[Federal Register Volume 75, Number 250 (Thursday, December 30, 2010)]
[Proposed Rules]
[Pages 82490-82533]
[FR Doc No: 2010-32085]

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Part IV

Securities and Exchange Commission

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17 CFR Parts 240 and 249

Process for Submissions for Review of Security-Based Swaps for
Mandatory Clearing and Notice Filing Requirements for Clearing
Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable
to All Self-Regulatory Organizations; Proposed Rule

Federal Register / Vol. 75 , No. 250 / Thursday, December 30, 2010 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-63557; File No. S7-44-10]
RIN 3235-AK87

Process for Submissions for Review of Security-Based Swaps for
Mandatory Clearing and Notice Filing Requirements for Clearing
Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable
to All Self-Regulatory Organizations

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: In accordance with Section 763(a) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act''),
the Securities and Exchange Commission (``Commission'') is proposing
rules under the Securities Exchange Act of 1934 (``Exchange Act'') to
specify the process for a registered clearing agency's submission for
review of any security-based swap, or any group, category, type or
class of security-based swaps, that the clearing agency plans to accept
for clearing, the manner of notice the clearing agency must provide to
its members of such submission and the procedure by which the
Commission may stay the requirement that a security-based swap is
subject to mandatory clearing while the clearing of the security-based
swap is reviewed. The Commission also is proposing to specify that when
a security-based swap is required to be cleared, the submission of the
security-based swap for clearing must be for central clearing to a
clearing agency that functions as a central counterparty. In addition,
the Commission is proposing rules to define and describe when notices
of proposed changes to rules, procedures or operations are required to
be filed by designated financial market utilities in accordance with
Section 806(e) of Title VIII of the Dodd-Frank Act and to set forth the
process for filing such notices with the Commission. Furthermore, the
Commission is proposing rules to make conforming changes as required by
the amendments to Section 19(b) of the Exchange Act contained in
Section 916 of the Dodd-Frank Act.

DATES: Comments should be received on or before February 14, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form(http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-44-10 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090.

All submissions should refer to File Number S7-44-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
also are available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Kim Allen, Attorney Fellow, Catherine
Moore, Senior Special Counsel, Kenneth Riitho, Special Counsel or
Andrew Bernstein, Attorney-Advisor, at<PHONE_NUMBER>; Office of
Clearance and Settlement, Division of Trading and Markets, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Dodd-Frank Act seeks to ensure that,
wherever possible and appropriate, derivatives contracts formerly
traded exclusively in the over-the-counter (``OTC'') market be
cleared.\1\ One key way in which the Dodd-Frank Act promotes clearing
of such contracts is by setting forth a process by which the Commission
would determine whether a security-based swap is required to be
cleared; if the Commission makes a determination that a security-based
swap is required to be cleared, then parties may not engage in such
security-based swap without submitting it for clearing unless an
exception applies.
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    \1\ See, e.g., Report of the Senate Committee on Banking,
Housing, and Urban Affairs regarding The Restoring American
Financial Stability Act of 2010, S. Rep. No. 111-176 at 34 (stating
that ``[s]ome parts of the OTC market may not be suitable for
clearing and exchange trading due to individual business needs of
certain users. Those users should retain the ability to engage in
customized, uncleared contracts while bringing in as much of the OTC
market under the centrally cleared and exchange-traded framework as
possible.'').
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    The Commission may determine that a security-based swap is required
to be cleared based on a review of a clearing agency's submission
regarding a security-based swap, or any group, category, type or class
of security-based swaps, that the clearing agency plans to accept for
clearing (i.e., a Security-Based Swap Submission (as defined
below)).\2\ If the Commission determines that a security-based swap is
not required to be cleared, such security-based swap may still be
cleared on a non-mandatory basis by the clearing agency if the clearing
agency has rules that permit it to clear such security-based swap.\3\
In addition, paragraph (b)(1) of new Section 3C of the Exchange Act, as
added by Section 763(a) of the Dodd-Frank Act (``Exchange Act Section
3C'') provides that ``[t]he Commission on an ongoing basis shall review
each security-based swap, or any group, category, type, or class of
security-based swaps to make a determination that such security-based
swap, or group, category, type, or class of security-based swaps should
be required to be cleared'' (``Commission-initiated Review'').\4\
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    \2\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(2)(C)) (``[t]he Commission shall * * * review each
submission made under subparagraphs (A) and (B), and determine
whether the security-based swap, or group, category, type, or class
of security-based swaps, described in the submission is required to
be cleared.'').
    \3\ See 15 U.S.C. 78s(b) and 12 U.S.C. 5465(e).
    \4\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(1)). The Dodd-Frank Act does not require rulemaking
with respect to Commission-initiated Reviews.
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    Consistent with the policy objective of the Dodd-Frank Act to bring
security-based swaps into a central clearing environment where
appropriate, the Commission is proposing to amend Rule 19b-4 under the
Exchange Act to incorporate two new requirements applicable to clearing
agencies under Exchange Act Section 3C, and under Section 806(e) of the
Dodd-Frank Act (``Section 806(e)''). The proposed amendments to Rule
19b-4 would mandate that submissions required under Exchange Act
Section 3C for a security-based swap, or any group, category, type or
class of security-based swaps, that a clearing agency plans to accept
for clearing (``Security-Based Swap Submissions'') and advance notices
required under Section 806(e) of proposed changes to rules, procedures

or operations of financial market utilities (``Advance Notices'') be
filed with the Commission on Form 19b-4. The proposed amendments to
Rule 19b-4 also would specify the manner of notice the clearing agency
must provide to its members of Security-Based Swap Submissions.
    Additionally, the Commission is proposing two related rules under
Exchange Act Section 3C. Proposed Rule 3Ca-1 would establish the
procedure by which the Commission, at the request of a counterparty or
on its own initiative, may stay the requirement that a security-based
swap is subject to mandatory clearing. Proposed Rule 3Ca-2 is intended
to prevent evasions of the clearing requirement by specifying that
security-based swaps required to be cleared must be submitted for
central clearing to a clearing agency that functions as a central
counterparty. Finally, the Commission is proposing technical,
conforming and clarifying amendments to Rule 19b-4 and Form 19b-4 to
conform the rule and form with new deadlines and approval, disapproval
and temporary suspension standards with respect to proposed rule
changes filed under Section 19(b) of the Exchange Act, as modified by
Section 916 of the Dodd-Frank Act (``Exchange Act Section 19(b)'').

I. Introduction

    On July 21, 2010, the President signed the Dodd-Frank Act into
law.\5\ The Dodd-Frank Act was enacted to, among other purposes,
promote the financial stability of the United States by improving
accountability and transparency in the financial system and by
providing for enhanced regulation and oversight of institutions
designated as systemically important.\6\ Title VII and Title VIII of
the Dodd-Frank Act are intended to further these goals and to mitigate
systemic risk in part by imposing new requirements with respect to
clearance and settlement systems.
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    \5\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act (Pub. L. 111-203, H.R. 4173).
    \6\ See Public Law 111-203, Preamble.
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    Title VII of the Dodd-Frank Act (``Title VII'') provides the
Commission and the Commodity Futures Trading Commission (``CFTC'') with
enhanced authority to regulate OTC derivatives following the recent
financial crisis.\7\ The Dodd-Frank Act is intended to bolster the
existing regulatory structure and provide regulatory tools to oversee
the OTC derivatives market, which has grown exponentially in recent
years and is capable of affecting significant sectors of the U.S.
economy. Title VII provides that the CFTC will regulate ``swaps,'' the
Commission will regulate ``security-based swaps,'' and the CFTC and the
Commission will jointly regulate ``mixed swaps.'' \8\
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    \7\ See, e.g, Report of the Senate Committee on Banking,
Housing, and Urban Affairs regarding The Restoring American
Financial Stability Act of 2010, S. Rep. No. 111-176 at 29 (2010)
(stating that ``[m]any factors led to the unraveling of this
country's financial sector and the government intervention to
correct it, but a major contributor to the financial crisis was the
unregulated [OTC] derivatives market.'')
    \8\ Section 712(d) of the Dodd-Frank Act provides that the
Commission and the CFTC, in consultation with the Board of Governors
of the Federal Reserve System, shall jointly further define the
terms ``swap,'' ``security-based swap,'' ``swap dealer,''
``security-based swap dealer,'' ``major swap participant,'' ``major
security-based swap participant,'' ``eligible contract
participant,'' and ``security-based swap agreement.'' These terms
are defined in Sections 721 and 761 of the Dodd-Frank Act and, with
respect to the term ``eligible contract participant,'' in Section
1a(18) of the Commodity Exchange Act, 7 U.S.C. 1a(18), as re-
designated and amended by Section 721 of the Dodd-Frank Act.
Further, Section 721(c) of the Dodd-Frank Act requires the CFTC to
adopt a rule to further define the terms ``swap,'' ``swap dealer,''
``major swap participant,'' and ``eligible contract participant,''
and Section 761(b) of the Dodd-Frank Act permits the Commission to
adopt a rule to further define the terms ``security-based swap,''
``security-based swap dealer,'' ``major security-based swap
participant,'' and ``eligible contract participant,'' with regard to
security-based swaps, for the purpose of including transactions and
entities that have been structured to evade Title VII of the Dodd-
Frank Act. Finally, Section 712(a) of the Dodd-Frank Act provides
that the Commission and CFTC, after consultation with the Board,
shall jointly prescribe regulations regarding ``mixed swaps'' as may
be necessary to carry out the purposes of Title VII. To assist the
Commission and CFTC in further defining the terms specified above,
and to prescribe regulations regarding ``mixed swaps'' as may be
necessary to carry out the purposes of Title VII, the Commission and
the CFTC have requested comment from interested parties. See
Securities Exchange Act Release No. 62717 (Aug. 13, 2010), 75 FR
51429 (Aug. 20, 2010) (Advance Joint Notice of Proposed Rulemaking
Regarding Definitions Contained in Title VII of the Dodd-Frank Act).
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    The OTC derivatives markets traditionally have been characterized
by privately negotiated transactions entered into by two
counterparties, in which each assumes the credit risk of the other
counterparty.\9\ Clearing of swaps and security-based swaps was at the
heart of Congressional reform of the derivatives markets in Title VII
of the Dodd Frank Act.\10\ Clearing agencies are broadly defined under
the Exchange Act and undertake a variety of functions.\11\ One such
function is to act as a central counterparty (``CCP''), which is an
entity that interposes itself between the counterparties to a
trade.\12\ For example, when an OTC derivatives contract between two
counterparties that are members of a CCP is executed and submitted for
clearing, it is typically replaced by two new contracts--separate
contracts between the CCP and each of the two original counterparties.
At that point, the original counterparties are no longer counterparties
to each other. Instead, each acquires the CCP as its counterparty, and
the CCP assumes the counterparty credit risk of each of the original
counterparties that are members of the CCP.\13\ Structured and operated
appropriately, CCPs may improve the management of counterparty risk and
may provide additional benefits such as multilateral netting of trades.
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    \9\ See, e.g., Financial Stability Board, Implementing OTC
Derivatives Market Reforms (Oct. 25, 2010) available at http://www.financialstabilityboard.org/publications/r_101025.pdf.
    \10\ As previously noted, the Dodd-Frank Act seeks to ensure
that, wherever possible and appropriate, derivatives contracts
formerly traded exclusively in the OTC market be cleared. See Letter
from Christopher Dodd, Chairman, Committee on Banking, Housing and
Urban Affairs, United States Senate and Blanche Lincoln, Chairman,
Committee on Agriculture, Nutrition, and Forestry, United States
Senate, to Barney Frank, Chairman, Financial Services Committee,
United States House of Representatives and Colin Peterson, Chairman,
Committee on Agriculture, United States House of Representatives
(June 30, 2010) (on file with the United States Senate).
    \11\ The term ``clearing agency'' means any person who acts as
an intermediary in making payments or deliveries or both in
connection with transactions in securities or who provides
facilities for the comparison of data regarding the terms of
settlement of securities transactions, to reduce the number of
settlements of securities transactions, or the allocation of
securities settlement responsibilities. Such term also means any
person, such as a securities depository, who (i) acts as a custodian
of securities in connection with a system for the central handling
of securities whereby all securities of a particular class or series
of any issuer deposited within the system are treated as fungible
and may be transferred, loaned, or pledged by bookkeeping entry
without physical delivery of securities certificates, or (ii)
otherwise permits or facilitates the settlement of securities
transactions or the hypothecation or lending of securities without
physical delivery of securities certificates. 15 U.S.C.
78c(a)(23)(A).
    \12\ See id. An entity that acts as a CCP for securities
transactions is a clearing agency as defined in the Exchange Act and
is required to register with the Commission.
    \13\ See Cecchetti, Gyntelberg and Hollanders, Central
counterparties for over-the-counter derivatives, BIS Quarterly
Review, September 2009, available at http://www.bis.org/publ/qtrpdf/r_qt0909f.pdf.
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    Exchange Act Section 3C sets forth a mandatory clearing requirement
for security-based swaps. This section requires the Commission to adopt
rules for submissions for review of security-based swaps that a
clearing agency plans to accept for clearing for a determination by the
Commission of whether the security-based swap (or group, category, type
or class of security-based swaps) is required to be cleared, i.e., is
subject to mandatory

