[Federal Register Volume 81, Number 198 (Thursday, October 13, 2016)]
[Proposed Rules]
[Pages 70744-70784]
[FR Doc No: 2016-23892]

Vol. 81

Thursday,

No. 198

October 13, 2016

Part II

 Securities and Exchange Commission

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

17 CFR Part 240

 Definition of Covered Clearing Agency; Proposed Rule

Federal Register / Vol. 81 , No. 198 / Thursday, October 13, 2016 /
Proposed Rules

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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-78963; File No. S7-23-16]
RIN 3235-AL48

Definition of Covered Clearing Agency

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule amendments.

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

SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') proposes to amend the definition of ``covered clearing
agency'' under Rule 17Ad-22 to mean a registered clearing agency that
provides the services of a central counterparty (``CCP''), central
securities depository (``CSD''), or a securities settlement system
(``SSS''). The Commission also proposes a definition of ``securities
settlement system'' and proposes to amend the definitions of ``central
securities depository services'' to facilitate the proposed amendment
to ``covered clearing agency.'' In addition, the Commission proposes to
amend the definition of ``sensitivity analysis'' under Rule 17Ad-22 to
expand the scope of covered clearing agencies subject to requirements
thereunder. These amendments are proposed pursuant to Section 17A of
the Securities Exchange Act of 1934 (``Exchange Act'') and the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act''), enacted in Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act'').

DATES: Submit comments on or before December 12, 2016.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-23-16 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090.

All submissions should refer to File Number S7-23-16. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
    Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at http://www.sec.gov to receive notifications by
email.

FOR FURTHER INFORMATION CONTACT: Jeffrey Mooney, Assistant Director;
Stephanie Park, Senior Special Counsel; Matthew Lee, Branch Chief;
Elizabeth Fitzgerald, Branch Chief; or DeCarlo McLaren, Attorney-
Adviser; Office of Market Infrastructure, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-7010, at<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: The Commission proposes to amend the
definition of ``covered clearing agency'' in Rule 17Ad-22(a)(5) to mean
a registered clearing agency that provides the services of a CCP, CSD,
or SSS. The Commission further proposes to define ``securities
settlement system'' under Rule 17Ad-22 to mean a clearing agency that
enables securities to be transferred and settled by book entry
according to a set of predetermined multilateral rules.\1\ The
Commission also proposes to amend Rule 17Ad-22(a)(3) to define
``central securities depository'' to mean a clearing agency that is a
securities depository as described in Section 3(a)(23)(A) of the
Exchange Act.\2\
---------------------------------------------------------------------------

    \1\ To facilitate this proposed addition, the Commission would
renumber the remaining definitions in Rule 17Ad-22(a).
    \2\ See 15 U.S.C. 78c(a)(23)(A).
---------------------------------------------------------------------------

    In addition, the Commission proposes to amend the definition of
``sensitivity analysis'' in Rule 17Ad-22(a)(16) to expand its coverage,
so that the policies and procedures of all covered clearing agencies
that are CCPs provide for a sensitivity analysis that considers the
most volatile relevant periods, where practical, that have been
experienced by the markets served by the covered clearing agency.\3\
---------------------------------------------------------------------------

    \3\ If the proposed definition of ``securities settlement
system'' is adopted, the definition of ``sensitivity analysis''
would move to Rule 17Ad-22(a)(17).
---------------------------------------------------------------------------

    In developing these proposed amendments, Commission staff has
consulted with the Financial Stability Oversight Council (``FSOC''),
Commodity Futures Trading Commission (``CFTC''), and Board of Governors
of the Federal Reserve System (``FRB'').\4\ The Commission has also
considered the relevant international standards as required by Section
805(a)(2)(A) of the Clearing Supervision Act.\5\ The relevant
international standards for CCPs, CSDs, and SSSs are the Principles for
Financial Market Infrastructures (``PFMI'').\6\
---------------------------------------------------------------------------

    \4\ See 12 U.S.C. 5472.
    \5\ See 12 U.S.C. 5464(a)(2)(A).
    \6\ See Committee on Payment and Settlement Systems and
Technical Committee of the International Organization of Securities
Commissions (``CPSS-IOSCO''), Principles for Financial Market
Infrastructures (Apr. 16, 2012), available at http://www.bis.org/publ/cpss101a.pdf.
    The PFMI sets forth twenty-four principles for financial market
infrastructures (``FMIs''), each of which includes a headline
standard and a list of key considerations that further explain the
headline standard. Accompanying explanatory notes further discuss
the objectives of and rationales for the standards, as well as
provide guidance on how the standards can be implemented. See id. at
17. Commission staff co-chaired the working group within CPSS-IOSCO
that drafted both the consultative and final versions of the PFMI.
In 2014, the CPSS became the Committee on Payments and Market
Infrastructures (``CPMI'').
    CPMI-IOSCO has published subsequent guidance relevant to
implementation of the PFMI. See PFMI: Disclosure framework and
Assessment methodology (Dec. 2012), available at http://www.bis.org/cpmi/publ/d106.pdf (``PFMI disclosure framework''); Recovery of FMIs
(Oct. 2014), available at http://www.bis.org/cpmi/publ/d121.pdf;
Public quantitative disclosure standards for CCPs (Feb. 2015),
available at http://www.bis.org/cpmi/publ/d125.pdf (``PFMI
quantitative disclosures''); Guidance on cyber resilience for FMIs
(Nov. 2015, consultative report), available at http://www.bis.org/cpmi/publ/d138.pdf; Resilience and recovery of CCPs: Further
guidance on the PFMI (Aug. 2016, consultative report), available at
http://www.bis.org/cpmi/publ/d149.pdf.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
    A. Regulatory Framework
    1. Exchange Act
    2. Dodd-Frank Act
    3. Rule 17Ad-22
    B. Distinctions among Clearing Agencies
    1. Registered Clearing Agencies
    2. Exempt Clearing Agencies

II. Proposed Amendments Under Rule 17AD-22
    A. Definition of ``Covered Clearing Agency''
    1. Critical Functions Common among CCPs, CSDs, and SSSs
    2. Critical Functions Specific to CCPs, CSDs, or SSSs
    3. Increasing Scrutiny of CCP, CSD, and SSS Functions
    4. Expanded Coverage under the Definition of ``Covered Clearing
Agency''
    B. Definition of ``Securities Settlement System''
    C. Definition of ``Central Securities Depository''
    D. Definition of ``Sensitivity Analysis''
    E. Request for Comments
III. Economic Analysis
    A. Economic Background
    B. Baseline
    1. Regulatory Framework for Registered Clearing Agencies
    2. Current Practices
    C. Consideration of Benefits, Costs, and the Effect on
Competition, Efficiency, and Capital Formation
    1. Economic Effects Related to Registered Clearing Agencies
    2. Economic Effects Related to Future Registrants
    3. Alternatives
IV. Paperwork Reduction Act
    A. Summary of Collection of Information and Use of Information
    1. Rule 17Ad-22(e)(1)
    2. Rule 17Ad-22(e)(2)
    3. Rule 17Ad-22(e)(3)
    4. Rule 17Ad-22(e)(4)
    5. Rule 17Ad-22(e)(5)
    6. Rule 17Ad-22(e)(6)
    7. Rule 17Ad-22(e)(7)
    8. Rule 17Ad-22(e)(8)
    9. Rule 17Ad-22(e)(9)
    10. Rule 17Ad-22(e)(10)
    11. Rule 17Ad-22(e)(11)
    12. Rule 17Ad-22(e)(12)
    13. Rule 17Ad-22(e)(13)
    14. Rule 17Ad-22(e)(14)
    15. Rule 17Ad-22(e)(15)
    16. Rule 17Ad-22(e)(16)
    17. Rule 17Ad-22(e)(17)
    18. Rule 17Ad-22(e)(18)
    19. Rule 17Ad-22(e)(19)
    20. Rule 17Ad-22(e)(20)
    21. Rule 17Ad-22(e)(21)
    22. Rule 17Ad-22(e)(22)
    23. Rule 17Ad-22(e)(23)
    24. Rule 17Ad-22(c)(1)
    B. Respondents
    C. Total Annual Reporting and Recordkeeping Burdens
    1. Rule 17Ad-22(e)(1)
    2. Rule 17Ad-22(e)(2)
    3. Rule 17Ad-22(e)(3)
    4. Rule 17Ad-22(e)(4)
    5. Rule 17Ad-22(e)(5)
    6. Rule 17Ad-22(e)(6)
    7. Rule 17Ad-22(e)(7)
    8. Rule 17Ad-22(e)(8)
    9. Rule 17Ad-22(e)(9)
    10. Rule 17Ad-22(e)(10)
    11. Rule 17Ad-22(e)(12)
    12. Rule 17Ad-22(e)(13)
    13. Rule 17Ad-22(e)(14)
    14. Rule 17Ad-22(e)(15)
    15. Rule 17Ad-22(e)(16)
    16. Rule 17Ad-22(e)(17)
    17. Rule 17Ad-22(e)(18)
    18. Rule 17Ad-22(e)(19)
    19. Rule 17Ad-22(e)(20)
    20. Rule 17Ad-22(e)(21)
    21. Rule 17Ad-22(e)(22)
    22. Rule 17Ad-22(e)(23)
    23. Total Burden for Rule 17Ad-22(e)
    24. Total Burden for Rule 17Ad-22(c)(1)
    D. Collection of Information is Mandatory
    E. Confidentiality
    F. Request for Comments
V. Small Business Regulatory Enforcement Fairness Act
VI. Regulatory Flexibility Act Certification
    A. Registered Clearing Agencies
    B. Certification
VII. Statutory Authority

I. Introduction

    The Commission preliminarily believes that amending the definition
of ``covered clearing agency'' would further the Commission's ongoing
efforts to enhance the regulatory framework for clearing agencies.\7\
As discussed below, the Commission preliminarily believes that
registered clearing agencies providing the services of CCPs, CSDs, and
SSSs perform a critical role for the U.S. securities markets and the
broader U.S. financial system by helping to reduce risk and by
providing transparency to the markets. In light of this critical role,
the Commission preliminary believes that the definition of ``covered
clearing agency'' should be expanded to include all such clearing
agencies, which would make them subject to the enhanced requirements of
Rule 17Ad-22(e).
---------------------------------------------------------------------------

    \7\ With these proposed rule amendments and guidance, the
Commission is not re-opening comment on the rules adopted by the
Commission in the CCA Standards adopting release with respect to
those entities already subject to the adopted rules. See Exchange
Act Release No. 34-78961, (Sept. 28, 2016) (``CCA Standards adopting
release'').
---------------------------------------------------------------------------

A. Regulatory Framework

    Below is an overview of the relevant regulatory requirements for
registered clearing agencies and for clearing agencies operating
pursuant to an exemption from registration (``exempt clearing
agencies'').
1. Exchange Act
    Section 17A of the Exchange Act directs the Commission to
facilitate the establishment of (i) a national system for the prompt
and accurate clearance and settlement of securities transactions and
(ii) linked or coordinated facilities for clearance and settlement of
securities transactions.\8\ In facilitating the establishment of the
national clearance and settlement system, the Commission must have due
regard for the public interest, the protection of investors, the
safeguarding of securities and funds, and maintenance of fair
competition among brokers and dealers, clearing agencies, and transfer
agents.\9\
---------------------------------------------------------------------------

    \8\ See 15 U.S.C. 78q-1(a)(2); see also Report of the Senate
Committee on Banking, Housing & Urban Affairs, S. Rep. No. 94-75, at
4 (1975) (urging that ``[t]he Committee believes the banking and
security industries must move quickly toward the establishment of a
fully integrated national system for the prompt and accurate
processing and settlement of securities transactions'').
    \9\ See 15 U.S.C. 78q-1(a)(2)(A).
---------------------------------------------------------------------------

    As discussed further below, clearing agencies are broadly defined
in the Exchange Act and undertake a variety of functions.\10\ Under
Section 17A and Rule 17Ab2-1,\11\ an entity that meets the definition
of a clearing agency is required to register with the Commission or
obtain from the Commission an exemption from registration prior to
performing the functions of a clearing agency. To grant registration to
a clearing agency, the Exchange Act requires the Commission to
determine that the rules and operations of the applicant clearing
agency meet the standards set forth in Section 17A.\12\ Specifically,
Section 17A(b)(3) provides that a clearing agency shall not be
registered unless the Commission determines that the clearing agency's
rules are consistent with the Exchange Act. In so doing, the Commission
must determine that, among other things, (i) the clearing agency is so
organized and has the capacity to be able to facilitate the prompt and
accurate clearance and settlement of securities transactions and to
safeguard securities or funds in its custody or control, (ii) the rules
of the clearing agency assure a fair representation of its members and
participants in the selection of its directors and administration of
its affairs, (iii) the rules of the clearing agency provide for the
equitable allocation of reasonable dues and fees, and (iv) the rules of
the clearing agency are designed to promote the prompt and accurate
clearance and settlement of securities transactions.\13\ Section
17A(b)(1) further provides that upon the

