17Ad-22 will establish a regulatory framework for CCPs for security-
based swap transactions and clearing agencies that are designated as
systemically important by the Council. In so doing, Rule 17Ad-22 will
help ensure that clearing agencies maintain effective operational and
risk management procedures as well as meet the statutory requirements
under the Exchange Act on an ongoing basis. Rule 17Ad-22 is consistent
with the Dodd-Frank Act and the Congressional findings in the adoption
of Section 17A. Specifically, Congress found that:
    (A) The prompt and accurate clearance and settlement of securities
transactions, including the transfer of record ownership and the
safeguarding of securities and funds related thereto, are necessary for
the protection of investors and persons facilitating transactions by
and acting on behalf of investors.
    (B) Inefficient procedures for clearance and settlement impose
unnecessary costs on investors and persons facilitating transactions by
and acting on behalf of investors.
    (C) New data processing and communications techniques create the
opportunity for more efficient, effective, and safe procedures for
clearance and settlement.
    (D) The linking of all clearance and settlement facilities and the
development of uniform standards and procedures for clearance and
settlement will reduce unnecessary costs and increase the protection of
investors and persons facilitating transactions by and acting on behalf
of investors.\478\
---------------------------------------------------------------------------

    \478\ See 15 U.S.C. 78q-1(a)(1).
---------------------------------------------------------------------------

    Section 17A of the Exchange Act was adopted in direct response to
the paperwork crisis of the late 1960's that nearly brought the
securities industry to a standstill and directly or indirectly resulted
in the failure of large numbers of broker-dealers \479\ because the
industry's clearance and settlement procedures were inefficient and
lacked automation.
---------------------------------------------------------------------------

    \479\ This crisis resulted from sharply increased trading
volumes and historic industry inattention to securities processing,
as demonstrated by inefficient, duplicative and highly manual
clearance and settlement system, poor records, insufficient controls
over funds and securities, and use of untrained personnel to perform
processing functions. See, e.g., Securities and Exchange Commission,
Study of Unsafe and Unsound Practices of Brokers and Dealers, H.R.
Doc. No. 231, 92d Cong., 1st Sess. 13 (1971).
---------------------------------------------------------------------------

    Economic characteristics of FMIs,\480\ such as clearing agencies,
including economies of scale, barriers to entry, and the particulars of
their legal mandates may limit competition and confer market power on
FMIs, which could lead to lower levels of service, higher prices, or
under-investment in risk-management systems.\481\ In addition, the
institutional structure of entities that provide clearance and
settlement services may not provide strong incentives or mechanisms for
safe and efficient design and operation, fair and open access, or the
protection of participant and customer assets in some
circumstances.\482\ Moreover, the participants in a clearing agency may
not consider the full impact of their actions on other participants,
such as the potential costs of delaying payments or settlements.\483\
Overall, a clearing agency and its participants may generate
significant negative externalities for the entire securities market if
they do not adequately manage their risks.\484\
---------------------------------------------------------------------------

    \480\ A ``financial market infrastructure'' is a multilateral
system among participating institutions, including the operator of
the system, used for the purposes of clearing, settling, or
recording payments, securities, derivatives, or other financial
transactions. See id. at 7.
    \481\ See FMI Report, supra note 32, at 11.
    \482\ See id.
    \483\ See id.
    \484\ See id.
---------------------------------------------------------------------------

    While the Commission believes that the U.S. clearance and
settlement system currently works well, it is important that the
operations of clearing agencies evolve with the securities markets,
especially as clearing agencies affect a wider array of market
participants. A clearing agency's direct participants, such as broker-
dealers, banks and other types of financial intermediaries, use
clearing agencies to clear and settle proprietary trading activity.
They also use clearing agencies as intermediaries for institutional
investors, retail investors, and proprietary trading firms,\485\
because clearing and settling a high volume of financial transactions
multilaterally through a clearing agency may in many

cases allow for greater efficiency and lower costs than settling
bilaterally.\486\ In addition, clearing agencies are often able to
manage risks related to the clearing and settling of financial
transactions more effectively for their participants, and, in some
cases, reduce certain risks, such as the risk that a purchaser of a
security will not receive the security or the risk that a seller of a
security will not receive payment for the security.\487\
---------------------------------------------------------------------------

    \485\ Some clearing agencies permit proprietary trading firms,
including high-frequency traders, that meet the clearing agency's
participation requirements, to clear trades without intermediation
by a broker-dealer or futures commission merchant (``FCM'').
    \486\ See Risk Management Supervision of Designated Clearing
Entities (July 2011), Report by the Commission, Board and CFTC to
the Senate Committees on Banking, Housing, and Urban Affairs and
Agriculture in fulfillment of Section 813 of Title VIII of the Dodd-
Frank Act.
    \487\ See id.
---------------------------------------------------------------------------

    Because clearing agencies concentrate risk, a disruption in a
clearing agency's operations or the failure of a clearing agency to
meet its obligations could cause a systemic disruption that can be
costly for more than just the clearing agency and its members. For
example, a significant dollar value of financial transactions pending
for clearance or to be cleared in the future through the clearing
agency could fail to settle on time or at the original contract terms.
If the clearing agency acting as a CCP does not have the funds to cover
the fail, members of the clearing agency would suffer losses and
liquidity constraints due to their inability to access their clearing
fund contributions and the clearing agency's inability to honor its
obligations.\488\ In addition, the failure has the potential to harm
the market as a whole in all financial instruments cleared by that
clearing agency and its members, beyond the securities pending for
clearance at the time of the original settlement failure.
---------------------------------------------------------------------------

    \488\ See id. at 8. While no clearing agency has ever failed in
the United States, such failure is not impossible. See, e.g., Donald
MacKenzie, An Engine, Not A Camera: How Financial Models Shape
Markets (2009); Ian Hay Davison, Securities Review Committee Report
(1989) (discussing the events surrounding the failure of the Hong
Kong Futures Exchange Clearing Corporation in 1987).
---------------------------------------------------------------------------

    The standards adopted today as part of Rule 17Ad-22 are intended to
help mitigate these risks by requiring measures that would reinforce
the safety of clearing agencies. Safe and reliable clearing agencies
are essential not only to the stability of the securities markets they
serve but often also to payment systems, which may be used by a
clearing agency or may themselves use a clearing agency to transfer
collateral. The safety of securities settlement arrangements and post-
trade custody arrangements is also critical to the goal of protecting
the assets of investors from claims by creditors of intermediaries and
other entities that perform various functions in the operation of the
clearing agency. Investors are more likely to participate in markets
when they have confidence in the safety and reliability of clearing
agencies; therefore the rule being adopted today should promote capital
formation.
    In addition, the rule seeks to promote the efficiency of clearing
agencies. As described below, the structure of the clearing agency
market and the structure of the clearing agencies themselves may not
provide the competitive incentives necessary to promote transparency,
fair access, and efficient operations. Transparency helps to ensure
that clearing members can make more informed decisions and that market
participants in general have better information about the stability of
the system. In turn, transparency promotes competition by facilitating
comparisons across clearing agencies. Fair access ensures that a
variety of market participants can gain access to clearing and
settlement services and thus promotes competition by lowering barriers
to entry for clearing agency participants.\489\ Efficient operations
can result in higher quality services or lower fees (or both) to
clearing agency members and their customers.
---------------------------------------------------------------------------

    \489\ See infra discussion of Rules 17Ad-22(b)(5), (6) and (7)
in Section V.C.5.
---------------------------------------------------------------------------

    The analysis below examines the projected economic effects of the
adopted rules. The analysis starts with a baseline discussion of the
current regulatory landscape and existing industry practices of
clearing agencies relating to their operations and risk management
procedures and membership policies. This discussion provides a point of
comparison for the second half of the economic analysis, which is a
discussion of the benefits and costs of the rules, as well as
alternative approaches to the rules that were considered by the
Commission.\490\
---------------------------------------------------------------------------

    \490\ In discussing the current practices of the registered
clearing agencies below, we have omitted descriptions of the
variations in the practices, policies, and procedures among
registered clearing agencies that are, nevertheless, consistent with
the requirements of the final rules. However, while these variations
are not discussed, notable distinctions in practices, policies, and
procedures that significantly impact the economic analysis are
addressed, as applicable.
---------------------------------------------------------------------------

B. Baseline

    Rule 17Ad-22 impacts the market for clearing agency services in
securities, with an emphasis on CCP services. There are currently seven
clearing agencies registered with the Commission that provide CCP or
CSD services. Six of these clearing agencies offer CCP services, and
one is a CSD. Together, they processed over $1 quadrillion in financial
market transactions in 2011.\491\ Some of these clearing agencies also
are regulated by the CFTC, the Federal Reserve, and the New York State
Department of Banking.
---------------------------------------------------------------------------

    \491\ This figure was calculated from the following sources:
DTCC 2011 Annual Report, available at http://dtcc.com/about/annuals/2011/report.php; OCC 2011 Annual Report, available at http://www.optionsclearing.com/components/docs/about/annual-reports/occ_2011_annual_report.pdf; CME Group 2011 Annual Report, available at
http://cmegroup.com/investor-relations/annual-review/2011/downloads/CME_Group_2011_Annual_Report.pdf; InterContinental Exchange 2011
Annual Report, available at http://files.shareholder.com/downloads/ICE/1860307941x0x556734/44EA48C5-CBCB-4468-BF54-048BFEEC8264/ICE_2011AR.pdf.
---------------------------------------------------------------------------

    Central clearing facilitates the management of counterparty credit
risk among dealers and other institutions by shifting that risk from
individual counterparties to CCPs, thereby helping protect
counterparties from each other's potential failures and preventing the
buildup of risk in such entities, which could be systemically
important. Central clearing generally reduces the counterparty risk of
market participants, including market makers and dealers. If market
makers and dealers cannot diversify this counterparty risk, they
generally pass the costs on to their clients in the form of higher
transaction costs. In order for central clearing to reduce risk, mark-
to-market pricing and margin requirements need to be applied in a
consistent manner.\492\ CCPs generally use liquid margin collateral to
manage the risk of a CCP member's failure, and rely on the accuracy of
their margin calculations and their access to liquid collateral to
protect against sudden movements in market prices. A CCP can also
reduce systemic risk through netting, by reducing the amount of funds
or other assets that must be exchanged at settlement.\493\
Nevertheless, a CCP also concentrates risks and responsibility for risk

management in the CCP.\494\ Consequently the effectiveness of a CCP's
risk controls and the adequacy of its financial resources are critical
aspects of the infrastructure of the market it serves.\495\
---------------------------------------------------------------------------

    \492\ See Christopher Culp, OTC-Cleared Derivatives: Benefits,
Costs, and Implications of the ``Dodd-Frank Wall Street Reform and
Consumer Protection Act (Journal of Applied Finance, No. 2, 2010),
available at http://www.rmcsinc.com/articles/OTCCleared.pdf.
    \493\ See, e.g., Darrell Duffie and Haoxiang Zhu, Does a Central
Clearing Counterparty Reduce Counterparty Risk?, (Stanford
University, Working Paper, 2010), available at http://
www.stanford.edu/~duffie/DuffieZhu.pdf; Nout Wellink, Mitigating
System Risk in OTC Derivatives Markets, (Banque de France, Financial
Stability Review, No. 14--Derivatives--Financial innovation and
stability, July 2010), available at http://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etude15_rsf_1007.pdf; and Manmohan
Singh, Collateral, Netting and System Risk in the OTC Derivatives
Market,'' (International Monetary Fund, Working Paper, 2009),
available at http://www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf.
    \494\ See RCCP, supra note 33, at 1.
    \495\ See id.
---------------------------------------------------------------------------

    The market for CCP services in the United States tends to be
segmented by financial instrument, with clearing agencies often
specializing in particular instruments. As such, some market segments
may have characteristics of natural monopolies capable of being
sustained despite the presence of competitors with the potential to
enter the market segment in question.\496\ For example, in the United
States, following a period of consolidation facilitated by the
introduction of Section 17A of the Exchange Act, only one CCP currently
processes transactions in U.S.-listed equities and only one CCP
processes transactions in exchange-traded options. However, three
clearing agencies currently serve as CCPs for swaps and security-based
swaps. Although two of the CCPs for security-based swaps are affiliated
entities, these affiliated CCPs do not compete with each other; one
primarily serves the U.S. market for security-based swaps, and the
other primarily serves the European market. Further, the affiliated CCP
serving the U.S. market has a dominant market share in the United
States, though the Commission believes this may be subject to change
over time as a result of competition from the other registered CCPs
offering security-based swap services, the entry of new competitors
into the U.S. market or other factors.
---------------------------------------------------------------------------