clearing.\14\ The Commission is proposing amendments to Rule 19b-4
under the Exchange Act to implement the requirement in Exchange Act
Section 3C that a clearing agency submit for Commission review each
security-based swap, or any group, category, type or class of security-
based swaps, that the clearing agency plans to accept for clearing and
provide notice to its members of such Security-Based Swap Submission.
The Commission also is proposing new Rules 3Ca-1 and 3Ca-2 under the
Exchange Act. Proposed Rule 3Ca-1 specifies the procedure for staying
the clearing requirement applicable to a security-based swap, based
either on an application of a counterparty to a security-based swap or
on the Commission's own initiative, until the Commission completes a
review of the terms of the security-based swap and the clearing
arrangement. Proposed Rule 3Ca-2 establishes a rule designed to prevent
evasions of the clearing requirement by specifying that security-based
swaps required to be cleared must be submitted for central clearing to
a clearing agency that functions as a central counterparty.
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    \14\ Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(2)(C)).
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    The Commission also is proposing rules to implement a filing
requirement applicable to certain clearing agencies under Title VIII of
the Dodd-Frank Act (``Title VIII''). Title VIII provides for enhanced
regulation of financial market utilities, which include clearing
agencies, that manage or operate a multilateral system for the purpose
of transferring, clearing or settling payments, securities or other
financial transactions among financial institutions or between
financial institutions and the financial market utility.\15\ The
regulatory regime in Title VIII will only apply, however, to financial
market utilities that the Financial Stability Oversight Council
(``Council'') designates as systemically important.\16\
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    \15\ The definition of ``financial market utility'' in Section
803(6) of the Dodd-Frank Act contains a number of exclusions
including but not limited to certain designated contract markets,
registered futures associations, swap data repositories, swap
execution facilities, national securities exchanges, national
securities associations, alternative trading systems, security-based
swap data repositories, security-based swap execution facilities,
brokers, dealers, transfer agents, investment companies and futures
commission merchants. 12 U.S.C. 5462(6)(B).
    \16\ Pursuant to Section 803(9) of the Dodd-Frank Act, a
financial market utility is systemically important if the failure of
or a disruption to the functioning of such financial market utility
could create, or increase, the risk of significant liquidity or
credit problems spreading among financial institutions or markets
and thereby threaten the stability of the financial system of the
United States. 12 U.S.C. 5462(9). Under Section 804 of the Dodd-
Frank Act, the Council has the authority, on a non-delegable basis
and by a vote of not fewer than two-thirds of the members then
serving, including the affirmative vote of its chairperson, to
designate those financial market utilities that the Council
determines are, or are likely to become, systemically important. The
Council may, using the same procedures as discussed above, rescind
such designation if it determines that the financial market utility
no longer meets the standards for systemic importance. Before making
either determination, the Council is required to consult with the
Board and the relevant Supervisory Agency (as determined in
accordance with Section 803(8) of the Dodd-Frank Act). Finally,
Section 804 of the Dodd-Frank Act sets forth the procedures for
giving entities a 30-day notice and the opportunity for a hearing
prior to a designation or rescission of the designation of systemic
importance. 12 U.S.C. 5463.
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    Section 806(e)(1)(A) of Title VIII requires any financial market
utility designated by the Council under Section 804 of the Dodd-Frank
Act as systemically important to file 60 days advance notice of changes
to its rules, procedures or operations that could materially affect the
nature or level of risk presented by the financial market utility.\17\
In addition, Section 806(e)(1)(B) requires each Supervisory Agency \18\
to adopt rules, in consultation with the Board of Governors of the
Federal Reserve System (``Board''), that define and describe when
designated financial market utilities are required to file Advance
Notices with their Supervisory Agency.\19\
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    \17\ 12 U.S.C. 5465(e)(1)(A).
    \18\ Section 803(8) of the Dodd-Frank Act defines the term
``Supervisory Agency'' in reference to the primary regulatory
authority for the financial market utility. For example, Section
803(8) of the Dodd-Frank Act provides that the Commission is the
Supervisory Agency for any financial market utility that is a
Commission-registered clearing agency. See 12 U.S.C. 5462(8). To the
extent that an entity is both a Commission-registered clearing
agency and registered with another agency, such as a CFTC-registered
derivatives clearing organization, the statute requires the two
agencies to agree on one agency to act as the Supervisory Agency,
and if the agencies cannot agree on which agency has primary
jurisdiction, the Council shall decide which agency is the
Supervisory Agency for purposes of the Dodd-Frank Act. 12 U.S.C.
5462(8).
    \19\ 12 U.S.C. 5465(e)(1)(B).
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    Clearing agencies registered with the Commission are financial
market utilities, as defined in Section 803(6) of Title VIII; \20\
thus, the Commission may be the Supervisory Agency of a clearing agency
that is designated as systemically important by the Council
(``designated clearing agency'').\21\ A clearing agency must begin
filing Advance Notices pursuant to Section 806(e) once the Council
designates the clearing agency as systemically important.\22\ The
Commission is proposing to implement the Section 806(e) filing
requirement by amending Rule 19b-4 to define and determine when Advance
Notices must be filed by designated clearing agencies and to require
that Advance Notices be filed on Form 19b-4.
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    \20\ 12 U.S.C. 5462(6).
    \21\ See supra note 18 discussing the definition of
``Supervisory Agency'' under the Dodd-Frank Act.
    \22\ Pursuant to Section 814 of the Dodd Frank Act, Title VIII
took effect on the date of enactment.
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    The Commission is proposing that Security-Based Swap Submissions
and Advance Notices be filed with the Commission on Form 19b-4 using
the existing Electronic Form 19b-4 Filing System (``EFFS''). Currently,
EFFS is used by self-regulatory organizations (``SROs''), which include
registered clearing agencies,\23\ to file proposed rule changes
electronically with the Commission pursuant to Exchange Act Section
19(b).\24\ The Commission is proposing to require clearing agencies to
use EFFS for the filing of Security-Based Swap Submissions and Advance
Notices because registered clearing agencies already use EFFS for
Exchange Act Section 19(b) filings and because there are similarities
between the requirement to file proposed rule changes under Exchange
Act Section 19(b) and the new requirements under the Dodd-Frank Act to
file Security-Based Swap Submissions and Advance Notices. For example,
a proposed rule change under Exchange Act Section 19(b) includes a
change in a ``stated policy, practice, or interpretation'' of an SRO
rule. A ``stated policy, practice, or interpretation'' is defined in
Exchange Act Section 19(b) as ``any material aspect of the operation of
the facilities of the SRO; or any statement made generally available to
the membership of, to all participants in, or to persons having or
seeking access * * * to facilities of, the self-regulatory organization
(``specified persons''), or to a group or category of specified
persons, that establishes or changes any standard, limit, or guideline
with respect to (1) the rights, obligations, or privileges of specified
persons * * *; or (2) the meaning, administration, or enforcement of an
existing rule.'' \25\ In cases where accepting a security-based swap
(or group, category, type or class of security-based swaps) for
clearing constitutes a change in a ``stated policy, practice, or
interpretation'' of the clearing agency, the clearing agency also

would be required to file a proposed rule change. Similarly, if a
change that a designated clearing agency proposes to make that would
require an Advance Notice would also constitute a change in a ``stated
policy, practice, or interpretation'' of the clearing agency, the
clearing agency would be required to file a proposed rule change in
addition to the Advance Notice.
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    \23\ The definition of SRO in Section 3(a)(26) of the Exchange
Act includes any registered clearing agency. 15 U.S.C. 78c(a)(26).
All SROs are required to file proposed rule changes with the
Commission under Exchange Act Section 19(b). 15 U.S.C. 78s(b).
    \24\ SROs are required to file with the Commission, in
accordance with rules prescribed by the Commission, copies of any
proposed rule or any proposed change in, addition to, or deletion
from the rules of the SRO (collectively referred to as a ``proposed
rule change''). 15 U.S.C. 78s(b)(1).
    \25\ 17 CFR 240.19b-4(c).
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    The Commission also is proposing to amend Rule 19b-4 and Form 19b-4
to conform to the requirements specified in Exchange Act Section 19(b),
as amended by Section 916 of the Dodd Frank Act.\26\ Section 916
provides new deadlines by which the Commission must publish and act
upon proposed rule changes submitted by SROs and new standards for
approval, disapproval and temporary suspension of proposed rule
changes.\27\ In addition, the Commission is proposing a number of
technical and clarifying amendments to Rule 19b-4 and Form 19b-4.
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    \26\ Public Law 111-203, section 916 (amending Exchange Act
Section 19(b)(2)).
    \27\ Id.
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    In proposing these rules, the Commission is mindful that there are
differences between the security-based swap market and the other
securities markets that the Commission regulates. The Commission also
is mindful that over time and as a result of Commission proposals to
implement the Dodd-Frank Act, further development of the security-based
swap market may alter the policy objectives and considerations relating
to the clearing of security-based swaps. During the process of
implementing the Dodd-Frank Act and beyond, the Commission therefore
will closely monitor developments in the security-based swap market,
including how the Security-Based Swap Submission and clearing processes
interact with the evolving business and practices of security-based
swap clearing agencies and other entities.

II. Discussion of the Proposed Rules

    The Commission is proposing to adopt rules to implement the new
requirements imposed by Title VII and Title VIII discussed above. In
accordance with the requirements set forth in Exchange Act Section 3C
(found in Title VII), the Commission is proposing amendments to Rule
19b-4 and Form 19b-4 and new Rule 3Ca-1 under the Exchange Act to
establish processes for (i) clearing agencies registered with the
Commission to submit for review each security-based swap, or any group,
category, type or class of security-based swaps, that the clearing
agency plans to accept for clearing for a determination by the
Commission of whether the security-based swap (or group, category, type
or class of security-based swaps) is required to be cleared, and to
determine the manner of notice the clearing agency must provide to its
members of such submission and (ii) how the Commission may stay the
requirement that a security-based swap is subject to mandatory
clearing. The Commission also is proposing new Rule 3Ca-2 to prevent
evasions of the clearing requirement. In addition, the Commission is
proposing amendments to Rule 19b-4 and Form 19b-4 to implement the
requirement, pursuant to Section 806(e), that any designated clearing
agency for which the Commission is the Supervisory Agency will be
required to provide advance notice to the Commission of changes to its
rules, procedures or operations that could materially affect the nature
or level of risks presented by the designated clearing agency. This
release also discusses the filing requirements in Exchange Act Section
19(b), Exchange Act Section 3C, and Section 806(e) and a clearing
agency's obligation to fully comply with and seek a determination
pursuant to each separate statutory requirement, when applicable.