Commission's motion or upon a clearing agency's application, the
Commission may conditionally or unconditionally exempt a clearing
agency from any provision of Section 17A of the Exchange Act or the
rules or regulations thereunder if the Commission finds that such
exemption is consistent with the public interest, the protection of
investors, and the purposes of Section 17A, including the prompt and
accurate clearance and settlement of securities and funds.\14\
---------------------------------------------------------------------------

    \10\ See 15 U.S.C. 78c(a)(23)(A); see also infra note 40 and
accompanying text (setting forth the definition of ``clearing
agency'' under the Exchange Act).
    \11\ See 17 CFR 240.17Ab2-1.
    \12\ See 15 U.S.C. 78q-1(b)(3)(A)-(I) (identifying nine
determinations that the Commission must make regarding the rules and
structure of a clearing agency to grant registration). In 1980, the
Commission published a statement of the views and positions of
Commission staff regarding the requirements of Section 17A. See
Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June
23, 1980).
    \13\ See 15 U.S.C. 78q-1(b)(3)(A), (C), (D), (F).
    \14\ See 15 U.S.C. 78q-1(b)(1).
---------------------------------------------------------------------------

    Following this registration process, the Commission supervises
registered clearing agencies using various tools. One of these tools is
Rule 17a-1 under the Exchange Act, which requires every registered
clearing agency to keep and preserve at least one copy of all
documents, including all correspondence, memoranda, papers, books,
notices, accounts, and other such records as shall be made or received
by it in the course of its business as such and in the conduct of its
self-regulatory activity for a period not less than five years and,
upon request of any representative of the Commission, to promptly
furnish to the possession of such representative copies of any such
documents required to be kept.\15\ Another of these tools is the rule
filing process for self-regulatory organizations (``SROs''),\16\ set
forth in Section 19(b) of the Exchange Act and rules and regulations
thereunder. A registered clearing agency is required to file with the
Commission any proposed rule or proposed change in, addition to, or
deletion from the registered clearing agency's rules.\17\ The
Commission publishes all proposed rule changes for comment and reviews
them. Proposed rule changes are generally required to be approved by
the Commission prior to going into effect; however, certain types of
proposed rule changes take effect upon filing with the Commission.\18\
When reviewing a proposed rule change, the Commission considers the
submissions of the clearing agency together with any comments received
on the proposed rule change in making a determination of whether the
proposed rule change is consistent with the requirements of the
Exchange Act. In addition, Section 17A of the Exchange Act further
provides the Commission with authority to adopt rules 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 clearing agency from engaging in any activity in
contravention of such rules and regulations.\19\
---------------------------------------------------------------------------

    \15\ See 17 CFR 240.17a-1(a) through (c); see also 15 U.S.C
78q(a)(1), (2).
    \16\ Upon registration, registered clearing agencies are SROs
under Section 3(a)(26) of the Exchange Act. See 15 U.S.C.
78c(a)(26).
    \17\ An SRO must submit proposed rule changes to the Commission
for review and approval pursuant to Rule 19b-4 under the Exchange
Act. A stated policy, practice, or interpretation of an SRO, such as
its written policies and procedures, would generally be deemed to be
a proposed rule change. See 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
    \18\ See 15 U.S.C. 78s(b)(3)(A) (setting forth the types of
proposed rule changes that take effect upon filing with the
Commission). The Commission may temporarily suspend those rule
changes within 60 days of filing and institute proceedings to
determine whether to approve or disapprove the rule changes. See 15
U.S.C. 78s(b)(3)(C).
    \19\ See 15 U.S.C. 78q-1(d).
---------------------------------------------------------------------------

    In addition, Commission staff conducts examinations of registered
and exempt clearing agencies to assess, among other things, existing
and emerging risks, compliance with applicable statutory and regulatory
requirements (including any terms and conditions set forth in an order
granting registration or an exemption from registration), and a
clearing agency's oversight of compliance by its participants with its
rules. Section 21(a) of the Exchange Act provides the Commission with
authority to initiate and conduct investigations to determine if there
have been violations of the federal securities laws.\20\ Section 19(h)
of the Exchange Act also provides the Commission with authority to
institute civil actions seeking injunctive and other equitable remedies
and/or administrative proceedings arising out of such
investigations.\21\
---------------------------------------------------------------------------

    \20\ See 15 U.S.C. 78u(a).
    \21\ See 15 U.S.C. 78s(h).
---------------------------------------------------------------------------

2. Dodd-Frank Act
    Title VII of the Dodd-Frank Act provides the Commission with
authority to regulate certain over-the-counter (``OTC'') derivatives.
Specifically, Title VII added provisions to the Exchange Act that (i)
require entities performing the functions of a clearing agency with
respect to security-based swaps (``security-based swap clearing
agencies'') to register with the Commission, and (ii) direct the
Commission to adopt rules with respect to security-based swap clearing
agencies.\22\
---------------------------------------------------------------------------

    \22\ See 15 U.S.C. 78q-1(i), (j); Dodd-Frank Act, Sec. 763(b),
124 Stat. at 1768-69 (adding paragraphs (i) and (j) to Section 17A
of the Exchange Act).
---------------------------------------------------------------------------

    The Clearing Supervision Act, enacted in Title VIII of the Dodd-
Frank Act, provides for the enhanced regulation of certain financial
market utilities (``FMUs'').\23\ FMUs include clearing agencies that
manage or operate a multilateral system for the purpose of
transferring, clearing, or settling payments, securities, or other
financial transactions among financial institutions or between
financial institutions and the FMU.\24\ FSOC has designated certain
FMUs as systemically important or likely to become systemically
important (``SIFMUs'').\25\ SIFMUs are required to file 60-days advance
notice of changes to rules, procedures, and operations that could
materially affect the nature or level of risk presented by the SIFMU
(``advance notice'').\26\ The Clearing Supervision Act authorizes the
Commission to object to changes proposed in such an advance notice,
which would prevent the clearing agency from implementing the
change.\27\ The Clearing Supervision Act also provides for enhanced
coordination between the Commission and FRB by allowing for regular on-
site examinations and information sharing.\28\ The Clearing Supervision
Act further provides that the Commission and CFTC shall coordinate with
the FRB to jointly develop risk management supervision programs for
SIFMUs.\29\ In

addition, the Clearing Supervision Act provides that the Commission and
CFTC may each prescribe risk management standards governing the
operations related to payment, clearing, and settlement activities
(``PCS activities'') of SIFMUs for which each is the supervisory
agency, in consultation with the FSOC and FRB and taking into
consideration relevant international standards and existing prudential
requirements.\30\
---------------------------------------------------------------------------

    \23\ The objectives and principles for the risk management
standards prescribed under the Clearing Supervision Act shall be to
(i) promote robust risk management; (ii) promote safety and
soundness; (iii) reduce systemic risks; and (iv) support the
stability of the broader financial system. Further, the Clearing
Supervision Act states that the standards may address areas such as
risk management policies and procedures; margin and collateral
requirements; participant or counterparty default policies and
procedures; the ability to complete timely clearing and settlement
of financial transactions; capital and financial resources
requirements for designated FMUs; and other areas that are necessary
to achieve the objectives and principles described above. See 12
U.S.C. 5464(b), (c).
    \24\ See 12 U.S.C. 5462(6). The definition of ``financial market
utility'' in Section 803(6) of the Clearing Supervision Act contains
a number of exclusions that include, but are not limited to, certain
designated contract markets, registered futures associations, swap
data repositories, swap execution facilities, national securities
exchanges, national securities associations, alternative trading
systems, security-based swap data repositories, security-based swap
execution facilities, brokers, dealers, transfer agents, investment
companies, and futures commission merchants. See 12 U.S.C.
5462(6)(B).
    \25\ See 12 U.S.C. 5463. An FMU is systemically important if the
failure of or a disruption to the functioning of such FMU could
create or increase the risk of significant liquidity or credit
problems spreading among financial institutions or markets and
thereby threaten the stability of the U.S. financial system. See 12
U.S.C. 5462(9).
    \26\ See 12 U.S.C. 5465(e)(1)(A); 17 CFR 240.19b-4(n). The
Commission published a final rule concerning the filing of advance
notices for designated clearing agencies in 2012. See Exchange Act
Release No. 34-67286 (June 28, 2012), 77 FR 41602 (July 13, 2012);
see also 17 CFR 240.17Ad-22(a)(8) (defining ``designated clearing
agency'').
    \27\ See 12 U.S.C. 5465(e).
    \28\ See 12 U.S.C. 5466.
    \29\ See 12 U.S.C. 5472; see also Risk Management Supervision of
Designated Clearing Entities (July 2011), available at https://www.federalreserve.gov/publications/other-reports/files/risk-management-supervision-report-201107.pdf (describing the joint
supervisory framework of the Commission, CFTC, and FRB) (``Risk
Management Supervision Report'').
    \30\ See 12 U.S.C. 5464(a)(2). The Commission notes that, under
Rule 17Ad-22(a)(8), a SIFMU for which the Commission is the
supervisory agency is a ``designated clearing agency.'' See 17 CFR
240.17Ad-22(a)(8).
---------------------------------------------------------------------------

3. Rule 17Ad-22
    In 2012, the Commission adopted Rule 17Ad-22 under the Exchange Act
to strengthen the substantive regulation of registered clearing
agencies, promote the safe and reliable operation of registered
clearing agencies, and improve efficiency, transparency, and access to
registered clearing agencies.\31\ At that time, the Commission noted
that the implementation of Rule 17Ad-22 would be an important first
step in developing the regulatory changes contemplated by Titles VII
and VIII of the Dodd-Frank Act.\32\ In this regard, Rule 17Ad-22(b)
established certain requirements for clearing agencies that provide CCP
services, and Rule 17Ad-22(d) established requirements for the
operation and governance of all registered clearing agencies.\33\
---------------------------------------------------------------------------

    \31\ See Exchange Act Release No. 34-71699 (Mar. 12, 2014), 79
FR 16865 (Mar. 26, 2014), corrected at 79 FR 29507, 29513 (May 22,
2014) (``CCA Standards proposing release''); see also 17 CFR
240.17Ad-22; Exchange Act Release No. 34-68080 (Oct. 22, 2012), 77
FR 66219, 66225-26 (Nov. 2, 2012) (``Clearing Agency Standards
adopting release'').
    \32\ See Clearing Agency Standards adopting release, supra note
31, at 66224-25.
    \33\ See 17 CFR 240.17Ad-22(b), (d).
---------------------------------------------------------------------------

    Contemporaneously with this proposal, the Commission has taken
another step in its development of an enhanced regulatory regime for
clearing agencies and expanded the requirements under Rule 17Ad-22 by
adopting new paragraph (e).\34\ Rule 17Ad-22(e) builds on the existing
framework by establishing requirements for registered clearing agencies
that meet the definition of a ``covered clearing agency,'' as discussed
further below. Rule 17Ad-22(e) requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to address the following topics
concerning its operation and governance:
---------------------------------------------------------------------------

    \34\ See CCA Standards adopting release, supra note 7, at 463-
477.
---------------------------------------------------------------------------

     General organization (including legal basis, governance, a
framework for the comprehensive management of risks, and recovery
planning);
     financial risk management (including credit risk,
collateral, margin, and liquidity risk);
     settlement (including settlement finality, money
settlements, and physical deliveries);
     CSDs and exchange-of-value settlement systems;
     default management (including default rules and procedures
and segregation and portability);
     business and operational risk management (including
general business risk, custody and investment risks, and operational
risk);
     access (including access and participation requirements,
tiered participation arrangements, and links);
     efficiency (including efficiency and effectiveness and
communication procedures and standards); and
     transparency.
    As described in the CCA Standards adopting release, a covered
clearing agency is subject to the requirements in Rule 17Ad-22(e),
whereas a registered clearing agency that is not a covered clearing
agency is subject to the requirements in Rule 17Ad-22(d).\35\ As noted
in the CCA Standards adopting release, the Commission continues to
believe that the availability of Rules 17Ad-22(d) and (e) help ensure
that the Commission can efficiently regulate registered clearing
agencies depending on the specific activity and risks that each type of
clearing agency poses to the U.S. markets.\36\ In particular, Rule
17Ad-22(d) provides a set of requirements for registered clearing
agencies that are not covered clearing agencies. The Commission expects
to continue to use these two sets of requirements to regulate the
national system for clearance and settlement as the varied entities
that constitute it, including both covered clearing agencies and
registered clearing agencies that are not covered clearing agencies,
continue to emerge and evolve.
---------------------------------------------------------------------------