    \496\ A natural monopoly is one in which the economies of scale
make having a single provider more efficient (lower average cost)
than having multiple competitors.
---------------------------------------------------------------------------

    The following sections set the baseline for comparison in our
analysis of the economic effects. In particular, they describe the
legal framework under which registered clearing agencies operate and
the current practices of clearing agencies as they relate to the rules
being adopted today.
1. Legal Framework
a. Overview of Statutory Framework and the Dodd-Frank Act
    In recognition of the risks posed by the concentration of clearance
and settlement activity at clearing agencies, the Exchange Act and
Titles VII and VIII of the Dodd-Frank Act provide a framework for
enhanced regulation and supervision of clearing agencies by the
Commission.
i. Exchange Act
    Section 17A of the Exchange Act \497\ and Rule 17Ab2-1 \498\
require entities to register with the Commission prior to performing
the functions of a clearing agency. Under the statute, the Commission
is not permitted to grant registration unless it determines that the
rules and operations of the clearing agency meet the standards set
forth in Section 17A.\499\ If the Commission registers a clearing
agency, the Commission oversees the clearing agency to facilitate
compliance with the Exchange Act using various tools that include,
among other things, the rule filing process for SROs and on-site
examinations by Commission staff. Section 17A(d) also gives the
Commission authority to adopt rules for clearing agencies as necessary
or appropriate in the public interest, for the protection of investors,
or otherwise in furtherance of the purposes of the Exchange Act and
prohibits a registered clearing agency from engaging in any activity in
contravention of these rules and regulations.\500\ In 1980, the staff
of the Commission provided guidance on meeting the requirements of
Section 17A in its Standards for Clearing Agency Regulation.\501\
---------------------------------------------------------------------------

    \497\ See 15 U.S.C. 78q-1(b). See also Public Law 111-203 Sec.
763(b) (adding subparagraph (g) to Section 17 of the Exchange Act).
    \498\ See 17 CFR 240.17Ab2-1.
    \499\ See supra note 5.
    \500\ See 15 U.S.C. 78q-1(d).
    \501\ See supra note 5.
---------------------------------------------------------------------------

ii. Title VII of the Dodd-Frank Act
    As described in Section I above, the Dodd-Frank Act was enacted to,
among other things, mitigate systemic risk and 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.\502\ Specifically, Title VII of the Dodd-Frank Act amended
the Exchange Act to require that security-based swap transactions must
be cleared through a clearing agency that is registered with the
Commission (or exempt from registration) if they are of a type that the
Commission determines be cleared, unless an exemption from mandatory
clearing applies.\503\ New Section 17A(i) of the Exchange Act also
gives the Commission authority to promulgate rules that establish
standards for security-based swap clearing agencies.\504\ Compliance
with any such rules is a prerequisite to the registration of a clearing
agency with the Commission \505\ and is also a condition to the
maintenance of its continued registration.\506\
---------------------------------------------------------------------------

    \502\ See supra note 20.
    \503\ See 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of
the Dodd-Frank Act).
    \504\ 15 U.S.C. 78q-1(i).
    \505\ Under the Exchange Act, a clearing agency can be
registered with the Commission only if the Commission makes a
determination that the clearing agency satisfies the requirements
set forth in paragraphs (A) through (I) of Section 17A(b)(3) of the
Exchange Act. 15 U.S.C. 78q-1(b)(3).
    \506\ See supra Section I.A.3.
---------------------------------------------------------------------------

iii. Title VIII of the Dodd-Frank Act
    In addition to the provisions in Title VII that expand the
Commission's authority under the Exchange Act to include security-based
swap activities, Title VIII of the Dodd-Frank Act, entitled the
Clearing Supervision Act, establishes an enhanced supervisory and risk
control system for systemically important clearing agencies and other
FMUs.\507\ As previously noted, on July 18, 2012, the Council
designated DTC, FICC, NSCC and OCC as systemically important, and
Section 17A(i) of the Exchange Act provides that the Commission, in
establishing clearing agency standards and in its oversight of clearing
agencies, may conform such standards and such oversight to reflect
evolving international standards.\508\ Section 805(a) of the Clearing
Supervision Act supplements the Exchange Act requirements by mandating
the Commission to take into consideration relevant international
standards and existing prudential requirements for clearing agencies
that are designated as systemically important FMUs.\509\
---------------------------------------------------------------------------

    \507\ See supra note 25.
    \508\ 15 U.S.C. 78q-1(i).
    \509\ 12 U.S.C. 5464(a)(1).
---------------------------------------------------------------------------

    In part, the Clearing Supervision Act provides that the Commission,
considering relevant international standards and existing prudential
requirements, may prescribe regulations that set risk management
standards for the operations related to PCS Activities \510\ of a
Designated Clearing Entity or the conduct of designated activities by a
Financial Institution.\511\ Creation of any such risk management
standards must be done in consultation with the Federal Reserve and the
Council.
---------------------------------------------------------------------------

    \510\ Certain post-trade processing activities that are not
captured by the Clearing Supervision Act may nevertheless be subject
to regulation by the Commission under the Exchange Act. See supra
note 100 and accompanying text.
    \511\ See supra note 27.
---------------------------------------------------------------------------

b. CPSS-IOSCO Standards
    As noted above, the final FMI Report was published on April 16,
2012 to replace the earlier CPSS-IOSCO

Recommendations and therefore represents a new reference point of
international standards contemplated by the Exchange Act and the
Clearing Supervision Act relevant for actions taken by the
Commission.\512\ The FMI Report recognizes that FMIs can differ
significantly in design, organization and function and that certain
principles are not applicable to certain types of FMIs. The principles
are designed therefore to be applied holistically, and the Final Report
expressly provides flexibility in terms of how FMIs will apply the
principles. The clearing agencies registered with the Commission have
generally implemented the CPSS-IOSCO Recommendations. The FMI Report
states that financial market infrastructures (including CCPs and CSDs)
are expected to observe the principles contained in the FMI Report
through ``appropriate and swift action'' consistent with the national
laws of their home jurisdictions.\513\
---------------------------------------------------------------------------

    \512\ See supra note 32.
    \513\ See RSSS and RCCP Reports, supra note 33.
---------------------------------------------------------------------------

c. Complementary Regulation by Other Regulators
    Rule 17Ad-22 and the rules for DCOs adopted by the CFTC \514\ are
generally consistent. The CFTC also incorporates some of the CPSS-IOSCO
Recommendations by rule to supplement the DCO core principles of the
Commodity Exchange Act (``CEA''). Nevertheless, there are some
differences between the rules the Commission is adopting today and
those of the CFTC.
---------------------------------------------------------------------------

    \514\ See 76 FR 69334 (Nov. 8, 2011).
---------------------------------------------------------------------------

    First, Rule 17Ad-22(b)(1) requires a CCP to measure its credit
exposures to its participants at least once a day while the CFTC's DCO
rules require that DCOs perform that function periodically throughout
the day. Second, consistent with the current practice at registered
CCPs providing clearing of security-based swaps, Rule 17Ad-22(b)(3)
requires CCPs for security-based swaps to maintain enough financial
resources to withstand a default by the two largest participant
families.\515\ All other CCPs would be required to be able to withstand
a default by the single largest participant family, for the reasons
discussed in Section V.C below.
---------------------------------------------------------------------------

    \515\ See supra Section III.C.3.
---------------------------------------------------------------------------

    The CFTC applies the latter standard to all DCOs. In its October
2010 rule proposal, the CFTC proposed requiring that systemically
important DCOs maintain sufficient financial resources to meet their
financial obligations to their clearing members notwithstanding a
default by the two clearing members creating the largest combined
financial exposure for the systemically important DCO in extreme but
plausible market conditions.\516\ The CFTC did not adopt this proposal
as part of its final rules for DCOs. The CFTC stated that it was
premature to adopt this rule for the following reasons: (1) The Council
had not designated any DCOs as systemically important; (2) the final
FMI Report had not been published; and (3) EMIR was not final.\517\ The
CFTC stated that it would be closely monitoring developments and would
be prepared to revisit the issue if the European Union or other foreign
regulators move closer to implementation of their respective
reforms.\518\
---------------------------------------------------------------------------

    \516\ See Financial Resources Requirements for Derivatives
Clearing Organizations, 75 FR 63113 (Oct. 14, 2010).
    \517\ See id. at 69352.
    \518\ We note that EMIR requires all CCPs to maintain sufficient
financial resources to withstand the default of the two participants
with the largest exposures. See supra note 167 at 43. EMIR was
adopted in July 2012. See supra note 167.
---------------------------------------------------------------------------

    Third, Rule 17Ad-22(b)(4) requires model validations to be
performed ``annually'' by a person who is free from influence from the
persons responsible for development or operation of the systems and
models being validated so that he or she can be candid in his or her
assessment of the model. The CFTC rule requires an ``independent''
validation on a ``regular basis.''
    Fourth, Rule 17Ad-22(b)(7) provides for scalability of net capital
requirements in proportion to the riskiness of the participants'
activities and permits CCPs to seek Commission approval to impose a net
capital requirement on participants that is higher than $50 million. In
contrast, the CFTC's DCO rules do not provide for scalability and do
not allow DCOs the option to seek approval for a higher net capital
requirement.
    Finally, a DCO is required to publicly disclose its margin-setting
methodology and default procedures on its Web site. Rule 17Ad-22(d)(11)
requires a clearing agency to make key aspects of its default
procedures publicly available, but nothing in the rules the Commission
is adopting today would require publication of the clearing agency's
margin methodology.
2. Current Practices
    An overview of the risk management practices, operations, policies
and procedures of registered clearing agencies is set forth below. The
discussions under the headings ``Risk Management--Measurement of credit
exposures,'' ``--Margin'' ``--Financial Resources'' and under the
heading ``Other Clearing Services'' are based upon public
representations \519\ made by registered clearing agencies regarding
their compliance with the CPSS-IOSCO Recommendations and upon the
Commission's observations with regard to registered clearing agencies
developed in carrying out its supervisory role. The discussion under
the heading ``Risk Management--Model Validation'' is based upon the
Commission's observations with regard to registered clearing agencies
in its supervisory role. The Commission notes that the practices
observed at registered clearing agencies generally are performed
pursuant to stated practices, policies and procedures as described
below.\520\
---------------------------------------------------------------------------

    \519\ See, e.g., NSCC's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Nov. 14, 2011),
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf; DTC's Assessment of Compliance with the CPSS/IOSCO
Recommendations for Central Counterparties (Dec. 12, 2011),
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf; FICC/GSD's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Dec. 15, 2011),
available at http://www.dtcc.com/legal/compliance/FICC_Self-Assessment.pdf.
    \520\ Registered clearing agencies are SROs as defined in
Section 3(a)(26) of the Exchange Act. A stated policy, practice, or
interpretation of an SRO, such as a clearing agency's written
policies and procedures, would generally be deemed to be a proposed
rule change. See 17 CFR 240.19b-4. See supra note 293.
---------------------------------------------------------------------------

a. Risk Management Practices
i. CCP Practices as They Relate to Rules 17Ad-22(b)(1)-(4)
    CCPs have a range of tools that can be used to manage the financial
risks to which they are exposed, and the tools that an individual CCP
uses will depend upon the nature of its obligations. Nonetheless, there
is a common set of procedures that are implemented by many CCPs to
manage counterparty credit and liquidity risks. Broadly, these
procedures enable CCPs to manage their risks by limiting the likelihood
of defaults, by limiting the potential losses and liquidity pressures
if a default should occur, and by ensuring that there are adequate
resources to cover losses and meet payment obligations on schedule.
    To manage its counterparty credit exposures to its participants
effectively, a clearing agency must be able to measure those exposures.
A clearing agency can ascertain its current credit exposure to each
participant by marking each participant's outstanding contracts to
current market prices and (to the extent permitted by a clearing
agency's rules and supported by law) netting any gains against any
losses. A clearing agency faces the risk that its exposure to

a participant can change as a result of a change in prices, in
positions, or both.
    The current practice of each CCP registered with the Commission
includes these procedures: (1) Measuring credit exposures at least once
a day; (2) setting margin coverage at a 99% confidence level over some
set period; (3) using risk-based models; (4) establishing a fund that
mutualizes losses of defaults by one or more participants that exceed
margin coverage; and (5) maintaining sufficient financial resources to
withstand the default of at least the largest participant,\521\ and in
the case of security-based swap transactions, maintaining enough
financial resources to be able to withstand the default of their two
largest participants.\522\
---------------------------------------------------------------------------