A. Security-Based Swap Submissions

    Exchange Act Section 3C creates, among other things, a clearing
requirement with respect to security-based swaps. Specifically, the
section provides that ``[i]t shall be unlawful for any person to engage
in a security-based swap unless that person submits such security-based
swap for clearing to a clearing agency that is registered under this
Act or a clearing agency that is exempt from registration under this
Act if the security-based swap is required to be cleared.'' \28\
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    \28\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(a)(1)). The requirement that a security-based swap be
cleared stems from a determination by the Commission. Such
determination may be made in connection with the review of a
clearing agency's submission regarding a security-based swap, or any
group, category, type or class of security-based swaps, that the
clearing agency plans to accept for clearing (i.e., a Security-Based
Swap Submission). See Public Law 111-203, section 763(a) (adding
Exchange Act Section 3C(b)(2)(C)) (``[t]he Commission shall * * *
review each submission made under subparagraphs (A) and (B), and
determine whether the security-based swap, or group, category, type,
or class of security-based swaps, described in the submission is
required to be cleared.''). In addition, Exchange Act Section
3C(b)(1) provides that ``[t]he Commission on an ongoing basis shall
review each security-based swap, or any group, category, type, or
class of security-based swaps to make a determination that such
security-based swap, or group, category, type, or class of security-
based swaps should be required to be cleared.''
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    Exchange Act Section 3C requires the Commission, not later than one
year after the date of the enactment of the Dodd-Frank Act, to adopt
rules for a clearing agency's Security-Based Swap Submissions and to
determine the manner of notice the clearing agency must provide to its
members of such Security-Based Swap Submission.\29\ In connection with
rulemaking related to Security-Based Swap Submissions, the Commission
is proposing rules related to (i) the process for making Security-Based
Swap Submissions to the Commission, (ii) the substance of Security-
Based Swap Submissions and (iii) the timing related to Security-Based
Swap Submissions. The Commission also is proposing a process and timing
for clearing agencies to provide notice to their members of Security-
Based Swap Submissions.
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    \29\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(2)(A)).
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1. Process for Making Security-Based Swap Submissions to the Commission
    A clearing agency that plans to accept a security-based swap for
clearing must file a Security-Based Swap Submission with the Commission
for a determination by the Commission of whether a security-based swap,
or a group, category, type or class of security-based swaps, is
required to be cleared. As discussed in Section I, in cases where
accepting a security-based swap (or group, category, type or class of
security-based swaps) for clearing constitutes a change in a ``stated
policy, practice, or interpretation'' of the clearing agency, the
clearing agency also would be required to file a proposed rule change.
In such cases, the Commission must determine (i) whether to approve the
clearing agency's proposed rule change to clear the applicable
security-based swap and (ii) whether the security-based swap would be
subject to the mandatory clearing requirement.
    The Commission is proposing to require clearing agencies to use
EFFS and Form 19b-4 for Security-Based Swap Submissions. Clearing
agencies, as SROs, are already required to file proposed rule changes
on Form 19b-4 on EFFS. Using the same filing process for Security-Based
Swap Submissions would leverage existing technology and reduce the
resources clearing agencies would have to expend on meeting Commission
filing requirements. In addition, the Commission anticipates that a
submission to clear a security-based swap, or any group, category, type
or class of security-based swaps, may be required to be filed under
both

Exchange Act Section 19(b) and Exchange Act Section 3C. This is because
a submission that must be filed with the Commission for a determination
under new Exchange Act Section 3C also may qualify as a proposed rule
change that must be filed with the Commission under Exchange Act
Section 19(b).\30\ In other words, the two filing requirements are not
mutually exclusive. Because a clearing agency may be required to file
the same proposal under Exchange Act Section 3C and Exchange Act
Section 19(b), the Commission preliminarily believes that the most
efficient use of the Commission's and clearing agencies' resources
would be to require clearing agencies to use the existing Form 19b-4
filing process for both types of filings. Accordingly, the proposed
rules related to the Security-Based Swap Submission process would be
added to existing Rule 19b-4, which currently governs the process for
filing proposed rule changes.
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    \30\ A clearing agency rule is defined broadly in the Exchange
Act to include the constitution, articles of incorporation, by-laws,
and rules, or instruments corresponding to the foregoing. 15 U.S.C.
78c(a)(27). The Commission anticipates that a proposal to clear a
new type, category or class of security-based swap will in many
cases also be a change to the rules of a registered clearing agency
that must be filed with the Commission for approval pursuant to
Exchange Act Section 19(b).
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    The Commission's proposed approach would eliminate the need for
multiple submissions to the Commission and could be accomplished by
adding a box to Form 19b-4 that clearing agencies would check to
indicate that they are making a Security-Based Swap Submission. As a
practical matter, the Commission believes that when a security-based
swap is submitted for review under Exchange Act Section 3C and
concurrently filed under Exchange Act Section 19(b) as a proposed rule
change, the two reviews will be carried out in tandem. In circumstances
where no proposed rule change filing would be required, such as a case
where a clearing agency's rules already permit it to clear the
security-based swap in question, EFFS and Form 19b-4 still would be
used for the Security-Based Swap Submission.
a. Substance of Security-Based Swap Submissions: Consistency With
Exchange Act Section 17A
    In reviewing a Security-Based Swap Submission, the Commission is
required to review whether the submission is consistent with Exchange
Act Section 17A.\31\ Accordingly, the Commission is proposing that each
Security-Based Swap Submission contain a statement regarding how the
submission is consistent with Exchange Act Section 17A.\32\ Exchange
Act Section 17A specifies, among other things, that the Commission is
directed, having due regard for the public interest, the protection of
investors, the safeguarding of securities and funds and maintenance of
fair competition among brokers and dealers, clearing agencies, and
transfer agents, to use its authority to facilitate the establishment
of a national system for the prompt and accurate clearance and
settlement of transactions in securities.\33\
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    \31\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(4)(A)).
    \32\ Proposed Rule 19b-4(o)(3)(i).
    \33\ 15 U.S.C. 78q-1.
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    The Commission must review whether a proposed rule change filed by
an SRO pursuant to Exchange Act Section 19(b) is consistent with
Exchange Act Section 17A.\34\ In connection with proposed rule changes,
an SRO is required to ``explain why the proposed rule change is
consistent with the requirements of the [Exchange] Act and the rules
and regulations thereunder applicable to the [SRO]. A mere assertion
that the proposed rule change is consistent with those requirements is
not sufficient.'' \35\ Presently, in complying with this requirement,
registered clearing agencies, among other things, specify how the
proposed rule change is consistent with the requirements under Exchange
Act Section 17A(b)(3). All registered clearing agencies must comply
with the standards in Exchange Act Section 17A, which include
requirements under Exchange Act Section 17A(b)(3) to maintain rules for
promoting the prompt and accurate clearance and settlement of
securities transactions, assuring the safeguarding of securities and
funds which are in the custody or control of the clearing agency or for
which it is responsible, fostering cooperation and coordination with
persons engaged in the clearance and settlement of securities
transactions, removing impediments to and perfecting the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions, and, in general, protecting investors and the
public interest.\36\\\ A registered clearing agency is also required
under Exchange Act Section 17A(b)(3) to provide fair access to clearing
and to have the capacity to facilitate the prompt and accurate
clearance and settlement of securities transactions and derivative
agreements, contracts, and transactions for which it is responsible, as
well as to safeguard securities and funds in its custody or control or
for which it is responsible.\37\ Under the proposed amendments to Rule
19b-4, a clearing agency would be required to specify how the Security-
Based Swap Submission is consistent with Exchange Act Section 17A and
specifically the requirements applicable under subsection 17A(b)(3).
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    \34\ See 15 U.S.C. 78s(b)(2)(C)(i), which provides that the
Commission shall approve a proposed rule change of an SRO if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
issued thereunder that are applicable to such organization.
    \35\ Item 3(b) of Form 19b-4. 17 CFR 240.819. Exchange Act
Section 19(b) has a similar but not identical requirement. It
requires that an SRO provide a statement of the basis of the
proposed rule change and provides that the Commission shall only
approve a proposed rule change if it finds that it is consistent
with the requirements of the Exchange Act and the rules and
regulations thereunder. 15 U.S.C. 78s(b).
    \36\ See 15 U.S.C. 78q-1(b)(3)(F).
    \37\ 15 U.S.C. 78q-1(b)(3)(A), (B) and (F).
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b. Substance of Security-Based Swap Submissions: Quantitative and
Qualitative Factors
    The Dodd-Frank Act requires the Commission to take into account
several factors in addition to consistency with Exchange Act Section
17A in reviewing a clearing agency's Security-Based Swap
Submission.\38\ The Commission is proposing to require clearing
agencies to provide information relevant to these factors through the
proposed amendments to Rule 19b-4 and Form 19b-4. Specifically,
clearing agencies would be required to submit quantitative and
qualitative information to assist the Commission in the consideration
of the five factors Exchange Act Section 3C requires the Commission to
take into account in reviewing a Security-Based Swap Submission, which
include:
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    \38\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(4)(B)(i)-(v)).
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    (i) The existence of significant outstanding notional exposures,
trading liquidity and adequate pricing data.
    (ii) The availability of a rule framework, capacity, operational
expertise and resources, and credit support infrastructure to clear the
contract on terms that are consistent with the material terms and
trading conventions on which the contact is then traded.
    (iii) The effect on the mitigation of systemic risk, taking into
account the size of the market for such contract and the resources of
the clearing agency available to clear the contract.
    (iv) The effect on competition, including appropriate fees and
charges applied to clearing.
    (v) The existence of reasonable legal certainty in the event of the
insolvency of the relevant clearing agency or one or