    \35\ See CCA Standards adopting release, supra note 7, at 36-40.
Rule 17Ad-22(d) sets forth minimum requirements for the operation
and governance of registered clearing agencies. Under this rule
proposal, all registered clearing agencies and covered clearing
agencies would remain subject to the requirements in Section 17A of
the Exchange Act and the relevant Commission rules and regulations
thereunder, including Rules 17Ad-22(a) and (c). Covered clearing
agencies would also remain subject to Rule 17Ad-22(e), and
registered clearing agencies that are not covered clearing agencies
would remain subject to Rule 17Ad-22(d). Registered clearing
agencies that provide CCP services would also remain subject to Rule
17Ad-22(b).
    \36\ See id. at 38.
---------------------------------------------------------------------------

B. Distinctions Among Clearing Agencies
    Section 17A of the Exchange Act was adopted in response to the
paperwork crisis of the late 1960s that nearly brought the securities
industry to a standstill and directly or indirectly resulted in the
failure of large numbers of broker-dealers because the industry's
clearance and settlement procedures were inefficient and lacked
automation.\37\ When Congress added Section 17A to the Exchange Act as
part of the Securities Acts Amendments of 1975, it made the following
four findings: (i) 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; (ii) inefficient procedures for
clearance and settlement impose unnecessary costs on investors and
persons facilitating transactions by and acting on behalf of investors;
(iii) new data processing and communications techniques create the
opportunity for more efficient, effective, and safe procedures for
clearance and settlement; and (iv) 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.\38\ Congress
therefore directed the Commission to facilitate the establishment of a
national system for the prompt and accurate clearance and settlement of
securities transactions.\39\ The Commission's ability to achieve these
goals and its supervision of the national system for clearance and
settlement is based upon

the regulation of the various entities that operate as clearing
agencies.
---------------------------------------------------------------------------

    \37\ The paperwork 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., Commission, Study of
Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc. No.
231, 92d Cong., 1st Sess. 13 (1971).
    \38\ See 15 U.S.C. 78q-1(a)(1)(A) through (D).
    \39\ See 15 U.S.C. 78q-1 et seq.; see also supra note 8.
---------------------------------------------------------------------------

    In defining ``clearing agency,'' Section 3(a)(23) of the Exchange
Act contemplates a broad variety of roles and functions. Pursuant to
Section 3(a)(23), a ``clearing agency'' is any person who does the
following:
     Acts as an intermediary in making payments or deliveries
or both in connection with securities transactions;
     provides facilities for the comparison of data regarding
the terms of settlement of securities transactions, to reduce the
number of settlements of securities transactions, or for the allocation
of securities settlement responsibilities;
     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
(such as a securities depository); or
     otherwise permits or facilitates the settlement of
securities transactions or the hypothecation or lending of securities
without physical delivery of securities certificates (such as a
securities depository).\40\
---------------------------------------------------------------------------

    \40\ See 15 U.S.C. 78c(a)(23)(A); see also supra note 10 and
accompanying text. In light of its potential breadth, the definition
excludes, among others, any national securities exchange or
registered securities association solely by reason of its providing
facilities for comparison of data respecting the terms of settlement
of securities transactions effected on such exchange or by means of
any electronic system operated or controlled by such association.
See 15 U.S.C. 78c(a)(23)(B)(ii).
---------------------------------------------------------------------------

    From these broad categories, a number of different types of
clearing agencies have emerged under the Commission's regulatory
oversight of the national system for clearance and settlement.\41\ As
discussed below, the Commission's historical approach in drawing
distinctions among the various clearing agencies operating within the
national system for clearance and settlement has, to a large degree,
been predicated on the range of clearing agency functions performed
within that system and whether, in response to these and other
elements, the appropriate regulatory response is registration or an
exemption from registration. Where registration is required, the
complete set of regulation adopted by the Commission pursuant to its
authority under Section 17A of the Exchange Act applies. As discussed
above, those clearing agencies that perform on a broad basis CCP and
CSD services have been required to register and are subject to the full
range of Commission rules and regulations for clearing agencies.\42\
Where the Commission has granted an exemption from registration,
exemptive conditions tailored to the particular clearing agency
functions performed by the clearing agency operate as the primary
regulatory requirements.
---------------------------------------------------------------------------

    \41\ In addition to those discussed below in Part I.B, the
Commission has also previously stated that entities called
``clearing corporations'' fall within the definition of ``clearing
agency'' under the Exchange Act. Clearing corporations provide a
range of clearance and settlement services but may not necessarily
fall within the definition of ``CCP'' or ``CSD.'' See Exchange Act
Release No. 20221 (Sept. 23, 1983), 48 FR 45167 (Oct. 3, 1983)
(order approving the clearing agency registration of four
depositories and four clearing corporations).
    \42\ The Commission has also granted an exemption from
registration as a clearing agency to certain entities that perform a
limited amount of CSD services for U.S. securities in certain
instances. See infra note 54.
---------------------------------------------------------------------------

1. Registered Clearing Agencies
    Three common functions of registered clearing agencies are the
functions of a CCP, CSD, and SSS. Each is described below.
    A clearing agency performs the functions of a CCP when it
interposes itself between the counterparties to a trade, acting
functionally as the buyer to every seller and the seller to every
buyer.\43\ Currently, CCPs make up five of the six active clearing
agencies registered with the Commission, and four of those five CCPs
are covered clearing agencies subject to Rule 17Ad-22(e).\44\
---------------------------------------------------------------------------

    \43\ See 17 CFR 240.17Ad-22(a)(1); Clearing Agency Standards
adopting release, supra note 31, at 66229.
    \44\ The CCPs that make up five of the six active clearing
agencies registered with the Commission are Fixed Income Clearing
Corporation (``FICC''), ICE Clear Credit (``ICC''), ICE Clear Europe
(``ICEEU''), National Securities Clearing Corporation (``NSCC''),
and The Options Clearing Corporation (``OCC''). As discussed in more
detail below, of those five CCP006ICC is the only CCP that is
currently not a covered clearing agency subject to Rule 17Ad-22(e).
---------------------------------------------------------------------------

    A clearing agency performs the functions of a CSD when it (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.\45\ A CSD may also
provide asset services, which may include the administration of
corporate actions and redemptions. One of the six active registered
clearing agencies provides securities depository services for the U.S.
securities markets and is commonly referred to as a CSD.\46\ This
clearing agency providing CSD services is also a covered clearing
agency subject to Rule 17Ad-22(e).
---------------------------------------------------------------------------

    \45\ See 15 U.S.C. 78c(a)(23)(A); 17 CFR 240.17Ad-22(a)(2).
    \46\ See 17 CFR 240.17Ad-22(a)(3); Clearing Agency Standards
adopting release, supra note 31, at 66229. This registered clearing
agency is the Depository Trust Company (``DTC'').
---------------------------------------------------------------------------

    A clearing agency also may perform the functions of an SSS. An SSS
is generally understood to be a clearing agency that enables securities
to be transferred and settled by book entry according to a set of
predetermined multilateral rules.\47\ In the Commission's experience,
SSS functions may be performed in a single registered clearing agency
that also provides CSD services. For example, on prior occasions the
Commission has included book-entry transfers as among the functions of
a CSD.\48\ In the U.S. securities markets, such functions are currently
performed by the one registered clearing agency providing securities
depository services noted above, which is a covered clearing agency
subject to Rule 17Ad-22(e).\49\
---------------------------------------------------------------------------

    \47\ See infra notes 83-88 and accompanying text (describing the
range of services that a clearing agency may provide in connection
with the settlement of securities transactions).
    \48\ See, e.g., Clearing Agency Standards adopting release,
supra note 31, at 66253.
    \49\ See, e.g., Exchange Act Release No. 34-77991 (June 3,
2016), 81 FR 37232, 37232-33 (June 9, 2016) (notice describing in
part the relationship between DTC's depository and book-entry
services).
---------------------------------------------------------------------------

    Five of the six active registered clearing agencies noted above are
SIFMUs--i.e., they have been designated systemically important by FSOC
pursuant to the Clearing Supervision Act.\50\ As previously discussed,
the Clearing Supervision Act provides for, among other things, the
enhanced regulation of SIFMUs, reflecting the fact that such entities
are critical market infrastructures that may pose a systemic risk to
the U.S. financial system. Each of the SIFMUs have

generally been described as providing the services of a CCP or CSD.\51\
---------------------------------------------------------------------------

    \50\ On July 18, 2012, the FSOC designated as systemically
important the following then-registered clearing agencies: CME Group
(``CME''), DTC, FICC, ICC, NSCC, and OCC. The Commission is the
supervisory agency for DTC, FICC, NSCC, and OCC, and the CFTC is the
supervisory agency for CME and ICC. The Commission jointly regulates
ICC and OCC with the CFTC. In addition, the Commission jointly
regulates ICE Clear Europe (``ICEEU''), which has not been
designated as systemically important by FSOC, with the CFTC and Bank
of England. DTC, FICC, NSCC, OCC, and ICEEU are covered clearing
agencies subject to Rule 17Ad-22(e).
    \51\ See, e.g., FSOC, 2012 Annual Report, at 163-187, available
at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
---------------------------------------------------------------------------

2. Exempt Clearing Agencies
    In addition to registered clearing agencies, currently the
Commission has granted exemptions from clearing agency registration to
five exempt clearing agencies.\52\ The Commission's exemptive orders
contain tailored conditions that, among other things, take into account
the range of clearing agency functions performed by each entity. Three
exempt clearing agencies provide trade matching services, which are
services that generally constitute comparison of data respecting the
terms of settlement of securities transactions.\53\ The remaining two
exempt clearing agencies are non-U.S. entities that perform a limited
range of clearing agency functions, including certain CSD and
collateral management services.\54\
---------------------------------------------------------------------------

    \52\ The five exempt clearing agencies are Clearstream,
Euroclear Bank SA/NV, Omgeo Matching Services--US, LLC, Bloomberg
STP LLC, and SS&C Technologies, Inc. See infra notes 53-54 (citing
the exemption orders for each).
    \53\ See Exchange Act Release No. 34-76514 (Nov. 24, 2015) 80 FR
75387 (Dec. 1, 2015) (``BSTP and SS&C exemption''); Exchange Act
Release No. 34-44188 (Apr. 17, 2001), 66 FR 20494 (Apr. 23, 2001);
see also Exchange Act Release No. 34-39829 (Apr. 6, 1998), 63 FR
17943 (Apr. 13, 1998) (providing interpretive guidance and
requesting comment on the confirmation and affirmation of securities
trades and matching).
    \54\ See Exchange Act Release No. 34-39643 (February 11, 1998),
63 FR 8232 (Feb. 18, 1998), as modified by Exchange Act Release No.
34-43775 (Dec. 28, 2000), 66 FR 819 (Jan. 4, 2001); Exchange Act
Release No. 34-38328 (Feb. 24, 1997), 62 FR 9225 (Feb. 28, 1997).
---------------------------------------------------------------------------

    In addition, prior to the effective date of Title VII of the Dodd-
Frank Act, the Commission issued a temporary exemption from the
registration requirements for clearing agencies in Section 17A(b) of
the Exchange Act to entities providing certain services, now sometimes
referred to as post-trade processing services, for security-based swaps
(``SBS exemption order'').\55\ To date, six entities providing a range
of such post-trade processing services are relying upon the SBS
exemption order. The Commission stated that the exemptive order was
necessary because the Dodd-Frank Act had expanded the definition of
``security'' to include security-based swaps, and therefore entities
performing the functions of a clearing agency with respect to security-
based swaps would be required to register under Section 17A(b)(1) of
the Exchange Act upon the effective date of Title VII.\56\ Those
functions, as described by the Commission in the SBS exemption order,
generally constitute certain collateral management, trade matching, and
tear up or compression functions.\57\
---------------------------------------------------------------------------

