). The Commission believes
these adjustments would impose a one-time burden of 100 hours on each
clearing agency, corresponding to an aggregate one-time

burden imposed on all clearing agencies of 1,000 hours.\463\
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    \463\ This figure was calculated as follows: ((Chief Compliance
Officer at 40 hours) + (Computer Operations Department Manager at 40
hours) + (Senior Programmer at 20 hours)) = 100 hours x 10
respondent clearing agencies = 1,000 hours.
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    Clearing agencies would be required to collect information relating
to standards of Rule 17Ad-22(c) on an ongoing basis. Based on the
analogous policies and procedures requirements and the corresponding
burden estimates in Regulation NMS, the Commission estimates that the
ongoing requirements of this rule would impose an annual burden of 60
hours on each respondent clearing agency, corresponding to an aggregate
annual burden for all respondent clearing agencies of 600 hours.\464\
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    \464\ This figure was calculated as follows: Compliance Attorney
at 60 hours x 10 respondent clearing agencies = 600 hours for all
respondent clearing agencies.
     For each respondent clearing agency, the estimated annualized
burden for Rule 17Ad-22(c) is 137 hours (figure calculated as
follows: 191 hours + 100 hours (Year 1 burden) + 60 hours (Year 2
burden) + 60 hours (Year 3 burden) = 411 hours (estimated total
burden over 3 years) / 3 years = 137 hours).
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5. Standards in Rule 17Ad-22(c)(1) That Impose a PRA Burden
    The standards in Rule 17Ad-22(c)(1) impose a PRA burden. In
contrast to the Proposing Release's burden estimates for proposed Rule
17Ad-22(c)(2), which accounted for 17 clearing agencies, the burden
estimate in the adopting release for Rule 17Ad-22(c)(1) reflects a
smaller number of clearing agencies. The requirements of Rule 17Ad-
22(c)(1) will apply to nine CCPs.
    On an ongoing basis, the Commission estimates that for a CCP to
generate the required reports concerning its financial resources would
impose a burden of three hours per respondent CCP per quarter. This
amounts to an annual burden of 12 hours for each CCP and corresponds to
an aggregate annual burden of 108 hours for all respondent CCP. \465\
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    \465\ This figure was calculated as follows: ((Compliance
Attorney at 1 hour) + (Computer Operations Department Manager at 2
hours)) = 3 hours per quarter x 4 quarters per year = 12 hours per
year x 9 respondent clearing CCPs = 108 hours.
    For each respondent CCP, the estimated annualized burden for
Rule 17Ad-22(c)(1) is 8 hours (figure calculated as follows: 0 hours
(Year 1 burden) + 12 hours (Year 2 burden) + 12 hours (Year 3
burden) = 24 hours (estimated total burden over 3 years) / 3 years =
8 hours).
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6. Standards in Rule 17Ad-22(c)(2) That Impose a PRA Burden
    The standards in Rule 17Ad-22(c)(2) impose a PRA burden. In
contrast to the Proposing Release's burden estimates for proposed Rule
17Ad-22(c)(2), which accounted for 17 clearing agencies, the burden
estimate in the adopting release for Rule 17Ad-22(c)(2) reflects a
smaller number of clearing agencies. The requirements of Rule 17Ad-
22(c)(2) will apply to all registered clearing agencies, a total of ten
respondents.
    The Commission expects that the exact burden of collecting
information relating to the procedures for facilitating an annual
audited financial statement of the clearing agency and posting that
annual audited financial statement to the clearing agency's Web site
would vary depending on how frequently each clearing agency may need to
update its procedures. Also, the Commission estimates based on its
experience with entities of similar size to the respondents to this
collection, that the initial burden of generating annual audited
financial statements would generally require on average 500 hours per
respondent clearing agency.\466\ However, as most registered clearing
agencies are already implementing this requirement as part of their
usual and customary practices, the rule, as an initial burden, would
largely affect a total of four entities--three potential new entrants
and one clearing agency that currently does not have two years of
annual audited financial statements prepared in accordance with U.S.
GAAP or IFRS posted on its Web site and therefore, would be required to
incur the costs of paying for an independent audit for two years of
financial statements.\467\ The Commission estimates that Rule 17Ad-
22(c)(2) would impose a one-time burden on each of these four clearing
agencies of 500 hours to prepare and review internal financial
statements, corresponding to an aggregate one-time burden on the four
respondent clearing agencies of 2,000 hours.\468\ This requirement
would necessitate work hours of compliance personnel and finance
personnel at the clearing agency to compile relevant data, organize and
analyze that data, and then post it to the clearing agency's Web site
consistent with the rule.
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    \466\ An example of the Commission's experience with entities of
a similar size to the respondents is that the Commission required
entities to post their annual financial statements on their
respective Web sites as conditions to the Commission's authorizing
them to provide CCP services for credit default swaps. See supra
note 2.
    \467\ BSECC and SCCP currently do not post audited financial
statements on their Web sites and are considered new entrants.
    \468\ This figure was calculated as follows: Senior Accountant
at 500 hours x 4 respondent clearing agencies = 2,000 hours.
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    Clearing agencies also would be required to collect information
relating to any procedures used to support compliance with Rule 17Ad-
22(c)(2) on an ongoing basis. Based on the analogous policies and
procedures requirements and the corresponding burden estimates in
Regulation NMS, the Commission estimates that the ongoing requirements
of this rule would impose an annual burden of 250 hours on each
respondent clearing agency for collecting information relating to
administering policies and procedures for facilitating an annual
audited financial statement of the clearing agency and posting that
annual audited financial statement to the clearing agency's Web site
for an aggregate burden of 2,500 hours.\469\
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    \469\ This figure was calculated as follows: Senior Accountant
at 250 hours x 10 respondent clearing agencies = 2,500 hours.
     Annualized, the estimated burden for Rule 17Ad-22(c)(2) is 333
hours (figure calculated as follows: 500 hours (Year 1 burden) + 250
hours (Year 2 burden) + 250 hours (Year 3 burden) = 1,000 hours
(estimated total burden over 3 years) / 3 years = 333 hours). This
figure represents a weighted average for 10 respondent clearing
agencies. The burden will be higher for clearing agencies that have
not yet implemented Rule 17Ad-22(c)(2). The burden will be less for
clearing agencies that have already implemented the requirement as
part of their usual and customary practices.
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    The requirement also would require the services of a registered
public accounting firm. The Commission estimates those services would
on average cost approximately $500,000 annually.\470\ Therefore, to
meet the ongoing requirements of Rule 17Ad-22(c)(2) the Commission
estimates a total annual cost of approximately $5,000,000 in the
aggregate for all respondent clearing agencies.\471\
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    \470\ A precise estimate of audit costs for clearing agencies
cannot be made, and therefore, we examined a number of existing
surveys, (see, e.g., surveys by CFO.com studying large and small
public companies). While the costs may vary depending on the
circumstances, we are using an estimate of $500,000, which is on the
upper range for an average cost.
    \471\ This figure was calculated as follows: $500,000 estimated
cost of registered public accounting firm x 10 respondent clearing
agencies = $5,000,000.
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7. Total Burden for Rule 17Ad-22
    The total initial burden for Rule 17Ad-22 is 11,340 hours.\472\ The
total ongoing annual burden for Rule 17Ad-22 is 4,888 hours.\473\ The
ongoing