more of its clearing members with regard to the treatment of customer
and security-based swap counterparty positions, funds, and
property.\39\
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    \39\ Proposed Rule 19b-4(o)(3)(ii).
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    Each Security-Based Swap Submission would be required to address
the factors listed above to the extent they are applicable to the
security-based swap, the clearing agency and the market.
    For example, in connection with the discussion responsive to factor
(i) above, the clearing agency could address pricing sources, models
and procedures demonstrating an ability to obtain price data to measure
credit exposures in a timely and accurate manner, as well as measures
of historical market liquidity and trading activity, and expected
market liquidity and trading activity if the security-based swap is
required to be cleared (including information on the sources of such
measures). With respect to the discussion of factor (ii) above, the
statement describing the availability of a rule framework could include
a discussion of the rules, policies or procedures applicable to the
clearing of the relevant security-based swap. Additionally, the
discussion of credit support infrastructure could include the methods
to address and communicate requests for, and posting of, collateral.
With respect to factor (iii) above, the discussion of systemic risk
could include a statement on the clearing agency's risk management
procedures, including among other things the measurement and monitoring
of credit exposures, initial and variation margin methodology,
methodologies for stress testing and back testing, settlement
procedures and default management procedures. With respect to factor
(iv) above, the discussion of fees and charges could address any volume
incentive programs that may apply or impact the fees and charges. With
respect to factor (v) above, the discussion could address segregation
of accounts and all other customer protection measures under
insolvency.
    In describing the security-based swap, or any group, category, type
or class of security-based swaps, that a clearing agency plans to
accept for clearing, the clearing agency could include the relevant
product specifications, including copies of any standardized legal
documentation, generally accepted contract terms,\40\ standard
practices for managing and communicating any life cycle events
associated with the security-based swap and related adjustments,\41\
and the manner in which the information contained in the confirmation
of the security-based swap trade is transmitted. The clearing agency
also could discuss its financial and operational capacity to provide
clearing services to all customers subject to the clearing requirements
as applicable to the particular security-based swap. Finally, the
clearing agency could include an analysis of the effect of a clearing
requirement on the market for the group, category, type, or class of
security-based swaps, both domestically and globally, including the
potential effect on market liquidity, trading activity, use of
security-based swaps by direct and indirect market participants and any
potential market disruption or benefits. This analysis could include
whether the members of the clearing agency are operationally and
financially capable of absorbing clearing business (including indirect
access market participants) that may result from a determination that
the security-based swap (or group, category, type or class of security-
based swaps) is required to be cleared.
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    \40\ For example, for some security-based swaps, industry
standard documentation would include the applicable International
Swaps and Derivatives Association, Inc. Master Agreement and any
related asset-class-specific definitions.
    \41\ The Commission has proposed Regulation SBSR, which contains
a definition of ``life cycle event.'' See Exchange Act Release No.
63346 (Nov. 19, 2010), 75 FR 75208 (Dec. 2, 2010) (``Regulation
SBSR--Reporting and Dissemination of Security-Based Swap
Information'').
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c. Substance of Security-Based Swap Submissions: Open Access
    New Exchange Act Section 3C also requires that the rules of a
clearing agency that clears security-based swaps subject to the
clearing requirement provide for open access.\42\ In the course of
reviewing a Security-Based Swap Submission, the Commission may assess
whether a clearing agency's rules provide for open access, particularly
with respect to the relevant Security-Based Swap Submission.
Accordingly, the proposed rule provides that the Security-Based Swap
Submission must include a statement regarding how a clearing agency's
rules:
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    \42\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(a)(2) (``[t]he rules of a clearing agency described in
paragraph (1) shall--(A) prescribe that all security-based swaps
submitted to the clearing agency with the same terms and conditions
are economically equivalent within the clearing agency and may be
offset with each other within the clearing agency; and (B) provide
for non-discriminatory clearing of a security-based swap executed
bilaterally or on or through the rules of an unaffiliated national
securities exchange or security-based swap execution facility.'').
---------------------------------------------------------------------------

    (i) Prescribe that all security-based swaps submitted to the
clearing agency with the same terms and conditions are economically
equivalent within the clearing agency and may be offset with each other
within the clearing agency; and
    (ii) Provide for non-discriminatory clearing of a security-based
swap executed bilaterally or on or through the rules of an unaffiliated
national securities exchange or security-based swap execution
facility.\43\
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    \43\ Proposed Rule 19b-4(o)(3)(ii).
---------------------------------------------------------------------------

    In making a determination, the Commission proposes to take into
account the factors specified in Exchange Act Section 3C and any
additional information the Commission determines to be appropriate. The
proposed rule also requires a clearing agency to provide any additional
information requested by the Commission as necessary to make a
determination.\44\ The Commission believes that such a requirement
would provide appropriate flexibility to facilitate our regulatory
responsibilities. In making a determination of whether or not the
clearing requirement would apply to the security-based swap, or any
group, category, type, or class of security-based swaps, described in
the submission, the Commission may require such terms and conditions as
the Commission determines to be appropriate in the public interest.\45\
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    \44\ Proposed Rule 19b-4(o)(6)(i).
    \45\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(4)(C)) and Proposed Rule 19b-4(o)(6)(ii).
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d. Timing Related to Security-Based Swap Submissions
    Under Exchange Act Section 3C, as added by Section 763(a) of the
Dodd-Frank Act, the Commission is required to make its determination of
whether a security-based swap described in a clearing agency's
Security-Based Swap Submission is required to be cleared not later than
90 days after receiving such Security-Based Swap Submission.\46\ The
90-day determination period may be extended with the consent of the
clearing agency making such Security-Based Swap Submission.\47\ The
Commission is required to make available to the public any Security-
Based Swap Submission it receives and to provide at least a 30-day
public comment period ``regarding its

determination whether the clearing requirement shall apply to the
submission.'' \48\ This 30-day comment period enables the public to
have an opportunity to comment on the Security-Based Swap Submission
and to provide information for the Commission to consider as part of
making its determination whether the clearing requirement should apply
to the submission. Accordingly, the Commission proposes to make the
Security-Based Swap Submission available for a 30-day public comment
period within the 90-day determination period. The Commission would
publish notice of the Security-Based Swap Submission in the Federal
Register and publish notice on the Commission's publicly-available Web
site at http://www.sec.gov. Such notice would include the solicitation
of public comment. This proposed publication process would be
consistent with the current process that is in place for proposed rule
changes under Exchange Act Section 19(b)(2) and Rule 19b-4.
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    \46\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(3)). Further, pursuant to proposed Rule 19b-4(o)(2),
if any information submitted to the Commission by a clearing agency
on Form 19b-4 were not complete or otherwise in compliance with Rule
19b-4 and Form 19b-4, such information would not be considered a
Security-Based Swap Submission and the Commission would be required
to inform the clearing agency within twenty-one business days of
such submission.
    \47\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(3)).
    \48\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(2)(C)).
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e. Notice to Clearing Agency Members
    New Exchange Act Section 3C requires that a clearing agency provide
notice to its members, in a manner determined by the Commission, of its
Security-Based Swap Submissions.\49\ To meet the requirement of
providing notice of Security-Based Swap Submissions to members, the
Commission is proposing amendments to Rule 19b-4 that would require
clearing agencies to post on their Web sites such submissions to the
Commission, and any amendments thereto.\50\ This public posting would
be required to be completed within two business days following the
Security-Based Swap Submission to the Commission. This timeframe is
consistent with the notice requirement that currently applies to
proposed rule changes,\51\ and the Commission believes that such
timeframe would provide members of the clearing agency and the public
with timely notice of the submission. The clearing agency would be
required to maintain such material on its Web site until the Commission
makes a determination regarding the Security-Based Swap Submission, the
clearing agency withdraws the Security-Based Swap Submission or the
clearing agency is notified that the Security-Based Swap Submission is
not properly filed.\52\ These requirements should help ensure that
submissions that are being actively considered by the Commission are
readily available to the members of the clearing agency and the public
and help provide for a more transparent process.
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    \49\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(2)(A)).
    \50\ Proposed Rule 19b-4(o)(5).
    \51\ Commission rules currently require SROs to post on their
Web sites a copy of any proposed rule change the SRO filed with the
Commission, and any amendments thereto. Such posting is required
within two business days after filing the proposed rule change with
the Commission. See 17 CFR 240.19b-4(l). In adopting this rule, the
Commission stated that all market participants, investors and other
interested parties should have access to proposed rule changes filed
with the Commission, and any amendments, as soon as practicable, and
that it did not believe that a two-business-day timeframe would be
impractical or unduly burdensome on SROs. See Securities Exchange
Act Release No. 50486 (Oct. 4, 2004), 69 FR 60287 (Oct. 8, 2004)
(Final Rules Regarding Proposed Rule Changes of Self-Regulatory
Organizations).
    \52\ Proposed Rule 19b-4(o)(5).
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    The Commission notes that the current instructions for Form 19b-4
require an SRO to file with the Commission copies of notices issued by
the SRO soliciting comment on the proposed rule change and copies of
all written comments on the proposed rule change received by the SRO
(whether or not comments were solicited) from its members or
participants. Any correspondence the SRO receives after it files a
proposed rule change, but before the Commission takes final action on
the proposed rule change, also is required to be filed with the
Commission.\53\ The SRO is required to summarize the substance of all
such comments received and respond in detail to any significant issues
raised in the comments about the proposed rule change.\54\ The
Commission is proposing that in connection with Security-Based Swap
Submissions, clearing agencies would be subject to these same
requirements. The Commission preliminarily believes that its proposal
to apply such requirements in the instructions to Form 19b-4 to
Security-Based Swap Submissions would provide the Commission with an
opportunity to consider the various viewpoints expressed by commenters
by making sure relevant comments are included in the materials provided
to the Commission.
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    \53\ See Items 5 and 9 (Exhibit 2) of Form 19b-4. 17 CFR
240.819.
    \54\ Item 5 of Form 19b-4. 17 CFR 240.819.
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f. Submissions of a Group, Category, Type or Class of Security-Based
Swaps
    The proposed amendments to Rule 19b-4 and Form 19b-4 would require
that clearing agencies submit security-based swaps for review by group,
category, type, or class to the extent it is practicable and reasonable
to do so.\55\ Any aggregation would be required to be clearly described
in a Security-Based Swap Submission so that market participants and the
public know which security-based swaps may be subject to a clearing
requirement. The Commission preliminarily believes that including
multiple security-based swaps in each submission--to the extent that
such groupings are practicable and reasonable (e.g., by taking into
consideration appropriate risk management issues applicable to the
aggregation)--would streamline the submission process for Commission
staff and the clearing agencies. This in turn would allow more
security-based swaps to be reviewed in a timely manner.
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    \55\ Proposed Rule 19b-4(o)(4). In its release proposing rules
to implement Section 723 of the Dodd-Frank Act, the CFTC has
proposed a similar rule. 75 FR 67277 (November 2, 2010).
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Request for Comments
    The Commission generally requests comments on all aspects of the
proposed amendments to Rule 19b-4 that would incorporate the process
for making Security-Based Swap Submissions. In addition, the Commission
requests comments on the following specific issues:
     Are there specific considerations that the Commission
should weigh more heavily in reviewing whether a Security-Based Swap
Submission is consistent with Exchange Act Section 17A? If so, what are
such considerations?
     Should the information included in this release as
examples of the kinds of information the clearing agency should include
in its Security-Based Swap Submission be required in all cases and
incorporated into the rules?
     To describe the security-based swap, or any group,
category, type or class of security-based swaps, that a clearing agency
plans to accept for clearing, should a clearing agency be required to
include in its Security-Based Swap Submissions specific product
specifications, including copies of any standardized legal
documentation, generally accepted contract terms, standard practices
for managing and communicating any life cycle events associated with
the security-based swap and related adjustments, and the manner in
which the information contained in the confirmation of the security-
based swap trade is transmitted? If not, why not? Is there other
information relating to the description of the security-based swaps
that clearing agencies should be required to provide? If so, what
information and why? Should this