    \521\ See supra note 183.
    \522\ See supra note 168.
---------------------------------------------------------------------------

1. Measurement of Credit Exposures
    Currently, registered clearing agencies measure credit exposures at
least once per day. Clearing agencies that guarantee trades on the
trade date, such as the FICC/GSD and OCC, measure credit exposures
multiple times per day. NSCC does not guarantee trades until midnight
of T+1, and it only measures credit exposures daily, though it is
considering an accelerated trade guarantee proposal that would
potentially revise these practices.\523\
---------------------------------------------------------------------------

    \523\ See NSCC's Assessment of Compliance with the CPSS/IOSCO
Recommendations for Central Counterparties (Nov. 14, 2011), at 24,
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf.
---------------------------------------------------------------------------

2. Margin
    Clearing agencies use risk-based models to set initial and
variation margin. Inputs to the margin calculation include, among other
things, portfolio size, asset price volatility, current asset values,
the likely liquidity of the asset should a particular market maker fail
(market-maker domination charges), the likely time it would take to
liquidate the assets, potential correlations between the value of
assets posted as collateral and the assets being cleared, and the
correlation of the prices in the portfolio of assets being cleared by
the participant.
    The current practice of many CCPs registered as clearing agencies
is to calculate daily margin requirements using risk-based models to
ensure coverage at a 99% confidence interval over a designated time
horizon. Losses beyond this level are typically covered by the CCP's
guaranty fund. This standard is consistent with the RCCP, which has
been the internationally accepted minimum standard for CCPs.\524\ The
RCCP advises that CCPs use margin and other risk control mechanisms to
limit exposures to potential losses from defaults by participants in
normal market conditions. The generally recognized standard for normal
market conditions, as defined in the RCCP, is price movements that
produce changes in exposures that are expected to breach margin
requirements or other risk controls only 1% of the time (i.e., at a 99%
confidence interval).\525\
---------------------------------------------------------------------------

    \524\ See supra note 74.
    \525\ See Bank for International Settlements' Committee on
Payment and Settlement Systems and Technical Committee of the
International Organization of Securities Commissions,
Recommendations for Central Counterparties, (Nov. 2004), at 21,
available at http://www.bis.org/publ/cpss64.pdf; see also infra
Section V.B.2 (discussion on current industry baselines and the use
of the 99% confidence level).
---------------------------------------------------------------------------

    This standard comports with the international standard for bank
capital requirements established by the Bank for International
Settlements, which requires banks to measure market risks at a 99%
confidence interval when determining regulatory capital
requirements.\526\ At the time the Basel Committee on Banking
Supervision (the ``Committee'') contemplated this standard, banks
measured value-at-risk using a range of confidence intervals from 90-
99%.\527\ When determining the minimum quantitative standards for
calculating risk measurements, the Committee noted the importance of
specifying ``a common and relatively conservative confidence level,''
choosing the 99% confidence interval over the other, less conservative
measures.\528\ Since adopted by the Committee in 1998, it has become a
generally recognized practice of banks to quantify credit risk as the
worst expected loss that a portfolio might incur over an appropriate
time horizon at a 99% confidence interval.\529\
---------------------------------------------------------------------------

    \526\ See Bank for International Settlements' Basel Committee on
Banking Supervision, International Convergence of Capital
Measurement and Capital Standards: A Revised Framework (June 2004),
available at http://www.bis.org/publ/bcbs107.pdf; see also Darryll
Hendricks and Beverly Hirtle, New Capital Rule Signals Supervisory
Shift (Sept. 1998), available at http://www.bis.org/bcbs/ca/alrequse98.pdf.
    \527\ See Bank for International Settlements' Basel Committee on
Banking Supervision, An internal model-based approach to market risk
capital requirements (Apr. 1995), at 12, available at http://www.bis.org/publ/bcbs17.pdf.
    \528\ See id.
    \529\ See Kenji Nishiguchi, Hiroshi Kawai, and Takanori Sazaki,
Capital Allocation and Bank Management Based on the Quantification
of Credit Risk, FRBNY Economic Policy Review (Oct. 1998), at 83,
available at http://www.newyorkfed.org/research/epr/98v04n3/9810nish.pdf; see also Jeff Aziz and Narat Charupat, Calculating
Credit Exposure and Credit Loss: A Case Study (Sept. 1998), at 34,
available at http://www.bis.org/bcbs/ca/alrequse98.pdf.
---------------------------------------------------------------------------

3. Financial Resources
    All clearing agencies that act as CCPs in the United States collect
contributions from their members to guaranty funds or clearing funds
for the mutualization of losses under extreme but plausible market
scenarios. The guaranty funds or clearing funds consist of liquid
assets, the sizes of which vary depending on the products that the CCP
clears. In particular, the guaranty funds for CCPs that clear security-
based swaps are relatively larger (as measured by the size of the fund
as a percentage of the total and largest exposures) than the guaranty
funds or clearing funds for other financial instruments. The guaranty
funds for security-based swaps are sized to achieve protection against
a default by two participant families to whom the clearing agency has
the largest exposures and are designed to protect the clearing agency
from the extreme jump-to-default risk associated with large protection
sellers. Security-based swap CCPs have organized their security-based
swap clearing operations either in a separate legal entity or by
establishing a separate fund and separate procedures (rules, membership
requirements and risk management practices) within a single legal
entity. The registered clearing agencies clearing products other than
security-based swaps maintain the financial resources to withstand the
default of the single largest participant family.\530\
---------------------------------------------------------------------------

    \530\ See, e.g., DTC's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Dec. 12, 2011),
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf.
---------------------------------------------------------------------------

4. Model Validation
    Clearing agencies registered with the Commission typically have a
model validation process in place that evaluates the adequacy of margin
models, parameters, and assumptions. Current model validation practices
vary among clearing agencies. Some registered clearing agencies conduct
annual validations, while others conduct them on an ad hoc basis or
perform validations on new models or changes to existing models before
implementing them. In addition to validating models, registered
clearing agencies typically review models used to calculate margin on a
regular basis and back-test them regularly to assess the reliability of
the methodology in achieving the desired coverage. Based on our
experience in supervising registered CCPs, we understand that
registered CCPs' approaches to model validation include model
validations

conducted by a qualified person who is either an outside third party or
is employed by the clearing agency but is free from influence from the
persons responsible for the development or operation of the models.
ii. Other Clearing Services (Practices as They Relate to Rule 17Ad-
22(d))
1. Legal Risk
    Because registered clearing agencies are SROs, they have written
policies and procedures in place that, at a minimum, address the
significant aspects of their operations and risk management
practices.\531\ A large portion of these policies and procedures are
available to members and participants of clearing agencies, but it is
also ordinarily the practice of clearing agencies to limit members'
access to certain of their policies and procedures to ensure their
integrity, particularly those policies and procedures associated with
the oversight of clearing participants. Registered clearing agencies
also make their rule books and certain key procedures available to the
public to provide a transparent legal framework.\532\
---------------------------------------------------------------------------

    \531\ See supra note 520.
    \532\ Generally, the rules and procedures of registered clearing
agencies can be found on their respective Web sites.
---------------------------------------------------------------------------

    Registered clearing agencies must be able to enforce those policies
and procedures and such enforcement powers are specifically
contemplated by operative provisions of the Exchange Act, subject to
oversight by the Commission.\533\ Clearing agency policies and
procedures that purport to create remedial measures that a party other
than the clearing agency (such as a clearing member) can use to seek
redress or to promote compliance with applicable rules must also be
enforceable in practice in order to be effective, and the Commission
believes that Rule 17Ad-22(d)(1) would augment the Exchange Act
requirement that the rules of the clearing agency must provide that its
participants shall be appropriately disciplined for any violation of
any provision of the rules of the clearing agency.\534\
---------------------------------------------------------------------------

    \533\ See Sections 17A(b)(3)(A), (G), and (H) of the Exchange
Act.
    \534\ See 15 U.S.C. 78q-1(b)(3)(G).
---------------------------------------------------------------------------

2. Participation Requirements
    Applicants for membership must provide a registered clearing agency
with certain financial and operational information prior to being
admitted as a member and on an ongoing basis as a condition of
continuing membership. The registered clearing agency reviews this
information to ensure that the applicant has the operational capability
to meet the technical demands of interfacing with the clearing agency.
In particular, registered clearing agencies require that an applicant
demonstrate that it has adequate personnel capable of handling
transactions with the clearing agency and adequate physical facilities,
books and records and procedures to fulfill its anticipated commitments
to, and to meet the operational requirements of, the clearing agency
and other participants with necessary promptness and accuracy and to
conform to any condition or requirement that the clearing agency
reasonably deems necessary for its protection.
    Registered clearing agencies use the ongoing monitoring process to
ensure they understand relevant changes in the financial condition of
their participants and to mitigate credit risk exposure of the clearing
agency to its participants. Financial statements filed with the
regulatory agencies, information obtained from other SROs and
information gathered from various financial publications are analyzed
by risk management staff so that the clearing agency may evaluate
whether the participant continues to be financially stable.
3. Custody of Assets and Investment Risk
    Registered clearing agencies currently seek to minimize the risk of
loss or delay in access by holding assets that are highly-liquid (e.g.,
cash, U.S. Treasury securities or securities issued by a U.S.
government agency) and engaging banks to custody the assets and
facilitate settlement. Clearing agencies that are designated
systemically important by the Council may be provided account services
at the appropriate Federal Reserve Bank to the extent such services are
not already available as the result of other laws and regulations.\535\
The use of account services at the Federal Reserve Bank would reduce
custody risk in clearing agencies that are designated systemically
important by the Council.
---------------------------------------------------------------------------

    \535\ See Section 806(a) of the Clearing Supervision Act. ``The
Board of Governors may authorize a Federal Reserve Bank to establish
and maintain an account for a designated financial market utility
and provide the services listed in section 11A(b) of the Federal
Reserve Act (12 U.S.C. 248a(b)) and deposit accounts under the first
undesignated paragraph of section 13 of the Federal Reserve Act (12
U.S.C. 342) to the designated financial market utility that the
Federal Reserve Bank is authorized under the Federal Reserve Act to
provide to a depository institution, subject to any applicable
rules, orders, standards, or guidelines prescribed by the Board of
Governors.'' 12 U.S.C. 5465(a).
---------------------------------------------------------------------------

4. Identification and Mitigation of Operational Risk
    Registered clearing agencies develop and maintain plans to assure
the safeguarding of securities and funds, the integrity of the
Automated Data Processing systems, and recovery of securities, funds,
or data under a variety of loss or destruction scenarios.\536\ In
addition, clearing agencies generally maintain an internal audit
department to review the adequacy of the clearing agencies' internal
controls, procedures, and records with respect to operational risks.
Some clearing agencies also engage independent accountants to perform
an annual study and evaluation of the internal controls relating to its
operations.\537\
---------------------------------------------------------------------------

    \536\ These practices, among others, have been developed
pursuant to Commission guidelines. See Automation Review Policy
Statements, supra note 330.
    \537\ See NSCC's Assessment of Compliance with the CPSS/IOSCO
Recommendations for Central Counterparties (Nov. 14, 2011),
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf.
---------------------------------------------------------------------------

5. Money Settlement Risks
    Registered clearing agencies use settlement banks to facilitate the
cash portion of securities settlements. Because DTC is organized as a
limited purpose trust company and is a member of the Federal Reserve
System,\538\ it has an account at the Federal Reserve Bank of New York,
and uses that account to facilitate end-of-day settlement. NSCC, as an
affiliate of DTC, also uses that account.
---------------------------------------------------------------------------

    \538\ See Section 806(a) of the Dodd-Frank Act (``The Board of
Governors may authorize a Federal Reserve Bank to establish and
maintain an account for a designated financial market utility and
provide the services listed in Section 11A(b) of the Federal Reserve
Act (12 U.S.C. 248a(b)) and deposit accounts under the first
undesignated paragraph of section 13 of the Federal Reserve Act (12
U.S.C. 342) to the designated financial market utility that the
Federal Reserve Bank is authorized under the Federal Reserve Act to
provide to a depository institution, subject to any applicable
rules, orders, standards, or guidelines prescribed by the Board of
Governors.'').
---------------------------------------------------------------------------

6. Cost-Effectiveness
    Registered clearing agencies have procedures to control costs and
to regularly review pricing levels against operating costs. These
clearing agencies may use a formal budgeting process to control
expenditures, and may review pricing levels against their costs of
operation during the annual budget process. Clearing agencies also
analyze workflows in order to make recommendations to improve the
operating efficiency of the clearing agency.