    \55\ See Exchange Act Release No. 34-64796 (July 1, 2011), 76 FR
39963 (July 7, 2011).
    \56\ In addition, as part of its consideration of whether future
rulemaking for post-trade processing clearing agencies would be
appropriate, the Commission noted that it may consider whether to
apply rules to clearing agencies engaged in PCS activities
identified in the Clearing Supervision Act. See Clearing Agency
Standards adopting release, supra note 31, at 66228. In particular,
the Clearing Supervision Act identifies the following as PCS
activities: (i) calculation and communication of unsettled financial
transactions between counterparties; (ii) netting of transactions;
(iii) provision and maintenance of trade, contract, or instrument
information; (iv) management of risks and activities associated with
continuing financial transactions; (v) transmittal and storage of
payment instructions; (vi) movement of funds; (vii) final settlement
of financial transactions; and (viii) other similar functions that
the FSOC may determine. See 12 U.S.C. 5462(7); see also supra note
30 and accompanying text.
    \57\ An expanded explanation of these different functions can be
found in the SBS exemption order. See SBS exemption order, supra
note 55, at 39964.
---------------------------------------------------------------------------

II. Proposed Amendments Under Rule 17Ad-22

    The Commission adopted Rule 17Ad-22(e) to strengthen the
substantive regulation of clearing agencies, promote the safe and
reliable operation of covered clearing agencies, and improve
efficiency, transparency, and access to covered clearing agencies. Rule
17Ad-22(e) includes requirements for covered clearing agencies intended
to address the activity and risks that their size, operation, and
importance pose to the U.S. securities markets, the risks inherent in
the products they clear, and the goals of both the Exchange Act and the
Dodd-Frank Act. Of particular note, the requirements in Rule 17Ad-22(e)
that address policies and procedures for transparency, governance,
financial risk management, and operational risk management help ensure
that covered clearing agencies are robust and stable.\58\
---------------------------------------------------------------------------

    \58\ See CCA Standards adopting release, supra note 7, at 475-
477, 463, 464-471, 474; see also supra note 34 and accompanying
text.
---------------------------------------------------------------------------

    The Commission is proposing to expand the coverage of Rule 17Ad-
22(e) so that all registered clearing agencies performing the functions
of a CCP, CSD, or SSS would be subject to Rule 17Ad-22(e). To
facilitate this amendment, the Commission is proposing in Part II.B a
definition of ``securities settlement system'' and in Part II.C to
amend the definition of ``central securities depository services.'' In
addition, the Commission also is proposing in Part II.D to amend the
definition of ``sensitivity analysis'' to expand its coverage, so that
the policies and procedures of all covered clearing agencies that are
CCPs provide for a sensitivity analysis that considers the most
volatile relevant periods, where practical, that have been experienced
by the markets served by the covered clearing agency. In Part II.E, the
Commission seeks comment on each of the proposed amendments.

A. Definition of ``Covered Clearing Agency''

    Rule 17Ad-22(a)(5) currently defines a covered clearing agency as a
registered clearing agency that: (i) has been designated as
systemically important by the FSOC and for which the Commission is the
supervisory agency under the Clearing Supervision Act (``designated
clearing agency''); or (ii) provides CCP services for security-based
swaps or is determined by the Commission to be involved in activities
with a more complex risk profile (``complex risk profile clearing
agency''), for which the CFTC is not the supervisory agency under the
Clearing Supervision Act.\59\ In the CCA Standards proposing release,
the Commission sought comment on whether the scope of Rule 17Ad-22(e)
was appropriate and whether the definition of ``covered clearing
agency'' was appropriate and sufficiently clear given the requirements
proposed.\60\
---------------------------------------------------------------------------

    \59\ See 17 CFR 240.17Ad-22(a)(5).
    \60\ See id. at 29516-17.
---------------------------------------------------------------------------

    In the CCA Standards adopting release, the Commission took an
important first step to establish coverage of the enhanced requirements
in Rule 17Ad-22(e) over an initial group of registered clearing
agencies. In light of the comments received on the CCA Standards
proposing release, the Commission is now proposing to amend the
definition of a ``covered clearing agency'' to broaden this coverage so
that it encompasses all registered clearing agencies performing the
functions of a CCP, CSD, or SSS. These functions are critical to the
U.S. securities markets and the broader U.S. financial system and
implicate the types of activities and risks that Rule 17Ad-22(e) is
designed to address. Specifically, the Commission proposes that the
definition of ``covered clearing agency'' be amended to mean a
registered clearing agency that provides the services of a CCP, CSD, or
SSS.
    The Commission preliminarily believes that the proposed amendment
to the ``covered clearing agency'' definition, which takes into account
the specific functions performed by registered clearing agencies, would
lead to greater regulatory consistency among

all registered clearing agencies that perform these critical functions.
Additionally, by focusing on functions rather than designation as
systemically important, activities with a more complex risk profile, or
the presence of another regulator, the proposed definition of ``covered
clearing agency'' would ensure that all clearing agencies performing
these critical functions are subject to enhanced requirements that
address the particular services provided by and risks inherent in these
critical functions.
1. Critical Functions Common among CCPs, CSDs, and SSSs
    Although the definition of ``clearing agency'' in the Exchange Act
is broad, there are certain activities which, by virtue of their
significance to the U.S. financial system generally, and the national
system for clearance and settlement in particular, support the
application of enhanced requirements. Among these are those clearing
agency activities that, at a general level, concern the concentration
and management of risk and the potential transmission of systemic risk.
Registered clearing agencies that provide CCP, CSD, or SSS services
perform common functions that implicate the concentration and
management of risk and the resulting systemic risk concerns. The
Commission therefore believes that it is appropriate to propose to
expand the definition of ``covered clearing agency'' to subject all
such registered clearing agencies to Rule 17Ad-22(e) because Rule 17Ad-
22(e) includes enhanced requirements that help mitigate the systemic
risk concerns raised by these activities, such as a requirement for
policies and procedures regarding a framework for the comprehensive
management of such risk and requirements for policies and procedures
that address, among other things, financial and general business risk
management, settlement risks, and transparency.\61\
---------------------------------------------------------------------------

    \61\ See 17 CFR 240.17Ad-22(e)(3) through (10), (15), (23).
---------------------------------------------------------------------------

    Financial risk management is an essential aspect of the role that
each of these registered clearing agencies provides for the U.S.
securities markets, both for their own participants and participants in
the broader U.S. financial system. Establishing requirements for
policies and procedures governing such risk management practices is a
cornerstone of Rule 17Ad-22(e). For example, with respect to credit
risk, Rule 17Ad-22(e)(4) requires that each covered clearing agency
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes.\62\ With
respect to liquidity risk, Rule 17Ad-22(e)(7) requires that each
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by the covered clearing agency, including measuring, monitoring,
and managing its settlement and funding flows on an ongoing and timely
basis and its use of intraday liquidity.\63\ Rule 17Ad-22(e)(5) and (6)
also include enhanced requirements for policies and procedures to
manage collateral and maintain a risk-based margin, with particular
requirements that help to ensure resilient stress testing of a covered
clearing agency's financial resources.\64\
---------------------------------------------------------------------------

    \62\ See 17 CFR 240.17Ad-22(e)(3). While Rule 17Ad-22(d) also
includes some requirements for policies and procedures related to
credit risk, Rule 17Ad-22(e) includes enhanced requirements related
to, among other things, stress testing.
    \63\ See 17 CFR 240.17Ad-22(e)(7). Rule 17Ad-22(d) does not
include requirements for policies and procedures related to the
management of liquidity risk.
    \64\ See 17 CFR 240.17Ad-22(e)(5), (6).
---------------------------------------------------------------------------

    General business risk is another potential risk that these types of
registered clearing agencies, as entities that concentrate risk, must
manage, and Rule 17Ad-22(e) includes enhanced requirements for policies
and procedures that manage general business risk. Specifically, Rule
17Ad-22(e)(3) requires policies and procedures that provide for a
comprehensive risk management framework that addresses a variety of
risks, including both financial risk and general business risk.\65\
Rule 17Ad-22(e)(15) further requires that each covered clearing agency
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to identify, monitor, and manage the
covered clearing agency's general business risk and hold sufficient
liquid net assets funded by equity to cover potential general business
losses so that the covered clearing agency can continue operations as a
going concern if those losses materialize.\66\ Other requirements in
Rule 17Ad-22(e) flow from the management of these risks as well.
Notably, Rule 17Ad-22(e)(3) requires policies and procedures reasonably
designed to ensure that a covered clearing agency establishes plans for
the recovery and orderly wind-down of the covered clearing agency
necessitated by credit losses, liquidity shortfalls, losses from
general business risk, or any other losses.\67\ Rule 17Ad-22(e)(15)
complements this requirement with requirements for policies and
procedures reasonably designed to provide for holding liquid net assets
funded by equity equal to the greater of either six months of its
current operating expenses or the amount determined by the board of
directors to be sufficient to ensure a recovery or orderly wind-down of
critical operations and services of the covered clearing agency, as
contemplated by the plans established under Rule 17Ad-22(e)(3).\68\ The
Commission preliminarily believes that a registered clearing agency
that provides CCP, CSD, or SSS services should be subject to enhanced
requirements for maintaining policies and procedures that manage
business risk and provide for recovery and wind-down plans. These
enhanced business risk requirements would benefit not only the clearing
agency but also participants and the public. Likewise, recovery and
wind-down plans help ensure that CCPs, CSDs, SSSs, and policymakers can
plan for and mitigate the potential systemic consequences of a wind-
down or failure.
---------------------------------------------------------------------------

    \65\ See 17 CFR 240.17Ad-22(e)(3). Rule 17Ad-22(d) does not
include comparable requirements.
    \66\ See 17 CFR 240.17Ad-22(e)(15). Rule 17Ad-22(d) does not
include requirements for policies and procedures related to the
management of business risk.
    \67\ See 17 CFR 240.17Ad-22(e)(3)(ii).
    \68\ See 17 CFR 240.17Ad-22(e)(15)(ii).
---------------------------------------------------------------------------

    Facilitating settlement and mitigating settlement risks is another
essential role played by these registered clearing agencies, CSDs and
SSSs in particular, and another important component of Rule 17Ad-22(e)
is enhanced requirements for policies and procedures governing
settlement. For example, Rule 17Ad-22(e) includes requirements directed
to settlement finality, physical delivery, and money settlements.\69\
Importantly, it also includes rules with enhanced requirements for
depository functions and settlement systems.\70\
---------------------------------------------------------------------------

    \69\ See 17 CFR 240.17Ad-22(e)(8), (9), (10).
    \70\ See 17 CFR 240.17Ad-22(e)(11). Rule 17Ad-22(d)(10) also
includes requirements for policies and procedures related to the
immobilization or dematerialization of securities certificates and
the transfer of them by book entry, but does not include
requirements for, among other things, policies and procedures
relating to ensuring the integrity of securities issues,
safeguarding the rights of securities issuers and holders,
preventing the unauthorized creation or deletion of securities, or
conducting periodic and at least daily reconciliation of securities
issues. See 17 CFR 240.17Ad-22(d)(10).