information be required in all cases and incorporated into the rules?
     What specific information should a clearing agency be
required to include in its Security-Based Swap Submissions regarding
pricing sources, models and procedures demonstrating an ability to
obtain price data to measure credit exposures in a timely and accurate
manner, as well as measures of historical market liquidity and trading
activity, and expected market liquidity and trading activity if the
security-based swap is required to be cleared (including information on
the sources of such measures)? Is there other information relating to
pricing that clearing agencies should be required to provide? If so,
what information and why? Should this information be required in all
cases and incorporated into the rules?
     What specific information should a clearing agency be
required to include in its Security-Based Swap Submissions pertaining
to the rules, policies or procedures applicable to the clearing of the
relevant security-based swap? Is there other information relating to
rule framework, capacity, operational expertise and resources the
clearing agency should be required to provide? If so, what information
and why? Should this information be required in all cases and
incorporated into the rules?
     Is there specific information a clearing agency should be
required to include in its Security-Based Swap Submissions regarding
the methods to address and communicate requests for, and posting of,
collateral? Is there other information relating to collateral that the
clearing agency should be required to provide? If so, what information
and why? Should this information be required in all cases and
incorporated into the rules?
     What specific information should a clearing agency be
required to include in its Security-Based Swap Submissions regarding
the clearing agency's risk management procedures, pertaining to among
other things the measurement and monitoring of credit exposures,
initial and variation margin methodology, methodologies for stress
testing and back testing, settlement procedures and default management
procedures? Is there other information relating to risk management that
the clearing agency should be required to provide? If so, what
information and why? Should this information be required in all cases
and incorporated into the rules?
     Should a clearing agency, in connection with each
submission or in some circumstances, be required to include an
independent validation of its margin methodology and its ability to
maintain sufficient financial resources? Why or why not, or in which
circumstances? If independent validation is required, how should the
Commission assess the independence and technical expertise of the party
providing the independent validation? What are the critical techniques,
risk factors and components that should be covered by the model
validation and why? If the clearing of the security-based swap
described in the Security-Based Swap Submission would not require a
change in the clearing agency's margin methodology, do commenters
believe it would be sufficient for the Commission to permit the
clearing agency to refer to an applicable independent validation of the
clearing agency's margin methodology previously provided to the
Commission with a statement explaining why the existing methodology
does not require a change in connection with clearing the new security-
based swap and how the current validation is still applicable in the
context of the security-based swap the clearing agency plans to clear?
If not, why not?
     What information should a clearing agency be required to
include in its Security-Based Swap Submissions regarding fees and
charges and address any volume incentive programs that may apply or
impact the fees and charges? Is there other information relating to
fees and charges that the clearing agency should be required to
provide? If so, what information and why? Should this information be
required in all cases and incorporated into the rules?
     Should a clearing agency be required to include in its
Security-Based Swap Submission information regarding segregation of
accounts and all other customer protection measures under insolvency?
If not, why not? Is there other information relating to insolvency of
the clearing agencies' members the clearing agency should be required
to provide? If so, what information and why? Should this information be
required in all cases and incorporated into the rules?
     Should a clearing agency be required to include in its
Security-Based Swap Submission information on whether cross-margining
is available to the clearing agency's members with respect to their
positions at other clearing agencies? If not, why not? What types of
effects on competition are such cross-margining arrangements likely to
have? Is there any specific information regarding cross-margining
arrangements that the Commission should collect? If not, why not? If
so, what information and why? Should this information be required in
all cases and incorporated into the rules?
     What information should a clearing agency be required to
include in its Security-Based Swap Submission regarding its financial
and operational capacity to provide clearing services to all customers
subject to the clearing requirements as applicable to the particular
security-based swap? Should this information be required to include an
analysis of the effect of a clearing requirement on the market for the
group, category, type, or class of security-based swaps, both
domestically and globally, including the potential effect on market
liquidity, trading activity, use of security-based swaps by direct and
indirect market participants and any potential market disruption or
benefits? Should it be required to include an analysis of whether the
members of the clearing agency are operationally and financially
capable of absorbing clearing business (including indirect access
market participants) that may result from a determination that the
security-based swap (or group, category, type or class of security-
based swaps) is required to be cleared? If not, why not? Is there other
information relating to capacity that the clearing agency should be
required to provide? If so, what information and why? Should this
information be required in all cases and incorporated into the rules?
     Is the process for notice to clearing agency members by
posting on the clearing agency Web site, as proposed by the Commission,
adequate as a notice mechanism for members? If not, what should change?
Is the two-day posting requirement appropriate to provide timely notice
to members? Would a shorter or longer period be appropriate?
     What other method of notice to clearing agency members
could or should be required rather than Web site posting?
     Should the Commission utilize the proposed rule change
filing system for Security-Based Swap Submissions? What other methods
of submitting Security-Based Swap Submissions to the Commission should
the Commission consider and why?
     What alternatives should the Commission consider to
requiring clearing agencies to submit security-based swaps for review
by group, category, type, or class, to the extent it is practicable and
reasonable to do so?
     Should the Commission consider consolidating multiple
Security-Based Swap Submissions from one clearing agency into a group,
category, type, or class of Security-Based Swap Submissions, or
subdividing a clearing

agency's submission of a group, category, type, or class of security-
based swaps, as appropriate, for review?
     What information should the clearing agency include in its
Security-Based Swaps Submissions to identify the scope of the group,
category, type or class of security-based swaps it plans to clear that
will provide sufficient parameters to put people on notice that a
security-based swap may be required to be cleared?
     What characteristics of security-based swaps should be
common among security-based swaps in order to aggregate them by group,
category, type or class? Would these characteristics be the same across
asset classes such as security-based equities derivatives, credit
derivatives and loan-based swaps? Should the Commission specify those
attributes in the rule?
     Are there any factors that would make aggregation more
difficult? Would these be the same or different across asset classes?
     Are there factors that may be clearing-agency specific
with respect to aggregation? If so, what are those factors?
    As discussed above, Exchange Act Section 3C provides, among other
things, for a determination by the Commission of whether security-based
swaps are required to be cleared.\56\ The Commission may determine that
a security-based swap is required to be cleared based on a review of a
clearing agency's submission regarding a security-based swap, or any
group, category, type or class of security-based swaps, that the
clearing agency plans to accept for clearing (i.e., a Security-Based
Swap Submission).\57\ Consistent with proposal, if the Commission
determines that a security-based swap is not required to be cleared,
such security-based swap may still be cleared on a non-mandatory basis
by the clearing agency if the clearing agency has rules that permit it
to clear such security-based swap.\58\ In addition, Exchange Act
Section 3C(b)(1) provides that ``[t]he Commission on an ongoing basis
shall review each security-based swap, or any group, category, type, or
class of security-based swaps to make a determination that such
security-based swap, or group, category, type, or class of security-
based swaps should be required to be cleared'' (i.e., a Commission-
initiated Review).\59\
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    \56\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(a)(1)).
    \57\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(2)(C)) (``[t]he Commission shall * * * review each
submission made under subparagraphs (A) and (B), and determine
whether the security-based swap, or group, category, type, or class
of security-based swaps, described in the submission is required to
be cleared.'').
    \58\ See 15 U.S.C. 78s(b) (proposed rule changes) and 12 U.S.C.
5465(e) (Advance Notices).
    \59\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(1)). The Dodd-Frank Act does not require rulemaking
with respect to Commission-initiated Reviews.
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    The proposed addition of paragraph (o) to Rule 19b-4 and related
amendments to Form 19b-4 are intended to provide a process for
Security-Based Swap Submissions. The Commission is required under the
Dodd-Frank Act to adopt rules specifying the process for Security-Based
Swap Submissions. As part of the process of review of each Security-
Based Swap Submission (and in each Commission-initiated Review), the
Commission must take into account the five factors specified in
Exchange Act Section 3C(b)(4)(B):
    (i) The existence of significant outstanding notional exposures,
trading liquidity and adequate pricing data.
    (ii) The availability of a rule framework, capacity, operational
expertise and resources, and credit support infrastructure to clear the
contract on terms that are consistent with the material terms and
trading conventions on which the contract is then traded.
    (iii) The effect on the mitigation of systemic risk, taking into
account the size of the market for such contract and the resources of
the clearing agency available to clear the contract.
    (iv) The effect on competition, including appropriate fees and
charges applied to clearing.
    (v) The existence of reasonable legal certainty in the event of the
insolvency of the relevant clearing agency or one or more of its
clearing members with regard to the treatment of customer and security-
based swap counterparty positions, funds, and property.\60\
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    \60\ Proposed Rule 19b-4(o)(3)(ii).
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    Proposed Rule 19b-4(o) and related amendments for Form 19b-4 would
require clearing agencies to include in their Security-Based Swap
Submissions information that will assist the Commission in the
quantitative and qualitative assessment of the statutory factors listed
above. The proposal also set forth examples of the information clearing
agencies should include in addressing these five factors.\61\
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    \61\ See Section II.A.1.b for a discussion of the types of
information that should be included in a Security-Based Swap
Submission.
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    Promoting clearing is a critical component of the reform mandated
by the Dodd-Frank Act, which seeks to bring transactions and
counterparties into a robust, conservative and transparent risk
management framework.\62\ Exchange Act Section 3C(b)(4)(B) \63\ sets
forth the factors the Commission is required to take into account in
determining whether a security-based swap is required to be cleared or
should be required to be cleared in connection with a Security-Based
Swap Submission or Commission-initiated Review, respectively. The
Commission recognizes that in interpreting and applying these factors,
it should be guided by the general principles underlying the Dodd-Frank
Act, including in particular the goal of promoting clearing where
appropriate. At the same time, the Commission is mindful that its
application of these factors may have a significant effect on the
market for individual security-based swaps. In addition, an overly
broad or narrow application of the mandatory clearing requirement could
undermine the policy objectives of the Dodd-Frank Act. For example, a
premature determination that a security-based swap is subject to
mandatory clearing may, in certain circumstances, limit the ability of
certain market participants to utilize that product (including for risk
management purposes) which in turn could ultimately result in less
clearing and more limited use of the security-based swap than might
otherwise have been the case if it had been permitted to trade without
being subject to a mandatory clearing requirement for a longer period
of time.
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    \62\ See Letter from Christopher Dodd, Chairman, Committee on
Banking, Housing, and Urban Affairs, United States Senate and
Blanche Lincoln, Chairman, Committee on Agriculture, Nutrition, and
Forestry, United States Senate, to Barney Frank, Chairman, Financial
Services Committee, United States House of Representatives and
Collin Peterson, Chairman, Committee on Agriculture, United States
House of Representatives (June 30, 2010) (on file with the United
States Senate) (``Congress determined that clearing is at the heart
of reform--bringing transactions and counterparties into a robust,
conservative and transparent risk management framework. Congress
also acknowledged that clearing may not be suitable for every
transaction or every counterparty. End users who hedge their risks
may find it challenging to use a standard derivative contract to
exactly match up their risks with counterparties willing to purchase
their specific exposures. Standardized derivative contracts may not
be suitable for every transaction.''). Additionally, and as
discussed herein in Section II.A.1.a, Exchange Act Section
3C(b)(4)(A) requires the Commission to review whether a Security-
Based Swap Submission is consistent with Exchange Act Section 17A.
    \63\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(b)(4)(B)).
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    On the other hand, an overly narrow application of the mandatory
clearing requirement would undermine the potential benefits of
centralized clearing for counterparties and the marketplace generally
that Exchange Act Section 3C