7. Links
    Each registered clearing agency is linked to other clearing
organizations, trading platforms, and service providers. An example of
such a link is DTC Canadian Link Service, which allows qualifying DTC
participants to clear and settle valued securities transactions with
participants of a Canadian securities depository. The link is designed
to facilitate cross-border transactions by allowing participants to use
a single depository interface for U.S. and Canadian dollar transactions
and eliminate the need for split inventories.\539\
---------------------------------------------------------------------------

    \539\ See infra note 617.
---------------------------------------------------------------------------

8. Governance
    Each registered clearing agency has a board that governs the
operations of the entity and supervises senior management. The key
components of a clearing agency's governance arrangements include the
clearing agency's ownership structure, the composition and role of its
board, the structure and role of board committees, reporting lines
between management and the board, and the processes that ensure
management is held accountable for the clearing agency's performance.
9. Information on Services
    Because registered clearing agencies are SROs, their rules are
published by the Commission and are available on each clearing agency's
Web site. In addition, information regarding the operations and
services of each clearing agency can be found either on the clearing
agency's Web site or a Web site maintained by an affiliated entity of
the clearing agency.
10. Immobilization and Dematerialization of Securities Certificates
    Virtually all mutual fund securities, government securities,
options, and municipal bonds in the United States are dematerialized,
and most of the equity and corporate bonds in the U.S. market are
either immobilized or dematerialized; some securities (e.g., mutual
fund shares, U.S. Treasury bills) are issued on a completely
dematerialized basis, while most securities issued to the public are
issued in the form of one or more physical certificates. Through the
end of 2010, over 99% of municipal and corporate debt by par value
distributed through DTC was in book-entry-only form.\540\ DTC estimates
that in excess of 90% of the corporate and municipal securities issued
to the public in the United States are distributed through DTC and are
represented by one or more physical certificates that are immobilized
at the depository.\541\
---------------------------------------------------------------------------

    \540\ See DTCC White Paper, supra note 389.
    \541\ See id.
---------------------------------------------------------------------------

11. Default Procedures
    Each registered clearing agency makes publicly available rules,
policies or procedures that set forth the actions the clearing agency
may take in the event of a participant default, with the exception of
certain of their policies and procedures that are kept non-public to
ensure their integrity, such as those associated with the oversight of
clearing participants. For example, clearing agency rules typically
state what constitutes a default, identify whether the board or a
committee of the board may make that determination and describe what
steps the clearing agency may take to protect itself and its
participants. In this regard, clearing agencies typically attempt,
among other things, to close-out, to hedge or to liquidate a defaulting
participant's positions.
12. Timing of Settlement Finality
    Each registered clearing agency has rules, policies or procedures
that provide for the settlement of their respective securities
transactions no later than the end of a pre-defined settlement day. For
example, DTC provides for final settlement of securities transfers no
later than the end of the day and the timing of finality is clearly
defined. Final cash settlement occurs at the end of the processing day
at DTC. Funds transfers through DTC's account at the Federal Reserve
Bank of New York that occur between DTC and a settling bank that is
acting on behalf of a DTC participant are final when made.
13. Delivery Versus Payment
    Rule 17Ad-22(d)(13) would apply to registered clearing agencies
that provide CSD services. DTC currently is the only registered
clearing agency that is a CSD. DTC operates a Model 2 DVP system that
provides for gross settlements of securities transfers during the day
followed by an end of day net funds settlement.\542\ Under DTC's rules,
in a DVP transaction, the delivering party is assured that it will be
paid for the securities once they are credited to the receiving party's
securities account.\543\
---------------------------------------------------------------------------

    \542\ See DTC's Assessment of Compliance with the CPSS/IOSCO
Recommendations for Central Counterparties (Dec. 12, 2011),
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf.
    \543\ See id.
---------------------------------------------------------------------------

14. Risk Controls To Address Participant's Failure To Settle
    The sole registered clearing agency providing CSD services, DTC,
which also extends limited intraday credit to participants, has
policies and procedures in place to ensure that timely settlement can
be completed in the event of the default of the participant with the
largest settlement obligation. DTC has policies and procedures to
establish limits (called net debit caps) for each participant. The net
debit cap ensures that the amount of cash that a participant owes the
clearing agency at any one point in time does not exceed this pre-
defined limit or cap. The net debit cap is set in relation to a
participant's normal activity with the maximum net debit cap for an
individual participant currently set at $1.8 billion. DTC also has
implemented other risk management controls to help ensure settlement.
For example, DTC monitors the value of the collateral supporting each
participant's net debit in its settlement system based on the
security's prior business day's closing market price, less a haircut,
which is based primarily upon the availability of prices, ratings, and
the price volatility of the particular security.
15. Physical Delivery Risks
    Each registered clearing agency has rules and procedures that
describe its obligations to its participants when it assumes deliveries
of physical instruments. For example, under NSCC's rules governing its
continuous net settlement (``CNS'') system, NSCC becomes the contra-
party for settlement purposes at the point NSCC's trade guarantee
attaches, thereby assuming the obligation of its members that are
receiving securities to receive and pay for those securities, and the
obligation of members that are delivering securities to make the
delivery. Unless NSCC has invoked its default rules, NSCC is not
obligated to make those deliveries until it receives from members with
delivery obligations deliveries of such securities; rather, deliveries
that come into CNS ordinarily are promptly redelivered to parties that
are entitled to receive them through an allocation algorithm. Members
are obligated to take and pay for securities allocated to them in the
CNS process. NSCC's rules also provide mechanisms allowing receiving
members a right to receive high priority in the allocation of
deliveries, and also permit a member to buy-in long positions that have
not been delivered to it by the close of business on the scheduled
settlement date.

b. Participant Access (Practices as They Relate to Rules 17Ad-22(b)(5)-
(7))
    To address credit risk management, clearing agencies establish
requirements for participants' financial resources, creditworthiness,
and operational capability, and maintain procedures to ensure ongoing
compliance with their rules. In its regulatory capacity overseeing
clearing agencies, Commission staff has observed that applicants for
clearing agency membership must demonstrate standards of financial
responsibility, operational capability and character. Specific criteria
used by clearing agencies address the extent and nature of the business
the applicant intends to conduct through the clearing agency and the
applicant's capital resources and financial stability, including
factors bearing on its financial capability to meet its projected
clearing agency obligations.\544\
---------------------------------------------------------------------------

    \544\ See, e.g., International Monetary Fund, Publication of
Financial Sector Assessment Program Documentation--Detailed
Assessment of Observance of the NSCC's Observance of the CPSS-IOSCO
Recommendations for Central Counterparties (2010), at 6-8, available
at http://www.imf.org/external/pubs/ft/scr/2010/cr10129.pdf; IMF's
Detailed Assessment of Observance of the Fixed Income Clearing
Corporation--Government Securities Division's Observance with the
CPSS-IOSCO Recommendations for Central Counterparties, performed in
connection with the Financial Sector Assessment Program of the
United States in 2010, at 6-8, available at www.imf.org/external/pubs/ft/scr/2010/cr10130.pdf.
---------------------------------------------------------------------------

    As of December 31, 2011, registered CCPs (including those clearing
nontraditional securities such as credit default swaps) had the
following numbers of members:

 FICC--302 members
 NSCC--187 full members; 647 limited members
 OCC--120 members
 CME--64 members
 ICE Clear Credit--27 members
 ICE Clear Europe--60 members

CCPs for traditional securities already have rules regarding access and
membership. All CCPs for traditional securities allow non-dealer
members, and none of them have minimum portfolio size or trading volume
thresholds.\545\ In addition, the minimum capital requirements to
access these CCPs range from $500,000 to $10,000,000.
---------------------------------------------------------------------------

    \545\ See infra discussion of Rules 17Ad-22(b)(5), (6) and (7)
in Section V.C.5 (benefits and costs of broad access requirements
and non-dealer membership).
---------------------------------------------------------------------------

    Certain clearing agencies that provide CCP services for security-
based swap transactions, however, have required members to have
significant minimum portfolio sizes or trading volumes, meet
significantly higher minimum capital requirements, and require members
to operate a dealer business. Such requirements may present challenges
to new liquidity providers in the relevant market. The CCPs argue that
these requirements are necessary to mitigate the risk exposure of the
CCP in the event of default by a clearing member.\546\ For example,
because markets for credit default swaps are generally less liquid than
markets for exchange-traded derivatives, traditional procedures for a
CCP to handle a member default may not be effective. The traditional
procedures for handling a default, which are used by CCPs for most
exchange-traded derivatives, call for the CCP to terminate all of its
contracts with the defaulting participant and promptly enter the market
and replace the contracts, so as to hedge against further losses on the
open positions created by termination of the defaulter's contracts. But
if the markets for the contracts cleared by the CCP are illiquid,
prompt replacement of the contracts may induce adverse price movements,
especially if the defaulting participant's positions are large.
Consequently, the application of traditional default procedures to
illiquid credit default swaps contracts may entail significant risk to
the CCP.
---------------------------------------------------------------------------

    \546\ See generally Bank for International Settlements, New
Developments in Clearing and Settlement Arrangements for OTC
Derivatives (Mar. 2007), at 27-29.
---------------------------------------------------------------------------

    To address this potential risk, these CCPs developed a default
management process that requires traders from their clearing members to
be seconded to the CCP to manage the defaulter's portfolio. They would
be charged with neutralizing the market risk in the portfolio by
entering into new OTC derivative contracts with non-defaulting clearing
members. Once neutralized as much as possible, the portfolio would be
divided and auctioned to non-defaulting members. The CCP would
determine a reservation price for the auction, and if a non-defaulting
clearing member's bid exceeds that reservation price, the auction would
be deemed successful. If not, the auction would fail. In the event of a
failed auction, the portfolio would be divided among the non-defaulting
clearing members pro rata based on their volumes of business. Under
this process, a non-defaulting CCP participant would bear the risk of
entering the markets to hedge open positions created by a default only
if it is a successful bidder or if one or more auctions fail and it is
assigned positions because it has outstanding positions with the CCP.
    This process creates a tension between the need for effective
default management procedures and the maintenance of fair and open
access to a CCP's services. Because of the stringent capital and other
requirements imposed by the CCP's membership standards, membership in a
CCP clearing security-based swaps generally has been limited to very
large dealers, those meeting the outstanding swap portfolio amount and
capital requirements. Current members may also have an incentive to
exclude new members, either to manage counterparty risk or to block
competitors. Being a member of a CCP may provide a competitive boost to
a new member that is a smaller dealer by allowing the CCP's
creditworthiness to be substituted for that of the new member.
Requirements that prevent smaller dealers from entering as new members
may, therefore, undermine competition and the entry of new liquidity
providers in the relevant market. Indeed, one committee argues that
access criteria in credit default swaps have had the effect of
excluding market participants such as mid-tier financial institutions
and buy-side firms from direct access to CCPs.\547\ While such
requirements have to date been adopted only by CCPs that engage in the
clearance and settlement of credit default swaps, the Commission
believes that preventing the introduction of such requirements also may
be an important consideration for other types of instruments.
---------------------------------------------------------------------------

    \547\ See Committee on the Global Financial System, The
Macrofinancial Implications of Alternative Configurations for Access
to Central Counterparties in OTC Derivatives Markets (Nov. 2011), at
9.
---------------------------------------------------------------------------

c. Disclosure of Financial Information (Practices as They Relate to
Rule 17Ad-22(c))
    Currently, there is no rule requirement under the Exchange Act or
Commission rule that mandates clearing agencies to record and maintain
information about their financial resources. Nevertheless, as part of
their ordinary risk management procedures developed in consultation
with their members, clearing agencies produce at least quarterly
internal reports regarding the ability of the CCP to withstand a
default by the participant (or two participants) to which the clearing
agency has the largest exposure in extreme but plausible market
conditions. In addition, as part of the Commission's supervision,
oversight and monitoring of clearing agencies, the Commission staff can
obtain such information on request. However, clearing agencies do not
all currently

record and maintain documentation that explains the methodology used to
compute their financial resource requirements as required by Rule 17Ad-
22(b)(3).
    Commission staff guidance to clearing agencies provides that
clearing agencies should provide, within 60 days following the close of
the clearing agency's fiscal year, audited annual financial statements
to those participants who have made clearing fund contributions and/or
have money and/or securities in the clearing agency's systems.\548\
With one exception, the clearing agencies report their accounting
information in U.S. GAAP.\549\ At present, clearing agencies publish
annual audited financial statements on their respective Web sites and
provide unaudited quarterly and annual audited financial statements to
their members.\550\ All the clearing agencies currently have their
financial statements audited in accordance with the standards of the
PCAOB by a registered public accounting firm, and when the financial
statements are posted on their Web sites, the clearing agencies include
the report of the auditor.
---------------------------------------------------------------------------