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

    Providing transparency to the markets is another essential role
that these registered clearing agencies facilitate in the markets they
serve by each maintaining a set of rules and procedures that govern
their participants, their clearance and settlement services, and their
risk management framework. Each registered clearing agency that
provides CCP, CSD, or SSS services has rules that, while they may vary
according to the characteristics of the markets they serve, generally
govern how they clear transactions or trades submitted by participants,
calculate whether and how much each participant owes in margin or to
the clearing or participant fund on either a gross or net basis,
receive securities from participants that owe securities, deliver
securities to participants that are owed securities, collect payments
from participants that owe money, and pay participants that are owed
money. Rule 17Ad-22(e)(23)(iv) also requires a covered clearing agency
to have policies and procedures that provide for a comprehensive public
disclosure of its material rules, policies, and procedures regarding
the requirements in Rule 17Ad-22(e).\71\ Increased transparency helps
market participants manage their risks, thereby reducing systemic risk
concerns across the U.S. financial system.
---------------------------------------------------------------------------

    \71\ See 17 CFR 240.17Ad-22(e)(23)(iv). No comparable
requirement exists in Rule 17Ad-22(d).
---------------------------------------------------------------------------

    Each of the above roles, common across the registered clearing
agencies that provide CCP, CSD, and SSS services, is addressed by the
enhanced requirements in Rule 17Ad-22(e), and therefore the Commission
believes that expanding the definition of ``covered clearing agency''
to include those registered clearing agencies that are integral in
either performing these functions or managing these risks, as
appropriate, will help to further strengthen the national system for
clearance and settlement and help to further mitigate risk to the
broader U.S. financial system.
2. Critical Functions Specific to CCPs, CSDs, or SSSs
    In addition to the critical roles common across CCPs, CSDs, and
SSSs, each such clearing agency also performs unique functions that
support expanded coverage of the ``covered clearing agency'' definition
and, through it, application of Rule 17Ad-22(e) to such clearing
agencies because, as discussed further below, Rule 17Ad-22(e) also
includes enhanced requirements with respect to these functions.
    First, with respect to CCPs, the Commission is proposing that the
definition of ``covered clearing agency'' be expanded so that CCPs
would be subject to Rule 17Ad-22(e) in all circumstances. The
Commission has, on previous occasions, noted that increasing reliance
by market participants on CCPs supports the application of enhanced
regulatory requirements that address the risks posed by such
activity.\72\ For example, market participants may rely on CCPs because
clearing and settling a high volume of financial transactions
multilaterally through a CCP can allow for greater efficiency and lower
costs than settling bilaterally.\73\ In addition, CCPs are often able
to manage risks for their participants related to the clearing and
settling of financial transactions more effectively, and, in some
cases, reduce certain risks such as the risk that a purchaser of a
security will not receive the security or that a seller of a security
will not receive payment for the security.\74\ CCPs have also become
increasingly important given the mandated central clearing of certain
swaps and security-based swaps that is required by the Dodd-Frank
Act.\75\
---------------------------------------------------------------------------

    \72\ See CCA Standards adopting release, supra note 7, at 257-
264; Clearing Agency Standards adopting release, supra note 31, at
66264-65 (noting, among other things, that 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).
    \73\ See, e.g., Risk Management Supervision Report, supra note
29, at 8.
    \74\ See, e.g., id. at 8.
    \75\ See, e.g., id. at 3.
---------------------------------------------------------------------------

    CCPs confer certain benefits to the markets in which they operate,
but can also pose substantial risk not only to individual market
participants but also to the broader financial system, due in part to
the fact that central clearing concentrates risk. Disruption to such
functions, or failure on the part of the clearing agency to meet its
obligations, could, result in significant costs to the clearing agency
itself and its members and create a potential source of contagion
affecting other market participants or the broader U.S. financial
system.\76\ As a result, proper management of the risks associated with
central clearing is necessary to ensure the stability of the U.S.
securities markets and the broader U.S. financial system. Each CCP
determines how best to manage its credit and liquidity risks,
consistent with its regulatory framework and as appropriate for the
products it clears and the market it serves. For example, participants
must meet membership requirements to join a CCP. Each CCP determines
who meets its membership criteria and continues to monitor its
membership to ensure that the members continue to meet these criteria.
Similarly, each CCP is responsible for determining its own margin
models and ensuring that each member meets its obligations under the
margin models. When the Commission adopted Rule 17Ad-22(e), it sought
to impose enhanced requirements to an initial group of registered
clearing agencies that concentrated risk because they were either
designated systemically important or engaged in activities with a more
complex risk profile. Now, the Commission believes it is appropriate to
propose to expand the coverage of the ``covered clearing agency''
definition to include all CCPs because, as described above, CCP
operations generally concentrate risk and can also act as a transfer
mechanism for risk, and Rule 17Ad-22(e) includes enhanced requirements
that help mitigate the risks that CCP functions carry. In particular,
Rule 17Ad-22(e) includes requirements

for the management of credit and liquidity risk, the development of
recovery and wind-down plans, and tiered participation
arrangements,\77\ and the Commission believes that applying these
requirements to all CCPs will help further mitigate systemic risk to
the U.S. financial system.
---------------------------------------------------------------------------

    \76\ See generally Darrell Duffie, Ada Li & Theo Lubke, Policy
Perspectives on OTC Derivatives Market Infrastructure, at 9 (Fed.
Reserve Bank N.Y. Staff Reps., Mar. 2010), available at http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is
successful in clearing a large quantity of derivatives trades, the
CCP is itself a systemically important financial institution. The
failure of a CCP could suddenly expose many major market
participants to losses. Any such failure, moreover, is likely to
have been triggered by the failure of one or more large clearing
members, and therefore to occur during a period of extreme market
fragility.''); Craig Pirrong, The Inefficiency of Clearing Mandates,
Policy Analysis, No. 655, at 11-14, 16-17, 24-26 (2010), available
at http://www.cato.org/pubs/pas/PA665.pdf, at 11-14, 16-17, 24-26
(stating, among other things, that ``CCPs are concentrated points of
potential failure that can create their own systemic risks,'' that
``[a]t most, creation of CCPs changes the topology of the network of
connections among firms, but it does not eliminate these
connections,'' that clearing may lead speculators and hedgers to
take larger positions, that a CCP's failure to effectively price
counterparty risks may lead to moral hazard and adverse selection
problems, that the main effect of clearing would be to
``redistribute losses consequent to a bankruptcy or run,'' and that
clearing entities have failed or come close to failing in the past,
including in connection with the 1987 market break); Manmohan Singh,
Making OTC Derivatives Safe--A Fresh Look, at 5-11 (IMF Working
Paper, Mar. 2011), available at http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf (addressing factors that could lead central
counterparties to be ``risk nodes'' that may threaten systemic
disruption); Domanski, Dietrich, Leonardo Gambacorta, and Cristina
Picillo. ``Central clearing: trends and current issues.'' BIS
Quarterly Review December (2015), available at https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf (describing links between CCP financial
risk management and systemic risk); Wendt, Froukelien, Central
counterparties: addressing their too important to fail nature
(2015), available at http://papers.ssrn.com/sol3/Delivery.cfm/wp1521.pdf?abstractid=2568596&mirid=1&type=2 (assessing the
potential channels for contagion arising from CCP
interconnectedness).
    \77\ See 17 CFR 240.17Ad-22(e)(4), (7), (19).
---------------------------------------------------------------------------

    Second, the Commission is similarly proposing that a clearing
agency providing CSD services also be a covered clearing agency. The
Commission has noted on previous occasions the importance of CSDs to
the U.S. securities markets. For example, the Commission has noted that
CSDs are critical elements of the national system for clearance and
settlement,\78\ and that 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.\79\ CSDs play a key role
in modern financial markets, where, for many issuers, transactions in
securities often involve no transfer of physical certificates.\80\ Such
paperless trading generally improves transactional efficiency but for
such benefits to accrue, market participants must have confidence that
CSDs can correctly account for the number of securities in their
custody and for the book entries that allocate securities across
participant accounts. The Commission therefore is proposing that CSDs
also be subject to Rule 17Ad-22(e) in all circumstances because of the
important role they play in the national system for clearance and
settlement of securities. Rule 17Ad-22(e)(11) established enhanced
requirements specific to CSDs. Rule 17Ad-22(e)(11)(i) requires a
covered clearing agency that provides central securities depository
(``CSD'') services to establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
securities in an immobilized or dematerialized form for their transfer
by book entry, ensure the integrity of securities issues, and minimize
and manage the risks associated with the safekeeping and transfer of
securities. Rule 17Ad-22(e)(11)(ii) requires a covered clearing agency
that provides CSD services to establish, implement, maintain and
enforce written policies and procedures reasonably designed to
implement internal auditing and other controls to safeguard the rights
of securities issuers and holders, prevent the unauthorized creation or
deletion of securities, and conduct periodic and at least daily
reconciliation of securities issues it maintains. Finally, Rule 17Ad-
22(e)(11)(iii) requires a covered clearing agency that provides CSD
services to establish, implement, maintain and enforce written policies
and procedures reasonably designed to protect assets against custody
risk through appropriate rules and procedures consistent with relevant
laws, rules, and regulations in jurisdictions where it operates.\81\ In
addition, Rule 17Ad-22(e) generally strengthens the substantive
regulations of clearing agencies through, among other things,
requirements for the comprehensive management of risk and the
development of recovery and wind-down plans, which are equally
important to CSDs.\82\ Therefore, the Commission believes that applying
Rule 17Ad-22(e) to all clearing agencies providing CSD services will
further help mitigate risk to the U.S. financial system.
---------------------------------------------------------------------------

    \78\ See BSTP and SS&C exemption, supra note 53, at 75398
(noting that a CSD is ``a critical element of the national system
for clearance and settlement'').
    \79\ See Clearing Agency Standards adopting release, supra note
34, at 66273.
    \80\ See CCA Standards proposing release, supra note 31, at
29603.
    \81\ See CCA Standards adopting release, supra note 7, at 472.
    \82\ See id. at 91-105 (describing the requirements under Rule
17Ad-22(e)(3)).
---------------------------------------------------------------------------

    Lastly, while in the U.S. securities markets the functions of an
SSS are typically performed by a registered clearing agency that also
provides CSD services, the Commission has also noted that clearing
agencies provide a broad range of services in connection with the
settlement of securities transactions.\83\ For example, the Commission
has previously noted that clearing agencies ``provide differing
clusters of services for their participants.'' \84\ In particular,
``[c]learing corporations generally receive trade data respecting
exchanges or [over-the-counter] trades between broker-dealers and
compare, account for and settle the netted securities transactions.''
\85\ Over the years, the Commission has registered a number of entities
as clearing agencies that provide a variety of securities settlement
services. These services include facilitating the settlement of
transactions executed by specialists on an exchange,\86\ providing
clearance and settlement services for mortgage-backed securities
transactions,\87\ and facilitating the clearance and settlement of
cross-border transactions.\88\ These SSSs play a vital role in
fostering the proper functioning of financial markets, but if they are
not effectively managed they have the potential to act as transmission
channels for financial shocks, particularly on days of market stress.
---------------------------------------------------------------------------

    \83\ See Exchange Act Release No. 34-20221 (Sept. 23, 1983), 48
FR 45167, 45169 & n.32 (Oct. 3, 1983) (in describing the accounting
processes that generate securities settlement obligations,
distinguishing NSCC's ``continuous net settlement'' system from a
``daily balance order'' system); Exchange Act Release No. 34-21335
(Sept. 20, 1984), 49 FR 37879, 37879 (Sept. 26, 1984) (in describing
the functions performed by the Boston Stock Exchange Clearing
Corporation (``BSECC''), noting that BSECC transmits data to NSCC
for processing and collects and pays members' daily settlement
obligations at NSCC and DTC);
    \84\ See 48 FR at 45169.
    \85\ See id. (citations omitted).
    \86\ See id. at 45173-77 (approving the registration of the
Stock Clearing Corporation of Philadelphia subject to conditions).
    \87\ See Exchange Act Release No. 34-24046 (Feb. 2, 1987), 52 FR
4218 (Feb. 10. 1987) (order granting registration as a clearing
agency to MBS Clearing Corporation).
    \88\ See Exchange Act Release No. 34-26812 (May 12, 1989), 54 FR
21691 (May 19, 1989) (order approving temporary registration as a
clearing agency of the International Securities Clearing
Corporation).
---------------------------------------------------------------------------

    The Commission also believes that a clearing agency providing SSS
services can raise credit, market, and operational risk concerns.\89\
The Commission preliminarily believes that these functions, whether
performed independently or consolidated with other clearing agency
functions in a single registered clearing agency, support application
of the enhanced standards in Rule 17Ad-22(e).\90\ In recent years, the
Commission has adopted requirements for the policies and procedures of
certain clearing agencies under Rule 17Ad-22 to help achieve delivery
versus payment and eliminate principal risk,\91\ both of which relate
to the provision of SSS services. The Commission adopted Rule 17Ad-
22(e) to strengthen the substantive regulations applicable to clearing
agencies to address, among other things, credit, market, and
operational risk. Because SSS operations present these types of risk,
the Commission is proposing to apply Rule 17Ad-22(e) to all entities
performing these SSS functions.
---------------------------------------------------------------------------

    \89\ The Commission notes that, currently, no registered
clearing agency provides only SSS services in the United States.
Nonetheless, the Commission preliminarily believes that SSSs,
because they are financial market infrastructures that provide
centralized services similar to CCPs and CSDs, can also serve as
potential transmission mechanisms for systemic risk and should
therefore also be subject to the same requirements as CCPs and CSDs.
In this regard, the Commission notes that Rule 17Ad-22(e)(12)
includes requirements specific to settlement systems. See CCA
Standards adopting release, supra note 7, at 472.
    \90\ See generally Report of the Senate Committee on Banking,
Housing & Urban Affairs, S. Rep. No. 94-75, at 5, 91 (recognizing
book-entry transfer as one of three basic clearing agency functions
before consolidating it, along with clearing and the transfer of
record ownership, into a single definition of ``clearing agency'' in
the Exchange Act).
    \91\ See 17 CFR 240.17Ad-22(d)(13), (e)(12).