was intended to provide. Moreover, because security-based swaps that
are subject to the clearing requirement also are required to be
executed on a national securities exchange or a swap execution facility
if such an exchange or facility makes the security-based swap available
to trade, imposing a clearing requirement could have a substantial
impact generally on the trading environment of the relevant
instruments, which in turn could affect the relative transparency and
liquidity of those instruments in ways that may promote, or detract
from, the overall goals of the Dodd-Frank Act.
    In short, the Commission recognizes, as did Congress, that a
determination that clearing is required could have ancillary
consequences. The Dodd-Frank Act includes an exception from the
mandatory clearing requirement to help address concerns regarding
circumstances when clearing may not be appropriate.\64\
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    \64\ See S. Rep. No. 111-176 at 34 (stating that ``[s]ome parts
of the OTC market may not be suitable for clearing and exchange
trading due to individual business needs of certain users. Those
users should retain the ability to engage in customized, uncleared
contracts while bringing in as much of the OTC market under the
centrally cleared and exchange-traded framework as possible. Also,
OTC (contracts not cleared centrally) should still be subject to
reporting, capital, and margin requirements so that regulators have
the tools to monitor and discourage potentially risky activities,
except in very narrow circumstances. These exceptions should be
crafted very narrowly with an understanding that every company,
regardless of the type of business they are engaged in, has a strong
commercial incentive to evade regulatory requirements.'').
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    However, because the Commission must still apply the statutory
factors, in light of the policy goals of the Dodd-Frank Act, to
determine whether clearing is required, the Commission is seeking
comment generally on how the factors identified in the statute should
be applied in making determinations as to whether particular security-
based swaps are or should be required to be cleared.
Request for Comments
     Are there specific considerations that the Commission
should weigh more heavily in making a determination that a security-
based swap is, or should be, required to be cleared? If so, what are
such considerations and why should they be given greater weight?
     In a Commission-initiated review, should the Commission
consider information that is different from the information the
Commission has proposed for a clearing agency to provide in a Security-
Based Swap Submission to enable the Commission to make a determination
regarding a clearing requirement? If so, what information should be
considered and why?
     How should the Commission measure ``significant
outstanding notional exposures''? Should the Commission consider a
threshold or a range for what qualifies as ``significant outstanding
notional exposures''? If so, should this threshold or range vary
depending on the asset class?
     How should the Commission analyze whether pricing data is
adequate?
     In taking into account the effect of requiring a security-
based swap (or group, category, type or class of security-based swaps)
to be cleared on the mitigation of systemic risk, how should the
Commission evaluate the resources of the clearing agency available to
clear the security-based swaps?
     In considering the existence of legal certainty in the
event of the insolvency of the relevant clearing agency or one or more
of its clearing members, are there specific factors that the Commission
should take into account? Would seeking information from third-party
sources such as legal opinions be appropriate? Are there any cross-
border considerations that should be considered?
     How should the Commission analyze the pool of potential
counterparties to a security-based swap (or group, category, type or
class of security-based swaps) subject to the clearing requirement?
     How should the Commission analyze the potential effect,
including the potential effect on liquidity, trading activity, use of
security-based swaps by direct and indirect market participants and any
potential disruption or benefit to the market for a security-based swap
(or group, category, type, or class of security-based swaps) required
to be cleared?
     Is there information reported to the swap data repository
that is otherwise not available to the public that a clearing agency
would require to prepare its Security-Based Swap Submission? If so,
what information would be required, and why?
2. Prevention of Evasion of the Clearing Requirement.
    Exchange Act Section 3C directs the Commission to prescribe rules
(and interpretations of rules) the Commission determines to be
necessary to prevent evasions of the clearing requirements.\65\ The
term ``clearing agency'' is defined broadly under the Exchange Act,\66\
and clearing agencies may offer a spectrum of clearing services.
Specifically, the Commission has identified the following entities and
activities as falling within the definition of clearing agency: (i)
Clearing corporations; (ii) securities depositories; and (iii) matching
services.\67\ As a result, there may be entities that operate as
registered clearing agencies for security-based swaps that do not
provide central clearing and act as a CCP. The Commission preliminarily
believes that the broad definition of the term ``clearing agency''
could be used by market participants to evade the clearing requirement
of Exchange Act Section 3C(a)(1), which states that ``[i]t shall be
unlawful for any person to engage in a security-based swap unless that
person submits such security-based swap for clearing to a clearing
agency that is registered under this Act or a clearing agency that is
exempt from registration under this Act if the security-based swap is
required to be cleared.'' \68\ For example, market participants seeking
to evade the requirement to clear a security-based swap set forth in
Exchange Act Section 3C(a)(1) could submit the security-based swap for
matching services (rather than for central clearing) to a clearing
agency that is either registered with the Commission or exempt from
registration under the Exchange Act.
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    \65\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(d)(1), which states that ``[t]he Commission shall
prescribe rules under this section (and issue interpretations of
rules prescribed under this section), as determined by the
Commission to be necessary to prevent evasions of the mandatory
clearing requirements under this Act.'').
    \66\ See supra note 11 discussing the definition of ``clearing
agency'' pursuant to Exchange Act Section 3(a)(23)).
    \67\ See Securities Exchange Act Release Nos. No. 20221 (Sept.
23, 1983), 48 FR 45167 (October 3, 1983), (Order Approving the
Clearing Agency Registration of Four Depositories and Four Clearing
Corporations) and 39829 (April 6, 1998), 63 FR 17943 (April 13,
1998) (Confirmation and Affirmation of Securities Trades; Matching).
    \68\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(a)(1)).
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    The Commission preliminarily believes that other types of clearing
functions and services offered by clearing agencies would not achieve
the goal of central clearing contemplated under the Dodd-Frank Act--
improving the management of counterparty risk.\69\ The Commission
preliminarily believes

that proposed Rule 3Ca-2 would prevent potential evasions of the
clearing requirement by requiring market participants to submit
security-based swaps to a clearing agency for central clearing as
opposed to other clearing functions or services. Accordingly, proposed
Rule 3Ca-2 would clarify the reference to ``submits such security-based
swap for clearing to a clearing agency'' in Exchange Act Section
3C(a)(1) to mean that the security-based swap must be submitted for
central clearing to a clearing agency that functions as a CCP.\70\
Submission to a clearing agency for clearing services other than
central clearing as a CCP would not meet the clearing requirement.
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    \69\ The Commission has identified the following entities and
activities as falling within the definition of clearing agency: (i)
Clearing corporations; (ii) securities depositories; and (iii)
matching services. Structured and operated appropriately, CCPs may
improve the management of counterparty risk and may provide
additional benefits such as multilateral netting of trades. See
supra note 67 and Section I.A.
    \70\ Proposed Rule 3Ca-2. The definitional section of the
Exchange Act provides that defined terms may have different meanings
in different contexts. See Exchange Act Section 3(a) (``When used in
this title, unless the context otherwise requires * * * .''). 15
U.S.C. 78c(a).
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Request for Comments
    The Commission generally requests comments on all aspects of
proposed Rule 3Ca-2. In addition, the Commission requests comments on
the following specific issues:
     Should the Commission require security-based swaps to be
submitted for central clearing to a clearing agency that acts as a CCP
to meet the clearing requirement?
     Are there clearing agency functions or services that are
not CCP functions performed by a clearing agency but that may provide
comparable benefits to those of a CCP? If so, please identify such
functions or services and the benefits they provide.

B. Stay of the Clearing Requirement and Review by the Commission

    Exchange Act Section 3C states that, after making a determination
that a security-based swap (or group, category, type or class of
security-based swaps) is required to be cleared, the Commission, on
application of a counterparty to a security-based swap or on the
Commission's own initiative, may stay the clearing requirement until
the Commission completes a review of the terms of the security-based
swap and the clearing arrangement.\71\ In connection with a stay of the
clearing requirement and subsequent review of the terms of the
security-based swap and the clearing arrangement, the Commission is
required to adopt rules for reviewing a clearing agency's clearing of a
security-based swap, or any group, category, type or class of security-
based swaps, that the clearing agency has accepted for clearing.\72\
Proposed Rule 3Ca-1 would establish a procedure for staying the
clearing requirement and the Commission's subsequent review of the
terms of the security-based swap and the clearing arrangement.
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    \71\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(c)(1)).
    \72\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(c)(4)).
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    Under proposed Rule 3Ca-1, a counterparty to a security-based swap
subject to the clearing requirement wishing to apply for a stay of the
clearing requirement would be required to submit a written statement to
the Commission that includes (i) a request for a stay of the clearing
requirement, (ii) the identity of the counterparties to the security-
based swap and a contact at the counterparty requesting the stay, (iii)
the identity of the clearing agency clearing the security-based swap,
(iv) the terms of the security-based swap subject to the clearing
requirement and a description of the clearing arrangement and (v) the
reasons a stay should be granted and the security-based swap should not
be subject to a clearing requirement, specifically addressing the same
factors a clearing agency must address in its Security-Based-Swap
Submission pursuant to proposed Rule 19b-4(o).\73\ The Commission
preliminarily believes that such information would assist the
Commission in determining whether to grant the stay. Under proposed
Rule 3Ca-1, the counterparty's statement to the Commission requesting
the stay of the clearing requirement would be made available to the
public on the Commission's Web site in order to provide the public with
notice of the submission of the stay. A stay of the clearing
requirement may be applicable to the counterparty requesting the stay
or more broadly, to the security-based swap, or any group, category,
type or class of security-based swaps, subject to the clearing
requirement. The Commission would provide notice to the public
regarding a stay of the clearing requirement that is generally
applicable.
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    \73\ Proposed Rule 3Ca-1(b).
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    Pursuant to Exchange Act Section 3C, in undertaking its review of
the clearing requirement subsequent to granting a stay, the Commission
would consider the clearing agency's clearing of the security-based
swap (or group, category, type of class of security-based swaps) for
consistency with the determination criteria under Exchange Act Section
3C(b)(4).\74\ The Commission also may take into consideration the
clearing agency's rules for open access as related to the security-
based swap (or group, category, type or class of security-based swaps)
subject to review.\75\ The Commission may determine that it requires
additional information in the possession of the clearing agency (as
distinguished from the information it received from the counterparty).
Accordingly, proposed Rule 3Ca-1 requires the application for the stay
to identify the clearing agency that is clearing the security-based
swap \76\ and also requires that any clearing agency that has accepted
for clearing the security-based swap, or any group, category, type or
class of security-based swaps, subject to the stay, provide information
requested by the Commission in the course of its review during the
stay.\77\ Exchange Act Section 3C also requires the Commission to
complete such clearing review not later than 90 days after issuance of
the stay, unless the clearing agency that clears the security-based
swap agrees to an extension of the time limit.\78\
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    \74\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(c)(3)(A)).
    \75\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(a)(2)).
    \76\ Proposed Rule 3Ca-1(b)(3).
    \77\ Proposed Rule 3Ca-1(d).
    \78\ See Public Law 111-203, section 763(a) (adding Exchange Act
Section 3C(c)(2)).
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    Proposed Rule 3Ca-1 provides that, upon completion of its review,
the Commission may determine unconditionally, or subject to such terms
and conditions as the Commission determines to be appropriate in the
public interest, that the security-based swap (or group, category, type
or class of security-based swaps) must be cleared.\79\ Alternatively,
the Commission may determine that the clearing requirement does not
apply to the security-based swap (or group, category, type or class of
security-based swaps).\80\ If the Commission were to make a
determination that the clearing requirement does not apply to a
security-based swap (or group, category, type or class of security-
based swaps), the proposed rule makes clear that clearing may continue
on a non-mandatory basis.\81\ As previously noted, moving security-
based swaps into clearing in a gradual manner through non-mandatory
clearing may in certain circumstances be appropriate. For example, a
premature determination that a product is subject to mandatory clearing
may, in certain circumstances,

limit the ability of certain market participants to utilize that
product (including for risk management purposes) which in turn could
ultimately result in less clearing and more limited use of the product
than might otherwise have been the case if it had been permitted to
trade without being subject to a mandatory clearing requirement for a
longer period of time.
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    \79\ Proposed Rule 3Ca-1(e)(1) and Public Law 111-203, section
763(a) (adding Exchange Act Section 3C(c)(3)(A)).
    \80\ Proposed Rule 3Ca-1(e)(2) and Public Law 111-203, section
763(a) (adding Exchange Act Section 3C(c)(3)(B)).
    \81\ See proposed Rule 3Ca-1(e)(2).
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Request for Comments
    The Commission generally requests comments on all aspects of
proposed Rule 3Ca-1. In addition, the Commission requests comments on
the following specific issues:
     Does the proposal provide sufficient guidance regarding
the process for a stay? Are there any alternative approaches the
Commission should consider?
     Should the Commission require a counterparty applying for
a stay to provide information that is broader or in addition to the
information the Commission has proposed? If so, what information should
be added to the requirement?
     Should the informational requirement imposed on a
counterparty applying for a stay be narrower than that which the
Commission has proposed? If so, what information should be eliminated
from the requirement?
     Are there any terms or conditions that the Commission
should generally consider imposing as part of a stay?
     Under what circumstances would it be reasonable for the
Commission to determine that clearing is not required after making an
initial determination that clearing is required?
     Should a Commission determination to allow clearing of a
securities-based swap on a non-mandatory basis be subject to ongoing
review or limited by a certain timeframe? What type of timeframe may be
appropriate?