    \548\ See Exchange Act Release No. 16900 (June 17, 1980).
Because BSECC and SCCP do not conduct clearance and settlement
operations they do not post audited financial statements. See supra
note 438.
    \549\ ICE Clear Europe posts financial statements in UK GAAP.
    \550\ See DTC's Assessment of Compliance with the CPSS/IOSCO
Recommendations for Central Counterparties (Dec. 12, 2011),
available at http://www.dtcc.com/legal/compliance/DTC_Self-Assessment.pdf; NSCC's Assessment of Compliance with the CPSS/IOSCO
Recommendations for Central Counterparties (Nov. 14, 2011),
available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf; FICC/GSD's Assessment of Compliance with the CPSS/
IOSCO Recommendations for Central Counterparties (Dec. 15, 2011),
available at http://www.dtcc.com/legal/compliance/FICC_Self-Assessment.pdf.
---------------------------------------------------------------------------

d. Comparison of Current Practices and Rule to CPSS-IOSCO
Recommendations as Related to Rules 17Ad-22(b)(1)-(3) and (d)
    In 2009, based upon an agreement reached with the U.S. Department
of Treasury, the operations of several U.S. clearing agencies were
assessed by independent assessors from the IMF against the CPSS-IOSCO
Recommendations.\551\ The IMF's assessments supported a finding of full
or broad observance of the CPSS-IOSCO Recommendations by each of the
clearing agencies registered with the Commission at that time. Further,
CME, ICE Clear Credit and ICE Clear Europe represented to the
Commission that they met the standards set forth in the RCCP when they
sought to obtain an exemption from the Commission to provide CCP
services for credit default swaps transactions.\552\ Only one CCP, OCC,
has not either been subject to an assessment using the RCCP or publicly
stated its view on whether it complies with the RCCP.\553\ Rules 17Ad-
22(b)(1), (2), (3) and (d) are largely modeled on the CPSS-IOSCO
Recommendations and therefore are largely consistent with observed
practices.
---------------------------------------------------------------------------

    \551\ See supra note 183.
    \552\ See generally Securities Exchange Act Release No. 60372
(July 23, 2009), 74 FR 37748 (July 29, 2009) (temporary exemptions
in connection with CDS clearing by ICE Clear Europe); Securities
Exchange Act Release No. 60373 (July 23, 2009), 74 FR 37740 (July
29, 2009) (temporary exemptions in connection with CDS clearing by
Eurex Clearing AG); Securities Exchange Act Release No. 59578 (Mar.
13, 2009), 74 FR 11781 (Mar. 19, 2009) (``March 2009 CME order'')
and Securities Exchange Act Release No. 61164 (Dec. 14, 2009), 74 FR
67258 (Dec. 18, 2009) (``December 2009 CME order'') (temporary
exemptions in connection with CDS clearing by CME); Securities
Exchange Act Release No. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12,
2009), Securities Exchange Act Release No. 61119 (Dec. 4, 2009), 74
FR 65554 (Dec. 10, 2009), and Securities Exchange Act Release No.
61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010) (temporary
exemptions in connection with CDS clearing by ICE Trust U.S. LLC).
    \553\ Nevertheless, the Commission has approved a proposed rule
change by OCC that revised its clearing fund formula so that it
would be the larger of either of the following events: (1) The
default of the largest single clearing member group; or (2) an event
involving the near-simultaneous default of two randomly-selected
clearing member groups. For a more complete description of the
proposed rule change, see discussion of the costs of Rule 17Ad-
22(b)(3).
---------------------------------------------------------------------------

    The table below maps the requirements of Rules 17Ad-22(b)(1)-(3)
and (d) to the corresponding CPSS-IOSCO Recommendations.
---------------------------------------------------------------------------

    \554\ RCCP Recommendation 5: Financial Resources states that
``[a] CCP should maintain sufficient financial resources to
withstand, at a minimum, a default by the participant to which it
has the largest exposure in extreme but plausible market
conditions.'' The explanatory note states that this should be viewed
as a minimum standard and that planning by a CCP should consider the
potential for two or more participants to default in a short time
frame. Rule 17Ad-22(b)(3) requires that a clearing agency that
provides CCP services maintain sufficient financial resources to
withstand, at a minimum, a default by the participant family to
which it has the largest exposure in extreme but plausible market
conditions; provided that a security-based swap clearing agency
shall maintain sufficient financial resources to withstand, at a
minimum, a default by the two participant families to which it has
the largest exposures in extreme but plausible market conditions.

                        COMPARISON OF RULE 17Ad-22 TO CPSS-IOSCO RCCP AND RSSS STANDARDS
----------------------------------------------------------------------------------------------------------------
           Rule 17Ad-22                                       CPSS-IOSCO RCCP and RSSS
----------------------------------------------------------------------------------------------------------------
17Ad-22 (b)(1): Measurement and     RCCP Recommendation 3.
 management of credit exposures.
17Ad-22 (b)(2):Margin requirements  RCCP Recommendation 4.
17Ad-22 (b)(3): Financial           RCCP Recommendation 5.\554\
 resources.
17Ad-22 (d)(1): Transparent and     RCCP Recommendation 1 and RSSS Recommendation 1.
 enforceable rules.
17Ad-22 (d)(2): Participation       RCCP Recommendation 2 and RSSS Recommendation 2.
 requirements.
17Ad-22 (d)(3): Custody of assets   RCCP Recommendation 7 and RSSS Recommendation 7.
 and investment risk.
17Ad-22 (d)(4): Identification and  RCCP Recommendation 8 and RSSS Recommendation 11.
 mitigation of operational risk.
17Ad-22 (d)(5): Money settlement    RCCP Recommendation 9 and RSSS Recommendation 10.
 risks.
17Ad-22 (d)(6): Cost-effectiveness  RCCP Recommendation 12 and RSSS Recommendation 15.
17Ad-22 (d)(7): Links.............  RCCP Recommendation 10 and RSSS Recommendation 19.
17Ad-22 (d)(8): Governance........  RCCP Recommendation 13 and RSSS Recommendation 13.
17Ad-22 (d)(9): Information on      RCCP Recommendation 14 and RSSS Recommendation 17.
 services.
17Ad-22 (d)(10): Immobilization     RSSS Recommendation 6.
 and dematerialization of
 securities certificates.
17Ad-22 (d)(11): Default            RCCP Recommendation 6.
 procedures.
17Ad-22 (d)(12): Timing of          RSSS Recommendation 8.
 settlement finality.
17Ad-22 (d)(13): Delivery versus    RSSS Recommendation 7.
 payment.
17Ad-22 (d)(14): Controls to        RSSS Recommendation 9.
 address participants' failure to
 settle.
17Ad-22 (d)(15): Physical delivery  RCCP Recommendation 10.
 risks.
----------------------------------------------------------------------------------------------------------------

C. Consideration of Costs, Benefits, and the Effect on Efficiency,
Competition and Capital Formation

1. Overview
    The purpose of each rule being adopted today is to enhance the
regulatory framework for registered clearing agencies. This regulatory
framework will facilitate ongoing compliance with the statutory
requirements that clearing agencies have rules that facilitate the
prompt and accurate clearance and settlement of securities transactions
and derivative agreements, contracts and transactions for which they
are responsible, and safeguard funds and securities. The rules do so by
requiring certain minimum standards. The Commission believes that these
requirements will help ensure resilient and cost-effective clearing
agency operations as well as promote transparency that would
consequently support confidence among market participants in clearing
agencies' ability to serve as efficient and financially stable
mechanisms for clearance and settlement and to facilitate capital
formation.
    In addition, the rules relating to membership requirements will
help facilitate broad participation and open access to clearing
agencies. If the rules enhance market participation by investors, the
rules may thereby increase price competition, discovery, and price
efficiency in the securities cleared by the clearing agency.
    Taken together, the rules are largely consistent with existing
industry practices. In particular, Rules 17Ad-22(b)(1)-(3) and (d) are
modeled on the CPSS-IOSCO Recommendations, which have been in place
since 2004 and are generally observed by all clearing agencies. Rule
17Ad-22(c)(2) would codify the existing practice of most registered
clearing agencies of maintaining certain financial information on their
Web sites. Registered CCPs already disclose their annual audited
financial statements on their Web sites, and all except for one
registered CCP prepare such financial statements using U.S. GAAP or
IFRS.\555\ By codifying existing practices, the rules ensure that these
benefits are being achieved with minimal need for change or for
disruption to the affected industry, while also providing new entrants
with legal certainty and transparency in meeting regulatory standards.
At the same time, the rules have been written to accommodate changes in
technology and market developments. Lastly, Rules 17Ad-22(b)(4) and
(b)(5)-(7) establish new minimum practices for clearing agencies with
regard to model validation and membership practices respectively.
---------------------------------------------------------------------------

    \555\ ICE Clear Europe posts financial statements prepared in
accordance with UK GAAP.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission identified potential costs
and benefits resulting from Rule 17Ad-22, as proposed, and requested
comment on all aspects of the cost-benefit analysis, including the
identification and assessment of any costs and benefits that were
discussed in the analysis.
    The Commission carefully considered all comments received on the
Proposing Release. The comments are discussed above in Section III in
relation to each part of Rule 17Ad-22. In particular, the Commission
carefully considered comments setting forth alternatives to the
requirements contained in Rule 17Ad-22. The discussion immediately
below takes into account the alternatives proposed by commenters.
Several commenters argued that Rule 17Ad-22(d) should not apply to
entities that perform certain post-trade processing services (i.e.,
comparison of trade data, collateral management and tear-up/
compression).\556\ In response to those comments, the Commission has
limited the scope of Rule 17Ad-22 to clearing agencies that are
registered with the Commission.
---------------------------------------------------------------------------

    \556\ See generally TriOptima Letter; Markit (April) Letter;
Markit (July) Letter; MarkitSERV (April) Letter; MarkitSERV (July)
Letter; Omgeo Letter.
---------------------------------------------------------------------------

    As discussed above, many of the provisions in Rule 17Ad-22 are
modeled on the CPSS-IOSCO Recommendations. As a general alternative to
prescribing its own requirements under Rule 17Ad-22, the Commission
considered requiring registered clearing agencies to perform self-
assessments using the CPSS-IOSCO Recommendations. This approach would
have been similar to the Board's amendment to its Payment System Risk
Policy Statement that directed certain systemically important entities
to conduct self-assessment using the CPSS-IOSCO Recommendations.\557\
The Commission decided against this alternative because the Commission
believes that it would be more appropriate for the Commission to
require registered clearing agencies to conduct assessments against
Commission rules because the Commission's regulatory approach relies on
examining and inspecting for compliance with, and, if necessary,
enforcing, a clear set of rules. Lastly, the Commission also considered
alternatives to each of the individual provisions of Rule 17Ad-22,
which are discussed in more detail below.
---------------------------------------------------------------------------

    \557\ See supra note 33.
---------------------------------------------------------------------------

    The Commission believes the resulting revised regulatory framework
should enhance confidence in the market and better serve market
participants. With the adoption of these rules, clearing agencies will
be well-positioned to withstand market volatility and evolve with
market developments and technological advancements. Establishing rules
that are consistent with current practice minimizes up-front costs and
provides a good starting point for promoting appropriate risk
management practices. As clearing agency practices evolve over time in
response changes in technology, legal requirements and other factors,
clearing agencies may need to make appropriate updates and improvements
to their operations and risk management practices, and as a result,
actual costs of ongoing compliance with Rule 17Ad-22 may differ from
the estimates discussed below.
    The following addresses the entire rule and each rule provision
being adopted today, its purpose, benefits and costs, and the impact of
the rule on efficiency, competition and capital formation.\558\

---------------------------------------------------------------------------

    \558\ Section 3(f) of the Exchange Act requires the SEC,
whenever it engages in rulemaking pursuant to the Exchange Act and
is required to consider or determine whether an action is necessary
or appropriate in the public interest, to consider, in addition to
the protection of investors, whether the action would promote
efficiency, competition, and capital formation. In addition, Section
23(a)(2) of the Exchange Act requires the SEC, when adopting rules
under the Exchange Act, to consider the impact such rules would have
on competition. Section 23(a)(2) of the Exchange Act also prohibits
the SEC from adopting any such rule that would impose a burden on
competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
---------------------------------------------------------------------------