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

3. Increasing Scrutiny of CCP, CSD, and SSS Functions
    In response to the CCA Standards proposing release, the Commission
received a number of comments on the proposed scope of the definition
of covered clearing agency asking the Commission to expand the scope of
the covered clearing agency definition and therefore the coverage of
Rule 17Ad-22(e).\92\ Specifically, one commenter endorsed efforts to
promote financial stability through the application of heightened
standards for covered clearing agencies, particularly those that
provide CCP services for security-based swaps and other derivatives,
noting that the mandatory clearing of OTC derivatives introduced
following the 2008 financial crisis has heightened the need for
enhanced standards for CCPs.\93\ A second commenter suggested that the
Commission apply Rule 17Ad-22(e) to all clearing agencies to reduce the
risk of failure and the problems such a failure would cause for
investors, citing the size of the derivatives markets, and the
potential for disruption and systemic risk that these markets may have
on covered clearing agencies.\94\ A third commenter recommended that
any provision of the proposed rules that reflects best practices should
be applied across all clearing agencies.\95\ Each of these comments
supports an approach under which registered clearing agencies are
subject to the enhanced standards in Rule 17Ad-22(e) where they perform
critical clearing agency functions that concentrate risk and could
serve as mechanisms for the transfer of systemic risk. Consistent with
these comments, the proposed application of Rule 17Ad-22(e) to all
registered clearing agencies that provide CCP, CSD, and SSS services
would strengthen the Commission's substantive regulation of clearing
agencies by imposing enhanced requirements for risk management policies
and procedures that help mitigate systemic risk.
---------------------------------------------------------------------------

    \92\ See CCA Standards adopting release, supra note 7, at 53-65.
    \93\ See The Clearing House at 1.
    \94\ See CFA Institute at 2.
    \95\ See DTCC at 4.
---------------------------------------------------------------------------

    In contrast to the above commenters, one commenter endorsed the
Commission's adopted definition of ``covered clearing agency'' and
supported not applying Rule 17Ad-22(e) to registered clearing agencies
that were dually registered with the CFTC and SEC, where the CFTC is
the supervisory authority under the Clearing Supervision Act.\96\ The
commenter also believed that subjecting a dually registered clearing
agency to requirements under Rule 17Ad-22(e) and the CFTC's regime
would result in duplicative regulation.\97\ The Commission
preliminarily believes that, as discussed in Part II.A.4 below,
although the proposed amendment to the definition of ``covered clearing
agency'' would subject some dually registered clearing agencies to
similar regulations under the Commission's and CFTC's comparable
regimes, expanding the definition to include dually registered clearing
agencies is nonetheless appropriate.
---------------------------------------------------------------------------

    \96\ See CME at 2.
    \97\ See id.
---------------------------------------------------------------------------

4. Expanded Coverage Under the Definition of ``Covered Clearing
Agency''
    The proposed amendment to the definition of ``covered clearing
agency'' would differ in two ways from the existing definition of
``covered clearing agency.'' First, it would no longer reference
whether a clearing agency has been designated systemically important by
the FSOC and for which the Commission is the supervisory agency under
the Clearing Supervision Act. Second, it would remove references to
clearing agencies that provide CCP services for security-based swaps or
are involved in activities the Commission determines to have a more
complex risk profile, unless the CFTC is the supervisory agency under
the Clearing Supervision Act. Amending the definition of ``covered
clearing agency'' in this way would replace these two categories of
clearing agencies with clearing agencies providing the services of a
CCP, CSD, or SSS and thereby expand the range of entities that fall
within the definition of ``covered clearing agency.'' Accordingly,
under the proposed amendment to the definition, whether a registered
clearing agency is a SIFMU or dually registered with the Commission and
the CFTC would no longer be relevant to application of the ``covered
clearing agency'' definition or Rule 17Ad-22(e).
    Thus, the potential for registered clearing agencies to be subject
to Rule 17Ad-22(e) would increase under the proposed amendment. In
particular, under the proposed amendment to the definition, the
narrower set of complex risk profile clearing agencies for which the
CFTC is not the supervisory agency would be replaced with the full
universe of registered clearing agencies that provide CCP, CSD, or SSS
services. In light of the discussion above regarding the critical
functions common among and specific to CCPs, CSDs, and SSSs, the
Commission preliminarily believes that such an expansion is appropriate
in order to help further mitigate systemic risk to the U.S. financial
system.
    Preliminarily, the Commission believes that such an approach is
appropriate even though it may subject clearing agencies that are
dually registered with the Commission and CFTC to similar requirements
in some instances. In this regard, the Commission first notes that the
staff has consulted with the CFTC, FRB, and FSOC in the development of
these rules to, in part, avoid unnecessarily duplicative or
inconsistent regulation with respect to clearing agencies that are
dually registered in the United States. With respect to such clearing
agencies--as well as clearing agencies regulated by authorities in
other jurisdictions--the Commission is nonetheless mindful, pursuant to
the comprehensive framework for regulating swaps and security-based
swaps established in Title VII, that the SEC has been given regulatory
authority over security-based swaps.\98\ CCPs that clear security-based
swaps present risks to the securities markets that must be subject to
appropriate risk management. As noted in the CCA Standards adopting
release, the Commission's intent with respect to Rule 17Ad-22(e) was,
in part, to take an incremental step under Rule 17Ad-22 to ensure that
these risks are appropriately managed consistent with the purposes of
the Exchange Act, the Clearing Supervision Act, and Title VII of the
Dodd-Frank Act.\99\ The Commission believes that the proposed
amendments to the definition of ``covered clearing agency'' represent
another incremental step to help ensure that these risks are
appropriately managed consistent with each of the above statutes. The
Commission has, through Rule 17Ad-22(e) sought to apply requirements
commensurate and appropriate to the risk posed by the clearing agency
functions and activities specific to

covered clearing agencies as they exist in, and serve, the U.S.
securities markets. The Commission acknowledges that other rules and
regulations may apply to a covered clearing agency that are similar in
scope or purpose to Rule 17Ad-22(e). However, the presence of similar
regulations does not negate the Commission's obligation to ensure that
risk in the U.S. securities markets is appropriately managed consistent
with the purposes of the Exchange Act, the Clearing Supervision Act,
and Title VII of the Dodd-Frank Act. Further, because Rule 17Ad-22(e)
and other comparable regulations--including those of the CFTC--are
consistent with the same international standards,\100\ the potential
for inconsistent regulation is low.
---------------------------------------------------------------------------

    \98\ This dual framework for the regulation of CCPs for swaps
and security-based swaps by the Commission and the CFTC was recently
recognized by the European Commission in its equivalence decision
for the CFTC. The European Commission has indicated that it will
conduct a separate equivalence analysis for CCPs clearing securities
and security-based swaps. See Commission Implementing Decision (EU)
2016/377 of 15 March 2016 on the equivalence of the regulatory
framework of the United States of America for central counterparties
that are authorised and supervised by the CFTC to the requirements
of Regulation (EU) No 648/2012 of the European Parliament and of the
Council, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016D0377.
    \99\ See CCA Standards adopting release, supra note 7, at 45.
    \100\ See CCA Standards adopting release, supra note 7, at 45.
---------------------------------------------------------------------------

    Further, in the CCA Standards adopting release, the Commission
addressed comments regarding the risk of duplicative regulation that
may result for clearing agencies dually registered with the Commission
and the CFTC,\101\ and noted that the Commission has previously
addressed concerns about duplication in the rule filing process by
streamlining the process under Rule 19b-4 for dually registered
clearing agencies.\102\ Specifically, for rule filings that primarily
concern the clearing operations of a registered clearing agency that do
not pertain to securities clearing operations but only to clearing of
products under the authority of the CFTC, the Commission made a policy
decision to provide a streamlined process for such rule filings to
become effective upon filing with the Commission, without pre-effective
notice and opportunity for comment.\103\
---------------------------------------------------------------------------

    \101\ See id. at 44-46.
    \102\ See Exchange Act Release No. 34-69284 (Apr. 3, 2013), 78
FR 21046 (Apr. 9, 2013).
    \103\ See id. at 21047.
---------------------------------------------------------------------------

    Finally, with respect to the proposed removal of designated
clearing agencies from the ``covered clearing agency'' definition, the
Commission notes that each designated clearing agency under Title VIII
provides either CCP or CSD services and, therefore, would remain a
covered clearing agency under the proposed amendment to the definition
of ``covered clearing agency.'' \104\ Moreover, the proposed shift to a
function-oriented definition of ``covered clearing agency'' would not
cause any of the registered clearing agencies that currently fall
within the definition to be excluded. DTC, FICC, ICEEU, NSCC, and OCC
all perform CCP, CSD, and/or SSS services.
---------------------------------------------------------------------------

    \104\ See supra note 50.
---------------------------------------------------------------------------

    The proposed amendment to the definition would expand the scope of
covered clearing agencies by one additional clearing agency, ICC.
Although ICC is a designated SIFMU and provides CCP services for
security-based swaps, the CFTC is its supervisory agency, so it is not
a covered clearing agency under the adopted definition.

B. Definition of ``Securities Settlement System''

    To facilitate the proposed amendment to the definition of ``covered
clearing agency,'' the Commission is also proposing to define
``securities settlement system'' to mean a clearing agency that enables
securities to be transferred and settled by book entry according to a
set of predetermined multilateral rules. The Commission understands
that this is the generally accepted meaning of the term.\105\ The
Commission preliminarily believes that this definition appropriately
captures the critical functions performed by SSSs described above,
including the role that SSSs have in concentrating and managing risk on
behalf of their participants. The proposed definition would, among
other things, include a clearing agency that facilitates the settlement
of transactions executed by specialists on an exchange, provides
clearance and settlement services for mortgage-backed securities
transactions, or facilities the clearance and settlement of cross-
border transactions.\106\
---------------------------------------------------------------------------

    \105\ See supra note 6.
    \106\ See supra notes 83-88.
---------------------------------------------------------------------------

C. Definition of ``Central Securities Depository''

    Consistent with the proposed amendment to the definition of
``covered clearing agency,'' and to improve consistency with both the
definition of ``central counterparty'' in Rule 17Ad-22(a)(2) and the
proposed definition of ``securities settlement system,'' the Commission
is proposing to amend the definition of ``central securities depository
services'' in Rule 17Ad-22(a)(3). Rule 17Ad-22(a)(3) as adopted defines
``central securities depository services'' to mean services of a
clearing agency that is a securities depository as described in Section
3(a)(23)(A) of the Exchange Act. The Commission is proposing to amend
Rule 17Ad-22(a)(3) so that it would instead define ``central securities
depository'' to mean a clearing agency that is a securities depository
as described in Section 3(a)(23)(A) of the Exchange Act.
    This modification would not alter the meaning of Rule 17Ad-22(a)(3)
other than to improve consistency with (i) the definition of ``central
counterparty'' and its use throughout Rule 17Ad-22, and (ii) the
proposed definition of ``securities settlement system'' and its
proposed use under Rule 17Ad-22. The Commission preliminarily believes
that this proposed modification is therefore appropriate so that the
definition of ``covered clearing agency'' is workable.

D. Definition of ``Sensitivity Analysis''

    The Commission is also proposing to amend the definition of
``sensitivity analysis'' under Rule 17Ad-22 to remove the reference to
``a covered clearing agency involved in activities with a more complex
risk profile'' from paragraph (ii). Pursuant to the proposed amendment,
all covered clearing agencies that are CCPs, rather than just those
involved in activities with a more complex risk profile, as part of
developing and maintaining policies and procedures for performing
sensitivity analysis pursuant to Rule 17Ad-22(e)(6), would need to
consider the most volatile relevant periods, where practical, that have
been experienced by the markets served by the clearing agency.
    Under the existing definition of ``sensitivity analysis,'' the
Commission applies the requirements for policies and procedures
regarding volatile relevant periods only to covered clearing agencies
that are complex risk profile clearing agencies. While this approach
applies the requirements related to sensitivity analysis to CCPs that
clear security-based swaps, it does not apply the requirements to other
clearing agencies that provide CCP services. Under the Commission's
proposed amendment to the ``sensitivity analysis'' definition, these
requirements for policies and procedures would apply to all covered
clearing agencies that are CCPs. The Commission believes that policies
and procedures for considering the most volatile relevant periods,
where practical, that have been experienced by the markets served by a
covered clearing agency promote sound risk management and help mitigate
systemic risk. The Commission therefore preliminarily believes that
expanding the coverage of this requirement to all CCPs will help
mitigate risks to the U.S. financial system. In light of the
Commission's proposal to expand the coverage of the ``covered clearing
agency'' definition to all CCPs, the Commission preliminarily believes
it is important to also require that any currently registered CCP or
CCP that may register with the Commission in the future be subject to
the same requirement to help mitigate risks to the U.S. financial
system. Based on its supervisory experience, the Commission

preliminarily believes that all active CCPs currently registered with
the Commission have policies and procedures for sensitivity analysis
though they may vary in their application.
    In addition, in order to improve consistency within the definition
of sensitivity analysis, the Commission is proposing to separate the
two elements that appear in current paragraph (i) into two separate
paragraphs and renumber the existing paragraphs accordingly. Thus,
``sensitivity analysis'' would mean an analysis that involves analyzing
the sensitivity of a model to its assumptions, parameters, and inputs
that (i) considers the impact on the model of both moderate and extreme
changes in a wide range of inputs, parameters, and assumptions,
including correlations of price movements or returns if relevant, which
reflect a variety of historical and hypothetical market conditions;
(ii) uses actual portfolios and, where applicable, hypothetical
portfolios that reflect the characteristics of proprietary positions
and customer positions; (iii) considers the most volatile relevant
periods, where practical, that have been experienced by the markets
served by the clearing agency; and (iv) tests the sensitivity of the
model to stressed market conditions, including the market conditions
that may ensue after the default of a member and other extreme but
plausible conditions as defined in a covered clearing agency's risk
policies. This proposed modification would not alter the meaning or
application of the definition of ``sensitivity analysis,'' but is
designed to improve clarity regarding the number of discrete elements
contained in the definition.