C. Title VIII Notice Filing Requirements for Designated Clearing
Agencies

    The Commission is proposing to add a new paragraph (n) to Rule 19b-
4 to implement the filing requirement in Section 806(e). New paragraph
(n) would require that an Advance Notice be submitted to the Commission
electronically on Form 19b-4. In addition, new paragraph (n) would
define when a proposed change to a clearing agency's rules, procedures
or operations could materially affect the nature or level of risks
presented by the designated financial market utility. This definition
would determine when an Advance Notice under Section 806(e) must be
filed with the Commission. The Commission also is proposing
corresponding amendments to Form 19b-4 as discussed in more detail in
Section II.D.
    As with Security-Based Swap Submissions filed pursuant to Exchange
Act Section 3C, the Commission anticipates that in many cases a
proposed change may be required to be filed as an Advance Notice under
Section 806(e) and as a proposed rule change under Exchange Act Section
19(b).\82\ This is because a proposal that qualifies as a proposed
change to a rule, procedure or operation that materially affects the
nature or level of risk presented by the designated clearing agency
under Section 806(e) may also qualify as a proposed rule change under
Exchange Act Section 19(b). As a result, a designated clearing agency
may be required to file a proposal as an Advance Notice and as a
proposed rule change. Designated clearing agencies, as SROs, will
already be required to file proposed rule changes on Form 19b-4 using
EFFS.\83\ Accordingly, and similar to the proposal for Security-Based
Swap Submissions, the Commission is proposing to require clearing
agencies to use the existing filing system, EFFS, and Form 19b-4 for
the filing of Advance Notices under Section 806(e). This would allow
designated clearing agencies to comply with the notice requirement in
Section 806(e) using the same system they use for submitting proposed
rule changes under Exchange Act Section 19(b) and, as applicable,
Security-Based Swap Submissions under Exchange Act Section 3C.
Leveraging the existing filing system, EFFS, for the submission of
Advance Notices is intended to utilize efficiently Commission and
designated clearing agency resources.
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    \82\ If the proposed change is related to clearing a type,
group, class, or category of security-based swap, it may also be
required to be filed as a Security-Based Swap Submission under
Exchange Act Section 3C.
    \83\ As discussed below in Section I.F., the processes under
Exchange Act Section 19(b) and Section 806(e) may not always
overlap. For example, certain changes to the operations of a
designated clearing agency may not require a rule filing under
Exchange Act Section 19(b), which does not specifically apply to
changes in operations. Such changes may, however, trigger a
requirement to file an Advance Notice if they would materially
affect the nature or level of risks presented by the designated
clearing agency. Nevertheless, the two processes are sufficiently
similar as to warrant using the same method for filing.
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1. Standards for Determining When Advance Notice Is Required
    Section 806(e)(1)(A) requires a designated financial market utility
to provide 60 days advance notice to its Supervisory Agency of any
proposed change to its rules, procedures or operations that could
materially affect the nature or level of risks presented by the
designated financial market utility.\84\ The Commission is proposing
that for purposes of this requirement, the phrase ``materially affect
the nature or level of risks presented'' \85\ would be defined to mean
the existence of a reasonable possibility that the change could affect
the performance of essential clearing and settlement functions or the
overall nature or level of risk presented by the designated clearing
agency.\86\ The proposed definition is designed to include all changes
that would affect the risk management functions performed by the
clearing agency that are related to systemic risk, as well as changes
that could affect the clearing agency's ability to continue to perform
its core clearance and settlement functions.\87\
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    \84\ 12 U.S.C. 5465(e)(1)(A).
    \85\ Id.
    \86\ Proposed Rule 19b-4(n)(2)(i).
    \87\ Core clearance and settlement functions may include, but
are not limited to, the processing, comparison, netting, or
guaranteeing of securities transactions as well as any processes or
procedures, such as internal risk management controls, that support
these functions.
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    In order to help designated clearing agencies determine whether an
Advance Notice is required, the Commission is proposing to include in
the rule a list of categories of changes to rules, procedures or
operations that the Commission preliminarily believes could materially
affect the nature or level of risks presented by a designated clearing
agency. The proposed list of such changes may include, but are not
limited to, changes that materially affect participant and product
eligibility, daily or intraday settlement procedures, default
procedures, system safeguards, governance or financial resources of the
designated clearing agency, or otherwise generally affect risk
management processes or capabilities.\88\ The Commission preliminarily
believes that changes in these areas pertain to core functions of a
clearing agency and, as a result, may affect the ability of a
designated clearing agency to manage its risks appropriately and to
continue to conduct systemically important clearance and settlement
services. For example, participant and product eligibility requirements
of a designated clearing agency are designed to ensure that the
clearing agency's members have sufficient financial resources and
operational capacity to meet obligations arising from participation in
the clearing agency, and to ensure that the products cleared by the
clearing agency are

sufficiently liquid and adequate pricing data is available. In
addition, a designated clearing agency's default procedures exist to
ensure that, should a default occur, the clearing agency has the
financial resources, liquidity and operational abilities to continue to
make payments to non-defaulting participants on time. Additional
examples of the types of matters that would fall within the categories
listed above include changes to the methods for making margin
calculations, liquidity arrangements and significant new services of
the clearing agency.
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    \88\ Proposed Rule 19b-4(n)(2)(ii).
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    Moreover, while a broad interpretation of the materiality threshold
is consistent with the underlying principles of Title VIII and
desirable to permit a review of all matters that impact the risks
presented by clearing agencies, not every change to a designated
clearing agency's rules, procedures or operations will be material.
Accordingly, the Commission has included two broad categories of
examples in the proposed rule of changes to rules, procedures or
operations that the Commission preliminarily believes would not
materially affect the nature or level or risks presented by a
designated clearing agency and therefore, would not require the filing
of an Advance Notice. The first category includes, but is not limited
to, changes to an existing procedure, control, or service that do not
modify the rights or obligations of the designated financial market
utility or persons using its payment, clearing, or settlement services
and that do not adversely affect the safeguarding of securities,
collateral, or funds in the custody or control of the designated
financial market utility or for which it is responsible. The second
category includes, but is not limited to, changes concerned solely with
the administration of the designated clearing agency or related to the
routine, daily administration, direction and control of employees.\89\
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    \89\ Proposed Rule 19b-4(n)(2)(iii).
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    The Commission preliminarily believes that the proposed definition
of ``materially affect the nature or level of risks presented''
provides sufficient information for designated clearing agencies to
know when advance notice under Section 806(e) is required while
allowing flexibility to capture all relevant proposed changes as
specific circumstances warrant. However, as this would be a new
requirement, the Commission expects that designated clearing agencies
may discuss, at least initially, proposed changes with Commission staff
prior to determining if advance notice under Section 806(e) is required
to be filed with respect to a proposed change to the clearing agency's
rules, procedures or operations.
2. Providing Notice of the Matters Included in an Advance Notice to the
Board and Interested Persons
    Given the role of clearing agencies in supporting financial
markets, the Commission recognizes that members of the public may have
an interest in proposed changes to the rules, procedures or operations
of systemically important clearing agencies. Accordingly, new paragraph
(n) of Rule 19b-4 would provide that, upon the filing of any Advance
Notice by a designated clearing agency, the Commission would publish
notice thereof in the Federal Register, together with the terms of the
substance of the proposed change to the rules, procedures, or
operations of the designated clearing agency and a description of the
subjects and issues involved.\90\ This requirement is consistent with
the existing procedures for proposed rule changes under Exchange Act
Section 19(b) and the proposed procedures for Security-Based Swap
Submissions under Exchange Act Section 3C. In addition, the Commission
is proposing that designated clearing agencies post Advance Notices and
any amendments thereto on their Web sites within two business days of
filing the notice or amendments in order to ensure that interested
parties have timely and transparent access to the matters discussed
therein, particularly in circumstances where a proposed change is not
required to be filed under Exchange Act Section 19(b) and, as a result,
would not otherwise be published for comment.\91\ Consistent with the
use and proposed use of Form 19b-4, the purpose of this proposed rule
would be to allow the Commission to give interested persons an
opportunity to review and to submit written data, views and arguments
concerning the matters referred to in the Advance Notice.\92\ Comments
and other information received would be considered by the Commission in
determining whether to object to an Advance Notice.
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    \90\ Proposed Rule 19b-4(n)(1).
    \91\ Proposed Rule 19b-4(n)(3).
    \92\ Under the Commission's current practice with respect to
Exchange Act Section 19(b), proposed rule changes are generally
published with a twenty-one day comment period. The Commission
expects that Advance Notices will be published for the same comment
period.
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    Section 806(e)(3) requires that the Commission provide the Board
with a complete copy of any information it receives in connection with
the Advance Notice.\93\ To satisfy this requirement, new paragraph (n)
would require a designated clearing agency to provide to the Board
copies of all materials submitted to the Commission relating to an
Advance Notice contemporaneously with such submission to the
Commission.\94\ Such copies would be provided to the Board in
triplicate and in hard copy format, pursuant to proposed changes to the
instructions of Form 19b-4.
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    \93\ 12 U.S.C. 5465(e)(3). In addition, the Commission is
required to provide the Board with any information it issues or
submits in connection therewith.
    \94\ Proposed Rule 19b-4(n)(5).
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    The Commission also is proposing that a designated clearing agency
be required to post a notice on its Web site that the proposed change
described in an Advance Notice has been permitted to take effect within
two business days of such date as determined in accordance with the
timeframe set forth in Section 806(e).\95\ The purpose of this proposed
rule is to provide a means for public notice when a proposed change
under Title VIII is permitted to become effective, since the Commission
will not affirmatively approve an Advance Notice under Section 806(e)--
i.e., it will not issue a public order granting approval as it does
with proposed rule changes under Exchange Act Section 19(b). As a
result, there will not be a Commission action to indicate when an
Advance Notice has been permitted to take effect. Moreover, the
designated clearing agency also would be required to post notice on its
Web site of the time at which the proposed change becomes effective if
that date is different from the date on which the proposed change is
permitted to become effective. To be consistent with the notice
requirements applicable to proposed rule changes under Exchange Act
Section 19(b) and to give interested parties timely notice of the
change, this notice would be required to be posted within two business
days of the effective date.\96\ Once the notice of the effectiveness of
the proposed change has been posted, the designated clearing agency
would be permitted to remove its original posting of the Advance Notice
and any amendments thereto from its Web site. A designated clearing
agency also could remove the Advance Notice from its Web site if it
withdrew the notice or if it was notified that such notice was not
properly filed.\97\
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    \95\ Proposed Rule 19b-4(n)(4)(i).
    \96\ Proposed Rule 19b-4(n)(4)(ii).
    \97\ Proposed Rule 19b-4(n)(3).