2. Purpose of Rule 17Ad-22
    The adoption by the Commission of Rule 17Ad-22 should benefit the
U.S. financial markets in several ways. Because market participants and
regulatory authorities are familiar with the CPSS-IOSCO Recommendations
upon which Rule 17Ad-22 is based, the provisions being adopted today
will increase the consistency among regulatory frameworks worldwide and
thus diminish the opportunities for regulatory arbitrage. Since their
publication in 2001, and 2004, respectively, the RSSS and RCCP have
been used by the World Bank and IMF in numerous technical assistance
and FSAP missions.\559\ Regulators from

multiple jurisdictions also have assessed the operations of clearing
organizations using the RSSS and RCCP and incorporated them into their
regulatory frameworks.\560\ The CPSS-IOSCO Recommendations have been
used as a recognized standard for market participants and regulators to
compare the operations of CCPs and CSDs.
---------------------------------------------------------------------------

    \559\ Between 2000 and 2009, 35 securities settlement systems
were assessed against the RSSS in 22 countries during FSAP and FSAP
update missions. See Presentation by Massimo Cirasino, World Bank,
and Christine Sampic, IMF, Financial Infrastructure Week, Rio de
Janeiro, Brazil (Mar. 15, 2011).
    \560\ For example, the Board also has proposed a rule that is
modeled on the CPSS-IOSCO Recommendations and substantially similar
to Rule 17Ad-22. See 76 FR 18452 (Apr. 4, 2011).
---------------------------------------------------------------------------

    The establishment of consistent standards for CCP and CSD
operations is an important goal that underpinned the enactment of
Section 17A of the Exchange Act. When Congress adopted Section 17A, as
part of the 1975 Amendments to the Securities Act (``1975
Amendments''), it determined that the implementation of linked systems
for clearance and settlement and uniform standards would reduce
unnecessary costs and increase the protection of investors and persons
facilitating transactions by and acting on behalf of investors. The
legislative history noted that when broker-dealers must deal with a
dozen or more different clearing and depository systems in their daily
securities operations, the result is excessive cost and poorer service
to investors.\561\ Rule 17Ad-22 establishes minimum standards for the
operations and risk management practices for clearing agencies that are
consistent with the standards for CCPs and CSDs operating domestically
and in other jurisdictions.
---------------------------------------------------------------------------

    \561\ S. Rep. 94-75, 94th Cong., 1st Sess., at 184 (1975).
---------------------------------------------------------------------------

    Furthermore, Rule 17Ad-22 will have the benefit of serving as a
minimum benchmark for the Commission in making its required
determinations regarding the rules of registered clearing agencies. For
example, for a clearing agency to be registered under Section 17A, the
Commission must find that it has the ability to facilitate the prompt
and accurate clearance and settlement of transactions, to safeguard
investor funds and securities, to remove impediments to and to perfect
the mechanism of a national clearance and settlement system, and in
general to protect investors and the public interest. Also, the
clearing agency's rules must provide adequate access to qualified
participants, fair representation of shareholders and participants,
equitable pricing, discipline of participants, and must not impose any
undue burden on competition.
    Rule 17Ad-22 will also have the benefit of augmenting the
Commission's ability to regulate clearing agencies. Because clearing
agencies are SROs, after a clearing agency has been registered with the
Commission, the clearing agency must submit proposed rule changes to
the Commission for approval under Exchange Act Rule 19b-4. To approve a
clearing agency's proposed rule change, the Commission must find that
it complies with Section 17A. The minimum benchmark established by Rule
17Ad-22 will help ensure and demonstrate that the existing operations
of clearing agencies and their proposed rule changes meet or exceed
international standards while remaining appropriate for the individual
clearing agency. As a result, a clearing agency cannot use Rule 17Ad-22
to reduce the strength of its operational standards or adopt a new
policy or procedure that the Commission believes does not meet the
requirements of Section 17A.
    Finally, the Commission believes Rule 17Ad-22 will help market
participants be in a position to better compare the operations of U.S.
clearing agencies with non-U.S. clearing organizations. In addition,
the Commission's adoption of Rule 17Ad-22 will lead to greater
confidence, both domestically and internationally, in the resiliency of
clearing agencies and their ability to support the U.S. financial
markets. The Commission's adoption of Rule 17Ad-22 may also reduce some
of the potential regulatory burden for CCPs and CSDs that may be
dually-regulated by the SEC and another domestic or foreign regulator
because it is modeled on standards already employed by other regulatory
authorities.
    Below we discuss a number of costs and benefits that are related to
the rule being adopted today. Many of these costs and benefits are
difficult to quantify with any degree of certainty, especially as
practices at clearing agencies are anticipated to evolve and
appropriately adapt to changes in technology and market developments.
In addition, the extent to which the increased ability to enforce
standards that are incorporated in the rule will help limit future
risks is unknown. Moreover, this difficulty is aggravated by the fact
that limited public data exists that is related to a clearing agency's
risk management practices that could assist in quantifying certain
costs. Therefore, much of the discussion is qualitative in nature but
where possible, we quantify the costs.
    Many, but not all, of the costs of the rule involve a collection of
information, and these costs and burdens were discussed in the
Paperwork Reduction Act section. When monetized \562\ those estimated
burdens and costs total $3.7 million \563\ in initial costs and $10.1
million \564\ in annual ongoing costs. A detailed discussion of other
economic

costs of the rulemaking is provided below.
---------------------------------------------------------------------------

    \562\ To monetize the internal costs the Commission staff used
data from the SIFMA publications, Management and Professional
Earnings in the Security Industry--2010, and Office Salaries in the
Securities Industry--2010, modified by the Commission staff to
account for an 1800 hour work-year and multiplied by 5.35
(professionals) or 2.93 (office) to account for bonuses, firm size,
employee benefits and overhead.
    \563\ The total initial cost was calculated as follows: [for
Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) (Assistant General Counsel
for 60 hours at $430 per hour) + (Compliance Attorney for 85 hours
at $320 per hour) + (Computer Operations Department Manager for 15
hours at $367 per hour) + (Senior Business Analyst for 15 hours at
$232 per hour) = $61,985 x 10 respondents = $619,850]; + [for Rule
17Ad-22(b)(4) ((Assistant General Counsel for 87 hours at $430 per
hour) + (Compliance Attorney for 77 hours at $320 per hour) +
(Computer Operations Department Manager for 23 hours at $367 per
hour) + (Senior Business Analyst for 23 hours at $232 per hour) =
$75,827 x 9 respondents = $682,443) + ((Chief Compliance Officer for
40 hours at $423 per hour) + (Computer Department Operations Manager
for 40 hours at $367 per hour) + (Senior Programmer for 20 hours at
$304 per hour) = $37,680 x 9 respondents = $339,120) = $1,021,563];
+ [for Rules 17Ad-22(b)(5)-(7) (Assistant General Counsel for 87
hours at $430 per hour) + (Compliance Attorney for 77 hours at $320
per hour) + (Computer Operations Department Manager for 23 hours at
$367 per hour) + (Senior Business Analyst for 23 hours at $232 per
hour)) = $75,827 x 9 respondents = $682,443]; + [for Rule 17Ad-22(c)
((Assistant General Counsel for 60 hours at $430 per hour) +
(Compliance Attorney for 85 hours at $320 per hour) + (Computer
Operations Department Manager for 23 hours at $367 per hour) +
(Senior Business Analyst for 23 hours at $232 per hour) = $66,777 x
10 respondents = $667,770) + ((Chief Compliance Officer for 40 hours
at $423 per hour) + (Computer Department Operations Manager for 40
hours at $367 per hour) + (Senior Programmer for 20 hours at $304
per hour) = $37,680 x 10 respondents = $376,800) = $1,044,570] +
[for Rule 17Ad-22(c)(2) (Senior Accountant for 500 hours at $198 per
hour) x 4 respondents = $396,000] = $3,764,426.
    \564\ The total ongoing cost was calculated as follows: [for
Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) (Compliance Attorney for 60
hours at $320 per hour = $19,200 x 10 respondents = $192,000)]; +
[for Rule 17Ad-22(b)(4) ((Compliance Attorney for 60 hours at $320
per hour = $19,200 x 9 respondents = $172,800) + (2 Independent
Consultants for 30 hours per week at $600 per hour = $36,000 per
week x 12 weeks = $432,000 x 9 respondents = $3,888,000) =
$4,060,800]; + [for Rules 17Ad-22(b)(5)-(7) (Compliance Attorney for
60 hours at $320 per hour = $19,200 x 9 respondents = $172,800]; +
[for Rule 17Ad-22(c) (Compliance Attorney for 60 hours at $320 per
hour = $19,200 x 10 respondents = $192,000)]; [for Rule 17Ad-
22(c)(1) (Compliance Attorney for 1 hour at $320 per hour) +
(Computer Operations Department Manager for 2 hours at $367) =
$1,054 per quarter x 4 quarters per year = $4,216 per year x 9
respondents = $37,944]; [for Rule 17Ad-22(c)(2) (Senior Accountant
for 250 hours at $198 per hour) x 10 respondents = $495,000) +
(Independent Audit Fee = $500,000 per year x 10 respondents =
$5,000,000)] = $10,150,544.
---------------------------------------------------------------------------

    Many parts of Rule 17Ad-22 are consistent with current practice and
therefore should not impose significant costs on registered clearing
agencies to comply with those provisions. As noted above, Rule 17Ad-22
also will have the benefit of augmenting the Commission's ability to
regulate clearing agencies. Rule 17Ad-22 should improve access to
security-based swap clearing agencies. The extent to which security-
based swap participants that will be eligible under new access
requirements choose to become members is unknown and we are unaware of
empirical data on the potential impact that this will have on
competition in the security-based swap market. Therefore, the
quantification of this benefit is not feasible.
3. Definitions (Rules 17Ad-22(a)(1)-(5))
a. Rule 17Ad-22(a)(1)
    Rule 17Ad-22(a)(1) would define ``central counterparty'' as a
clearing agency that interposes itself between counterparties to
securities transactions to act functionally as the buyer to every
seller and as the seller to every buyer. The definition contained in
this rule is generally consistent with the common usage and
understanding of that term.\565\ The costs and benefits associated with
the impacts of the definition are incorporated in the discussion below
related to the costs and benefits of the provisions where the
definition is used.
---------------------------------------------------------------------------

    \565\ See RCCP, supra note 33, Annex 5: Glossary.
---------------------------------------------------------------------------

b. Rules 17Ad-22(a)(2) and (5)
    Rule 17Ad-22(a)(2) would define ``central securities depository
services'' to mean services of a clearing agency that is a securities
depository as described in Section 3(a)(23) of the Exchange Act.\566\
Rule 17Ad-22(a)(5) would define ``net capital,'' for the limited
purpose of Rule 17Ad-22(b)(7), to have the same meaning as set forth in
Rule 15c3-1 under the Exchange Act for broker-dealers or any similar
risk adjusted capital calculation for all other prospective clearing
members.\567\ The costs and benefits associated with the impacts of the
definition are incorporated in the discussion below related to the
costs and benefits of the provisions where the definition is used.
---------------------------------------------------------------------------

    \566\ ``[Clearing agency] 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).
    \567\ As appropriate, the clearing agency may develop risk
adjusted capital calculations for prospective clearing members that
are not broker-dealers.
---------------------------------------------------------------------------

c. Rule 17Ad-22(a)(3)
    Rule 17Ad-22(a)(3) would define ``participant family,'' for the
limited purposes of Rules 17Ad-22(b)(3) and 17Ad-22(d)(14), to mean
that if a participant controls another participant, or is under common
control with another participant, then the affiliated participants
shall be collectively deemed to be a single participant. The Commission
is not narrowing the definition of control in this context to mean
ownership of 50% or more of the voting securities or other interests in
a participant, as requested by one commenter.\568\ We believe the more
appropriate evaluation of control is based on the relation between the
entities and the power, directly or indirectly, to direct the
management or policies of a company, whether through ownership of
securities, by contract, or otherwise. In conducting this evaluation,
clearing agencies should also be guided by the definition of
``control'' set forth in Rule 405 under the Exchange Act, using the
information available to them. The costs and benefits associated with
the impacts of the definition are incorporated in the discussion below
related to the costs and benefits of the provisions where the
definition is used.
---------------------------------------------------------------------------