E. Request for Comments

    The Commission requests comment on all aspects of the proposed
amendments to the definitions of ``covered clearing agency,'' ``central
securities depository,'' and ``sensitivity analysis'' and the proposed
definition of ``securities settlement system,'' including whether the
definitions are sufficiently clear and, if not, how they should be
changed. In addition, the Commission requests comment on the following
specific issues. In all cases, responses should be supported by
detailed explanation and analysis and, where possible, empirical
evidence.
     In describing the functions or services of a covered
clearing agency as those of a CCP, CSD, or SSS, has the Commission's
proposal appropriately classified the functions/services of a covered
clearing agency? Are there other clearing agency functions or services
that the Commission should consider including in the definition of
``covered clearing agency?'' If so, explain why these functions or
services should be included and how these functions relate to the
policy goals and requirements in Rule 17Ad-22(e). In addition, please
explain whether any of the clearing agency functions included in the
proposed definition of ``covered clearing agency'' should be excluded
and why such an exclusion is appropriate.
     Will the proposed approach to expanding the definition of
``covered clearing agency'' result in duplicative costs for CCPs, CSDs,
and SSSs? If so, what are these costs?
     Should any of the requirements under Rule 17Ad-22(e) be
altered as they relate to the new entities under the proposed expansion
of the ``covered clearing agency'' definition? Please explain.
     In referencing a securities depository as described in
Section 3(a)(23)(A) of the Exchange Act, does the proposed definition
of ``central securities depository'' sufficiently describe the
functions of a CSD? Why or why not? What other functions, if any,
should be included in the definition of ``central securities
depository?''
     The definition of ``central securities depository'' would
continue to appear in Rule 17Ad-22(d)(14).\107\ However, as a result of
the proposed amendment to the ``covered clearing agency'' definition, a
registered clearing agency that performs CSD services would be a
covered clearing agency subject to Rule 17Ad-22(e) and would not be
subject to the requirements in Rule 17Ad-22(d). Accordingly, should the
Commission modify Rule 17Ad-22(d)(14) in light of the proposed
amendments? If so, how should the Commission apply Rule 17Ad-22(d)(14)
to a registered clearing agency that is not a covered clearing agency?
---------------------------------------------------------------------------

    \107\ Rule 17Ad-22(d)(14) requires a registered clearing agency
other than a covered clearing agency to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to institute risk controls, including collateral
requirements and limits to cover the clearing agency's credit
exposure to each participant family exposure fully, that ensure
timely settlement in the event that the participant with the largest
payment obligation is unable to settle when the clearing agency
provides CSD services and extends intraday credit to participants.
See 17 CFR 240.17Ad-22(d)(14).
---------------------------------------------------------------------------

     Do commenters agree with the proposed definition of
``securities settlement system?'' Should there be another definition?
If so, why? Does the definition sufficiently describe the functions of
an SSS? Is it sufficiently clear what ``according to a set of
predetermined multilateral rules'' means? Please provide examples of
SSS activities.
     In light of the proposed amendment to the definition of
``sensitivity analysis,'' would a covered clearing agency have to make
changes to its policies and procedures for conducting sensitivity
analysis to comply with the new definition? If so, explain the current
policies and procedures of covered clearing agencies relevant to
conducting sensitivity analysis and how they would need to be changed.
The Commission also requests information regarding the anticipated
costs of any such changes to policies and procedures. The Commission
also requests information regarding the potential benefits.

III. Economic Analysis

    The Commission is sensitive to the economic consequences and
effects of the proposed amendments, including their benefits and costs.
Under Section 3(f) of the Exchange Act, whenever the Commission engages
in rulemaking under the Exchange Act and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, it must consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.\108\ Further, as noted above, Section 17A of the Exchange
Act directs the Commission, when using its authority to facilitate the
establishment of a national system for clearance and settlement of
securities transactions, to have due regard for the public interest,
the protection of investors, the safeguarding of securities and funds,
and maintenance of fair competition among brokers and dealers, clearing
agencies, and transfer agents.\109\ Section 23(a)(2) of the Exchange
Act also prohibits the Commission from adopting any rule that would
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.\110\
---------------------------------------------------------------------------

    \108\ See 15 U.S.C. 78c(f).
    \109\ See supra Part I.A.1.
    \110\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The proposed amendments to three definitions in Rule 17Ad-22(a)
would generally expand the scope of registered clearing agencies
subject to Rule 17Ad-22(e). The Commission is proposing to amend the
definition of ``covered clearing agency'' in Rule 17Ad-22(a)(5) by
focusing directly on clearing agency functions. Thus the amended
definition of ``covered clearing agency'' covers all clearing agencies
that provide the services of a CCP, CSD, or SSS. The Commission is also
proposing a

conforming amendment to the definition of ``central securities
depository services'' in Rule 17Ad-22(a)(3), and the Commission is
proposing to amend the definition of ``sensitivity analysis'' in Rule
17Ad-22(a)(17). As discussed in more detail below, the Commission
preliminarily believes the proposed amendments to Rule 17Ad-22(a) would
cause one additional registered clearing agency to fall within the
definition of ``covered clearing agency'' and become subject to
requirements of Rule 17Ad-22(e).

A. Economic Background

    The Commission believes that the proposed amendments would support
improvements in risk management at registered clearing agencies not
currently subject to Rule 17Ad-22(e) as adopted with respect to
systemic risk, as well as with respect to legal, credit, liquidity,
general business, custody, investment, and operational risk.
    As noted in the CCA Standards adopting release, registered clearing
agencies have become an essential part of the infrastructure of the
U.S. securities markets.\111\ While central clearing generally benefits
the markets in which it is available, clearing agencies can pose
substantial risk to the financial system as a whole, due in part to the
fact that central clearing concentrates risk in the clearing agency.
Disruption to a clearing agency's operations, or failure on the part of
a clearing agency to meet its obligations, could therefore serve as a
potential source of contagion, resulting in significant costs not only
to the clearing agency itself or its members but also to other market
participants or the broader U.S. financial system.\112\ As a result,
proper management of the risks associated with central clearing is
necessary to ensure the stability of the U.S. securities markets and
the broader U.S. financial system. The mandate in Title VII of the
Dodd-Frank Act for central clearing of security-based swaps, wherever
possible and appropriate, further reinforces this need.\113\ When a
clearing agency provides CCP services, central clearing replaces
bilateral counterparty exposures with exposures against the clearing
agency. Consequently, a move from voluntary clearing to mandatory
clearing of security-based swaps, holding the volume of security-based
swap transactions constant, would increase economic exposures against
clearing agencies that centrally clear security-based swaps. Increased
exposures in turn raise the possibility that these clearing agencies
may serve as a transmission mechanism for systemic events.
---------------------------------------------------------------------------

    \111\ See CCA Standards adopting release, supra note 7, at 257.
    \112\ See generally Dietrich Domanski, Leonardo Gambacorta, and
Cristina Picillo, Central Clearing: Trends and Current Issues, BIS
Quarterly Review (Dec. 2015), available at https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf (describing links between CCP financial risk
management and systemic risk); Darrell Duffie, Ada Li & Theo Lubke,
Policy Perspectives on OTC Derivatives Market Infrastructure, at 9
(Fed. Reserve Bank N.Y. Staff Reps., Mar. 2010), available at http://www.newyorkfed.org/research/staff_reports/sr424.pdf (``If a CCP is
successful in clearing a large quantity of derivatives trades, the
CCP is itself a systemically important financial institution. The
failure of a CCP could suddenly expose many major market
participants to losses. Any such failure, moreover, is likely to
have been triggered by the failure of one or more large clearing
members, and therefore to occur during a period of extreme market
fragility.''); Pirrong, The Inefficiency of Clearing Mandates,
Policy Analysis, No. 655, at 11-14, 16-17, 24-26 (2010), available
at http://www.cato.org/pubs/pas/PA665.pdf, at 11-14, 16-17, 24-26
(stating, among other things, that ``CCPs are concentrated points of
potential failure that can create their own systemic risks,'' that
``[a]t most, creation of CCPs changes the topology of the network of
connections among firms, but it does not eliminate these
connections,'' that clearing may lead speculators and hedgers to
take larger positions, that a CCP's failure to effectively price
counterparty risks may lead to moral hazard and adverse selection
problems, that the main effect of clearing would be to
``redistribute losses consequent to a bankruptcy or run,'' and that
clearing entities have failed or come close to failing in the past,
including in connection with the 1987 market break); Froukelien
Wendt, Central Counterparties: Addressing Their Too Important to
Fail Nature (IMF Working Paper, Jan. 2015), available at http://papers.ssrn.com/sol3/Delivery.cfm/wp1521.pdf (assessing the
potential channels for contagion arising from CCP
interconnectedness); Manmohan Singh, Making OTC Derivatives Safe--A
Fresh Look, at 5-11 (IMF Working Paper, Mar. 2011), available at
http://www.imf.org/external/pubs/ft/wp/2011/wp1166.pdf (addressing
factors that could lead central counterparties to be ``risk nodes''
that may threaten systemic disruption).
    \113\ See supra Part I.A.2.
---------------------------------------------------------------------------

    As the Commission discussed in the CCA Standards adopting release,
clearing agencies have incentives to implement a risk management
framework that can effectively manage the risks posed by central
clearing.\114\ First, the ongoing viability of a clearing agency
depends on its reputation and the confidence that market participants
have in its services. Clearing agencies therefore have an incentive to
reduce the likelihood that a member default or operational outage would
disrupt settlement of a particular transaction or set of transactions.
Second, some clearing agencies operate as member-owned utilities and
mutualize default risk across their members, and thus non-defaulting
participants are subject to losses that occur above the defaulter's
margin and clearing fund. Clearing agencies that operate under such
models thus have an economic interest in sound risk management to
reduce the expected level of losses that must be mutualized. Other
clearing agencies are publicly traded and therefore could have
different incentives because non-member-owners have a lower economic
stake in the clearing agency than member-owners under a mutualized
structure.
---------------------------------------------------------------------------

    \114\ See CCA Standards adopting release, supra note 7, at 259-
260.
---------------------------------------------------------------------------

    Such an ownership structure could increase the incentive for
owners, particularly those that are non-members, to take risks, though
these incentives may be tempered by rules of the clearing agency that
are consistent with Section 17A(b)(3)(C) of the Exchange Act, which
requires that the clearing agency's rules assure fair representation of
its shareholders and participants in the selection of the clearing
agency's directors and administration of its affairs.\115\
---------------------------------------------------------------------------

    \115\ See 15 U.S.C. 78q-1(b)(3)(C).
---------------------------------------------------------------------------

    Nevertheless, incentives for sound risk management may be tempered
by pressures to reduce costs and maximize profits that are distinct
from goals set forth in governing statutes.\116\ This tension may
result in a clearing agency making decisions that result in tradeoffs
between the costs and benefits of risk management that may not fully
reflect the costs and benefits that accrue to other financial market
participants as a result of its decisions. For example, because the
current market to provide central clearing is characterized by high
barriers to entry and limited competition,\117\ the market power
exercised by clearing agencies in the markets they serve may reduce
incentives to invest in risk management systems.\118\ Further, even if
clearing agencies do internalize costs that they impose on their
clearing members, they may fail to internalize the consequences of
their risk management decisions on other entities within the financial
system that are connected to them through relationships with their
clearing members.\119\ Such a failure represents a financial network
externality imposed by clearing agencies on the broader financial
system and suggests that

financial stability, as a public good, may be under-produced in
equilibrium.
---------------------------------------------------------------------------