external cost for Rule 17Ad-22 is $8.9 million.\474\
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    \472\ This figure was calculated as follows: 1,750 hours for
initial burdens associated with 17Ad-22(b)(1)-(3) and (d)(1)-(15) +
2,790 hours for initial burdens associated with 17Ad-22(b)(4) +
1,890 hours for initial burdens associated with 17Ad-22(b)(5)-(7) +
4,910 hours for initial burdens associated with 17Ad-22(c) = 11,340
hours.
    \473\ This figure was calculated as follows: 600 hours for
annual burdens associated with 17Ad-22(b)(1)-(3) and (d)(1)-(15) +
540 hours for annual burdens associated with 17Ad-22(b)(4) + 540
hours for initial burdens associated with 17Ad-22(b)(5)-(7) + 3,208
hours for annual burdens associated with 17Ad-22(c) = 4,888 hours.
    \474\ This figure was calculated as follows: $3,888,000 (for
Rule 17Ad-22(b)(4)) + $5,000,000 (for Rule 17Ad-22(c)(2)).
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D. Collection of Information Is Mandatory

    The collection of information relating to Rule 17Ad-22(b) and Rule
17Ad-22(c)(1) will be mandatory for all CCPs. The collection of
information relating to Rule 17Ad-22(c)(2) and Rule 17Ad-22(d) will be
mandatory for all registered clearing agencies.

E. Confidentiality

    The Commission expects that the written policies and procedures
that will be generated pursuant to Rules 17Ad-22(b)(1)-(7), Rule 17Ad-
22(c)(2), and Rules 17Ad-22(d)(1)-(15) will be communicated to the
members, subscribers, and employees (as applicable) of all entities
covered by the Rule. To the extent that this information is made
available to the Commission, it will not be kept confidential. Any
records generated in connection with the requirement of Rules 17Ad-
22(b)(1)-(3), Rules 17Ad-22(b)(5)-(7), Rule 17Ad-22(c)(2), and Rules
17Ad-22(d)(1)-(15) to establish written policies and procedures will be
required to be preserved in accordance with, and for the periods
specified in, Exchange Act Rules 17a-1 \475\ and 17a-4(e)(7).\476\
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    \475\ 17 CFR 240.17a-1.
    \476\ 17 CFR 240.17a-4(e)(7).
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    The information collected pursuant to Rule 17Ad-22(c)(1) relating
to the calculation and maintenance of a record of the financial
resources necessary to meet the requirements of Rule 17Ad-22(b)(3) will
be retained by the registered clearing agencies that perform CCP
services and will be available to the Commission. To the extent that
the Commission receives confidential information pursuant to this
collection of information, such information would be kept confidential,
subject to the provisions of applicable law.\477\
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    \477\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of
Information Act provides an exemption for ``trade secrets and
commercial or financial information obtained from a person and
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the
Freedom of Information Act provides an exemption for matters that
are ``contained in or related to examination, operating, or
condition reports prepared by, on behalf of, or for the use of an
agency responsible for the regulation or supervision of financial
institutions.'' 5 U.S.C. 552(b)(8)).
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V. Economic Analysis

A. Overview

    The rules that we are adopting today are designed to enhance the
substantive regulation of securities clearing agencies. The Commission
is sensitive to the economic effects of the rules it is adopting today,
including their costs and benefits. Some of these costs and benefits
stem from statutory mandates, while others are affected by the
discretion we exercise in implementing the mandates. We requested
comment on all aspects of the costs and benefits of the proposal,
including any effect our proposed rules may have on efficiency,
competition, and capital formation.
    As required by Title VII and Title VIII of the Dodd Frank Act, Rule