    \568\ See supra note 107 and accompanying text.
---------------------------------------------------------------------------

d. Rule 17Ad-22(a)(4)
    Rule 17Ad-22(a)(4) would define ``normal market conditions'' for
the limited purposes of Rules 17Ad-22(b)(1) and (2), to mean conditions
in which the expected movement of the price of cleared securities would
produce changes in a clearing agency's exposures to its participants
that would be expected to breach margin requirements or other risk
control mechanisms only one percent of the time.\569\
---------------------------------------------------------------------------

    \569\ The definition of normal market conditions in Rule 17Ad-
22(a)(4) is consistent with the corresponding explanation
established in the CPSS-IOSCO Recommendations. See RCCP, supra note
33, at 21 (explanatory note number 1).
---------------------------------------------------------------------------

    The rule conforms to the generally recognized standard of ``normal
market conditions'' as defined in the RCCP and is the benchmark for
most CCPs' margin methodologies, many of which use risk-based models to
ensure coverage at a 99% confidence interval, at minimum, over a
designated time horizon.\570\ The standard also comports with the
international standard for bank capital requirements established by the
Bank for International Settlements, which requires banks to measure
market risks at a 99% confidence interval when determining regulatory
capital requirements.\571\ The costs and benefits associated with the
impacts of the definition are incorporated in the discussion below
related to the costs and benefits of the provisions where the
definition is used.
---------------------------------------------------------------------------

    \570\ See RCCP, supra note 33, Annex 5: Glossary. See also supra
discussion on 99% confidence interval as an accepted standard for
measuring market risk in Section II.B.2.b and discussion of current
industry baselines in Section V.B.
    \571\ See Bank for International Settlements' Basel Committee on
Banking Supervision, International Convergence of Capital
Measurement and Capital Standards: A Revised Framework (June 2004),
available at http://www.bis.org/publ/bcbs107.pdf; see also Darryll
Hendricks and Beverly Hirtle, New Capital Rule Signals Supervisory
Shift, available at http://www.bis.org/bcbs/ca/alrequse98.pdf. See
also supra notes 526-529 and accompanying text.
---------------------------------------------------------------------------

4. Risk Management Requirements for CCPs (Rules 17Ad-22(b)(1)-(4))
    Rules 17Ad-22(b)(1)-(4) concern risk management requirements for
clearing agencies that perform CCP services. In particular, these rules
will require a clearing agency that provides CCP services to have
written policies and procedures reasonably designed to: measure its
credit exposures at least once a day, use margin requirements to limit
its exposures to potential losses from defaults by its participants,
use risk-based models and parameters to set margin requirements and to
review such requirements at least monthly, maintain sufficient
financial resources to withstand a default by the two participant
families, if clearing security-based swaps, or one participant family
otherwise, to which it has the largest exposure,\572\ and provide for
an annual model validation process.
---------------------------------------------------------------------------

    \572\ See Rule 17Ad-22(a)(3), supra Section III.B.3 (defining
``participant family'' for purposes of proposed Rule 17Ad-22(b)(3)).
---------------------------------------------------------------------------

    As described above, these rules are consistent with current
practice. Registered clearing agencies already have written policies
and procedures designed to meet these risk management requirements,
particularly Rules 17Ad-22(b)(1)-(3). While Rules 17Ad-22(b)(1)-(3)
reflect the CPSS-IOSCO Recommendations, which are observed by all
clearing agencies, Rule 17Ad-22(b)(4) would establish certain new
minimum practices for clearing agencies.
     First, Rule 17Ad-22(b)(1) requires that each CCP measure
its credit exposures at least once per day. This rule codifies the
current minimum baseline adhered to by the two clearing

agencies presently registered with the Commission that provide CCP
services.
     Second, Rule 17Ad-22(b)(2) requires that each CCP collect
margin from its participants to limit exposures resulting from changes
in prices or participant positions in current market conditions. This
margin can also be used to minimize the CCPs losses in the event of a
participant default. This rule is consistent with the current practice
of each CCP to calculate daily margin requirements using risk-based
models to ensure coverage at a 99% confidence interval (i.e., under
``normal market conditions''), at minimum, over a designated time-
horizon.
     Third, and consistent with Rule 17Ad-22(b)(3), each CCP
currently maintains sufficient financial resources to withstand, at a
minimum, a default by the participant to which it has the largest
exposure in extreme but plausible market conditions.\573\ In addition,
both registered CCPs clearing security-based swap transactions maintain
additional financial resources sufficient to withstand the simultaneous
default by the two participant families to which the CCPs have the
largest exposures.
---------------------------------------------------------------------------

    \573\ See, e.g., supra notes 168 and 183.
---------------------------------------------------------------------------

     Fourth, Rule 17Ad-22(b)(4) would ensure that all CCPs have
annual model validations performed by a qualified person who is free
from influence from the persons responsible for development or
operation of the models being validated.
    While not requiring major changes to existing operational practices
and policies and procedures currently in place at most registered
clearing agencies, Rules 17Ad-22(b)(1)-(4) provide enforceability to
minimum standards regarding how clearing agencies manage counterparty
credit and default risks. One of the primary roles of a CCP is to
mitigate counterparty credit and default risk. Because of the role
margin plays in a default, a CCP must have confidence that the
liquidation value of available margin will be sufficient to cover
amounts owed by a defaulting participant to the clearing agency, and
that the margin will be available for liquidation without delay. As
described in the baseline discussion,\574\ CCPs have mechanisms and
procedures in place to measure credit exposure. To effectively mitigate
counterparty credit risk, a CCP must have accurate and timely
measurements of its credit exposures to each of its counterparties, and
must impose adequate margin requirements determined by risk-based
models and parameters. CCPs may be faced with significant and rapid
changes in counterparty credit exposures.
---------------------------------------------------------------------------

    \574\ See supra Section V.B.2.a.
---------------------------------------------------------------------------

    Frequent measurement of counterparty credit exposures and the use
of validated risk-based modeling are essential to setting adequate
margin requirements. A good margin setting methodology will help avoid
both under- and over-collateralization. Under-collateralization exposes
a CCP to increased credit risk in the event of a participant default,
as the CCP may be unable to recover amounts owed to it from the
participant on an unsecured basis. Incurring losses on a counterparty
default could disrupt the operations of the clearing agency as well as
its non-defaulting participants by exposing them to unanticipated
liabilities. These disruptions could negatively impact price efficiency
and capital formation if distressed liquidations result in prices away
from fundamental values for significant periods of time. Over-
collateralization imposes unnecessary costs on trading by tying up
clearing member assets that could otherwise be used more efficiently,
harming allocative efficiency and capital formation. The Commission
believes that Rules 17Ad-22(b)(1)-(4) creates standards to mitigate a
CCP's risks associated with counterparty credit exposures and defaults.
    Rules 17Ad-22(b)(1)-(4) acknowledge that appropriate risk
management will vary based on a number of factors relating to the
markets and products a CCP serves. Subject to minimum standards, the
rules permit each clearing agency the flexibility to develop the most
effective and economically efficient risk measurement and risk-based
modeling approaches for each of its unique markets and products to
achieve an optimal level of risk mitigation. By setting only a minimum
standard, the rules also allow each CCP to adapt its risk management
strategies as needed in response to dynamic market conditions rather
than locking the CCP into a fixed set of risk mitigation rules. The
minimum standards also prevent a CCP from establishing risk monitoring
procedures below a baseline in an effort to reduce costs and gain a
competitive advantage.
    The Commission believes that credit exposures should be measured at
least once a day because a clearing agency that did not do so would not
be able to effectively manage its risk. However, the Commission
believes that it cannot reasonably determine the most appropriate
frequency for CCPs to monitor their risk exposures in all
circumstances. The minimum standards in Rules 17Ad-22(b)(1)-(4) are
intentionally written to comply with CPSS-IOSCO Recommendations and
limit systemic risk while not precluding entry to potential new entrant
CCPs. Each CCP is exposed to participants in different markets
characterized by different trading patterns, volumes, liquidity,
transparency and other unique market characteristics. Rules 17Ad-
22(b)(1)-(4) provide each CCP the flexibility to tailor its risk
management practices to each of its unique markets and products,
allowing it to develop the most economically efficient and effective
risk mitigation strategies possible.
    The Commission considered the range of practices at registered
clearing agencies with respect to monitoring risk exposures and
recognizes that there is a risk that by setting the minimum standards
according to the highest level of current market practice, the
standards could be too high for some potential market conditions or
future security types. This could result in sub-optimal risk management
practices for a period in the future to the extent such factors are not
appropriately recognized by the Commission.
    The Commission believes it is appropriate that CCPs clearing
security-based swaps are held to the higher minimum standard in Rule
17Ad-22(b)(3) than CCPs that do not clear security-based swaps. In
particular, the Commission believes that the requirement to maintain at
a minimum financial resources capable of withstanding the default of
its two largest participant families as opposed to only its largest
participant family is at this time appropriate for clearing security-
based swaps but not for other securities because of the unique and
heightened risks posed by credit default swaps relative to traditional
securities. Credit default swaps pose additional risk management
challenges in that their value can change by a large amount in an
extremely short time interval (i.e., they are subject to significant
jump-to-default risk).\575\ Unlike many equity and fixed income
securities, but similar to other derivative contracts, a CCP's
obligation when clearing credit default swaps does not end when the
transaction settles, but at its expiration. In addition, unlike other
products that also exhibit these characteristics, credit default swaps
are unique in their size relative to their underlying markets. Recent
research shows that notional outstanding in credit default swaps are
often close to or greater than the

outstanding value of the underlying instruments.\576\
---------------------------------------------------------------------------

    \575\ See supra note 162.
    \576\ See supra note 163.
---------------------------------------------------------------------------

    Several other factors also complicate risk modeling for credit
default swaps. CCPs have only recently introduced clearing for
security-based swaps, so the risk models used by CCPs have not yet been
stressed by a substantial range of market conditions. In addition, many
security-based swaps are relatively illiquid, which complicates the
default management process. For example, more than 98% of single-name
credit default swap reference entities trade less than 10 times per
day.\577\ Low liquidity typically leads to wider bid-ask spreads,
greater price impact of trades, and potentially higher costs when
finding replacements for defaulted positions.
---------------------------------------------------------------------------

    \577\ See Memorandum by the Commission's Division of Risk,
Strategy, and Financial Innovation, Security-Based Swap Block Trade
Definition Analysis (Jan. 13, 2011), available at http://www.sec.gov/comments/s7-34-10/s73410-12.pdf. See also Che Sidanius
and Anne Wetherilt, Thoughts on Determining Central Clearing
Eligibility of OTC Derivatives, (Bank of England, Financial
Stability Paper, No. 14, Mar. 2012), available at http://www.bankofengland.co.uk/publications/Documents/fsr/fs_paper14.pdf.
The authors report that in the six months ending February 2012, 90%
of their sample of 1,000 single name CDS contracts trade an average
of less than 50 times per week.
---------------------------------------------------------------------------

    The Commission recognizes that requiring a different standard for
CCPs for security-based swaps could discourage new entrants from
entering into the market for these instruments because of higher
financial resource requirements relative to other types of instruments.
In particular, the higher the financial resource requirements, the
higher the costs to establish a new clearing agency, potentially
resulting in fewer clearing agencies.
    While the Commission is sensitive to the consequences of
establishing a different standard for CCPs for security-based swaps,
the Commission believes that the financial resources of a CCP must be
robust enough to accommodate the risks that are particular to each
market served--irrespective of whether such analysis results in
different standards. As described above, the Commission believes that
Rule 17Ad-22(b)(3) does not represent a change in practice for any CCP
that currently clears credit default swaps, and to the extent that it
represents an increased financial resources requirement for potential
competitors, this increased burden is justified by the greater
difficulty of risk-management in credit default swaps as opposed to
traditional securities.\578\ Furthermore, the Commission believes that
the burdens associated with this provision are minimized as the rule
permits registered CCPs to comply with the ``cover two'' requirement by
establishing a separate fund and related procedures for their security-
based swap operations if they prefer this structure to the application
of the ``cover two'' requirement to the entire legal entity. As
security-based swap products with different characteristics are
proposed for clearing over time, the Commission would evaluate risk
profiles of such products to consider how they would be treated under
the ``cover two'' standard.
---------------------------------------------------------------------------

    \578\ See CFTC-SEC Staff Roundtable on Clearing of Credit
Default Swaps (Oct. 2010), at 123, available at<EMAIL_ADDRESS>(Stan Ivanov, ICE Clear Credit stating ``at ICE
we look at two simultaneous defaults of the two biggest losers upon
extreme conditions * * *'').
---------------------------------------------------------------------------