    \116\ See supra Parts I.A.1 and 2 (describing the requirements
under the Exchange Act and the Dodd-Frank Act).
    \117\ See CCA Standards proposing release, supra note 31, at
29576.
    \118\ See infra Part III.C.1.c (discussing the effect on
competition).
    \119\ See Daron Acemoglu, Asuman Ozdaglar & Alireza Tahbaz-
Salehi, Systemic Risk and Stability in Financial Networks (NBER
Working Paper No. 18727, Jan. 2013), available at http://www.nber.org/papers/w18727.
---------------------------------------------------------------------------

B. Baseline

    In order to perform its analysis of the likely economic effects of
the proposed amendments to Rule 17Ad-22(a), the Commission is using an
economic baseline that considers the current market for clearance and
settlement services as it exists at the time of this proposal. As
discussed above,\120\ the Commission preliminarily believes that the
proposed amendment to the definition of ``covered clearing agency''
will likely result in one additional registered clearing agency, ICC,
becoming subject to the requirements in Rule 17Ad-22(e). Further, as
discussed below, the Commission preliminarily believes that the
proposed amendments potentially affect ICEEU even though the amendment
to the definition of ``covered clearing agency'' will not change
ICEEU's current status as a covered clearing agency.\121\ The
Commission's baseline therefore includes the two entities in the market
for clearance and settlement services--ICC and ICEEU--that the
Commission believes would be affected by the proposed amendments. In
addition to current market practices at these entities, the baseline
includes rules adopted by the Commission, including rules adopted in
the CCA Standards adopting release, as well as rules adopted by other
regulators, including those in other jurisdictions to the extent that
these rules affect the cost structure, business and market practices of
the above-mentioned entities. The following section discusses the
elements of the baseline that are relevant for the economic analysis of
the proposed amendments.
---------------------------------------------------------------------------

    \120\ See supra Part II.A.4.
    \121\ See infra Part III.C.1.c.
---------------------------------------------------------------------------

    Pursuant to the adoption of amendments to Rule 17Ad-22,\122\ five
registered clearing agencies--DTC, FICC, ICEEU, NSCC and OCC--currently
meet the definition of ``covered clearing agency''. Table 1 below
provides basic membership statistics for the two clearing agencies--ICC
and ICEEU--that the Commission preliminarily believes would be affected
by the proposed amendments to Rule 17Ad-22(a).
---------------------------------------------------------------------------

    \122\ See CCA Standards adopting release, supra note 7, at 458-
459.

 Table 1--Membership Statistics for ICE Clear Credit & ICE Clear Europe
                                   123
------------------------------------------------------------------------
                                                                 Number
------------------------------------------------------------------------
Clear Credit Members..........................................        30
ICE Clear Europe Members......................................        80
--Clear Europe Members that clear CDS.........................        21
------------------------------------------------------------------------

    To further assess the economic effects of the proposed amendments
to Rule 17Ad-22(a), including possible effects on efficiency,
competition, and capital formation, the Commission is also considering
as part of the baseline (i) the current regulatory framework for
registered clearing agencies, and (ii) the current practices of the
entities that would be affected by the proposed amendments to Rule
17Ad-22(a). Each is discussed further below.
---------------------------------------------------------------------------

    \123\ Membership statistics are taken from the Web sites of each
of the listed clearing agencies as of March 2016. ICE, ICE Clear
Credit Participants, available at https://www.theice.com/clear-credit/participants; ICE, ICE Clear Europe Membership, available at
https://www.theice.com/clear-europe/membership.
---------------------------------------------------------------------------

1. Regulatory Framework for Registered Clearing Agencies
    As previously discussed, the current regulatory framework for
registered clearing agencies begins with Section 17A of the Exchange
Act, which directs the Commission to facilitate the establishment of a
national system for the prompt and accurate clearance and settlement of
securities transactions and provides for the registration of clearing
agencies.\124\ Section 19 of the Exchange Act sets forth the general
registration requirements for clearing agencies as SROs, their
responsibility as SROs to file proposed rule changes with the
Commission for review and approval, and, in general, the provisions
relating to Commission oversight of SROs.\125\ Titles VII and VIII of
the Dodd-Frank Act have expanded the Commission's role with respect to
the regulation of central clearing. Specifically, Title VII amended
Section 17A of the Exchange Act by adding new paragraphs (g) through
(j), which provide the Commission with authority to adopt rules
governing security-based swap clearing agencies.\126\ The Clearing
Supervision Act, adopted in Title VIII, provides for enhanced
regulation of SIFMUs and, more generally, for enhanced coordination
among the Commission, CFTC, and FRB by facilitating examinations and
information sharing.\127\ As noted above, on July 18, 2012, the FSOC
designated as SIFMUs five registered clearing agencies.\128\
---------------------------------------------------------------------------

    \124\ See supra Part I.A.1.
    \125\ See supra notes 16-18 and accompanying text.
    \126\ See supra note 22 and accompanying text.
    \127\ See supra notes 23-30 and accompanying text.
    \128\ See supra note 50.
---------------------------------------------------------------------------

    In 2012, the Commission adopted Rule 17Ad-22 under the Exchange Act
to strengthen the substantive regulation of registered clearing
agencies, promote the safe and reliable operation of registered
clearing agencies, and improve efficiency, transparency, and access to
registered clearing agencies.\129\ In its economic analysis of the
Clearing Agency Standards release, the Commission noted that the
economic characteristics of clearing agencies, including economies of
scale, barriers to entry, and the particulars of their legal mandates,
may limit competition and confer market power on such clearing
agencies, which may lead to lower levels of service, higher prices, or
under-investment in risk management systems.\130\ To address these
potential market failures, Rule 17Ad-22 was adopted to strengthen the
substantive regulation of clearing agencies, promote the safe and
reliable operation of clearing agencies, improve efficiency,
transparency, and access to clearing agencies, and promote consistency
with international standards.\131\
---------------------------------------------------------------------------

    \129\ See supra note 31 and accompanying text.
    \130\ See Clearing Agency Standards adopting release, supra note
31, at 66263.
    \131\ See id. at 66225-26, 66263-64.
---------------------------------------------------------------------------

    Today, the Commission adopted amendments to Rule 17Ad-22 and new
Rule 17Ab2-2. Rule 17Ad-22(a)(5) provides the definition of ``covered
clearing agency,'' and Rule 17Ad-22(e) establishes standards for the
operation and governance of registered clearing agencies that meet the
definition of a covered clearing agency. Rule 17Ab2-2 provides a
process by which the Commission may determine or rescind past
determinations about, whether a covered clearing agency is systemically
important in multiple jurisdictions, and whether any of the activities
of a clearing agency providing CCP services, including clearing
agencies registered with the Commission for the purpose of clearing
security-based swaps, have a more complex risk profile.\132\
---------------------------------------------------------------------------

    \132\ See CCA Standards adopting release, supra note 7, at 456-
477.
---------------------------------------------------------------------------

    Finally, efforts by the CFTC to adopt rules that are consistent
with the PFMI are also relevant to the economic analysis of the
proposed amendments to Rule 17Ad-22(a).\133\ The CFTC has issued rules
for derivatives clearing organizations and systemically important
derivatives clearing

organizations (``SIDCOs'') which it indicated are intended to be
consistent with the PFMI.\134\ ICC, the registered clearing agency that
the Commission anticipates will fall into the revised covered clearing
agency definition, is a clearing agency registered with the Commission
that is also supervised by the CFTC as a SIDCO under subpart C of Part
39 of the Commodity Exchange Act.
---------------------------------------------------------------------------

    \133\ See id. at 272.
    \134\ See Derivatives Clearing Organizations and International
Standards, Final Rule, 78 FR 72477 (Dec. 2, 2013).
---------------------------------------------------------------------------

2. Current Practices
    Current industry practices are a critical element of the economic
baseline for registered clearing agencies. Registered clearing agencies
must operate in compliance with Rule 17Ad-22, though they may vary in
the particular ways they achieve such compliance. Some variation in
practices across registered clearing agencies derives from the products
they clear and the markets they serve.
    As discussed above,\135\ the Commission preliminarily believes that
the proposed revision to Rule 17Ad-22(a) will likely result in one
additional registered clearing agency, ICE Clear Credit, falling within
the definition of covered clearing agency. Further, the Commission
preliminarily believes that the proposed amendments may affect ICE
Clear Europe (ICEEU) even though these amendments will not change
ICEEU's current status as a covered clearing agency.\136\ An overview
of the current practices of these entities is set forth below and
includes discussion of clearing agency policies and procedures
regarding general organization and risk management, including the
management of legal, credit, liquidity, business, custody, investment,
and operational risk. This discussion is intended solely for the
purpose of analyzing the economic effects of the proposed amendments
and is based on the Commission's general understanding of current
practices as of the date of this proposal, informed by information
published by registered clearing agencies, as well as the Commission's
experience supervising registered clearing agencies.
---------------------------------------------------------------------------

    \135\ See Part II.A.4.
    \136\ See infra Part III.C.1.c.
---------------------------------------------------------------------------

a. General Organization
i. Legal Risk
    Legal risk is the risk that a registered clearing agency's rules,
policies, or procedures may not be enforceable and concerns, among
other things, its contracts, the rights of members, netting
arrangements, discharge of obligations, and settlement finality. Cross-
border activities of a registered clearing agency may also present
elements of legal risk.
    Rule 17Ad-22(d)(1) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for a well-founded,
transparent, and enforceable legal framework for each aspect of its
activities in all relevant jurisdictions.\137\ Each registered clearing
agency makes a large portion of these policies and procedures available
to members and participants. In addition, each also publishes their
rule books and other key procedures publicly in order to promote the
transparency of their legal framework.\138\
---------------------------------------------------------------------------

    \137\ See 17 CFR 240.17Ad-22(d)(1); Clearing Agency Standards
adopting release, supra note 31, at 66245-46.
    \138\ The rule book of each registered clearing agency, as well
as select policies and procedures, are publicly available on each
registered clearing agency's Web site.
---------------------------------------------------------------------------

ii. Governance
    Rule 17Ad-22(d)(8) requires a registered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to have governance arrangements that are
clear and transparent to fulfill the public interest requirements in
Section 17A of the Exchange Act applicable to clearing agencies, to
support the objectives of owners and participants, and to promote the
effectiveness of the clearing agency's risk management procedures.\139\
Important elements of a registered clearing agency's governance
arrangements include its ownership structure; its charter, bylaws, and
charters for committees of its board and management committees; its
rules, policies, and procedures; the composition and role of its board,
including the structure and role of board committees; reporting lines
between management and the board; and the processes that provide for
management accountability with respect to the registered clearing
agency's performance.
---------------------------------------------------------------------------

    \139\ See 17 CFR 240.17Ad-22(d)(8); see also Clearing Agency
Standards adopting release, supra note 31, at 66251-52.
---------------------------------------------------------------------------

    Each registered clearing agency has a board that governs its
operations and supervises senior management. Each registered clearing
agency also has an independent audit committee of the board and has
established a board committee or committee of members tasked with
overseeing the clearing agency's risk management functions.
iii. Amended Framework for the Comprehensive Management of Risks
    Rules 17Ad-22(b) and (d) require registered clearing agencies to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to measure and mitigate credit
exposures, identify operational risks, evaluate risks arising in
connection with cross-border and domestic links for the purpose of
clearing or settling trades, achieve DVP settlement, and implement risk
controls to cover the clearing agency's credit exposures to
participants.\140\ Rule 17Ad-22(d)(4) requires a registered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to establish business continuity
plans setting forth procedures for the recovery of operations in the
event of a disruption.\141\ Rule 17Ad-22(d)(11) further requires a
registered clearing agency to establish, implement, maintain and
enforce written policies and procedures reasonably designed to make key
aspects of the clearing agency's default procedures publicly available
and establish default procedures that ensure that the clearing agency
can take timely action to contain losses and liquidity pressures and to
continue meeting its obligations in the event of a participant
default.\142\
---------------------------------------------------------------------------

    \140\ See 17 CFR 240.17Ad-22(b) and (d); see also Clearing
Agency Standards adopting release, supra note 31.
    \141\ See 17 CFR 240.17Ad-22(d)(4); see also Clearing Agency