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3. Timing and Determination of Advance Notices Pursuant to Section
806(e)
    Section 806(e) does not require the Commission to approve
affirmatively a proposed change referred to in the Advance Notice;
however, Section 806(e) requires that the Commission notify the
designated clearing agency of any objection to the proposed change.
Section 806(e)(1)(E) provides that an objection must be made within 60
days of the Commission's receipt of the Advance Notice, unless the
Commission requests additional information in consideration of the
notice, in which case the 60-day period will recommence on the date
such information is received by the Commission.\98\ Additionally,
pursuant to Section 806(e)(1)(H), the Commission may extend the review
period for an additional 60 days for proposed changes that raise novel
or complex issues, subject to the Commission providing the designated
clearing agency with prompt written notice of the extension.\99\
Finally, Section 806(e)(4) requires that the Commission consult with
the Board before taking any action on, or completing its review of, the
change referred to in the Advance Notice.\100\ The timeframes set forth
in Section 806(e) determine when a proposed change to a designated
clearing agency's rules, procedures or operations will become
effective, and the Commission is not proposing any rules related to
these timeframes.
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    \98\ 12 U.S.C. 5465(e)(1)(E).
    \99\ 12 U.S.C. 5465(e)(1)(H).
    \100\ 12 U.S.C. 5465(e)(4).
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4. Implementation of Proposed Changes and Emergency Changes Pursuant to
Section 806(e)
    Section 806(e)(1)(F) provides generally that a designated clearing
agency may not implement a proposed change filed as an Advance Notice
if the Commission notifies it of an objection during the applicable
review period.\101\ Section 806(e), however, provides two exceptions to
this prohibition. First, Section 806(e)(1)(I) permits the designated
clearing agency to implement a change before the 60-day review period
(or such longer period as extended in accordance with the statute)
expires if the Commission notifies the designated clearing agency in
writing that it does not object to the proposed change to the
designated clearing agency's rules, procedures or operations and
authorizes the designated clearing agency to implement the change on an
earlier date, subject to any conditions imposed by the Commission.\102\
As noted above, however, before taking any action on, or completing its
review of, a change proposed by a designated clearing agency in an
Advance Notice, the Commission is required to consult with the
Board.\103\
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    \101\ 12 U.S.C. 5465(e)(1)(F).
    \102\ 12 U.S.C. 5465(e)(1)(I).
    \103\ 12 U.S.C. 5465(e)(4).
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    Second, Section 806(e)(2) allows a designated clearing agency to
implement a change that would otherwise require providing an Advance
Notice if it determines that (i) an emergency exists and (ii) immediate
implementation of the change is necessary for the designated clearing
agency to continue to provide its services in a safe and sound
manner.\104\ If a designated clearing agency determines to implement an
emergency change, it must provide notice to the Commission as soon as
practicable, and in no event later than 24 hours after implementation
of the relevant change.\105\ Such emergency notice must contain all of
the information otherwise required to be in an Advance Notice as well
as a description of (i) the nature of the emergency and (ii) the reason
the change was necessary in order for the designated clearing agency to
continue to provide its services in a safe and sound manner.\106\ In
reviewing the emergency notice, the Commission may require modification
or rescission of the relevant change if it determines that the change
is not consistent with the purposes of Title VIII, including all
applicable rules, orders, or the risk management standards prescribed
under Section 805(a) of Title VIII.\107\ The procedures for
implementing a proposed change to a designated clearing agency's rules,
procedures or operations before the expiration of the standard review
period or on an emergency basis are set forth in Section 806(e). The
Commission is not proposing any rules related to these implementation
procedures.
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    \104\ 12 U.S.C. 5465(e)(2)(A).
    \105\ 12 U.S.C. 5465(e)(2)(B).
    \106\ 12 U.S.C. 5465(e)(2)(C).
    \107\ 12 U.S.C. 5465(e)(2)(D). Pursuant to Section 806(e)(3),
the Commission is required to provide the Board concurrently with a
complete copy of any notice, request or other information it
receives. However, the Commission is proposing that the designated
clearing agency file copies of any such notice, requests or other
information with the Board in order to help meet this requirement.
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Request for Comments
    The Commission generally requests comments on all aspects of the
proposed amendments to Rule 19b-4 to incorporate the process for
designated clearing agencies to file Advance Notices with the
Commission pursuant to Section 806(e). In addition, the Commission
requests comments on the following specific issues:
     Do the proposed rules sufficiently define and describe
when advance notice of proposed changes to rules, procedures or
operations are required to be filed by designated financial market
utilities in accordance with Section 806(e)?
     Is the proposed definition for the term ``materially
affect the nature or level of risks presented'' by a designated
clearing agency broad enough to capture all types of changes that could
materially affect the nature or level of risks presented by a
designated clearing agency? Alternatively, should the definition
include a greater degree of specificity regarding the proposed changes
that must be filed as Advance Notices with the Commission?
     Should additional examples be provided regarding the
categories of changes that may materially affect the nature or level of
risks presented by a designated clearing agency and, as a result, would
be required to be filed with the Commission under Section 806(e)?
Should additional examples be provided regarding the categories of
changes that may not materially affect the nature or level of risks
presented by a designated clearing agency and, as a result, would not
be required to be filed with the Commission under Section 806(e)? If
so, what additional examples should be provided?
     Should the Commission utilize the proposed rule change
filing system under Rule 19b-4 for Advance Notices required to be filed
by designated clearing agencies under Section 806(e)? Do commenters
have suggestions for other methods of filing Advance Notices with the
Commission?
     Should the Commission specify any additional requirements
to those already in Section 806(e) with respect to Advance Notices
implemented on an emergency basis? If so, please specify such
requirements. Is the proposed rule's requirement for proposed changes
implemented on an emergency basis too onerous? If so, please specify
changes that should be made.
     Is there any specific additional information that should
be included in the Advance Notice filing requirement regarding the
nature or level of risks presented by the designated clearing agency?

D. Amendments to Form 19b-4

    In conjunction with the proposed Rule 19b-4 amendments, the
Commission is proposing to amend Form 19b-4 to include Security-Based
Swap Submissions and Advance

Notices. Specifically, the Commission is proposing to amend the cover
page of Form 19b-4 to add additional checkboxes so that a clearing
agency may indicate that the filing is being submitted as a Security-
Based Swap Submission or an Advance Notice (in the case of a designated
clearing agency) as well as a proposed rule change under Exchange Act
Section 19(b). A clearing agency would be able to select more than one
filing type, check the appropriate box or boxes to indicate the filing
type and submit all related information as a single filing. In other
words, in cases where a proposed change must be filed pursuant to more
than one filing requirement, the clearing agency would be able to meet
all applicable filing requirements by submitting a single Form 19b-4
electronically on the existing filing system, EFFS, to the Commission.
    The Commission also is proposing to amend the General Instructions
for Form 19b-4 regarding the filing requirements for Security-Based
Swap Submissions and Advance Notices. The Commission is proposing to
amend the instructions to include specific information that is required
to be filed as part of a Security-Based Swap Submission or an Advance
Notice.
    With respect to Security-Based Swap Submissions, the proposed
amendments to the Form 19b-4 General Instructions would require
clearing agencies to include a statement that includes, but is not
limited to: (i) How the submission is consistent with Exchange Act
Section 17A; (ii) information that will assist the Commission in the
quantitative and qualitative assessment of the factors specified in
Exchange Act Section 3C; and (iii) how the rules of the clearing agency
meet the criteria for open access. Additionally, in order to facilitate
the Commission's review of a Security-Based Swap Submission, the
proposed instructions provide examples of the types of information the
clearing agency should provide relating to product specifications;
pricing sources, models and procedures; risk management procedures;
measures of market liquidity and trading activity; credit support; the
effect of a clearing requirement on the market for the swap; applicable
rules, policies, or procedures; terms and trading conventions on which
the swap is currently traded; and financial and operational capacity.
    With respect to Advance Notices, the proposed amendments to the
Form 19b-4 General Instructions would require the designated clearing
agency to provide a description of the nature of the proposed change
and the expected effects on risks to the designated clearing agency,
its participants, or the market and it must provide a description of
how the designated clearing agency will manage any identified risks. A
designated clearing agency also would be instructed to provide any
additional information requested by the Commission necessary to assess
the effect the proposed change would have on the nature or level of
risks associated with the designated clearing agency's payment,
clearing or settlement activities and the sufficiency of any proposed
risk management techniques.
    The Commission is proposing to provide a new Exhibit 1A to the
General Instructions for the Federal Register notice template used by
clearing agencies as an exhibit to the Form 19b-4 filing. New Exhibit
1A would be used only by clearing agencies. All other SROs would
continue to use the current Exhibit 1 to prepare the Federal Register
notice for proposed rule changes. The Commission is proposing a
separate exhibit for clearing agencies because the proposed rule to
require notice of Security-Based Swap Submissions and Advance Notices
to be published in the Federal Register would apply only to clearing
agencies. Instructions on preparing a Federal Register notice for
Security-Based Swap Submissions and Advance Notices would be
unnecessary for all other SROs. In order to avoid any confusion, the
Commission is proposing to provide clearing agencies with Exhibit 1A to
use to prepare a Federal Register notice for a proposed rule change,
Security-Based Swap Submission, or Advance Notice, or any combination
of the three. The proposed amendments to the General Instructions for
Form 19b-4 also would incorporate the statutory timeframes and other
procedural requirements that are in Exchange Act Section 3C and Section
806(e).
    Moreover, pursuant to existing Rule 19b-4(j), SROs are required to
sign Form 19b-4 electronically in connection with filing a proposed
rule change and to retain a copy of the signature page in accordance
with Rule 17a-1. Under the proposed rules, Rule 19b-4(j) would be
modified such that it would apply also to Security-Based Swap
Submissions filed in accordance with Exchange Act Section 3C and
Advance Notices filed in accordance with Section 806(e).
    In addition, the proposed changes to the General Instructions for
Form 19b-4 would reflect the new deadlines by which the Commission must
publish and act upon proposed rule changes submitted by SROs and the
new standards for approval, disapproval or suspension of proposed rule
changes pursuant to the amendments to Exchange Act Section 19(b)
contained in Section 916 of the Dodd-Frank Act. The Commission is
proposing a number of technical and clarifying amendments to Rule 19b-4
and Form 19b-4 to make the instructions consistent with the new
requirements in Section 916 of the Dodd-Frank Act and with current
practices of SRO filers.\108\
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    \108\ See proposed amendments to the General Instructions for
Form 19b-4.
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    Section 916 of the Dodd-Frank Act also modified Exchange Act
Section 19(b)(3)(A), which permits certain types of proposed rule
changes to take effect immediately upon filing with the Commission and
without the notice and approval procedures required by Exchange Act
Section 19(b)(2), to make clear that any rule establishing or changing
a fee, due or other charge imposed by the SRO qualifies for this
designation, regardless of whether the fee, due or other charge is
applicable only to a member.\109\ The General Instructions for Form
19b-4 have been modified to reflect this clarification.
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    \109\ 15 U.S.C. 78s(b)(3)(A).
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    The Commission requests comment on all aspects of the proposed
amendments to Form 19b-4. In addition, the Commission requests comments
on the following specific issues:
     Do the proposed amendments to Form 19b-4 adequately
capture the filing requirements in Exchange Act Section 3C and Section
806(e) while allowing clearing agencies to meet the requirements for
filing notice of proposed rule changes under Exchange Act Section
19(b)? If not, why not?
     Would additional changes to Rule 19b-4 or Form 19b-4 be
useful in order to accommodate the filing of Advance Notices under
Section 806(e)? If so, what specific changes should the Commission
consider?

E. Amendments to Rule 19b-4 Relating to Section 916 of the Dodd-Frank
Act

    Under Exchange Act Section 19(b)(2)(E),\110\ as amended by the
Dodd-Frank Act, the Commission is required to send the SRO notice to
the Federal Register for publication thereof within 15 days of the date
on which the SRO's Web site publication is made. The Commission is
proposing to amend Rule 19b-4 to provide that if a SRO does not post a
proposed rule change on its Web site on the same day that it files the
proposal with the Commission, then the SRO shall inform the Commission
of the date on which it posted such proposal on its Web site. The
purpose of this

change is to advise the Commission of the date the SRO posted the
proposed rule change filing to its Web site, as such posting initiates
the timing for the requirement of the Commission to send notice of the
proposed rule change to the Federal Register.
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