    The Commission further recognizes the benefits associated with
establishing financial resource requirements that are consistent with
the international standards, such as the benefit of reduced incentives
for regulatory arbitrage. The Commission notes that the ``cover two''
requirement for security-based swaps CCPs is consistent with the
financial resource requirements for CCPs contained in the FMI Report
\579\ and in EMIR.
---------------------------------------------------------------------------

    \579\ See FMI Report, Principles 4 and 7, supra note 32.
---------------------------------------------------------------------------

    The Commission believes it is important to codify the practice of
obtaining an annual model validation to ensure that a CCP can evaluate
the continued appropriateness of its margin models. Rule 17Ad-22(b)(4)
also should help CCPs better evaluate their margin models, which should
promote greater confidence in clearing agencies' risk management
practices.
    The Commission is also mindful of the costs associated with the
final rule. In particular, the Commission recognizes that though many
parts of Rule 17Ad-22 being adopted by the Commission today are a
codification of usual and customary practices at CCPs and clearing
agencies, they may still impose costs.
    As noted above, the standards contained in Rule 17Ad-22(b)(1)-(4)
would impose certain burdens and related costs on respondent clearing
agencies. As discussed in Section IV.C, based on policies and
procedures requirements for Regulation NMS, and based on staff
conversations with industry representatives, the Commission has
estimated the burdens and related costs of these requirements for
clearing agencies.
    The clearing agency standards in Rules 17Ad-22(b)(1)-(4) may
require respondent clearing agencies to review and amend their policies
and procedures. The standards contained in Rule 17Ad-22(b)(4) also
would impose one-time costs on clearing agencies to create policies and
procedures as well as require one-time systems adjustments related to
the capability to perform an annual model validation. The costs of
creating these policies are included in the $3.7 million startup cost
estimates discussed earlier.
    The standards contained in Rules 17Ad-22(b)(1)-(3) also would
impose ongoing costs on clearing agencies such as monitoring and
enforcement activities with respect to the policies and procedures the
registered clearing agency creates in response to the standards. The
ongoing costs of these monitoring and enforcement activities are
included in the estimated $10.1 million annual costs discussed
earlier.\580\ These Rules may also impose additional incremental costs
related to, for example, employee training, systems testing, and other
operational considerations designed to ensure both initial and
continued compliance with such policies and procedures.
---------------------------------------------------------------------------

    \580\ This number also reflects the costs of Rules 17Ad-
22(d)(1)-(15).
---------------------------------------------------------------------------

    The standards contained in Rule 17Ad-22(b)(4) would also impose
ongoing costs on clearing agencies. For example, the clearing agency
standards in Rule 17Ad-22(b)(4) would collectively require respondent
CCPs to perform certain ongoing monitoring and enforcement activities
with respect to the policies and procedures the clearing agency creates
in response to the standard and to provide for an annual model
validation. The Commission believes clearing agencies would hire a
consulting firm \581\ that dedicates two consultants to the project.
The costs for the consultants are included in the $10.1 million annual
paperwork cost discussed earlier. Rule 17Ad-22(b)(4) may also impose
additional incremental costs associated with employee training, systems
testing, and other operational considerations designed to ensure
initial and continued compliance with the clearing agencies model
validation policies and procedures.
---------------------------------------------------------------------------

    \581\ Currently, the majority of the clearing agencies
performing model validation employ a consulting firm; the remainder
of the clearing agencies have created an internal model validation
group that does not report to the person overseeing the development
or operation of the models.
---------------------------------------------------------------------------

    Except as noted above, Rules 17Ad-22(b)(1)-(4) establish standards
that are already largely adhered to in practice by each CCP registered
with the Commission. Thus, while Rules 17Ad-22(b)(1)-(4) will require
each currently registered CCP to continue the

expenditures associated with maintaining current rules, policies, and
procedures, they should impose limited incremental costs.
    In the Proposing Release, the Commission identified potential costs
and benefits resulting from Rules 17Ad-22(b)(1)-(4), as proposed, and
requested comment on all aspects of the cost-benefit analysis,
including the identification and assessment of any costs and benefits
that were not discussed in the analysis. Although the Commission did
not receive any comments on the specific cost-benefit analysis
contained in the Proposing Release, several commenters raised concerns,
which are discussed above in Section III.C.1.b, that have a bearing on
the costs and benefits associated with the rule. In response to these
comments, the Commission carefully considered alternatives to the
approach we are adopting in Rule 17Ad-22, including more prescriptive
alternatives (e.g., specifying how many times a day a clearing agency
should measure its credit exposures to its participants). However, as
noted above, clearing agencies match the frequency of credit exposure
calculations to the horizon of the guarantee they provide. The
requirement to measure credit exposure at least once per day does not
preclude more frequent measurement of credit exposure, allowing those
who guarantee intraday to measure exposures intraday. Therefore, the
Commission believes the flexibility provided by Rules 17Ad-22(b)(1) and
(2) appropriately reflects differences in clearing agency models.
    The Commission also considered alternatives to Rule 17Ad-22(b)(3),
such as (1) requiring each clearing agency, regardless of the
securities cleared, to maintain sufficient financial resources to
withstand, at a minimum, a default by the participant family to which
it has the largest exposure in extreme but plausible market conditions,
and (2) requiring each clearing agency, regardless of the securities
cleared, to maintain sufficient financial resources to withstand, at a
minimum, a default by the two participant families to which it has the
largest exposure in extreme but plausible market conditions. The
Commission decided to create separate standards for the two different
kinds of CCPs because it believes that clearing security-based swaps is
inherently riskier than clearing other types of securities, as
discussed above.
    Furthermore, the Commission considered a number of alternatives to
provisions in Rule 17Ad-22(b)(4). For example, one alternative was to
be more prescriptive in identifying who could perform the annual model
validations. The Commission recognizes there is a tradeoff between the
need for expertise in conducting model validations and the independence
of the validator. Therefore, Rule 17Ad-22(b)(4) sets a principle that
allows the clearing agencies to balance this trade-off in a way that
satisfies the purpose of the validation. The Commission also considered
alternatives, which would have required that model validations occur
more or less frequently than annually. The Commission believes that
requiring model validation at least annually is appropriate because it
complies with CPSS-IOSCO Recommendations and clearing agencies have
economic incentives to evaluate their models more frequently if market
conditions change, whether or not they are required to do so by
Commission rules.
5. Participant Access Standards for CCPs (Rules 17Ad(b)(5)-(7))
    These rules establish requirements for policies and procedures
detailing membership practices. Although we believe that these rules
reflect current practices for some CCPs, they may require a change in
practice for others. Specifically, Rules 17Ad-22(b)(5), (6) and (7)
would introduce certain requirements regarding access to CCPs,
including that each CCP must: (1) Provide the opportunity for a person
who does not perform any dealer or security-based swap dealer services
to obtain membership; (2) preclude the use of minimum portfolio size
thresholds and minimum transaction volume thresholds as conditions to
membership; and (3) provide the ability to obtain membership to persons
who maintain net capital equal to or greater than $50 million.
    The Commission is adopting Rules 17Ad-22(b)(5), (6) and (7) to
establish a regulatory framework for registered CCPs regarding
membership practices. These rules also address concerns about access to
central clearing in light of the proposed implementation of mandatory
clearing requirements around the world.\582\ The Commission believes
that Rules 17Ad-22(b)(5), (6) and (7) will complement Section 17A of
the Exchange Act, which requires that a clearing agency shall not be
registered unless the Commission determines, among other things, that
the clearing agency's rules do not impose burdens on competition that
are unnecessary or inappropriate to promote the purposes of the
Exchange Act \583\ and that the rules are not designed to permit unfair
discrimination in the admission of participants or among participants
in the use of the clearing agency.\584\
---------------------------------------------------------------------------

    \582\ See, e.g., CFTC-SEC Staff Roundtable on Clearing of Credit
Default Swaps (Oct. 2010), available at<EMAIL_ADDRESS>    \583\ 15 U.S.C. 78q-1(b)(3)(F).
    \584\ 15 U.S.C. 78q-1(b)(3)(G).
---------------------------------------------------------------------------

    As described above, CCPs for securities other than security-based
swaps generally do not engage in the practices that Rules 17Ad-
22(b)(5), (6), and (7) are designed to prevent. However, CCPs for
security-based swaps have required members to have a minimum portfolio
size (e.g., $1 trillion outstanding) or minimum trading volume, meet
very high minimum capital requirements (e.g., $5 billion), and require
members to operate a dealer business. Rule 17Ad-22 is designed to
prohibit these types of practices by all CCPs, irrespective of the
types of products cleared, by establishing a minimum standard that
would have the benefit of uniformity for currently registered CCPs and
any future market entrants.
    CCPs have membership requirements so that the CCPs and their
members can limit their exposures to less creditworthy market
participants. However, as noted above, members may have the incentive
to promote membership requirements that limit access to the CCP for
competitive reasons. While such requirements have to date been adopted
only by CCPs that engage in the clearance and settlement of credit
default swaps, the Commission believes that preventing the introduction
of such requirements also may be an important consideration for CCPs
that clear other instruments.\585\ If a clearing agency clears both
security-based swaps and other securities, Rule 17Ad-22(b)(6) will
prohibit the clearing agency from denying membership solely because the
applicant did not maintain a minimum portfolio size or minimum volume
in security-based swap transactions. The rule is being applied to all
clearing agencies, regardless of the type of instrument cleared, so
that an existing or future clearing agency could not use its market
power to exclude potential applicants for the benefit of its existing
members or unnecessarily restrict access to central clearing. Indeed,
the concerns noted above about the incentives to control access to CCPs
could apply to the clearing of any security. Accordingly, all CCPs,
regardless of the type of security, will be subject to Rules 17Ad-
22(b)(5), (6), and (7).
---------------------------------------------------------------------------

    \585\ See supra Section V.B.2.b and note 547.
---------------------------------------------------------------------------

    The Commission believes that no registered CCP should deny

membership solely because a person does not perform any dealer or
security-based swap dealer services or based on a minimum portfolio
size or minimum transaction volume thresholds. The Commission does not
believe that these factors are, by themselves, appropriate indicators
of whether an applicant should be admitted to membership in a clearing
agency. The Commission is adopting Rule 17Ad-22(b)(5) to help to foster
the development of correspondent clearing arrangements that will allow
market participants that are not dealers or security-based swap dealers
to obtain access to a CCP, which should have the beneficial result of
greater competition in and access to central clearing because these
persons do not execute securities trades for their own account.
Instead, they provide correspondent clearing services for market
participants.\586\ As a result, their ability to provide correspondent
clearing services would tend to increase as competition and transaction
volumes increased. The Commission further believes that imposing
minimum thresholds on the size or transaction volume of a participant's
portfolio would not function as a good indicator of whether the
participant is able to meet its obligations to a clearing agency.\587\
New participants in a CCP that do not initially intend to or have the
capacity to transact in substantial size or volume may nevertheless
have the operational and financial capacity to perform the activities
that other participants are able to perform but at lower size or volume
levels. Accordingly, the Commission believes that Rule 17Ad-22(b)(6)
will help facilitate the requirement in Section 17A of the Exchange Act
that the rules of a clearing agency must permit fair and open access to
qualified participants.
---------------------------------------------------------------------------

    \586\ See supra note 235.
    \587\ Proposed Rule 17Ad-22(b)(6) would not prohibit a clearing
agency from imposing maximum portfolio sizes or transaction volume
amounts.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(7) will significantly increase access to clearing
membership in CCPs that clear credit default swaps while still allowing
CCPs to maintain what the Commission believes will be sufficient net
capital standards for members. For example, the rule establishes a
minimum net capital requirement of $50 million that only approximately
201 broker-dealers, or four percent of the total number of registered
broker-dealers, can satisfy today according to broker-dealer data
available to the Commission. A net capital threshold of $100 million
would reduce the number of broker-dealers that could meet the standard
by 73 (36%) to 128 eligible firms, while a further reduction of the net
capital requirement to $25 million would increase the number of
eligible broker-dealer firms by 86 (42%) to 287 (6% of all registered
broker-dealers).\588\ The Commission believes that firms that maintain
a net capital level of at least $50 million have sufficient financial
resources to participate at some level in a CCP, provided that they are
able to comply with other reasonable membership standards, and that the
increase in the potential pool of clearing members is consistent with
the Commission's intention of expanding access to clearing.
---------------------------------------------------------------------------

    \588\ As stated above, the $50 million net capital requirement
affects access to CCPs that clear CDS. The Commission recognizes
that the number of dealers that clear CDS is significantly smaller
than the total number of broker-dealers, and that even if Proposed